Bankruptcy

Bankruptcy is a court process used to eliminate debt. While there are many types of bankruptcies, this article will focus on the two types of consumer bankruptcy: Chapter 7 and Chapter 13. These processes are designed to be as fair as possible and to help the “honest but unfortunate debtor” receive a fresh start on life.

  • WHAT ARE THE DIFFERENCES BETWEEN ALL OF THE TYPES OF BANKRUPTCY THAT CAN BE FILED?


    CHAPTER 7 – LIQUIDATION
    A court-supervised procedure by which a trustee examines the property and disclosures of the debtor to determine the fairness of the case and what should happen during the process. Certain property is deemed as “exempt,” meaning necessary for the debtor to continue after the process. Non-exempt property may need to be abandoned to the trustee or offset with other assets.

    EXEMPT PROPERTY
    You will be able to keep this property after you file for bankruptcy. The exemption amounts are based off of your equity in the property, meaning its fair market value minus any loans for financing that you have on the property. (Value thresholds may vary by state. Check your individual state resource page for its unique statutes.) 

    • Homestead
    • Manufactured Home
    • Personal Property (Household Goods)
    • Motor Vehicle
    • Tools of Trade
    • Life Insurance Proceeds, Accident/Disability Proceeds, Pension/Annuity, 401(k), IRA
      Public Assistance Based on Need

    Not all debtors are automatically eligible to file for Chapter 7 bankruptcy.
    If the debtor’s current monthly income is less than the state median, then the debtor automatically qualifies for Chapter 7 bankruptcy. However, if the debtor’s current monthly income is more than that state median, the Bankruptcy Code requires application of a means test to determine whether the Chapter 7 filing is presumptively abusive. If the debtor cannot pass the means test, then the case will generally be converted to Chapter 13 (with the debtor’s consent) or will be dismissed.

    CHAPTER 13 – INDIVIDUAL DEBT ADJUSTMENT
    This court process is more similar to a payment plan. Over 3 to 5 years, the debtor makes regular payments against his debt. At the end of this process, the remaining debt is discharged like in a Chapter 7.  Creditors get more money than they would have gotten anyway. Debtors get the protection of the court process and only make one payment that they can afford.

    Chapter 13 is also used by consumer debtors who do not qualify for Chapter 7 relief under the means test. Chapter 13 is very different from Chapter 7 since the Chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor’s anticipated income over the life of the plan. Unlike Chapter 7, the debtor does not receive an immediate discharge of debts. They must first complete the payments required under the plan. The debtor is also protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. More debts can be eliminated under Chapter 13 than Chapter 7. Debts dischargeable in a Chapter 13 but not in a Chapter 7 include debts for willful and malicious injury to property (as opposed to a person), debts incurred to pay non-dischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings.

  • WHAT IS THE “MEANS TEST”?


    A means test determines whether your income compared to expenses is low enough for you to file for Chapter 7 bankruptcy. It’s a formula designed to keep high-wage earners from filing Chapter 7 bankruptcy. If your current monthly income is less than the median income for a household of your size in your state, then you automatically qualify to file for Chapter 7, and no further “means test” is necessary.

    The median income for a household of your size can be determined here.

    Even if your income is above the state median, you might still qualify for Chapter 7. The means test exemption requirements include your obligations are primarily non-consumer (business) debts, you’re a disabled veteran and incurred most debt while on active duty, or you’re a military reservist or a member of the National Guard called to active duty before filing your case (typically a temporary exclusion). You can find out if you are exempt from the means test here.

  • I HAVE A MORTGAGE LOAN ON MY HOUSE OR A CAR LOAN ON MY CAR. CAN THESE LOANS BE DISCHARGED IN BANKRUPTCY?


    In general, if you want to keep the underlying collateral (house, car, etc.) after the bankruptcy is over, the lender will require you to reaffirm your loan in the bankruptcy case, meaning that the loan is not included in the bankruptcy discharge and survives the bankruptcy. The discharge only means that the lender cannot sue you personally for collection on the loan anymore. The discharge does not remove the lender’s lien on your property. Although a discharge of the mortgage loan means that you are not personally liable to pay the mortgage, if you do not pay the mortgage, the lender may enforce its lien by foreclosing on the property.

  • MY PROPERTY IS BEING FORECLOSED. CAN I FILE BANKRUPTCY TO PROTECT MY HOME OR DELAY THE FORECLOSURE?


    Maybe, but the protection may be limited. Once the homeowner files for bankruptcy, the automatic stay goes into effect. This bars a lender’s attempts to enforce mortgage liens by beginning, continuing or competing foreclosure actions. If the homeowner files for bankruptcy prior to the foreclosure’s sheriff’s sale, then the lender must comply with the automatic stay and cannot immediately continue with the sheriff’s sale.

    However, the lender can obtain relief from the automatic stay by requesting the bankruptcy court lift or terminate the automatic stay so the lender can proceed with the foreclosure even while the bankruptcy case is ongoing. You are entitled to file a response to the lender’s request and have a hearing with a bankruptcy judge to determine if the automatic stay should be lifted or terminated to allow foreclosure to proceed.

    In Chapter 7, the automatic stay can provide you with time to arrange for other living arrangements, or to allow for additional time for you to save money and reinstate (once you have paid back all amounts overdue plus certain additional costs) your mortgage.

    In Chapter 13, the automatic stay allows you time to restructure your debts using the Chapter 13 repayment plan. Using the Chapter 13 repayment plan, you can include your mortgage payments and overdue amounts for repayment of your other debts over a period of 3 to 5 years.

    If the homeowner files for bankruptcy during the redemption period (e.g. after the sheriff’s sale), the homeowner’s right to redeem (a period of time: 5 weeks, 6 months, or 12 months after the sheriff’s sale) is extended to 60 days after the bankruptcy case’s order for relief.

  • HOW LONG WILL BANKRUPTCY NEGATIVELY IMPACT MY CREDIT SCORE?


    Chapter 7 and Chapter 13 bankruptcy cases can remain on your credit report for 10 years after completion of the bankruptcy. However, many Chapter 13 cases are “unofficially” removed from your credit report 7 years after completion of the bankruptcy. In general, the older an item that is listed on your credit report, the less impact that item will have on your credit score. For example, a bankruptcy that is 6 months old will have a much greater negative impact on your credit score than one that is 6 years old.

  • CAN I FILE BANKRUPTCY MYSELF, WITHOUT A LAWYER?


    Yes, you can file bankruptcy yourself. This is called filing “pro se”. However, bankruptcy is very complex. Retaining a qualified attorney to file your petition and manage your bankruptcy case is strongly recommended because bankruptcy has long-term financial and legal outcomes. Pro se litigants are expected to follow the rules and procedures in federal courts and should be familiar with the United States Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, and the local rules of the court where the case is filed.

    Check your state’s resource page to find local rules.

Wagner Falconer & Judd is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.

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