Bankruptcy
FAQ (Chapter 7 and Chapter 13)
What Is Bankruptcy?
Chapter 7 and Chapter 13
bankruptcy basics.
Bankruptcy is a federal court process designed to help
consumers and businesses eliminate their debts or repay them under the
protection of the bankruptcy court. Bankruptcies can generally be
described as "liquidations" or "reorganizations."
Chapter 7 bankruptcy is the liquidation variety: If
you own property that isn't exempt under your state's laws, it may be
taken and sold ("liquidated") to pay back some of your debt.
Chapter 13 bankruptcy is the most common type of
"reorganization" bankruptcy for consumers: You get to keep
all of your property, but you must make monthly payments over three to
five years to repay all or some of your debt.
Both kinds of bankruptcy have numerous rules -- and
exceptions to those rules -- about what kinds of debts are covered,
who can file, and what property you can and cannot keep.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy can be filed by individuals
(called a "consumer" Chapter 7 bankruptcy) or businesses
(called a "business" Chapter 7 bankruptcy). A Chapter 7
bankruptcy typically lasts three to six months.
Property liquidation. In Chapter 7
bankruptcy, some of your property may be sold to pay down your debt.
In return, most or all of your unsecured debts (that is, debts for
which collateral has not been pledged) will be erased. You get to keep
any property that is classified as exempt under the state or federal
laws available to you (such as your clothes, car, and household
furnishings). Many debtors who file for Chapter 7 bankruptcy are
pleased to learn that all of their property is exempt.
Secured debt. If you owe money on a
secured debt (for example, a car loan for which the car is pledged as
a guarantee of payment), you have a choice of allowing the creditor to
repossess the property; continuing your payments on the property under
the contract (if the lender agrees); or paying the creditor a lump sum
amount equal to the current replacement value of the property. Some
types of secured debts can be eliminated in Chapter 7 bankruptcy.
Eligibility for Chapter 7. Not
everyone can file for Chapter 7 bankruptcy. For example, if your
disposable income is sufficient to fund a Chapter 13 repayment plan --
after subtracting certain allowed expenses and monthly payments for
certain debts -- you won't be allowed to use Chapter 7 bankruptcy. For
more on this and other requirements, see
Chapter 7 Bankruptcy -- Who Can File?
Bankruptcy doesn't work on some kinds of debts.
Though bankruptcy can eliminate many kinds of debts, such as credit
card debt, medical bills, and unsecured loans, there are many types of
debts, including child support and spousal support obligations and
most tax debts, that cannot be wiped out in bankruptcy. For more
information, see
What Bankruptcy Can and Cannot Do.
For more information on Chapter 7 bankruptcy, see
How to File for Chapter 7 Bankruptcy, by attorney Stephen
Elias, attorney Albin Renauer, and Robin Leonard, J.D. (Nolo).
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is also known as "wage
earner" bankruptcy because, in order to file for Chapter 13, you
must have a reliable source of income that you can use to repay some
portion of your debt.
Repayment. When you file for Chapter
13 bankruptcy, you must propose a repayment plan that details how you
are going to pay back your debts over the next three to five years.
The minimum amount you'll have to repay depends on how much you earn,
how much you owe, and how much your unsecured creditors would have
received if you'd filed for Chapter 7 bankruptcy.
Debt limits. Your debts must be
within limits set by the federal government: Currently, you may not
have more than $1,010, 650 in secured debt and $336,900 in unsecured
debt.
Secured debts. If you have secured
debts, Chapter 13 gives you an option to make up missed payments to
avoid repossession or foreclosure. You can include these past due
amounts in your repayment plan and make them up over time.
For more information on Chapter 13 bankruptcy, see
Chapter 13 Bankruptcy: Repay Your Debts, by attorney
Stephen Elias and Robin Leonard, J.D.
Other Types of Reorganization Bankruptcy
In addition to Chapter 13 bankruptcy, there are two
other types of reorganization bankruptcy: Chapter 11 and Chapter 12.
Chapter 11 bankruptcy. Chapter 11 is
typically used by financially struggling businesses to reorganize
their affairs. It is also available to individuals, but because
Chapter 11 bankruptcy is expensive and time-consuming, it is generally
used only by those whose debts exceed the Chapter 13 bankruptcy limits
(rare) or who own substantial nonexempt assets (such as several pieces
of real estate). If you are considering Chapter 11 bankruptcy, you'll
need to talk to a lawyer.
Chapter 12 bankruptcy. Chapter 12 is
almost identical to Chapter 13 bankruptcy. But to be eligible for
Chapter 12 bankruptcy, at least 80% of your debts must arise from the
operation of a family farm. Chapter 12 bankruptcy has higher debt
ceilings to accommodate the large debts that may come with operating a
farm, and it offers the debtor more power to eliminate certain types
of liens. Very few people use Chapter 12 bankruptcy; if you want to
join their ranks, you should consult with a lawyer.
For More Information
For more information on whether bankruptcy is the
right choice, see
The New Bankruptcy: Will It Work for You?, by attorney
Stephen Elias (Nolo).
What Bankruptcy Can and Cannot Do
Bankruptcy is a powerful tool
for debtors, but some kinds of debts can't be wiped out in bankruptcy.
Bankruptcy is good at wiping out credit card debt, but
you may have trouble eliminating some other kinds of debts, including
child support, alimony, most tax debts, student loans, and secured
debts.
What Bankruptcy Can Do
If you are facing serious debt problems, bankruptcy
may offer a powerful remedy. Here are some of the things filing for
bankruptcy can do:
Wipe out credit card debt and other unsecured
debts.
Bankruptcy is very good at wiping out credit card debt.
Unless you have a special "secured" credit card, your credit
card balance is an unsecured debt -- that is, the creditor does not
have a lien on any of your property and cannot repossess any items if
you fail to pay the debt. This is precisely the kind of debt that
bankruptcy is designed to eliminate. Besides credit card debt, you may
have other unsecured debts, and bankruptcy can wipe these out as well.
If you file for Chapter 13 rather than Chapter 7, you
may have to pay back some portion of your unsecured debts. However,
any unsecured debts that remain once your repayment plan is complete
will be discharged.
Stop creditor harassment and collection
activities. Bankruptcy can stop creditor harassment, but if
the "harassment"' is simply phone calls and letters, there
are simpler ways to stop it;
. If the harassment is more serious -- for instance, if the creditor
is about to repossess your car or foreclose your mortgage --
bankruptcy can help;
.
Eliminate certain kinds of liens. A
lien is a creditor's right to take some or all of your property and
will survive bankruptcy unless you invoke certain procedures during
your bankruptcy case. For more information, see
How to File for Chapter 7 Bankruptcy, by attorney Stephen
Elias, attorney Albin Renauer, and Robin Leonard, J.D. (Nolo).
What Bankruptcy Can't Do
Here's what bankruptcy cannot do for you:
Prevent a secured creditor from repossessing
property. A bankruptcy discharge eliminates debts, but it
does not eliminate liens. So, if you have a secured debt (a debt where
the creditor has a lien on your property and can repossess it if you
don't pay the debt), bankruptcy can eliminate the debt, but it does
not prevent the creditor from repossessing the property.
Eliminate child support and alimony
obligations. Child support and alimony obligations survive
bankruptcy -- you will continue to owe these debts in full, just as if
you had never filed for bankruptcy. And if you use Chapter 13, your
plan will have to provide for these debts to be repaid in full.
Wipe out student loans, except in very limited
circumstances. Student loans can be discharged in bankruptcy
only if you can show that repaying the loan would cause you
"undue hardship," a very tough standard to meet. You must be
able to show not only that you cannot afford to pay your loans now,
but also that you have very little likelihood of being able to pay
your loans in the future.
Eliminate most tax debts. Eliminating
tax debt in bankruptcy is not easy, but it is sometimes possible for
older debts for unpaid income taxes. There are many requirements to be
met, however.
Eliminate other nondischargeable debts.
The following debts are not dischargeable under either Chapter 7 or
Chapter 13 bankruptcy:
-
debts you forget to list in your bankruptcy
papers, unless the creditor learns of your bankruptcy case
-
debts for personal injury or death caused by your
intoxicated driving, and
-
fines and penalties imposed for violating the law,
such as traffic tickets and criminal restitution.
If you file for Chapter 7, these debts will remain
when your case is over. If you file for Chapter 13, these debts will
have to be paid in full during your repayment plan. If they are not
repaid in full, the balance will remain at the end of your case.
In addition, some types of debts may not be discharged
if the creditor convinces the judge that they should survive your
bankruptcy. These include debts incurred through fraud, such as lying
on a credit application or passing off borrowed property as your own
to use as collateral for a loan.
What Only Chapter 13 Bankruptcy Can Do
Chapter 7 can't help you with these situations, but
Chapter 13 can:
Stop a mortgage foreclosure. Filing
for Chapter 13 bankruptcy will stop a foreclosure and force the lender
to accept a plan where you make up the missed payments over time while
staying current on your regular monthly payments. To make this plan
work, you must be able to demonstrate that you will have enough income
in the future to support such a repayment plan.
Allow you to keep nonexempt property.
You don't have to give up any property in Chapter 13 because you use
your income to fund your repayment plan.
"Cram down" secured debts that are
worth more than the property that secures them. You can
sometimes use Chapter 13 to reduce a debt to the replacement value of
the property securing it, then pay off that debt through your plan.
For example, if you owe $10,000 on a car loan and the car is worth
only $6,000, you can propose a plan that pays the creditor $6,000 and
have the rest of the loan discharged. However, under the new
bankruptcy law, you can’t cram down a car debt if you purchased the
car during the 30-month period before you filed for bankruptcy. For
other types of personal property, you can’t cram down a secured debt
if you purchased the property within one year of filing for
bankruptcy.
For more information on Chapter 13 bankruptcy, see
Chapter 13 Bankruptcy: Repay Your Debts, by attorney Stephen
Elias and Robin Leonard, J.D. (Nolo).
How Bankruptcy Stops Your Creditors: The Automatic
Stay
After you file for bankruptcy,
the automatic stay offers potent legal protection against bill
collectors.
When you file for bankruptcy, something called the
automatic stay immediately stops any lawsuit filed against you and
most actions against your property by a creditor, collection agency,
or government entity. Especially if you are at risk of being evicted,
being foreclosed on, being found in contempt for failure to pay child
support, or losing such basic resources as utility services, welfare,
unemployment benefits, or your job (because of a raft of wage
garnishments), the automatic stay may provide a powerful reason to
file for bankruptcy.
What the Automatic Stay Can Prevent
Here is how the automatic stay affects some common
emergencies:
-
Utility disconnections. If you're behind on
a utility bill and the company is threatening to disconnect your
water, electric, gas, or telephone service, the automatic stay
will prevent the disconnection for at least 20 days. Although the
amount of a utility bill itself rarely justifies a bankruptcy
filing, preventing electrical service cutoff in January in New
England might be justification enough.
-
Foreclosure. If your home mortgage is being
foreclosed on, the automatic stay temporarily stops the
proceedings, but the creditor will often be able to proceed with
the foreclosure sooner or later. If you are facing foreclosure,
Chapter 13 bankruptcy is usually a better remedy than Chapter 7
bankruptcy, if you want to keep your house.
-
Eviction. If you are being evicted from
your home, the automatic stay may provide some help -- but the new
bankruptcy law makes it easier for landlords to proceed with
evictions. If your landlord already has a judgment of possession
against you when you file, the automatic stay won't affect these
eviction proceedings; the landlord can continue just as if you
hadn't filed for bankruptcy. And if the landlord alleges that
you've been endangering the property or using controlled
substances there, the automatic stay won't do you much good,
either. In other cases, the automatic stay might buy you a few
days or weeks, but the landlord will probably ask the court to
lift the stay and allow the eviction -- and the court will
probably agree to do so.
-
Collection of overpayments of public benefits.
If you receive public benefits and were overpaid, normally the
agency is entitled to collect the overpayment out of your future
checks. The automatic stay prevents this collection. However, if
you become ineligible for benefits, the automatic stay doesn't
prevent the agency from denying or terminating benefits for that
reason.
-
Multiple wage garnishments. Filing for
bankruptcy stops garnishments dead in their tracks. (And not only
will you take home a full salary, but you also may be able to
discharge the debt in bankruptcy.) Although no more than 25% of
your wages may be taken to satisfy court judgments (up to 50% for
child support and alimony), many people file for bankruptcy if
more than one wage garnishment is threatened.
What the Automatic Stay Cannot Prevent
In a few instances, the automatic stay won't help you.
-
Certain tax proceedings. The IRS can still
audit you, issue a tax deficiency notice, demand a tax return
(which often leads to an audit), issue a tax assessment, or demand
payment of such an assessment. However, the automatic stay does
stop the IRS from issuing a tax lien or seizing your property or
income.
-
Support actions. A lawsuit against you
seeking to establish paternity or to establish, modify, or collect
child support or alimony isn't stopped by your filing for
bankruptcy.
-
Criminal proceedings. A criminal proceeding
that can be broken down into criminal and debt components will be
divided, and the criminal component won't be stopped by the
automatic stay. For example, if you were convicted of writing a
bad check, sentenced to community service, and ordered to pay a
fine, your obligation to do community service won't be stopped by
your filing for bankruptcy.
-
Loans from a pension. Despite the
automatic stay, money can be withheld from your income to repay a
loan from certain types of pensions (including most job-related
pensions and IRAs).
-
Multiple filings. If you had a
bankruptcy case pending during the previous year, then the stay
will automatically terminate after 30 days unless you, the
trustee, the U.S. Trustee, or a creditor asks for the stay to
continue and proves that the current case was filed in good faith.
If a creditor had a motion to lift the stay pending during the
previous case, the court will presume that you acted in bad faith,
and you'll have to overcome this presumption to get the protection
of the stay in your current case.
How Creditors Can Get Around the Automatic Stay
Usually, a creditor can get around the automatic stay
by asking the bankruptcy court to remove ("lift") the stay,
if it is not serving its intended purpose. For example, say you file
for bankruptcy the day before your house is to be sold in foreclosure.
You have no equity in the house, you can't pay your mortgage arrears,
and you have no way of keeping the property. The foreclosing creditor
is apt to go to court soon after you file for bankruptcy and ask for
permission to proceed with the foreclosure -- and that permission is
likely to be granted.
For More Information
For more information on the automatic stay and how it
might apply in your situation, see
The New Bankruptcy: Will It Work for You?, by attorney
Stephen Elias.
Eliminating Tax Debts in Bankruptcy
Most taxes can't be eliminated
in bankruptcy, but some can.
You may hear radio commercials offering the hope of
eliminating tax debts in bankruptcy. But it's not as simple as it
sounds. Most tax debts can't be wiped out in bankruptcy -- you'll
continue to owe them at the end of a Chapter 7 bankruptcy case, or
you'll have to repay them in full in a Chapter 13 bankruptcy repayment
plan.
If you need to discharge tax debts, Chapter 7
bankruptcy will probably be the better option -- but only if your
debts qualify for discharge (see below) and you are eligible for
Chapter 7 bankruptcy
.
When You Can Discharge a Tax Debt
You can discharge (wipe out) debts for federal income
taxes in Chapter 7 bankruptcy only if all of the following
conditions are true:
-
The taxes are income taxes. Taxes other
than income, such as payroll taxes or fraud penalties, can never
be eliminated in bankruptcy.
-
You did not commit fraud or willful evasion.
If you filed a fraudulent tax return or otherwise willfully
attempted to evade paying taxes, such as using a false Social
Security number on your tax return, bankruptcy can't help.
-
The debt is at least three years old. To
eliminate a tax debt, the tax return must have been originally due
at least three years before you filed for bankruptcy.
-
You filed a tax return. You must have filed
a tax return for the debt you wish to discharge at least two years
before filing for bankruptcy.
-
You pass the "240-day rule." The
income tax debt must have been assessed by the IRS at least 240
days before you file your bankruptcy petition, or must not have
been assessed yet. (This time limit may be extended if the IRS
suspended collection activity because of an offer in compromise or
a previous bankruptcy filing.)
You Can't Discharge a Federal Tax Lien
If your taxes qualify for discharge in a Chapter 7
bankruptcy case, your victory may be bittersweet. This is because
bankruptcy will not wipe out prior recorded tax liens. A Chapter 7
bankruptcy will wipe out your personal obligation to pay the debt, and
prevent the IRS from going after your bank account or wages, but if
the IRS recorded a tax lien on your property before you file for
bankruptcy, the lien will remain on the property. In effect, this
means you'll have to pay off the tax lien in order to sell the
property.
For More Information
To find out more about which debts you can eliminate
in bankruptcy, see
The New Bankruptcy: Will It Work for You?, by attorney
Stephen Elias (Nolo).
A Chapter 7 Bankruptcy Overview
How Chapter 7 bankruptcy
works.
Chapter 7 bankruptcy is sometimes called
"liquidation" bankruptcy -- it cancels your debts, but you
might have to let the bankruptcy court liquidate (sell) some of your
property for the benefit of your creditors. ("Chapter 7"
refers to the chapter of the federal Bankruptcy Code that contains the
bankruptcy law.)
Chapter 7 Bankruptcy Costs in Time and Money
The whole Chapter 7 bankruptcy process takes about
four to six months, costs $299 in filing and administrative fees, and
commonly requires only one trip to the courthouse.
You must also complete credit counseling with an
agency approved by the United States Trustee. (For a list of approved
agencies in each state, go to the Trustee's website,
www.usdoj.gov/ust, and click "Credit Counseling and Debtor
Education.")
Who Can File
You won't be able to use Chapter 7 bankruptcy if you
already received a bankruptcy discharge in the last six to eight years
(depending which type of bankruptcy you filed) or if, based on your
income, expenses, and debt burden, you could feasibly complete a
Chapter 13 repayment plan. (For more information on these eligibility
requirements, see
Chapter 7 Bankruptcy -- Who Can File?)
Bankruptcy Forms
To file for Chapter 7 bankruptcy, you fill out a
petition and a number of other forms and file them with the bankruptcy
court in your area. Basically, the forms ask you to describe:
-
your property
-
your current income and monthly living expenses
-
your debts
-
property you claim the law allows you to keep
through the Chapter 7 bankruptcy process (called "exempt
property") -- most states let you keep some equity in your
home, clothing, household furnishings, Social Security payments
you haven't spent, and other necessities such as a car and the
tools of your trade.
-
property you owned and money you spent during the
previous two years, and
-
property you sold or gave away during the previous
two years.
You'll find step-by-step instructions for filling out
all of the required forms in
How to File for Chapter 7 Bankruptcy, by Stephen Elias, Albin
Renauer, and Robin Leonard (Nolo).
Bankruptcy's Magic Wand -- The Automatic Stay
Filing for Chapter 7 bankruptcy puts into effect an
"Order for Relief" -- known informally as the
"automatic stay." The automatic stay immediately stops most
creditors from trying to collect what you owe them. So, at least
temporarily, creditors cannot legally grab ("garnish") your
wages, empty your bank account, go after your car, house, or other
property, or cut off your utility service or welfare benefits. For
more information, see
How Bankruptcy Stops Your Creditors: The Automatic Stay.
Bankruptcy Court's Control Over Your Financial
Affairs
By filing for Chapter 7 bankruptcy, you are
technically placing the property you own and the debts you owe in the
hands of the bankruptcy court. You can't sell or give away any of the
property you own when you file, or pay off your pre-filing debts,
without the court's consent. However, with a few exceptions, you can
do what you wish with property you acquire and income you earn after
you file for bankruptcy.
The Bankruptcy Trustee for Chapter 7 Bankruptcy
The court exercises its control through a
court-appointed person called a "bankruptcy trustee." The
trustee's primary duty is to see that your creditors are paid as much
as possible on what you owe them. And the more assets the trustee
recovers for creditors, the more the trustee is paid.
The trustee (or the trustee's staff) will examine your
papers to make sure they are complete and to look for nonexempt
property to sell for the benefit of creditors. The trustee will also
look at your financial transactions during the previous year to see if
any can be undone to free up assets to distribute to your creditors.
In most Chapter 7 bankruptcy cases, the trustee finds nothing of value
to sell.
The Creditors Meeting
A week or two after you file, you (and all the
creditors you list in your bankruptcy papers) will receive a notice
that a "creditors meeting" has been scheduled. The
bankruptcy trustee runs the meeting and, after swearing you in, may
ask you questions about your bankruptcy and the papers you filed. In
the vast majority of Chapter 7 bankruptcies, this is the debtor's only
visit to the courthouse.
What Happens to Your Property
If, after the creditors meeting, the trustee
determines that you have some nonexempt property, you may be required
to either surrender that property or provide the trustee with its
equivalent value in cash. If the property isn't worth very much or
would be cumbersome for the trustee to sell, the trustee may
"abandon" the property -- which means that you get to keep
it, even though it is nonexempt. (For information on which types of
property are typically exempt, see
When Chapter 7 Bankruptcy Isn't the Right Choice. However, which
property is exempt varies by state -- you can find complete lists of
exempt property for every state in
How to File for Chapter 7 Bankruptcy, by Stephen Elias, Albin
Renauer, and Robin Leonard (Nolo).)
Most property owned by Chapter 7 debtors is either
exempt or is essentially worthless for purposes of raising money for
the creditors. As a result, few debtors end up having to surrender any
property, unless it is collateral for a secured debt (see below).
How Your Secured Debts Are Treated
If you've pledged property as collateral for a loan,
the loan is called a secured debt. The most common examples of
collateral are houses and automobiles. If you're behind on your
payments, the creditor can ask to have the automatic stay lifted in
order to repossess or foreclose on the property. However, if you are
current on your payments, you can keep the property and keep making
payments as before -- unless you have enough equity in the property to
justify its sale by the trustee.
If a creditor has recorded a lien against your
property because of a debt you haven't paid (for example, because the
creditor obtained a court judgment against you), that debt is also
secured. You may be able to wipe out the lien in Chapter 7 bankruptcy.
The Chapter 7 Bankruptcy Discharge
At the end of the bankruptcy process, all of your
debts are wiped out (discharged) by the court, except:
-
debts that automatically survive bankruptcy, such
as child support, most tax debts, and student loans, unless the
court rules otherwise, and
-
debts that the court has declared nondischargeable
because the creditor objected (for example, debts incurred by your
fraud or malicious acts).
For more information and step-by-step help filing for
Chapter 7 bankruptcy, see
How to File for Chapter 7 Bankruptcy, by Stephen Elias, Albin
Renauer, and Robin Leonard (Nolo).
Chapter 7 Bankruptcy -- Who Can File?
The bankruptcy "means
test" and other Chapter 7 eligibility rules.
Filing for Chapter 7 bankruptcy can be a powerful tool
for dealing with overwhelming debt. But it isn't available to
everyone. There are several situations in which you won't be
allowed to file Chapter 7 bankruptcy.
You Have Enough Income to Repay Your Debts
Under the old bankruptcy rules, the bankruptcy judge
had the power to dismiss a Chapter 7 bankruptcy case if he or she
thought the debtor had sufficient disposable income to fund a Chapter
13 repayment plan. There were no hard and fast rules dictating when a
judge should dismiss a case on these grounds -- it depended on the
facts of the case and the attitude of the judge.
Now that the new bankruptcy law has gone into effect,
however, there are clear criteria that dictate who will be allowed to
stay in Chapter 7 bankruptcy -- and who will be forced to use Chapter
13 bankruptcy if they want to file. Disabled veterans whose debts were
incurred during active duty and people whose debts come primarily from
the operation of a business get a fast pass to Chapter 7 bankruptcy.
All others must meet the requirements set out below.
How High is Your Income?
Under the new rules, the first step in figuring out
whether you can file for Chapter 7 bankruptcy is to measure your
"current monthly income" against the median income for a
family of your size in your state. Your "current monthly
income" is your average income over the last six months before
you file. If your income is less than or equal to the median, you can
file for Chapter 7 bankruptcy.
If your income is more than the median, however, you
must pass "the means test" -- another requirement of the new
law -- in order to file for Chapter 7 bankruptcy.
Do You Have Enough Disposable Income to Repay Some
Debts?
The purpose of the means test is to figure out whether
you have enough disposable income, after subtracting certain allowed
expenses and required debt payments, to repay at least a portion of
your unsecured debts over a five-year repayment period.
For much more information on these new requirements,
including detailed worksheets that will help you figure out whether
you can use Chapter 7 bankruptcy, see
How to File for Chapter 7 Bankruptcy, by Attorneys Stephen
Elias, Albin Renauer, and Robin Leonard (Nolo).
You Previously Received a Bankruptcy Discharge
You cannot file for Chapter 7 bankruptcy if you
obtained a discharge of your debts in a Chapter 7 bankruptcy case
within the last eight years, or a Chapter 13 case within the last six
years.
A Previous Bankruptcy Was Dismissed Within the
Previous 180 Days
You cannot file for Chapter 7 bankruptcy if a previous
Chapter 7 or Chapter 13 case was dismissed within the past 180 days
because:
-
you violated a court order
-
the court ruled that your filing was fraudulent or
constituted an abuse of the bankruptcy system, or
-
you requested the dismissal after a creditor asked
for relief from the automatic stay.
You Defrauded Your Creditors
A bankruptcy court may dismiss your case if it thinks
you have tried to cheat your creditors or concealed assets so you can
keep them for yourself.
Certain activities are red flags to the courts and
trustees. If you have engaged in any of them during the past year,
your bankruptcy case may be dismissed. These no-nos include:
-
unloading assets to your friends or relatives to
hide them from creditors or from the bankruptcy court
-
running up debts for luxury items when you were
clearly broke and had no way to pay them off
-
concealing property or money from your spouse
during a divorce proceeding, or
-
lying about your income or debts on a credit
application.
In addition, you must sign your bankruptcy papers
under "penalty of perjury" swearing that everything in them
is true. If you deliberately fail to disclose property, omit material
information about your financial affairs, or use a false Social
Security number (to hide your identity as a prior filer), and the
court discovers your action, your case will be dismissed and you may
be prosecuted for fraud.
The Bankruptcy Means Test: Is Your Income Low Enough
for Chapter 7 Bankruptcy?
A means test calculator can
determine whether you qualify for Chapter 7 bankruptcy -- try one
online.
The "means test" is a formula designed to
keep filers with higher incomes from filing for Chapter 7 bankruptcy.
Only bankruptcy filers with primarily consumer debts, not business
debts, need to take the means test. High income filers who fail the
means test may use Chapter 13 bankruptcy to repay a portion of their
debts, but may not use Chapter 7 bankruptcy to wipe out their debts
altogether.
However, having to take the Chapter 7 means test
doesn't mean that you must be penniless in order to use Chapter 7
bankruptcy. You can earn significant monthly income and still qualify
for Chapter 7 bankruptcy if you have a lot of expenses, such as a high
mortgage payment. This article shows you simple ways to determine
whether you can pass the means test -- and, therefore, use Chapter 7
-- if you were to file for bankruptcy.
How Does the Chapter 7 Means Test Work?
The means test was designed to limit the use of
Chapter 7 bankruptcy to those who truly can't pay their debts. It does
this by deducting specific monthly expenses from your "current
monthly income" (your average income over the six calendar months
before you file for bankruptcy) to arrive at your monthly
"disposable income." The higher your disposable income, the
more likely you won’t be allowed to use Chapter 7 bankruptcy.
To take the means test, you must first determine
whether your income is more or less than the median income in your
state. If you earn more than the median, you must figure out whether
you would have enough left over, after subtracting certain expenses,
to repay some of your debt.
Is Your Income More Than the Median?
The first step is simple: If your current monthly
income is less than the median income for a household of your size in
for your state, you pass. Period. You're done. You do not need to
complete the rest of the means test. You can file for Chapter 7.
Do You Have Enough Disposable Income to Repay Some
Debts?
For those whose household income exceeds the state
median, the means test computations get significantly more complex.
You must determine whether you have enough income left over (called
"disposable income"), after paying your "allowed"
monthly expenses, to pay off at least a portion of your unsecured
debts (such as credit card bills). If your disposable income adds up
to more than a certain amount, you fail the means test and cannot file
for Chapter 7 bankruptcy.
Median income levels vary by state and household size,
and each county and metropolitan region has different allowed amounts
for categories of expenses: basic necessities, housing, and
transportation. But don't worry: You can get through the math with the
help of an online calculator.
Use a Chapter 7 Means Test Online Calculator
If you're looking for an easy way to determine your
eligibility under the Chapter 7 means test, use our online
means test calculator, created by the author of Nolo's book
How to File for Chapter 7 Bankruptcy, Albin Renauer, J.D.
Once you enter your zip code, the calculator uses the applicable
income and expense standards for your state, county, and region to
determine your eligibility.
You’ll have to supply some income and expense
information, but the calculator will save you the trouble of looking
up income and expense figures for your area and doing the math. And,
if you decide to file for Chapter7 bankruptcy, you can use these
figures on your official paperwork (the calculator closely follows the
format of the means test form, Official Form 22A, that you must
complete when you file for bankruptcy).
If You Pass the Chapter 7 Means Test
Just because you qualify under the means test does not
necessarily mean you should file for Chapter 7 bankruptcy --
merely that you can. Any decision to file for Chapter 7
bankruptcy should be made only after considering alternatives and
other factors discussed in other articles on this website or in Nolo's
The New Bankruptcy: Will It Work for You?, by Attorney
Stephen Elias.
Once you've made your decision to go ahead and file
for Chapter 7 bankruptcy, Nolo's book
How to File for Chapter 7 Bankruptcy, by Stephen Elias, Albin
Renauer, and Robin Leonard, can walk you step by step through the
filing process.
If You Don't Pass the Chapter 7 Means Test
If you don’t pass the means test, you are limited to
using Chapter 13 bankruptcy, which requires you to make monthly
payments over a five-year period according to a strict budget
monitored by the court. Most people who file for bankruptcy prefer
Chapter 7, which requires no repayment. However, Chapter 13 bankruptcy
is still the best way to handle specific types of problems, like
curing a default on a mortgage. (See
Reasons to Use Chapter 13 Bankruptcy Instead of Chapter 7 Bankruptcy.)
For help filing a Chapter 13 bankruptcy, see Nolo's
Chapter 13 Bankruptcy: Repay Your Debts, by Stephen Elias and
Robin Leonard.
When Chapter 7 Bankruptcy Isn't the Right Choice
Chapter 7 bankruptcy may make
you sacrifice property, yet not discharge all your debt.
If you are inclined to file for Chapter 7 bankruptcy,
take a moment to decide whether it makes economic sense. You need to
consider three questions:
-
Are you judgment proof -- that is, are creditors
legally barred from taking your property or income even if you
don't file for Chapter 7 bankruptcy?
-
Will Chapter 7 bankruptcy discharge enough of your
debts to make it worth your while?
-
Will you have to give up property you really want
to keep?
Are You Judgment Proof?
Most unsecured creditors are required to obtain a
court judgment before they can start collection procedures, such as a
wage garnishment or seizure of personal property. (Collections for
taxes, child support, and student loans are exceptions to this general
rule.)
If your debts are mainly of the type that require a
judgment, the next question is whether you have any income or property
that your creditors can seize if they go to the trouble of obtaining a
judgment. For instance, if all of your income comes from Social
Security (which can’t be taken by creditors), and all of your
property is exempt, there is nothing your creditors can take from you
to satisfy their judgment. That makes you "judgment proof."
While you may still wish to file for Chapter 7 bankruptcy to get a
fresh start, nothing bad will happen to you if you don’t file, no
matter how much you owe.
Will Chapter 7 Bankruptcy Discharge Enough of Your
Debts?
Certain categories of debts cannot be discharged in
Chapter 7 bankruptcy. It doesn't make much sense to file for Chapter 7
bankruptcy if your primary goal is to eliminate these nondischargeable
debts. The main nondischargeable debts are:
-
back child support and alimony obligations
-
student loans, unless repayment would cause you
undue hardship
-
income taxes less than three years past due
-
recent debts for luxuries (more than $550 to any
one creditor incurred within 90 days before you file for
bankruptcy, and cash advances of more than $825 within 70 days
before you file), and
-
court judgments for injuries or death to someone
arising from your intoxicated driving.
The bankruptcy judge may rule some types of debts as
nondischargeable if the creditor objects to a discharge in the
bankruptcy court. These debts include:
-
debts incurred on the basis of fraud, such as
lying on a credit application or writing a bad check
-
debts from willful or malicious injury to another
or another's property
-
debts from larceny (theft), breach of trust, or
embezzlement, or
-
debts arising out of a marital settlement
agreement or divorce decree that aren't otherwise automatically
nondischargeable as support or alimony.
If the bulk of your indebtedness is from debts that
creditors may object to being discharged, it may still make sense to
file for Chapter 7 bankruptcy and hope your creditors don't object.
Codebtors will still be on the hook. If you want to
discharge debts for which you have a codebtor (such as someone who
cosigned a loan for you, or a business partner who is equally liable
for the debt), bankruptcy won't wipe out the debt. If the debt is of a
type that can be discharged in Chapter 7 bankruptcy, you will no
longer be legally responsible for paying it, but your codebtor will.
How Much Property Will You Have to Give Up?
Whether or not you decide to file for Chapter 7
bankruptcy may depend on what property of yours will be taken to pay
your creditors ("nonexempt" property) and what property you
get to keep ("exempt" property).
Certain kinds of property are exempt in almost every
state, while others are almost never exempt. The following are items
you can typically keep (exempt property):
-
motor vehicles, up to a certain value
-
reasonably necessary clothing (no mink coats)
-
reasonably needed household furnishings and goods
(the second TV may have to go)
-
household appliances
-
jewelry, up to a certain value
-
personal effects
-
life insurance (cash or loan value, or the
proceeds of life insurance), up to a certain value
-
pensions
-
part of the equity in your home
-
tools of your trade or profession, up to a certain
value
-
a portion of unpaid but earned wages, and
-
public benefits (welfare, Social Security,
unemployment compensation) accumulated in a bank account.
Items you must typically give up (nonexempt property)
include:
-
expensive musical instruments (unless you're a
professional musician)
-
stamp, coin, and other collections
-
family heirlooms
-
cash, bank accounts, stocks, bonds, and other
investments
-
a second car or truck, and
-
a second or vacation home.
Is Chapter 7 Bankruptcy More Than You Need?
You may be considering bankruptcy just to stop
harassment by your creditors. However, in most cases, you can stop
creditors from making telephone calls to your home or work by simply
telling them to stop. For more information, see
What to Do If a Bill Collector Crosses the Line.
Deciding Whether to File Chapter 7 Bankruptcy
If you determine that you are judgment proof, that
you'll be stuck with significant debt following bankruptcy, or that
you may have to give up too much property, Chapter 7 bankruptcy may
not make sense for you. For a discussion of other options, including
the possibility of doing nothing, see
Alternatives to Bankruptcy.
When Chapter 7 Bankruptcy Is Better than Chapter 13
Bankruptcy
Chapter 7 bankruptcy has some
significant advantages over Chapter 13 bankruptcy.
Most people who file for bankruptcy choose Chapter 7
bankruptcy because it's fast, effective, easy to file, and doesn't
require payments over time.
Advantages of Chapter 7 Bankruptcy
A typical Chapter 7 bankruptcy case is opened and
closed within three to six months, and the person filing emerges
debt-free except for a mortgage, car payments, and certain types of
debts that survive bankruptcy, such as student loans, recent taxes,
and unpaid child support.
Although you can lose property in Chapter 7
bankruptcy, most filers don't. Bankruptcy lets you keep most
necessities -- if you have little to begin with, chances are good
you'll be able to keep all or most of your property (unless you
pledged the item as collateral for a loan).
However, not everyone is eligible to use Chapter 7
bankruptcy. If your income is sufficient to fund a Chapter 13
repayment plan, after subtracting what you'll spend on certain allowed
expenses and monthly payments for child support, tax debts, secured
debts (such as a mortgage or car loan), and a few other types of
debts, you won't be allowed to file for Chapter 7 bankruptcy.
Drawbacks of Chapter 13 Bankruptcy
Probably the main reason most people prefer Chapter 7
bankruptcy is that it doesn't require you to repay any portion of your
debts, as Chapter 13 bankruptcy does. And if you use Chapter 13
bankruptcy, you must complete the entire three- to five-year repayment
plan in order to have your remaining debts discharged (unless the
court lets you off the hook early, for hardship reasons). The majority
of those who file for Chapter 13 bankruptcy don't complete their
plans, so filers run a very real risk that their debts won't
ultimately be discharged.
Despite this major potential drawback, there are some
good reasons why people who are eligible for both types of bankruptcy
choose to use Chapter 13.
For More Information
For help filing a Chapter 7 bankruptcy, see
How to File for Chapter 7 Bankruptcy, by Stephen Elias, Albin
Renauer, and Robin Leonard (Nolo).
What Happens to Your Car in Chapter 7 Bankruptcy?
by Attorney Stephen R. Elias
Chapter 7 bankruptcy allows
you to keep or surrender your car or truck.
People often wonder how Chapter 7 bankruptcy will
affect their ability to keep their car. If you aren't making payments
on a car, then you'll be able to keep it if its value falls under your
state's vehicle exemption amount. However, if you are making payments
on your car, it's not so simple. During your bankruptcy, you'll need
to decide whether you want to surrender the vehicle or keep it by
continuing to make payments. You let the bankruptcy court know what
you want to do by filing an official form called the Statement of
Intention (SOI) with your other bankruptcy papers, as well as mailing
a separate copy of the SOI to your vehicle lender. Similarly, if you
are leasing your car, you can either reject the lease on your SOI or
can keep the car by assuming the lease.
Walking Away From the Car
If you want to walk away from the car, you list the
lender on your SOI and state that you intend to surrender the vehicle
-- that is, turn it in to the lender. This will clear you of any
further liability on the debt after your bankruptcy. If you are
leasing your car, you can get out of the lease by rejecting the lease
on your SOI.
Keeping a Car You're Still Paying For
If you want to keep a car you are making payments on,
no matter what else is going on in your bankruptcy, you should
continue to make your payments as scheduled. You do have a choice,
however, on how to keep the car: You can either pay the lender a lump
sum to purchase the car at its current value (called
redemption
), or enter into a new contract (called a
reaffirmation
agreement), which lets you keep your car under much the same terms as
your original car's promissory note (although this is negotiable).
Sometimes your lender will let you keep the car
without entering into a reaffirmation agreement, by simply allowing
you to continue to make the payments under the old agreement (this is
called the ride-through option). If your lender has been accepting
your payments, it's a sign that you may be able to retain the vehicle
and continue making payments without entering into a new reaffirmation
agreement.
Negotiating With the Lender to Keep the Car
To find out whether your lender will require a new
contract, call them and ask for the bankruptcy or loss mitigation
department. Explain that you intend to file for bankruptcy and ask
whether you need to reaffirm the promissory note or can instead retain
the car and continue making payments without reaffirming.
If the lender agrees to let you retain the car and pay
according to the old agreement, the lender will still have a
lien
and can repossess the car if you
default
on your payments. But if the car is repossessed (or if you decide to
give it back), you won't have to worry about still owing a deficiency
on the car (the amount of the loan minus what the lender can sell the
car for) -- that will be wiped out after your bankruptcy case is
over.
If the lender requires you to reaffirm the promissory
note and you do reaffirm it, consider carefully whether you want to do
this. The lender will have a right to repossess the car if you default
on your payments and you will owe any deficiency that remains
on your loan if that happens. If you want to reaffirm your loan,
you'll take the following steps.
Negotiate the Reaffirmation Agreement
First, you'll state on your Statement of Intention
that you intend to reaffirm the promissory note. Then, the lender will
send you an agreement setting out the same or similar terms as your
old agreement. At this point you should consider negotiating the terms
more to your advantage. You do have some leverage here, because the
lender knows that bankruptcy gives you the option of surrendering the
car and canceling all liability. Lenders lose a lot of money on
repossessions, so they have an incentive to cut you a better deal,
such as reducing the principal of the loan to the car's current value.
Don't be afraid to attempt to negotiate for this. All the lender can
do is say "No." If the lender does say "No," you
may want to consider surrendering the car at this point, and let the
bankruptcy erase your liability for the remaining payments on the
loan.
Have the Court Review the Reaffirmation Agreement
Once you and the lender have agreed on the terms of
the reaffirmation agreement, you'll sign the agreement and file it
with the court. At the "discharge hearing," near the end of
your bankruptcy, the judge will decide whether the agreement should be
enforced. After considering your income, the amount you owe on the
car, and its value, the judge may decide that the reaffirmation will
create an undue hardship for you or be against your best interests. If
you still owe much more than the car's value, a judge might disallow
the reaffirmation.
What Happens If the Judge Approves the Reaffirmation
If the judge approves the reaffirmation agreement, you
will continue to be liable under its terms after your bankruptcy ends.
For instance, if you have to give the car back due to a loss of
income, at a time when you owe $25,000 under the agreement and your
car is worth only $10,000, you'll be on the hook for the $15,000
deficiency. Remember that because you can't file another Chapter 7
bankruptcy for eight years, you could be back where you started before
you filed for bankruptcy (another reason why a judge might not approve
the reaffirmation in the first place).
What Happens If the Judge Disapproves the
Reaffirmation
If the judge disapproves the reaffirmation agreement,
you don't necessarily lose the car. According to several bankruptcy
court opinions, you can keep the car as long as you remain current on
your payments. These courts reason that as long as you do what is
required of you by the bankruptcy code (state your intention to
reaffirm, sign and file the reaffirmation agreement, and attend the
discharge hearing), the fact that judge disapproves the agreement is
beyond your control and should not result in your having to give up
your car. All of this is conditioned, of course, on staying current on
your payments. (See In re Moustafi, 371 Bankruptcy Reporter
434 (Bankr Ariz 2007).) You can read this case at
www.georgiabankruptcyblog.com/moustafi.pdf. Paradoxically, if the
judge disapproves the agreement, you will probably be better off,
because you will be left with the practical equivalent of the
ride-through option, meaning that you won't owe a deficiency should
the car have to be surrendered or repossessed.
Where to Go for More Information
For more information on redeeming and reaffirming
secured property in a Chapter 7 bankruptcy, see
How to File for Chapter 7 Bankruptcy (Nolo), by
attorneys Stephen Elias, Albin Renauer, and Robin Leonard.
An Overview of Chapter 13 Bankruptcy
The basic steps involved in a
typical Chapter 13 bankruptcy case.
Chapter 13 bankruptcy, sometimes called reorganization
bankruptcy, is quite different from Chapter 7 bankruptcy. In a Chapter
7 bankruptcy, most of your debts are wiped out; in exchange, you must
relinquish any property that isn't exempt from seizure by your
creditors. In a Chapter 13 bankruptcy, you don't have to hand over any
property, but you must use your income to pay some or all of what you
owe to your creditors over time -- from three to five years, depending
on the size of your debts and income.
Chapter 13 Eligibility
Chapter 13 bankruptcy isn't for everyone. Because
Chapter 13 requires you to use your income to repay some or all of
your debt, you'll have to prove to the court that you can afford to
meet your payment obligations. If your income is irregular or too low,
the court might not allow you to file for Chapter 13.
If your total debt burden is too high, you are also
ineligible. Your secured debts cannot exceed $1,010,650, and your
unsecured debts cannot be more than $336,900. A "secured
debt" is one that gives a creditor the right to take a specific
item of property (such as your house or car) if you don't pay the
debt. An "unsecured debt" (such as a credit card or medical
bill) doesn't give the creditor this right.
The Chapter 13 Process
Before you can file for bankruptcy, you must receive
credit counseling from an agency approved by the United States
Trustee's office. (For a list of approved agencies, go to the
Trustee's website at
www.usdoj.gov/ust and click "Credit Counseling and Debtor
Education.") These agencies are allowed to charge a fee for their
services, but they must provide counseling for free or at reduced
rates if you cannot afford to pay.
In addition, you'll have to pay the filing fee, which
is currently $274, and file numerous forms. For line-by-line
instructions on filling out the required bankruptcy forms, see
Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over
Time, by Stephen Elias and Robin Leonard (Nolo).
The Chapter 13 Repayment Plan
The most important part of your Chapter 13 paperwork
will be a repayment plan. Your repayment plan will describe in detail
how (and how much) you will pay each of your debts. There is no
official form for the plan, but many courts have designed their own
forms.
How Much You Must Pay
Your Chapter 13 plan must pay certain debts in full.
These debts are called "priority debts," because they're
considered sufficiently important to jump to the head of the
bankruptcy repayment line. Priority debts include child support and
alimony, wages you owe to employees, and certain tax obligations.
In addition, your plan must include your regular
payments on secured debts, such as a car loan or mortgage, as well as
repayment of any arrearages on the debts (the amount by which you've
fallen behind in your payments).
The plan must show that any disposable income you have
left after making these required payments will go towards repaying
your unsecured debts, such as credit card or medical bills. You don't
have to repay these debts in full (or at all, in some cases). You just
have to show that you are putting any remaining income towards their
repayment.
How Long Your Repayment Plan Will Last
The length of your repayment plan depends on how much
you earn and how much you owe. If your average monthly income over the
six months prior to the date you filed for bankruptcy is more than the
median income for your state, you'll have to propose a five-year plan.
If your income is lower than the median, you may propose a three-year
plan. (To get the median income figures for your state, go to the
United States Trustee's website,
www.usdoj.gov/ust, and click "Means Testing Information.")
No matter how much you earn, your plan will end if you
repay all of your debts in full, even if you have not yet reached the
three- or five-year mark.
If You Can’t Make Plan Payments
If for some reason you cannot finish a Chapter 13
repayment plan -- for example, you lose your job six months into the
plan and can’t keep up the payments -- the bankruptcy trustee may
modify your plan, or the court might let you discharge your debts
on the basis of hardship. Examples of hardship would be a sudden plant
closing in a one-factory town or a debilitating illness.
If the bankruptcy court won’t let you modify your plan or give you a
hardship discharge, you might be able to convert to a Chapter 7
bankruptcy or ask the bankruptcy court to dismiss your Chapter 13
bankruptcy case (you would still owe your debts, plus any interest
creditors did not charge while your Chapter 13 case was pending). For
information on your alternatives in this situation, see
Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over
Time, by Stephen Elias and Robin Leonard (Nolo).
How a Chapter 13 Case Ends
Once you complete your repayment plan, all remaining
debts that are eligible for discharge will be wiped out. Before you
can receive a discharge, you must show the court that you are current
on your child support and/or alimony obligations and that you have
completed a budget counseling course with an agency approved by the
United States Trustee. (This requirement is separate from the
mandatory credit counseling you must undergo before filing
for bankruptcy -- you can find a list of approved agencies at the
Trustee's website,
www.usdoj.gov/ust; click "Credit Counseling and Debtor
Education.")
For more information, see
Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over
Time, by Stephen Elias and Robin Leonard (Nolo).
Are You Eligible for Chapter 13 Bankruptcy?
Learn whether Chapter 13
bankruptcy is an option for you.
Chapter 13 bankruptcy is a good option for some
debtors, but it isn't available to everyone.
Businesses Can't File for Chapter 13 Bankruptcy
A business, even a sole proprietorship, cannot file
for Chapter 13 bankruptcy in the name of that business. Businesses are
steered toward Chapter 11 bankruptcy when they need help reorganizing
their debts.
If you own a business, however, you can file for
Chapter 13 bankruptcy as an individual. You can include in your
Chapter 13 bankruptcy case business-related debts for which you are
personally liable. There is one exception to this rule: Stockbrokers
and commodity brokers cannot file a Chapter 13 bankruptcy case, even
if they want to discharge only personal (nonbusiness) debts.
You Must Have Sufficient Disposable Income
In order to qualify for Chapter 13, you will have to show the
bankruptcy court that you will have enough income, after subtracting
certain allowed expenses and required payments on secured debts (such
as a car loan or mortgage), to meet your repayment obligations. Your
plan must pay back certain debts in full, or the judge will not
confirm (approve) it and allow you to proceed.
You can use the income from the following sources to
fund a Chapter 13 plan:
-
regular wages or salary
-
income from self-employment
-
wages from seasonal work
-
commissions from sales or other work
-
pension payments
-
Social Security benefits
-
disability or workers' compensation benefits
-
unemployment benefits, strike benefits, and the
like
-
public benefits (welfare payments)
-
child support or alimony you receive
-
royalties and rents, and
-
proceeds from selling property, especially if
selling property is your primary business.
If you are married, your income does not necessarily
have to be "yours." A nonworking spouse can file alone and
use money from a working spouse as a source of income. And an
unemployed spouse can file jointly with a working spouse.
Your Debts Must Not Be Too High
You do not qualify for Chapter 13 bankruptcy if your
secured debts exceed $1,010,650. (This amount is adjusted for
inflation every three years; the last increase took effect on April 1,
2007.) A debt is secured if you stand to lose specific property if you
don't make your payments to the creditor. Home loans and car loans are
the most common examples of secured debts. But a debt might also be
secured if a creditor -- such as the IRS -- has filed a lien (notice
of claim) against your property.
In addition, for you to be eligible for Chapter 13
bankruptcy, your unsecured debts cannot exceed $336,900. (This amount
is also increased every three years.) An unsecured debt doesn't
give the creditor a right to take a particular piece of property.
Most debts are unsecured, including credit card debts, medical
and legal bills, back utility bills, and department store charges.
You Must Be Current on Your Income Tax Filings
To file for Chapter 13, you will have to submit proof
that you filed your federal and state income tax returns for the four
tax years prior to your bankruptcy filing date. If you need some time
to get current on your filings, the court can postpone the
proceedings. Ultimately, however, if you don't produce your returns or
transcripts of the returns for those four years, your Chapter 13 case
will be dismissed.
Want to Learn More?
For more information on Chapter 13's eligibility
requirements, see
Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over
Time, by Robin Leonard and Stephen Elias (Nolo).
Reasons to Use Chapter 13 Bankruptcy Instead of
Chapter 7 Bankruptcy
Sometimes it makes sense to
file for Chapter 13 bankruptcy instead of Chapter 7 bankruptcy.
Many debtors choose not to file for Chapter 13
bankruptcy because it requires repayment of at least a portion of
their debts (unlike Chapter 7 bankruptcy, which wipes out many debts
entirely
).
In some situations, however, Chapter 13 bankruptcy is
the better bankruptcy option. Not only that, but certain debtors don't
get to choose: Not everyone is eligible for Chapter 7 bankruptcy, so
Chapter 13 will by the only option available to some filers.
Here are some good reasons to file for Chapter 13:
You cannot file for Chapter 7. You
won't be allowed to file for Chapter 7 if you cannot meet some new
requirements imposed by the 2005 revisions to the bankruptcy law.
Under these new rules, you cannot file for Chapter 7 if both of the
following are true:
-
Your current monthly income over the six months
prior to your filing date is more than the median income for a
household of your size in your state (go to the website of the
United States Trustee,
www.usdoj.gov/ust, and click "Means Testing Information"
to see the median figures for your state).
-
Your disposable income, after subtracting certain
expenses and monthly payments for debts you would have to repay in
Chapter 13, exceeds certain limits set by law. These calculations
are commonly referred to as the "means test" -- if you
have the means to repay a certain amount of your debt through a
Chapter 13 repayment plan, you flunk the test and are ineligible
for Chapter 7 bankruptcy. (For more information, including a link
to an online calculator you can use to see whether you pass the
means test, see
The Bankruptcy Means Test: Is Your Income Low Enough for Chapter 7
Bankruptcy?)
The means test can get fairly complex -- and, to make
matter worse, Congress has its own definitions of "disposable
income," "current monthly income,"
"expenses," and other important terms, which sometimes
operate to make your income seem higher than it actually is. You can
find step-by-step instructions to determine if you qualify for Chapter
7 under these new rules in
How to File for Chapter 7 Bankruptcy, by attorney Stephen
Elias, attorney Albin Renauer, and Robin Leonard, J.D. (Nolo).
In addition, if you have received a Chapter 7
bankruptcy discharge within the last eight years, or a Chapter 13
discharge within the last six years, you may not file for Chapter 7
bankruptcy.
You are behind on your mortgage or car loan,
and want to make up the missed payments over time and reinstate the
original agreement. You cannot do this in Chapter 7 bankruptcy. You
can make up missed payments only in Chapter 13 bankruptcy.
You have a tax obligation, student loan, or
other debt that cannot be discharged in Chapter 7. You can
include these debts in your Chapter 13 plan and pay them off over
time.
You have a sincere desire to repay your debts,
but you need the protection of the bankruptcy court to do so. This
might be the case if creditors are coming after you, or if you simply
require the formal structure and deadlines the Chapter 13 process
provides in order to follow through on your good intentions.
You have nonexempt property that you want to keep.
When you file for Chapter 7 bankruptcy, you get to keep only
exempt property
-- property that is protected from creditors under state or federal
law. You have to give your nonexempt property to the bankruptcy
trustee, who can sell it and distribute the proceeds to your
creditors.
In Chapter 13, you don't have to give up any property.
Instead, you repay your debts out of your income. So, if you have
nonexempt property that you can't bear to part with, Chapter 13 might
be the better choice.
You have a codebtor on a personal debt. If you
file for Chapter 7 bankruptcy, your codebtor will still be on the hook
-- and your creditor will undoubtedly go after the codebtor for
payment. If you file for Chapter 13 bankruptcy, the creditor will
leave your codebtor alone, as long as you keep up with your bankruptcy
plan payments.
For more help deciding which bankruptcy is right for
you, see
The New Bankruptcy: Will It Work for You?, by attorney
Stephen Elias (Nolo). Or, for help filing Chapter 13, see
Chapter 13 Bankruptcy: Repay Your Debts, by attorney Stephen
Elias and Robin Leonard, J.D. (Nolo).
Your Obligations Under a Chapter 13 Bankruptcy Plan
Learn which debts you must pay
back when you file for Chapter 13 bankruptcy.
To begin a Chapter 13 bankruptcy, you fill out a
packet of forms -- mostly the same forms as you would use in a Chapter
7 bankruptcy -- listing your income, property, expenses, and debts.
You file these forms and paperwork with a nearby bankruptcy court. You
must also file a workable payment plan proposing how you plan to
handle your debts over the payment plan period.
You must also file your tax return for the previous
year, proof that you've filed your tax returns for the last four
years, and a certificate showing that you've completed credit
counseling with an agency approved by the United States Trustee (go to
www.usdoj.gov/ust, then click "Credit Counseling and Debtor
Education" for a list of approved agencies).
Under a Chapter 13 plan, you make payments, usually
monthly, to the bankruptcy trustee, an official appointed by the
bankruptcy court to oversee your case. The trustee in turn pays your
creditors and collects a statutory commission based on the amounts
paid out under your plan. You must make every payment, on time, in
order to successfully complete your plan and get a discharge of your
remaining debts.
How Much You'll Have to Pay
Some creditors are entitled to receive 100% of what
you owe them, while others may receive a much smaller percentage (or
nothing at all). Typically, Chapter 13 bankruptcy plans must provide
that:
Administrative claims will be paid 100%. These
include:
-
your filing fee ($274)
-
the trustee's commission (3% to 10% of each
monthly payment), and
-
attorney's fees, if you hire an attorney for help
with your Chapter 13 bankruptcy.
Priority debts will be paid 100%. These
include:
-
back alimony and child support
-
most tax debts (including state and federal income
taxes)
-
wages, salaries, or commissions you owe to
employees, and
-
contributions you owe to an employee benefit fund.
Mortgage defaults will be paid 100%
if you want to keep your house.
Other secured debt defaults will be
paid 100% if you want to keep the property. Missed car
payments fall into this category.
Unsecured debts will be paid anywhere from 0%
to 100% of what you owe. The exact amount depends on:
-
the total value of your nonexempt property
-
the amount of disposable income you have each
month to put toward your debts, and
-
how long your plan lasts.
Disposable Income
Your payment plan must commit to paying any leftover
disposable income (your income less certain allowed expenses and
payments on secured loans, such as a mortgage or car loan) towards
your unsecured debts, such as credit card debts and medical bills.
Length of Payment Plan
The length of your payment plan depends on your income
level. If your "current monthly income" (your average income
over the six months prior to filing) exceeds the median monthly income
for a household of your size in your state, your plan must last five
years. If your income is less than the median, you can propose a
three-year plan, even if your unsecured creditors cannot be fully
repaid during that time. (To find the median income figures for your
state, go to the United States Trustee's website,
www.usdoj.gov/ust, and click "Means Testing Information.")
Your "current" monthly income might be out of date.
Because your current monthly income, as calculated above, is an
average, it may well be more than your actual monthly income at the
time you file. For instance, if you were laid off unexpectedly three
months before filing, your monthly income when you file may be quite
low -- as compared to your average income over the last six months,
which will have to include three months of your salary.
No Surrender of Property
If you file for Chapter 13 bankruptcy, you don't have
to hand over any of your property; instead, you repay your debts out
of your income. In exchange for getting to keep your property, your
plan will have to pay your creditors at least the value of your
nonexempt property. (In
Chapter 7 bankruptcy, you must surrender your nonexempt property to
the trustee, who can sell it and distribute the proceeds to your
creditors. You do get to keep property that is
exempt
.)
For more information on Chapter 13 bankruptcy, see
Chapter 13 Bankruptcy: Repay Your Debts, by attorney Stephen
Elias and Robin Leonard, J.D.
Bankruptcy FAQ (Chapter 7 and Chapter 13)
Chapter 7 bankruptcy and Chapter 13 bankruptcy: what you need to
know.
What's Below:
What
exactly is bankruptcy? Will it wipe out all my debts?
What is
the difference between Chapter 7 and Chapter 13 bankruptcy? Which one
lets me keep my property?
Am I
free to choose between Chapter 7 bankruptcy and Chapter 13 bankruptcy?
Which type of bankruptcy should I use?
What
exactly is bankruptcy? Will it wipe out all my debts?
Bankruptcy is a federal court process designed to help
consumers and businesses eliminate their debts or repay them under the
protection of the bankruptcy court. Bankruptcies can generally be
described as "liquidation" (Chapter 7) or
"reorganization" (Chapter 13). Under a Chapter 7 bankruptcy,
you ask the bankruptcy court to wipe out (discharge) the debts you
owe. Under a Chapter 13 bankruptcy, you file a plan with the
bankruptcy court proposing how you will repay your creditors. You must
repay some debts in full; others may be repaid only partially or not
at all, depending on what you can afford.
When you file either kind of bankruptcy, a court order
called an "automatic stay" goes into effect. The automatic
stay prohibits most creditors from taking any action to collect the
debts you owe them unless the bankruptcy court lifts the stay and lets
the creditor proceed with collections.
Certain debts cannot be discharged in bankruptcy; you
will continue to owe them just as if you had never filed for
bankruptcy. These debts include back child support, alimony, and
certain kinds of tax debts. Student loans will not be discharged
unless you can show that repaying the debt would be an undue burden,
which is a very tough standard to meet. And other types of debts might
not be discharged if a creditor convinces the court that the debt
should survive your bankruptcy.
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What
is the difference between Chapter 7 and Chapter 13 bankruptcy? Which
one lets me keep my property?
In Chapter 7 bankruptcy, you ask the bankruptcy court
to discharge most of the debts you owe. In exchange for this
discharge, the bankruptcy trustee can take any property you own that
is not exempt from collection (see below), sell it, and distribute the
proceeds to your creditors.
In Chapter 13 bankruptcy, you file a repayment plan
with the bankruptcy court to pay back all or a portion of your debts
over time. The amount you'll have to repay depends on how much you
earn, the amount and types of debt you owe, and how much property you
own.
You lose no property in Chapter 13 bankruptcy, because
you fund your repayment plan through your income. In Chapter 7
bankruptcy, you select property you are eligible to keep from a list
of state exemptions. Although state exemption laws differ, states
typically allow you to keep these types of property in a Chapter 7
bankruptcy:
-
Equity in your home, called a homestead
exemption. Under the Bankruptcy Code, you can exempt up to
$20,200 of equity. Some states have no homestead exemption; others
allow debtors to protect all or most of the equity in their home.
-
Insurance. You usually get to keep the
cash value of your policies.
-
Retirement plans. Most retirement
benefits are protected in bankruptcy.
-
Personal property. You'll be able to keep
most household goods, furniture, furnishings, clothing (other than
furs), appliances, books and musical instruments. You may be able
to keep jewelry only worth up to $1,000 or so. Most states let you
keep a vehicle as long as your equity doesn't exceed several
thousand dollars. And many states give you a "wild card"
amount of money -- often $1,000 or more -- that you can apply
toward any property.
-
Public benefits. All public benefits,
such as welfare, Social Security, and unemployment insurance, are
fully protected.
-
Tools used on your job. You'll probably
be able to keep up to a few thousand dollars worth of the tools
used in your trade or profession.
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Am
I free to choose between Chapter 7 bankruptcy and Chapter 13
bankruptcy? Which type of bankruptcy should I use?
If you meet the eligibility requirements for both
types of bankruptcy, then you can choose the type of bankruptcy that
makes the most sense for your situation. However, you may not have a
choice.
Under the new bankruptcy law, filers whose incomes are
higher than the median income for a family of their size in their
state may not be allowed to file for Chapter 7 bankruptcy if their
disposable income, after subtracting certain allowed expenses and
required debt payments, would allow them to pay back some portion of
the unsecured debt over a five-year repayment period.
Also, if you have secured debts of more than
$1,010,650 and unsecured debts of more than $336,900, for example,
then you cannot use Chapter 13 bankruptcy.
Most people who file for bankruptcy choose to use
Chapter 7, if they meet the eligibility requirements; Chapter 7 is a
popular choice because, unlike Chapter 13, it doesn't require filers
to pay back any portion of their debts.
However, Chapter 13 might be a better choice,
depending on your situation. For example, if you are behind on your
mortgage and want to keep your house, you can include your missed
payments in your Chapter 13 plan and repay them over time. In Chapter
7, you would have to make up the whole past due amount right away --
and you might lose your house, if your equity exceeds the exemption
amount available to you. For more on situations when Chapter 13 makes
sense, see
Reasons to Use Chapter 13 Bankruptcy Instead of Chapter 7 Bankruptcy.
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