Chapter 7 is the most popular form of bankruptcy. It is a liquidation proceeding in which the bankruptcy court is asked to eliminate the debts owed. This gives the debtor a “fresh start”. However, certain debts, such as student loans, alimony and child support, cannot be eliminated or discharged. In a Chapter 7 case, all of the debtor’s nonexempt assets are liquidated and distributed to creditors. The debtor then receives a bankruptcy discharge in about four to six months after filing bankruptcy.
Instead of paying creditors out of the debtor’s assets, a Chapter 13 bankruptcy provides a repayment plan for the debtors to pay back creditors. It is available to individuals with regular income. In a Chapter 13 bankruptcy, debtors keep their assets and pay back creditors out of future earnings over the life of the payment plan (3-5 years). However, the Chapter 13 debtor can also choose to make some payment out of their current assets. At the completion of the payment plan, the debtor receives a discharge. With certain exceptions, the discharge that the Chapter 13 debtor receives is similar to the discharge that the Chapter 7 debtor receives.
Will I have to give up all of my assets?
The Bankruptcy Code provides that a debtor filing for bankruptcy can keep certain assets for a fresh start by exempting property from the bankruptcy estate.
Will I be allowed to file bankruptcy?
There are presently no fixed income standards for filing bankruptcy. The critical question asked about those filing Chapter 7 is whether a debtor has sufficient funds after payment of his necessary future living expenses to repay his debts.
The United States Trustee or the Chapter 7 trustee can seek to have a debtor’s case dismissed for “substantial abuse” if the debtor’s income is sufficient to repay a significant portion of the scheduled debts. 11 U.S.C. 707(b). The real expectation is that debtors who are challenged in this way will convert their case to Chapter 13.
The law on this subject is not well developed and the attitudes of trustees and judges about what is “abusive” varies from district to district.
This concept does not apply to Chapter 7 debtors whose debts are primarily business debts, tax debt, or to those filing Chapter 13.
What do I have to do to file bankruptcy?
A bankruptcy case is begun by filing a petition, schedules of assets and liabilities, and a statement of financial affairs with the bankruptcy court and paying the filing fee. Browse downloadable versions of the official bankruptcy forms.
You will be required to attend at least one meeting of creditors (the 341 meeting), in which the trustee and creditors who choose to come can ask you questions under oath about your financial affairs. Additionally, you may be required to attend a reaffirmation hearing, in front of a judge, if you intend on reaffirming any of your secured debt (houses, cars, boats, etc.)
How long does it take?
In Chapter 7 cases, the period of time between when the case is filed to receipt of the discharge order is usually about 3 to 6 months. During that period, the debtor generally does not have to do anything other than attend the first meeting of creditors. The most time consuming part of filing bankruptcy is usually preparing the schedules necessary to file the case.
The discharge affects debts that existed on the date the case was filed or have their origin in facts that occurred before the case was filed.
Getting Credit After Bankruptcy
You will get credit after bankruptcy. Some clients have been very concerned about the state of their credit after filing bankruptcy. Although a bankruptcy entry will appear on your credit report for 10 years following the discharge, this does not mean that you will not get a credit card, or buy a home or car for 10 years. Far from it; remember: creditors want you to borrow. Shortly after your bankruptcy discharge, we can almost promise that you will receive a credit card offer to help you get back on your feet (possibly from Providian). The fact is, you no longer have the majority of your debt; you have an ability to repay (income is freed up), and you can’t declare bankruptcy (Chapter 7) again for eight years. Further, the probability of a consumer declaring bankruptcy a second time in their lifetime is low (it does happen, but after most people do it once, they change their habits).
Are student loans discharged in a bankruptcy proceeding?
Educational loans guaranteed by the United States government are generally not discharged by a Chapter 7 or Chapter 13 bankruptcy. Although,they may be dischargeable if the court finds that paying off the loan will impose an undue hardship on the debtor and his or her dependents.
In order to qualify for a hardship discharge, the debtor must demonstrate that he or she cannot make payments at the time the bankruptcy is filed and will not be able to make payments in the future. The debtor must apply before the discharge of the debtor’s other debts is granted. Application for a hardship discharge is not included in the standard bankruptcy fees, and must be paid for after the case is filed.
The Bankruptcy Code does not specifically define the requirements for granting a hardship discharge of a student loan. Courts have applied different standards, but they often apply a three-part test to determine eligibility:
If the debtor is forced to pay off the student loan, the debtor will not be able to maintain a minimum standard of living for himself or herself and his or her dependents;
The financial circumstances that satisfy the income test in (1.) will continue for a significant portion of the repayment period; and
3. Good Faith
The debtor must have made a good-faith effort to repay the loan prior to the bankruptcy.
What effect does a bankruptcy filing have on the collection of alimony and child support?
A Chapter 7 filing should have no effect on such collections.
Although filing bankruptcy stops, or “stays,” all efforts to collect debts, the Bankruptcy Code excludes actions to collect child support or spousal maintenance from the stay unless the creditor attempts to collect from the “property of the estate.” In a Chapter 7 proceeding, “property of the estate” includes all possessions, money, and interests the debtor owns at the time he or she files. Money earned after the bankruptcy is filed, however, is not property of the estate. Since most child and spousal support is paid out of the debtor’s current income, the bankruptcy should have little impact.
A debtor under Chapter 13 must pay all domestic support obligations that fall due after the petition is filed. Failure to do so could result in dismissal of the case.
Neither a Chapter 7 nor a Chapter 13 discharge affects future child or spousal support obligations. In other words, even at the conclusion of the bankruptcy proceeding, these on-going obligations remain.
Does a bankruptcy discharge eliminate all debts?
The rules on which debts are discharged, or eliminated, are different depending on which type of bankruptcy is filed. A Chapter 13 discharge affects only those debts provided for by the plan. Additional exceptions to a Chapter 13 discharge include claims for spousal and child support; educational loans; drunk driving liabilities; criminal fines and restitution obligations; and certain long-term obligations, such as home mortgages, that extend beyond the term of the plan.
In a Chapter 7 proceeding, the following debts are not discharged:
Debts or creditors not listed on the schedules filed at the outset of the case;
Most student loans, unless repayment would cause the debtor and his or her dependents undue hardship;
Recent federal, state, and local taxes;
Child support and spousal maintenance (alimony);Government-imposed restitution, fines, or penalties;
Debts resulting from driving while intoxicated; and
Debts not dischargeable in a previous bankruptcy because of the debtor’s fraud.
In addition, the following debts are not discharged if the creditor objects during the case and proves that the debt fits one of these categories:
Debts from fraud, including certain debts for luxury goods or services incurred within ninety days before filing and certain cash advances taken within seventy days before filing;
Debts from willful and malicious acts;
Debts from embezzlement, larceny, or breach of fiduciary duty.
What types of property are exempt?
Motor vehicles, up to a certain value;
Reasonably necessary clothing;
Reasonably necessary household goods and furnishings;
Jewelry, up to a certain value;
A portion of the equity in the debtor’s home;
Tools of the debtor’s trade or profession, up to a certain value;
A portion of unpaid but earned wages;
Public benefits, including public assistance (welfare), Social Security, and unemployment compensation, accumulated in a bank account; and
Damages awarded for personal injury.
Will a debtor lose his or her home by filing bankruptcy?
One of the debtor’s major concerns in a consumer bankruptcy is the thought of losing the family home. Although that is possible in some cases, loss of the debtor’s home need not always result from a bankruptcy filing.
If the debtor in a Chapter 7 liquidation bankruptcy is behind on his or her mortgage payments, the home could be lost. The mortgage lender in such cases usually asks the bankruptcy court to lift the automatic stay so that it can institute foreclosure proceedings, in which case the home will be sold and the proceeds used to pay off the debt. Whether a debtor who is not behind on mortgage payments will lose his or her house depends on how much equity the debtor has in the property and the amount of the state homestead exemption. If the amount of debt owed on the home is less than the home’s market value, the debtor could lose the house unless the homestead exemption entitles the debtor to most of the equity.
In a Chapter 13 proceeding, however, even if the debtor is behind on mortgage payments, if the wage-earner plan includes paying back any missed mortgage payments and current payments are paid when due as well, the debtor should not lose his or her home. If the debtor is current on his or her house payments, the home will not be lost if the debtor continues to make payments when due.
If the debtor is a renter rather than a homeowner, and if the debtor is current in his or her rent payments, it is unlikely that the lessor would even become aware of the bankruptcy proceeding. If the debtor is behind, however, he or she could be evicted. Even after the automatic stay is triggered by the bankruptcy filing, the landlord is likely to ask the court to lift the stay on its behalf, and the court is likely to grant that request.
How long is bankruptcy and other credit information included on the debtor’s credit report?
A consumer credit report may include Chapter 7 and Chapter 13 bankruptcy information for ten years from the time the case is filed. One major consumer credit reporting agency is said to remove Chapter 13 information after only seven years, but it is not legally required to do so.
Most other credit information can be included in a consumer credit report for seven years. Civil suits, civil judgments, and arrest records, however, can be reported for at least seven years, and longer if the information is relevant for a longer time period. For example, if the civil judgment against the debtor is valid for ten years, it can be reported for credit-rating purposes for the same time period.
These time limits on reporting credit information do not apply to reports for credit transactions that involve or are reasonably expected to involve a principal amount of $150,000 or more, the underwriting of life insurance involving or reasonably expected to involve a face amount of $150,000 or more, or the employment of a person at a salary that is or is reasonably expected to be at least $75,000 annually.
Because both the Fair Credit Reporting Act, which controls what a credit reporting agency may include in a consumer’s credit report, and the Bankruptcy Code are federal law, the same rules apply in all states. There may be some differences, however, in relation to the more-than-seven-year information, since most of the relevant time periods or statutes of limitations are found in the individual states’ laws.
What happens if the debtor’s salary increases after filing a chapter 13 wage earner plan?
The Bankruptcy Code requires that the debtor contribute his or her projected disposable income toward the plan payments for the duration of the plan. Although the code imposes this requirement only when the trustee or a creditor demands it, in reality the trustee always requires it, at least at the beginning of the plan. Whether changes in salary will change the payment plan depends on a complete consideration of all of the circumstances.
If the debtor’s income changes after the case has been filed but before the court has confirmed the plan, making it binding on the creditors, the trustee will closely scrutinize the debtor’s disposable income to make sure that the payments and the income are consistent and will incorporate any necessary changes into the plan. If the debtor’s income changes during the duration of the repayment plan, changes in income may not necessitate any changes in payments. The trustee may, however, ask that payments be adjusted if the debtor’s income increases significantly. The trustee does not closely monitor the debtor’s income, and it may actually be outside the scope of a trustee’s duties to do so.
The trustee will consider not only the salary increase, but also whether there has been a corresponding increase in disposable income, on which the payments are based. Disposable income is the amount of the debtor’s salary that is left after deducting all reasonable living expenses. If the debtor’s salary increases but so do his or her expenses, there may be no increase in disposable income and therefore no change in the payment plan. If there is a significant increase in disposable income, the trustee may ask for an increase in payments. In cases in which the plan extends over more than thirty-six months, the increased payments may actually reduce the length of the plan’s term, so that the debtor has paid off the debts and receives a discharge sooner.
What is a reaffirmation agreement?
Even if a debt can be discharged, you may have special reasons why you want to promise to pay it. For example, you may want to work out a plan with the bank to keep your car. To promise to pay that debt, you must sign a reaffirmation agreement with the creditor. Reaffirmation agreements are under special rules and are voluntary. They are not required by bankruptcy law or by any other law.
– Must be voluntary;
– Must not place to heavy a burden on you or your family;
– Must be in your best interest; and
– Can be canceled anytime before the Court issues your discharge or within 60 days after the agreement is filed with the Court, whichever gives you the most time.
If you are an individual and you are not represented by an attorney, the Court must hold a hearing to decide whether to approve the reaffirmation agreement. The agreement will not be legally binding until the court approves it.
If you reaffirm a debt and then fail to pay it, you owe the debt the same as though there was no bankruptcy. The debt will not be discharged and the creditor can take action to recover any property on which it has a lien or mortgage. The creditor can also take legal action to recover a judgment against you.
What is the difference between secured and unsecured debt?
Secured debt is a creditor’s claim that is secured by a lien of some type on your property, either by your agreement or involuntarily such as with a court judgment or taxes. A creditor can generally claim the property that secures the debt in the event of bankruptcy. Unsecured debt is not tied to any type of property, leaving the creditor without any claim to property.
The best and perhaps the easiest way to find out whether a debt is a secured debt is to review the documents signed at the time the debt was incurred. If the debt is secured, the documents will say so and will describe the creditor’s security interest, which is usually in the property that is the subject of the financing.
Sometimes, however, the type of debt itself will suggest whether it is secured. The following types of debts are often secured debts, which means that if the debtor does not make payments on the debt when due, the creditor can take back the property that secures the debt, sell it, and apply the proceeds to pay off the debt. (If the sale price is not enough to cover the full amount owed, the debtor may still be liable for the remainder.)
Companies financing home purchases almost always require a mortgage on the house. If the borrower defaults on the mortgage payments, the lender can force a foreclosure, in which case the house is sold and the proceeds are used to pay of the debt.
When a person purchases a car on credit, the lender puts a lien on the car, which allows it to repossess the car if the borrower defaults (i.e., fails to make payments on time).
Although many consumers are unaware of this, when they charge something that they purchase at the local department store, the store may retain a security interest in the item purchased based on the agreement that the consumer signed when he or she first opened the account. As a result, if the purchaser fails to pay according to the credit-card agreement, the store can take back the merchandise.
Finance company loans
When a borrower obtains a loan from a finance company and is asked to list things that he or she owns, it is possible that the finance company will obtain a security interest in the items listed.