Bankruptcy
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is oftentimes referred to as liquidation because a bankruptcy trustee who controls most of your assets at the time you file can liquidate (convert to cash) your non-exempt assets to pay a pro-rata portion of your outstanding bills. If there are sufficient non-exempt assets to repay all creditors, then they will be paid in full. The vast majority of people filing bankruptcy in Chapter 7 cases do not have any non-exempt assets, and thus there is no actual liquidation for the benefit of creditors.
Chapter 7 Bankruptcy Timeline:
Chapter 7 bankruptcy cases move relatively quickly compared with chapter 13 cases, and you generally receive a discharge in about 4 months from filing. A discharge is a court order that eliminates unsecured debts like credit card debt, medical bills, personal loans, judgment deficiencies on repossessions, old tax debts, payday loans, and garnishments.
What is the Chapter 7 Bankruptcy Means Test?
Prior to filing for Chapter 7 bankruptcy, debtors are put through a means test. Most will pass meaning Chapter 7 is an available option for them to consider. For those who do not pass the means test, filing bankruptcy may still be an option in the form of Chapter 13.
The Chapter 7 means test is basically a hypothetical formula created by congress that is supposed to gauge your ability to repay your debts. Income the debtor has received in the 6 months prior to filing is compared to the median income for the debtors household size for individuals in the same location. Debtors are then allowed certain deductions such as vehicle and mortgage payments, taxes, health insurance, and transportation expenses. Some of these categories are limited by IRS standards like the transportation expense. With secured debts such as houses and financed cars, the actual amounts paid can be used in the means test. At the end of the means test, a figure is generated from the information provided which indicates whether Chapter 7 is an option.
You don’t have to sort out the complexities of the means test alone. The calculations can oftentimes be complex due to the numerous steps that are involved, and also because it requires a detailed understanding of the rules. A knowledgeable consumer bankruptcy attorney can crunch the numbers and tell you whether or not you qualify for Chapter 7 bankruptcy.
In Most Cases Before Filing your Chapter 7 Bankruptcy Case, You Must Receive a Briefing from a Credit Counseling Agency.
Prior to the bankruptcy filing, individual must receive a Credit Counseling Briefing from a
certified credit counseling agency unless their debts are considered primarily non-consumer debt. What may or may not be classified as a non-consumer debt should be determined by a qualified consumer bankruptcy attorney. The credit counselor will conduct an analysis of your budget based on the information you provide and will also discuss alternatives to filing bankruptcy if they feel you may be able to avoid a bankruptcy filing.
Chapter 7 Bankruptcy Exemptions Protect Your Property from Creditors.
Bankruptcy Exemptions protect certain property from being taken and sold for the benefit of your creditors in bankruptcy. The exemptions available to debtors vary from state to state and depend on factors such as how long you have lived in the state you are filing bankruptcy. In California, exemptions typically include your primary residence, tools of the trade, work equipment, vehicle, certain items of personal
property, including household items and the like. In the vast majority of Chapter 7 cases, the available exemptions will protect all of your property. If all of your property is not exempt, a court-appointed bankruptcy trustee will determine whether he can liquidate your non-exempt assets to make some money to repay creditors. The trustee will generally only liquidate assets if there is a market for the property and he or she can generate enough money from the liquidation to make a significant payment to your creditors.
The Final Step
Before the court will grant you your bankruptcy discharge, debtors must complete an approved
Debtor Education Course. These courses typically last an hour or so and give the debtor some helpful tips on how to budget in the future, in theory to lessen the likelihood of putting yourself in a similar situation in the future.
Chapter 7 Bankruptcy Fees: What are the Typical Costs of Filing for Chapter 7 Bankruptcy?
Chapter 7 bankruptcy fees will vary depending on the complexity of the case and how much time the attorney will have to devote to it. Factors such as the total amount of unsecured debt, number of creditors, tax liens and other secured debts are used by the attorney to get a general idea of how much time it will take. Obviously, the more complex a case is, the higher the fee charged. The good thing about chapter 7 cases however is that the routine bankruptcy is done for a flat fee so debtors know how much they are looking at up front.
Current Bankruptcy Law and the Need for Competent Representation
The bankruptcy process was made much more complicated in October of 2005 with the
implementation of the new bankruptcy law, the Bankruptcy Abuse Prevention
and Consumer Protection Act (BAPCPA) of 2005.
BAPCPA introduced several new “hurdles”, including the means test, a mandatory credit counseling briefing prior to filing bankruptcy for most, and a debtor education course before receiving a discharge
of their debts. Hiring competent representation is a must, and cannot be underemphasized. If consumers are going to try to handle the complexities of a bankruptcy filing on their own, the court will generally expect consumers to be up to speed with the requirements of the law. Just becoming familiar with the basics can take hours of research. It is best to leave this detailed work to a licensed professional.
AUTOMATIC STAY
When an individual files for bankruptcy relief, their creditors must stop trying to collect from you. Creditors cannot continue to call you or send you collection letters. They cannot repossess your car or sue you. They cannot garnish your wages or levy your bank account, even if an order is already in effect.
With very limited exceptions, the “automatic stay” prohibits all collection activity after you file for bankruptcy relief.
The automatic stay will generally stop all emergencies in the following situations:
Foreclosure: If your house is in foreclosure and about to be sold, the automatic stay will stop the
foreclosure action.
Utility shut-offs: If your utilities have been shut-off or are about to be shut off, the automatic stay will force the utility company to maintain your service. Sometimes the utility company will require a deposit within a reasonable time after you file, which must be paid. If you do not provide adequate assurances of future payment, they may be able to turn off your lights and heat after the bankruptcy filing.
Repossession: Lenders cannot take your vehicle while the automatic stay is in effect. With vehicles, however, this is a temporary solution. In order to for the stay to not terminate by operation of law shortly after the bankruptcy filing, debtors must reaffirm their car loan or surrender the car in the bankruptcy.
Lawsuits/Garnishments: The bankruptcy filing stops wage garnishments and lawsuits immediately. The automatic stay protects your monthly income from your creditors. Assuming the debt is dischargeable in the bankruptcy, you will be able to eliminate that entire outstanding debt upon discharge.
SSI/Food Stamps/Public Benefit Overpayments: If you received an overpayment of public assistance benefits, the agency can collect the overpayment absent a bankruptcy filing. The automatic stay stops the agency from collecting on the overpayment. Overpayment benefits are dischargeable in bankruptcy provided there was no fraud in obtaining the benefits in question.
Tax Levies: The bankruptcy filing and automatic stay will temporarily stop the IRS from seizing your property to satisfy delinquent tax debts. If the taxes meet the requirements to be discharged under applicable bankruptcy law, they will be eliminated upon conclusion of the case.
The automatic stay will not stop the following actions:
Criminal Proceedings: The automatic stay will not stop criminal proceedings.
Support Actions: The automatic stay will not stop a lawsuit against you seeking to establish paternity or to establish, modify, or collect child support or maintenance.
Domestic Violence: The automatic stay will not stop the commencement of a civil action regarding domestic violence.
The automatic stay will generally remain in effect until you complete the bankruptcy and receive a discharge, however there are certain instances where the stay terminates sooner, or where there is no stay at all.
BANKRUPTCY GLOSSARY
Bankruptcy Glossary of Terms
Below you will find definitions to some of the most commonly used terms in a bankruptcy proceeding.
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Abandonment: A procedure whereby a Trustee “gives back” or abandons estate property, usually because it is burdensome to the bankruptcy estate and no money can be made for creditors by liquidating the property.
Adjustable Rate Mortgage (ARM): A loan with a monthly payment that “adjusts” or changes from month to month based on the index it is tied to.
Adversary Proceeding: A lawsuit within a bankruptcy, most often in an attempt to exclude a debt from being discharged in the bankruptcy.
Amendment: Adding, deleting, or correcting information contained in a bankruptcy petition.
Asset: Any item of value owned by an individual or entity, whether currently in your possession or an entitlement in the future that you possessed prior to the bankruptcy filing.
Assisted Person: Any person whose debts consist primarily of consumer debts and the value of whose non-exempt property is less than $150,000.00.
Automatic Stay: An immediate consequence of a bankruptcy filing that protects debtors from most collection actions, including garnishments, lawsuits, repossessions, and foreclosures.
Bankruptcy: A legal process whereby an individual (or a company) files bankruptcy schedules with the court stating an inability to repay creditors. Bankruptcy provides a “fresh start” in most situations if the qualifications are met.
Bankruptcy Petition: The legal documents that must be filed with the court for a bankruptcy case to officially start.
Bankruptcy Trustee: A person appointed by the U.S. Department of Justice or sometimes by the creditors in certain bankruptcy cases. The purpose of the trustee is to oversee the proceedings of the bankruptcy case and liquidate non-exempt assets for the benefit of creditors.
Chapter 7 Bankruptcy: A type of bankruptcy sometimes referred to as “liquidation” bankruptcy or “straight” bankruptcy because a bankruptcy trustee can liquidate (convert to cash) any non-exempt assets to help pay off what you can to your creditors.
Chapter 13 Bankruptcy: A type of personal bankruptcy oftentimes referred to as a “reorganization” or “wage earner plan.” In Chapter 13 cases, debtors work with the trustee and bankruptcy court to develop a three to five year repayment plan to repay a percentage of their debts.
Claim: A right to payment or equitable relief, whether or not reduced to judgment.
Collateral: Something of value (usually property) given as security for a loan.
Consumer Debt: Debt incurred by an individual for personal, family or household use.
Cosigner: One who obligates themselves on a debt with somebody else. A cosigner is responsible for making payments on the account if the primary is unwilling, or unable to do so.
Credit Counseling Certificate: This is a pre-requisite for most who wish to file for bankruptcy protection. It must be completed prior to the filing of the case and a certificate of completion must be filed with the court.
Credit Report: A record of your payment history to your creditors and includes your credit cards, mortgage
loans, vehicle loans and more. Consumers can access their credit report for free once a year by going to: www.annualcreditreport.com.
Current Monthly Income (CMI): Defined as the average monthly income from all sources that the debtor receives without regard to whether such income is taxable, derived in the 6 months prior to filing the petition.
Debt: Liability on a claim.
Debt Relief Agency: Any person who provides any bankruptcy assistance to an assisted person in exchange for money or other valuable consideration.
Debtor Education Certificate: This is a pre-requisite to obtaining a discharge under Chapter 7 or Chapter 13. The Debtor Education Course offers budgeting tips and other helpful pointers so that the debt cycle is not repeated in the future.
Default: A failure or inability to meet ones financial obligations. If a loan goes into default, the lender can take collection actions, including a lawsuit, repossession, foreclosure or garnishment, depending on the type of loan.
Discharge: A court order/permanent injunction signed by a bankruptcy judge forever eliminating all dischargeable debt.
Dischargeable: Able to be eliminated in a bankruptcy proceeding. If a debt is dischargeable, it is wiped out forever.
Disposable Monthly Income (DMI): Current Monthly Income received by the debtor less amounts reasonably necessary to be expended.
Domestic Support Obligation: A debt or obligation to pay a spouse, former spouse, parent, child or someone on the child’s behalf including a government entity, or alimony, maintenance or support under a court order or separation agreement. Domestic Support Obligations are non-dischargeable in bankruptcy.
Equity: The value of an asset minus its encumbrances.
Exemptions: Applicable law that “exempts” or protects assets from being liquidated for a creditors benefit in a bankruptcy proceeding.
FICO Score: Also known as your credit score. It ranges between 300-850. The higher the score, the better credit risk you are.
Fixed Rate Mortgage: A mortgage whose payment remains constant over the life of the loan (usually about 30 years).
Foreclosure (Mortgage Foreclosure): A process by which a bank or mortgage company reclaims ownership of a house after a homeowner has defaulted under the terms of the mortgage agreement.
Garnishment: A court order obtained after a judgment authorizing a debtor’s wages to be withheld by their employer and turned over to the creditor to satisfy the judgment.
Identity Theft: The crime of stealing another person’s identity, usually for financial gain.
Insolvent: When a person’s liabilities exceed their assets.
Judicial Lien: a lien obtained by judgment, levy, sequestration or other legal or equitable proceeding.
Levy: A court order obtained after a judgment authorizing the creditor to deduct any available money in a debtor’s financial account(s). Unlike a garnishment, a levy order only allows a creditor to take the money in the account on the date the levy is served on the financial institution and does not allow a creditor to sit back and wait until money is deposited into the account. If there is no money in the account at the time of the levy, the judgment creditor must reapply for another levy order to try again.
Lien: A charge against or interest in property to secure payment of a debt or performance of an obligation.
Lien Avoidance: A process in a bankruptcy case that allows a debtor to avoid, or get rid of a judgment lien on property to the extent it impairs an exemption in the property.
Lien Stripping: A process under Chapter 13 that allows certain junior liens to be stripped off the property. The stripped claim becomes an unsecured creditor in the bankruptcy.
Liquidation: The process of converting or selling an asset into cash.
Means Test: A formula designed by congress and implemented under Chapter 7 of the Bankruptcy Abuse Prevention Consumer Protection Act (BAPCPA) whereby income and allowable expenses are factored into a determination whether a debtor is eligible to file for Chapter 7, or if they have the “means” to repay a percentage of their debts to creditors in Chapter 13.
Meeting of Creditors: A required hearing under section 341 of the Bankruptcy Code, the purpose of which is to allow creditors to question the debtor regarding the nature and location of assets.
Non-Consumer Debt: Debt incurred that is not primarily for the benefit of the individual, family, or household. Non-consumer debt includes business debt.
Non-Dischargeable: A claim that is unable to be eliminated as a result of the bankruptcy filing.
Non-Revolving Credit: A credit line that requires monthly payments and does not allow repaid funds to be borrowed against from the available credit limit.
Payday Loan: Short-term, small dollar amount, high interest loans designed for those who need cash
between pay periods.
Predatory Lending: A term used to describe unfair, deceptive, or fraudulent practices of some lenders
in the loan origination process.
Preference: A preference is a payment to a creditor within a certain timeframe before the filing of the bankruptcy that results in the creditor receiving more than they otherwise would in the bankruptcy proceeding. Preference payments can be undone by the trustee. The purpose of pursuing a preference is to recover the payment so that all similarly situated creditors are treated equally.
Reaffirmation Agreement: An agreement to continue to make payments on a secured asset despite the bankruptcy filing. Once a reaffirmation agreement is approved, Debtors are back on the hook for the debt despite the bankruptcy filing. If they default in the future, they can be held liable for any deficiency balance.
Redemption: The process during an active Chapter 7 bankruptcy case whereby personal property primarily intended for family or household use is “bought out” or paid off for the replacement value of the property rather than what is owed against it. For redemption purposes, replacement value is the price a retail merchant would charge for property of that kind, taking into consideration the age and condition of the property at the time value is determined.
Repossession: The process of reclaiming property when payments aren’t timely made.
Revolving Credit: A credit line that allows spending and repayment as
desired with a minimum payment based on the balance owed, including interest.
Schedules: Documents prepared and filed with the bankruptcy court that contain information on your assets, income and debts.
Secured Debt: Debt that is attached to collateral to ensure repayment. An example is a mortgage loan secured by a house.
Subprime Loan: Higher interest loan given to individuals with low credit scores or that have demonstrated a risky credit history.
Surrender: Returning secured property to the lender in a bankruptcy case.
Unsecured Debt: A debt not secured or attached to collateral.
United States Bankruptcy Code: The source of the applicable law that governs the Bankruptcy process in the United States.
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CHAPTER 13 BANKRUPTCY
Filing Bankruptcy under Chapter 13 of the U.S. Bankruptcy Code
While there are many reasons to choose to file chapter 13, individual debtors generally file for this type of relief to help stop foreclosures and/or vehicle repossessions. Under Chapter 13, debtors are allowed to keep these items provided they establish a repayment plan that account for the arrears on these assets. The amount you are required to repay is determined by a formula created by congress which considers your income and certain expenses. Your assets are also relevant in determining your repayment amount. The final figure after running the numbers through the formula is called “Disposable Monthly Income,” and absent special circumstances, this is the amount you are required to repay to your unsecured creditors in the case.
Just as with Chapter 7 bankruptcy, you will need to attend a meeting of creditors approximately 1 month after filing Chapter 13 bankruptcy. If the trustee has any issues with the repayment plan you have proposed, he/she will file an objection to confirmation of your case detailing the basis for the objection, and schedule a court hearing for the judge to decide the issue should the parties not come to an agreement on their own accord. Once the court approves the case, debtors are required to make their plan payment for the length of their chapter 13 case, usually between 3-5 years. Once all of the required payments are made pursuant to the plan, the court grants a discharge which generally eliminates the remaining unsecured debt not repaid under the chapter 13.
Before Obtaining a Discharge: Debtor Education
Under current bankruptcy law, debtors must complete a debtor education course
before being granted a discharge by the courts. This requirement applies regardless of whether you’re filing bankruptcy under chapter 7 or chapter 13. The debtor education course serves as an educational tool for debtors to plan their financial future and learn some important lessons related to establishing and maintaining credit.
Why hiring a knowledgeable Bankruptcy Lawyer is important
Making a decision whether to file for bankruptcy is not easy, and involves a significant amount of thought to ensure the decision is right for you. Once you have made a decision to file, it is equally important to put significant thought into hiring bankruptcy representation. A knowledgeable bankruptcy lawyer can help you separate the emotions from the facts and assist you in putting a plan into action that best suits your individual financial situation. When your financial future is on the line, don’t make the mistake of trying to file on your own.
What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy involves a repayment of debts to creditors approved by the courts and administered by a bankruptcy trustee. The debtor submits a plan for approval by the courts and upon confirmation, makes monthly payments to the bankruptcy trustee. These payments are paid out to creditors pursuant to the terms of the plan. The repayment period is generally from 3-5 years. At the end of the repayment period, all remaining unsecured debts that are “dischargeable” are discharged and these creditors are forever prevented from collecting on these debts against you in the future.
Who Can File Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is sometimes called a “wage earners” plan because in order to make the payments under the terms of the plan, you have to have a regular source of income. While it may be possible to “fund” a chapter 13 plan with non-wage income (social security, disability etc.), the key to success here is that the income stream come in on a regular basis.
There are certain debt limits under chapter 13 that debtors must meet before being eligible to file for relief. Currently, the limit for secured debts (ie. financed house or vehicle) is $1,010,650 and for unsecured debts (ie credit cards, medical bills, etc.) $336,900.
CHAPTER 7 VS. CHAPTER 13
Is Chapter 7 or Chapter 13 Bankruptcy Better?
In order to answer this question it is necessary for a qualified bankruptcy attorney to review and analyze your specific financial situation. Each chapter has benefits the other does not, therefore it is extremely important that you consult a professional to assist you in the decision process.
Generally speaking, Chapter 7 bankruptcy is ideal for consumers who have a lot of unsecured debt, like credit card debt and medical bills. If you don’t have much real and personal property, your income is low, and most of your debts are unsecured, Chapter 7 bankruptcy might be the right choice for you. Chapter 13 bankruptcy tends to be the better option for those individuals who have a regular source of income and/or non-exempt property they’d like to keep safe from being liquidated for the benefit of creditors.
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CREDIT AFTER BANKRUPTCY
Our firm specializes in getting you back on your feet after bankruptcy. We work with several lenders who specialize in post-bankruptcy loans and lines of credit, financial advisors who can access medical insurance and retirement planning for our clients, accountants, bookkeepers and numerous other helpful professionals who can help repairing your financial outlook.
Most individuals who make the tough decision to file for bankruptcy protection have an understandable
desire to avoid credit all together when it’s over. Many people think that if you use only cash, you won’t put yourself into a similar situation that caused you to file in the first place.
The fact is that reestablishing credit after a bankruptcy is probably the most important part of your financial recovery. If you ever plan on purchasing real estate or other large assets in the future, the bottom line is that you will need an improved credit history to get future credit. Most mortgage and vehicle lenders will want to see that you’ve managed your finances since the bankruptcy filing, so the more you can do in this regard the better off you will be down the road. It is suggested that a debtor apply for a credit card after discharge, whether secured or unsecured, and use the card for two purchases you have regardless of what you do; Food and Gas. Charge these two things on a credit card each month and put the money you would normally spend on this in your bank account. At the end of each month, pay off the credit card in full.
#1 POST BANKRUPTCY PITFALL
You cannot and will not get ahead post bankruptcy if your expenses exceed your income.
THE 3 “B”’s POST BANKRUPTCY
Budget, Budget, Budget
Credit Repair Scams:- Remember the Golden Rule
“If it seems too good to be true, it probably is.” There is no “magic bullet” that will restore your credit overnight. Your Bankruptcy will be reflected on your credit for 7-10 years (depending on the chapter) no matter what anyone tells you. If anyone promises to erase it from your credit, be very skeptical and do not pay anything before they show you the results.
3 BK MYTHS
1. Filing bankruptcy makes me a loser. Absolutely not!
One of the main reasons bankruptcy laws were created was to encourage individual entrepreneurs and businesses to take risks. Some of the country’s most successful people have filed for bankruptcy. It should be thought of as a business decision to prioritize your family’s financial future and nothing more.
2. If I file for Bankruptcy my neighbors will know and my name will be published in the newspaper.
Wrong. A bankruptcy filing is not something that is published in your local newspaper. It is, however, public information. This means that anyone who wanted to know if you filed for bankruptcy would have to go to the courthouse and search the court records to get this information. How likely is this to happen?
3. Bankruptcy is a difficult and time consuming process.
Unlike most court proceedings, a bankruptcy generally does not involve jury trials, cross examination, or any other courtroom drama you may see on TV. In fact, in the majority of bankruptcy cases, you’ll never even appear before a judge. Moreover, in most instances, debtors receive their Chapter 7 discharge in 4 months or less.
