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A Guide to Bankruptcy -  FAQs
Newland & Newland, LLP

Libertyville
Waukegan
Arlington Hts 
Crystal Lake

(847) 549-0000
 
email to : steve@newlandlaw.com

With proper legal assistance, filing for bankruptcy will allow you to regain control of your life. No more debt collectors contacting you. Plus do away with that feeling of drowning in debt. Our team of dedicated legal professionals is dedicated to work hard in your interests. .

We offer free initial consultations and manageable payment plans.

BANKRUPTCY FAQs

1.    WHAT IS BANKRUPTCY?
        
Bankruptcy is a legal process where if you have more debts that you can pay, debts can be eliminated or a payment plan can be set up to help you and to protect your assets.  Once a Bankruptcy petition is filed your creditors cannot collect any debts from you directly. 

2.    WHAT IS THE DIFFERENCE BETWEEN CHAPTER 7 AND CHAPTER 13?
        
A Chapter 7 Bankruptcy is when you discharge (eliminate) debts.  A Chapter 13 Bankruptcy is when you restructure your debt over a 3 to 5 year period to allow you to pay back all or part of your debt.

3.    CAN I CHOOSE THE TYPE OF BANKRUPTCY?
        
Sometimes.  If your income is above a certain level you may not qualify for a Chapter 7 and may need to file a Chapter 13.  However, even if your income is above a certain level you can still qualify for a Chapter 7 if you satisfy certain "means testing".
 If you qualify for both Chapter 7 and Chapter 13 then you may choose the one that is best for your particular situation.

4.     WHAT IS A SECURED DEBT?  WHAT IS AN UNSECURED DEBT?
        
A secured debt is a debt where the creditor has a lien on a certain item of your property.  For example, a mortgage lender puts a lien on your house when you obtain a loan so they are a secured creditor.  Also, when you finance the purchase of a car, the finance company will typically be a secured creditor.  On the other hand, credit cards and medical bills typically do not have a security interest in any of your property so those debts are unsecured debts.  Unsecured debts are easily discharged in a Chapter 7 Bankruptcy unless you have sufficient assets over and above your exemptions to pay these debts.  There are also ways to discharge secured debts. 

5.     WHAT DEBTS ARE NOT DISCHARGABLE IN A CHAPTER 7?
        
The following debts are not dischargable: recent taxes; child support obligations, alimony and other terms of a marital settlement agreement; liabilities arising from fraud; liabilities arising from driving while intoxicated; debts that accrue after you file for bankruptcy; debts you failed to disclose in your petition.

6.    CAN I PICK AND CHOOSE WHAT DEBTS I WANT DISCHARGED?
        
For the most part yes.  If you do not want a particular debt discharged, (for example if you have a car loan and you want to keep your car) then you can enter into a reaffirmation agreement with that creditor.  Or if you owe money to a relative or friend and you want to keep paying that person then you are free to do that.  In some cases you may want a debt discharged but debts listed in the preceding FAQ are not dischargable.

7.    WILL MY EMPLOYER FIND OUT IF I FILE BANKRUPTCY?
        
Generally no.  However, if you opt to have your Chapter 13 payment plan come out of your paycheck automatically they will know, but you are not required to have the payment come from your paycheck.

8.    I FILED FOR BANKRUPTCY IN THE PAST, CAN I FILE AGAIN?
        
A Chapter 7 Bankruptcy can be filed every 8 years from a previous Chapter 7 or 6 years from a prior Chapter 13 filing.  Chapter 13 Bankruptcy can be filed 4 years from a prior Chapter 7 filing or 2 years from a prior Chapter 13 filing. 

9.    WHAT EFFECT WILL BANKRUPTCY HAVE ON MY CREDIT RATING?
        
If you are filing for bankruptcy more than likely you are behind in your bills so your credit already is not good.  A bankruptcy will also be a negative mark on your credit report.  However, as bankruptcy wipes out much if not all of your debt, it may make you more appealing to a creditor. 

10.    WILL I NEED TO GO TO COURT?
        
In most cases you will only have to go to the courthouse one time, for the creditor's meeting to meet with the bankruptcy trustee.  Typically no creditors show up for the creditors meeting, however, we shall be there with you.  The trustee will ask you several questions about your petition.

11.    MUST I DISCLOSE ALL OF MY ASSETS AND INCOME?
        
Yes, on the bankruptcy petition you must disclose all of your property, investments, assets and income.  You cannot pick and choose what assets to list.

12.    CAN I USE MY CREDIT CARDS WHEN I FILE FOR BANKRUPTCY?
        
No, you cannot use your credit cards if you are even planning on filing bankruptcy.  When you use a credit card, you are borrowing money.  So if you borrow money when you are planning on filing bankruptcy the debt will not be discharged.

13.    DO I LOSE ALL MY PROPERTY WHEN I FILE BANKRUPTCY?
        
No, the purpose of bankruptcy is to preserve your property, not to lose it.  However, if you have property in excess of the exemptions you are permitted you may have some property sold off, but that is rarely the case. 

14.    CAN BANKRUPTCY STOP A CREDITOR FROM GARNISHING MY PAYCHECK?
        
Yes, once you file bankruptcy, an automatic stay is in place.  That means creditors can no longer attempt to collect any debts from you.  The creditor can no longer garnish your paycheck.

15.    IF I FILE BANKRUPTCY CAN A CREDITOR STILL SUE ME?
        
No, once you file bankruptcy, an automatic stay is in place.  That means creditors can no longer attempt to collect any debts from you.  The exception would be if a creditor is a secured creditor and shows good cause that the asset needs to be removed from the bankruptcy estate. 

16.    IF I FILE BANKRUPTCY DOES MY SPOUSE ALSO NEED TO?
        
No, in many cases your spouse does not need to file bankruptcy just because you are.          

17.  DO YOU HAVE ANY OTHER QUESTIONS?
        
Feel free to contact us by telephone or email to set up a FREE consultation.

Legal Encyclopedia Table of Contents

How Foreclosure Works
How Bankruptcy Can Help With Foreclosure
The New Bankruptcy Law: Changes to Chapter 7 and 13
What Is Bankruptcy?
What Bankruptcy Can and Cannot Do
How Bankruptcy Stops Your Creditors: The Automatic Stay
A Chapter 7 Bankruptcy Overview
The Bankruptcy Means Test: Is Your Income Low Enough for Chapter 7 Bankruptcy?
What Happens to Your Car in Chapter 7 Bankruptcy?
An Overview of Chapter 13 Bankruptcy
Are You Eligible for Chapter 13 Bankruptcy?
Reasons to Use Chapter 13 Bankruptcy Instead of Chapter 7 Bankruptcy

How Foreclosure Works

by Attorney Stephen R. Elias

 

How foreclosure procedures work, in both judicial and non-judicial foreclosure states.

Foreclosure happens when you fall behind on your house payments and your lender uses state procedures to sell your house. Foreclosure works differently in different states. In some states, the lender has to file a lawsuit to foreclose (judicial foreclosure), while in others, it can foreclose without going to court (non-judicial foreclosure).

Here’s a rundown of the basic procedures for each type of foreclosure.

Judicial Foreclosure

In a judicial foreclosure, the lender must go to court to get the foreclosure started. A judicial foreclosure typically takes several months or more, giving you time to look for another place to live, and to save some money for the future. Another advantage is that you can raise in court any legal defenses you may have to the foreclosure (without having to file your own lawsuit).

States Using Judicial Foreclosure

With some exceptions, foreclosures go through court in these states:

Arizona

 

New Jersey

Delaware

 

New Mexico

Florida

 

New York

Hawaii

 

North Dakota

Illinois

 

Ohio

Indiana

 

Oklahoma 

Iowa

 

Pennsylvania

Kansas

 

South Carolina

Kentucky

 

South Dakota

Louisiana

 

Vermont

Maine

 

West Virginia

Nebraska

 

Wisconsin

Procedures in a Judicial Foreclosure

Here’s how a typical judicial foreclosure might proceed.

You get behind in your mortgage payments. A mortgage holder can begin foreclosure procedures if you miss just one payment, but usually will wait longer -- much longer in many states.

The lender sends a notice of intent to begin foreclosure. In many states, the lender sends a ten-day notice of intent to begin foreclosure proceedings. The notice informs you that the proceedings can be avoided if you make up the missed payments, plus costs and interest.

The lender files a lawsuit. If you don’t make up the missed payments, the lender will then go to court and file a lawsuit.

The lender gives you notice of the lawsuit. The lender does this by delivering a Summons and Complaint to you (called “serving you with” a Summons and Complaint in legalese).

You have a chance to respond. The Summons and Complaint give you a period of time within which you must respond if you choose to contest or argue the lawsuit (usually between 15 and 30 days). Whether or not you file a response is up to you. Either way, your lender will have the burden of proving to the judge that the foreclosure is justified under the terms of the mortgage.

  • If you don’t respond, the chances are excellent that the foreclosure will go through. The court will issue a default judgment that authorizes the lender to sell your home.
  • If you do respond, you’ll have the opportunity to tell a judge just why you think you have a legal right to keep your house and that foreclosure is not warranted. The better your defenses, the longer the process will drag out in court. Even if you win, however, it may be a temporary victory if the lender can fix whatever problem caused it to lose this time.

The lender sends a notice of intent to sell. Once the judge issues a judgment, the lender typically will send you a ten-day notice of intent to sell the property. At this point, in many states you can avoid the foreclosure sale if somehow you can “redeem” the mortgage (pay it off in full, as well as the foreclosure costs and attorney's fees).

The auction is held. If no one buys your home at the auction, ownership goes to the lender. Up to this point, the entire process, from the first notice to the auction, typically takes three months -- more, if you file a response to the Summons and Complaint.

You are allowed to stay or get evicted. Even when you lose ownership of your home, most state laws don’t require you to move out right away. The lender may just let the house sit, waiting for the market to improve. You can remain in the home payment-free until you receive an official, written eviction notice.

Non-Judicial Foreclosures

If you live in a non-judicial foreclosure state, your lender does not have to go to court in order to foreclose on your home. This means that the foreclosure can proceed more quickly.

If your property is in one of these states, you most likely signed two core documents when you bought or refinanced your home: a promissory note and a deed of trust. The deed of trust turns the promissory note into a debt secured by a lien (legal claim) on your home. The deed of trust authorizes the lender to foreclose on the property if you default. The deed of trust typically allows the foreclosure to proceed outside of court, under state law.

States Using Non-Judicial Foreclosure

Alabama

 

Nevada

Alaska

 

New Hampshire

Arizona (sometimes)

 

New Mexico (sometimes)

Arkansas

 

North Carolina

California

 

Oklahoma (unless homeowner requests judicial forclosure)

Colorado

 

Oregon

District of Columbia

 

Rhode Island

Georgia

 

South Dakota (unless homeowner requests judicial foreclosure)

Idaho

 

Tennessee

Maryland

 

Texas

Massachusetts

 

Utah

Michigan

 

Vermont (sometimes)

Minnesota

 

Virginia

Mississippi

 

Washington

Missouri

 

West Virginia (sometimes)

Montana

 

Wyoming

The Non-Judicial Foreclosure Process

Your state’s law sets out the specifics of the foreclosure procedure, including how much notice you get, how the property will be sold (typically at a public auction), and what rights (if any) you have to reinstate the loan before the foreclosure date or recover title to the property after it’s sold.

warning Time may be short. You have to be on your toes when a foreclosure looms in a non-judicial state. That’s because you'll be given very little notice of the foreclosure sale, and once it happens, you may be permanently out of luck.

Notice of sale. In most states, your first notice of the proceeding will be the notice of sale. Depending on the state, this notice will be either served on you personally, published in the local newspaper, posted in the courthouse and on the property itself, or by some combination of the above.

Notice of default and notice of sale. Some states provide you with two notices -- a formal written notice that you are in default (usually about 30 days, but sometimes more and sometimes less) and another formal notice that your house will be sold at auction (again, usually about a month, but it can be as little as 15 days -- in Georgia, for example, and a few other states).

Right to reinstate. Between the notice of default and notice of sale, you typically are allowed to reinstate the mortgage by paying off what you owe, plus fees and costs (which can be very high). With a couple of exceptions, however, once the sale occurs, your house is gone.

The auction is held. If you don’t reinstate the mortgage, the home will be sold at auction. As with judicial foreclosures, if no one meets the minimum bid, the property goes to the lender.

Right to redeem. A few states give you some time after the foreclosure auction to redeem the property (to recover ownership of the property by paying off the successful bidder).

Challenging a Non-Judicial Foreclosure in Court

Because you don’t have the opportunity to raise defenses to the foreclosure in a non-judicial foreclosure, if you wish to contest the foreclosure, you will have to file a lawsuit yourself. When you do this, you ask the court to temporarily stop the foreclosure so that you can resolve the legal issues in court (and possibly at trial). Once you are in court, you can raise the same defenses you would have raised in a judicial foreclosure proceeding.

In these lawsuits, you typically ask the court for three things, in the following order:

  • a temporary restraining order (which lasts about ten days)
  • a preliminary injunction (which, in foreclosure actions, will last until the court decides the case), and
  • a permanent injunction (which will be issued if the judge decides in your favor).

To learn more about the ins and outs of foreclosure, both judicial and non-judicial, get The Foreclosure Survival Guide, by Stephen Elias (Nolo).

 


How Bankruptcy Can Help With Foreclosure

by Attorney Stephen R. Elias

 

Avoid or delay foreclosure of your home by seeking bankruptcy protection.

If you are facing foreclosure and cannot work out a deal or other alternative with the lender, bankruptcy may help.

If you get behind on your mortgage payments, a lender may take steps to foreclose -- that is, enforce the terms of the loan by selling the house at a public auction and taking payment of your loan out of the auction.

This won’t happen overnight. The foreclosure process typically starts after you fall behind on your payments for at least two months, and often three or four. That gives you time to try some alternate measures, such as loan forbearance, a short sale, or a deed in lieu of foreclosure.

But if you've already tried and failed with these measures, now is a good time to consider bankruptcy as a possibility for avoiding or stalling foreclosure. Here are some ways that filing for bankruptcy can help you.

The Automatic Stay: Delaying Foreclosure

When you file either a Chapter 13 or Chapter 7 bankruptcy, the court automatically issues an order (called the Order for Relief) that includes a wonderful thing known as the “automatic stay.” The automatic stay directs your creditors to cease their collection activities immediately, no excuses. If your home is scheduled for a foreclosure sale, the sale will be legally postponed while the bankruptcy is pending—typically for three to four months. However, there are two exceptions to this general rule:

Motion to lift the stay. If the lender obtains the bankruptcy court’s permission to proceed with the sale (by filing a “motion to lift the stay”), you may not get the full three to four months. But even then, the bankruptcy will typically postpone the sale by at least two months, or even more if the lender is slow in pursuing the motion to lift the automatic stay.

Foreclosure notice already filed. Unfortunately, bankruptcy’s automatic stay won’t stop the clock on the advance notice that most states require before a foreclosure sale can be held (or a motion to lift the stay can be filed). For example, before selling a home in California , a lender has to give the owner at least three months’ notice. If you receive a three-month notice of default, and then file for bankruptcy after two months have passed, the three-month period would elapse after you’d been in bankruptcy for only one month. At that time the lender could file a motion to lift the stay and ask the court for permission to schedule the foreclosure sale.

How Chapter 13 Bankruptcy Can Help

Many people will do whatever they can to stay in their home for the indefinite future. If that describes you, and you’re behind on your mortgage payments with no feasible way to get current, the only way to keep your home is to file a Chapter 13 bankruptcy.

How Chapter 13 works. Chapter 13 bankruptcy lets you pay off the “arrearage” (late, unpaid payments) over the length of a repayment plan you propose—five years in some cases. But you’ll need enough income to at least meet your current mortgage payment at the same time you’re paying off the arrearage. Assuming you make all the required payments up to the end of the repayment plan, you’ll avoid foreclosure and keep your home.

2nd and 3rd mortgage payments. Chapter 13 may also help you eliminate the payments on your second or third mortgage. That’s because, if your first mortgage is secured by the entire value of your home (which is possible if the home has dropped in value), you may no longer have any equity with which to secure the later mortgages. That allows the Chapter 13 court to “strip off” the second and third mortgages and recategorize them as unsecured debt – which, under Chapter 13, takes last priority and often does not have to be paid back at all.

Canceling debt. Chapter 7 bankruptcy will also cancel all the debt that is secured by your home, including the mortgage, as well as any second mortgages and home equity loans.

Canceling tax liability for certain property loans. Thanks to a new law, you no longer face tax liability for losses your mortgage or home-improvement lender incurs as a result of your default, whether you file for bankruptcy or not. This new law applies to the 2007 tax year and the following two years.

However, the new tax law doesn’t shield you from tax liability for losses the lender incurs after the foreclosure sale if:

  • the loan is not a mortgage or was not used for home improvements (such as a home equity loan used to pay for a car or vacation), or
  • the mortgage or home equity loan is secured by property other than your principal residence (for example, a vacation home or rental property).

This is where Chapter 7 bankruptcy helps. It will exempt you from tax liability on losses the lender incurs if you default on these other loans.

Chapter 7 Cannot Cancel the Foreclosure

With all this debt being cancelled, you may be wondering why the foreclosure on your home won’t be cancelled too. The trouble is, when you bought your home you probably signed two documents (at least) — a promissory note to repay the mortgage loan, and a security agreement that could be recorded as a lien to enforce performance on the promissory note.

Chapter 7 bankruptcy gets rid of your personal liability under the promissory note, but it doesn’t remove the lien. That’s the way Chapter 7 works. It gets rid of debt but not liens – you’ll still probably have to give up the house under the lien since that’s what provided collateral for the loan.

Chapter 7 Bankruptcy May Not Be Right For You

Not everyone can or should use Chapter 7 bankruptcy. Here’s why:

You could lose property you want to keep. Chapter 7 might cause you to lose property you don’t want to give up. As an example, if your wedding ring is particularly valuable, it may exceed the dollar amount of jewelry you’re allowed to keep in a bankruptcy (under something called the "jewelry exemption"). In that case, the bankruptcy trustee could order you to turn the ring over to be sold for the benefit of your creditors.

You may not be eligible. Even if Chapter 7 bankruptcy would work for you, you may not be eligible. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, you are not eligible if your average gross income for the six-month period preceding the bankruptcy filing exceeds the state median income for the same size household. Nor are you eligible if your current income provides enough excess over your living expenses to fund a reasonable Chapter 13 repayment plan.

Bankruptcy’s Effect on Your Credit Score

Both bankruptcy and foreclosure will damage your credit score. However, sometimes bankruptcy is the preferable option when trying to rebuild credit. Here’s why:

A foreclosure will damage your credit score for many years, will not get rid of your other debt, and is particularly harmful if you are house shopping.

In contrast, discharging your debts in bankruptcy will harm your credit score, but can help you rebuild your score quicker than after a foreclosure. This is because bankruptcy will leave you solvent and debt-free – and therefore able to start rebuilding good credit sooner.

Keep in mind that the current mortgage meltdown and credit crunch (which are prevalent at the time this article is being written) may change the way bankruptcy and foreclosure affect credit ratings.

If All Else Fails: Relief From Debt and Tax Liability

If you’re certain you won’t be able to propose a Chapter 13 repayment plan that a bankruptcy judge will approve, and Chapter 7 will provide only a temporary delay from the foreclosure sale, then what’s the point of either?

If you have to lose your home -- a bitter result to be sure, but sometimes unavoidable -- you can at least view bankruptcy as the best way to get out from under your mortgage debt and tax liability. Bankruptcy also offers a way to save some money, which will help you find new shelter and weather the psychological and economic shocks that lie ahead.

To learn more about Chapter 13 bankruptcy and how it can help you avoid foreclosure, get Chapter 13 Bankruptcy: Repay Your Debts, by Robin Leonard and Stephen Elias (Nolo). For information on Chapter 7 bankruptcy, including forms and instructions for filing yourself, get How to File for Chapter 7 Bankruptcy, by Stephen R. Elias, Albin Renauer, and Robin Leonard (Nolo).

 


The New Bankruptcy Law: Changes to Chapter 7 and 13

 

Chapter 7 bankruptcy may be harder to file under the new law.

The latest changes to bankruptcy law may be making it harder for some people to file bankruptcy. And a few filers with higher incomes are no longer allowed to use Chapter 7 bankruptcy, but will instead have to repay at least some of their debt under Chapter 13. All debtors now have to get credit counseling before they can file a bankruptcy case -- and additional counseling on budgeting and debt management before their debts can be wiped out. And, because the law imposes new requirements on lawyers, it is sometimes tougher to find an attorney to represent you in a bankruptcy case.

Here are some of the most important changes.

Restricted Eligibility for Chapter 7 Bankruptcy

Under the old rules, most filers could choose the type of bankruptcy that seemed best for them -- and most chose Chapter 7 bankruptcy (liquidation) over Chapter 13 bankruptcy (repayment). The new law prohibits some filers with higher incomes from using Chapter 7 bankruptcy.

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 household of your size in your state. If your income is less than or equal to the median, you can file for Chapter 7 bankruptcy. If it 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.

The Means Test

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 make payments on a Chapter 13 plan. To find out whether you pass the means test, you subtract certain allowed expenses and debt payments from your current monthly income. If the income that's left over after these calculations is below a certain amount, you can file for Chapter 7.

If you're looking for an easy way to determine your eligibility under the 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.

Counseling Requirements

Before you can file for bankruptcy under either Chapter 7 or Chapter 13, you must complete credit counseling with an agency approved by the United States Trustee's office. (To find an approved agency in your area, go to the Trustee's website, www.usdoj.gov/ust, and click "Credit Counseling and Debtor Education".) The purpose of this counseling is to give you an idea of whether you really need to file for bankruptcy or whether an informal repayment plan would get you back on your economic feet.

Counseling is required even if it's obvious that a repayment plan isn't feasible or you are facing debts that you find unfair and don't want to pay. You are required only to participate, not to go along with any repayment plan the agency proposes. However, if the agency does come up with a repayment plan, you will have to submit it to the court, along with a certificate showing that you completed the counseling, before you can file for bankruptcy.

Toward the end of your bankruptcy case, you'll have to attend another counseling session, this time to learn personal financial management. Only after you submit proof to the court that you fulfilled this requirement can you get a bankruptcy discharge wiping out your debts. (The website above also lists approved debt counselors.)

Lawyers May Be Harder to Find -- and More Expensive

As you can see, the new law adds some complicated requirements to the field of bankruptcy. This makes it more expensive -- and time-consuming -- for lawyers to represent clients in bankruptcy cases, which means attorney fees have gone up.

The new law also imposes some additional requirements on lawyers, chief among them that the lawyer must personally vouch for the accuracy of all of the information their clients provide them. This means attorneys have to spend more time on bankruptcy cases, and charge their clients accordingly. This combination of new requirements have driven some bankruptcy lawyers out of the field altogether.

Some Chapter 13 Filers Will Have to Live on Less

Under the old rules, people who filed under Chapter 13 had to devote all of their disposable income -- what they had left after paying their actual living expenses -- to their repayment plan. The new law added a wrinkle to this equation: Although Chapter 13 filers still have to hand over all of their disposable income, they have to calculate their disposable income using allowed expense amounts dictated by the IRS -- not their actual expenses -- if their income is higher than the median in their state. And these allowed expense amounts must be subtracted not from the filer's actual earnings each month, but from the filer's average income during the six months before filing.

Other Changes

There are other changes that can affect bankruptcy filers negatively, including how property is valued (at replacement cost instead of auction value) -- this means more debtors are at risk of having their property taken and sold by the trustee -- and how long a filer must live in a state to use that state's exemption laws (this can make a big difference in the amount of property a bankruptcy filer gets to hold on to). These changes and others are explained in The New Bankruptcy: Will It Work for You?, by Attorney Stephen Elias (Nolo).

Also, you might find author Stephen Elias's podcast helpful: What Are the Rules Under the New Bankruptcy Law?

 


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.

 


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).

 


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.

 


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).

 


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