Bankruptcy is a legal process overseen by federal bankruptcy courts. It’s designed to help individuals and businesses eliminate all or part of their debt or to help them repay a portion of what they owe. Bankruptcy may help you get relief from your debt, but it’s important to understand that declaring bankruptcy has a serious, long-term effect on your credit. Bankruptcy will remain on your credit report for 7-10 years, affecting your ability to open credit card accounts and get approved for loans with favorable rates. Bankruptcy can be a complex process, and the average person probably isn’t equipped to go through it alone. Working with a bankruptcy attorney can help ensure your bankruptcy goes as smoothly as possible and complies with all the applicable rules and regulations governing bankruptcy proceedings. You’ll also have to meet some requirements before you can file for bankruptcy. You’ll need to demonstrate you can’t repay your debts and also complete credit counseling with a government-approved credit counselor. The counselor will help you assess your finances, discuss possible alternatives to bankruptcy, and help you create a personal budget plan. If you decide to move forward with bankruptcy proceedings, you’ll have to decide which type you’ll file: Chapter 7 or Chapter 13. Both types of bankruptcy can help you eliminate unsecured debt (such as credit cards), halt a foreclosure or repossession, and stop wage garnishments, utility shut-offs and debt collection actions. With both types, you’ll be expected to pay your own court costs and attorney fees. However, the two types of bankruptcy relieve debt in different ways.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy works slightly differently, allowing you to keep your property in exchange for partially or completely repaying your debt. The bankruptcy court and your attorney will negotiate a three- to five-year repayment plan. Depending on what’s negotiated, you may agree to repay all or part of your debt during that time period. When you’ve completed the agreed repayment plan, your debt is discharged, even if you only repaid part of the amount you originally owed. While any type of bankruptcy negatively affects your credit, a Chapter 13 may be a more favorable option. Because you repay some (or all) of your debt, you may be able to retain some assets. What’s more, a Chapter 13 bankruptcy will cycle off your credit report after seven years, and you could file again under this chapter in as little as two years. A chapter 13 bankruptcy is also called a wage earners plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years.
Advantages of Chapter 13
Chapter 13 offers individuals a number of advantages over liquidation under chapter 7. Perhaps most significantly, chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still make all mortgage payments that come due during the chapter 13 plan on time. Another advantage of chapter 13 is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the chapter 13 plan. Doing this may lower the payments. Chapter 13 also has a special provision that protects third parties who are liable with the debtor on “consumer debts.” This provision may protect co-signers. Finally, chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under chapter 13 protection.
Chapter 13 Eligibility
Any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual’s unsecured debts are less than $394,725 and secured debts are less than $1,184,200. These amounts are adjusted periodically to reflect changes in the consumer price index. A corporation or partnership may not be a chapter 13 debtor. An individual cannot file under chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.
Disadvantages of Chapter 13
• It can take up to five years for you to repay your debts under a Chapter 13 plan.
• Debts must be paid out of your “disposable” income, which is whatever income you have left over after necessities (such as food, shelter, and medical care) are paid. All of your extra cash is thus tied up during the entire repayment plan.
• Bankruptcy will ruin your credit for some time to come. A Chapter 13 bankruptcy can remain on your credit report for up to 10 years.
• You’ll lose all your credit cards.
• Bankruptcy will make it nearly impossible to get a mortgage, if you don’t already have one.
• You can’t file for Chapter 7 bankruptcy if you previously went through bankruptcy proceedings under Chapter 13 within the last six years.
• Declaring bankruptcy under Chapter 13 now will make it harder to declare under Chapter 7 later.
• Bankruptcy won’t relieve you of your obligations to pay alimony and/or child support.
• Bankruptcy won’t get rid of your student loan debt.
• You’ll have to explain to a judge or trustee how you got into a financial mess.
• You can’t file for Chapter 13 bankruptcy if a previous Chapter 7 or Chapter 13 case was dismissed within the past 180 days because you violated a court order, or you requested the dismissal after a creditor asked for relief from the automatic stay.
Types of Debt in Chapter 13
Chapter 13 bankruptcy divides debt into several categories: secured debt, priority unsecured debt, and general unsecured debt. How much you must pay for each type of debt differs. For instance, you’ll pay all of your priority debt—such as support obligations and most tax debt in your Chapter 13 repayment plan. You’ll make your secured debt payments (such as a mortgage and car loan) if you intend to keep the car or house serving as collateral (the house or car). All debts other than priority and secured obligations are general unsecured debt and the amount you’ll pay to your unsecured creditors in Chapter 13 bankruptcy will be the greater of your disposable income or the amount your creditors would have received had you filed for Chapter 7 bankruptcy.
• Disposable income: You must devote all of your disposable income to your plan. The amount your unsecured creditors get depends on how much money you have left over each month after paying allowed expenses, secured debts, and priority claims.
• Best interest of the creditors: Also, at a minimum, your unsecured creditors must get what they would have received had you filed for Chapter 7 bankruptcy. In a nutshell, it’s an amount equal to the value of the property that you can’t protect with a bankruptcy exemption. Keep in mind that priority creditors are also unsecured. After paying secured creditors, you’ll pay priority unsecured creditors. Any funds remaining go to general unsecured creditors.
In Chapter 13 bankruptcy, you must devote all of your “disposable income” to repayment of your debts over the life of your Chapter 13 plan. Your disposable income first goes to your secured and priority creditors. Your unsecured creditors share any remaining amount. Disposable income is what you have left over at the end of every month after you pay your reasonable and necessary living expenses. The court determines your disposable income by reviewing the Chapter 13 means test forms. The forms are similar to the Chapter 7 means test forms used to decide whether or not you qualify for a Chapter 7 bankruptcy.
Chapter 7 Bankruptcy Requirements
Some debtors cannot file for Chapter 7 bankruptcy leaving Chapter 13 bankruptcy as the only option. You cannot file for Chapter 7 bankruptcy if both of the following are true:
• Your current monthly income over the six months before your filing date is more than the median income for a household of your size in your state.
• Your disposable income, after subtracting certain expenses and monthly payments for debts you would have to repay in Chapter 13 bankruptcy, exceeds certain limits set by law. These calculations are referred to as the “means test.” They determine whether you have the means to repay a certain amount of your debt through a Chapter 13 repayment plan. If you do, you flunk the test and are ineligible for Chapter 7 bankruptcy.
How the Automatic Stay Works
The automatic stay is an order that’s put in place as soon as you file for bankruptcy. All collection efforts to collect money you owe (other than child support and alimony), including calls, letters, and other techniques, must come to an immediate halt. It stops almost anyone who is trying to collect from you.
A few things that a creditor cannot do once the stay is in place include:
• garnishing your wages (taking money out of your paycheck)
• levying on your bank account (instructing the bank to withdraw funds)
• foreclosing on your house
• repossessing your car, or
• moving forward with a civil lawsuit requesting a money judgment.
In most cases, the automatic stay will protect you throughout your case. But not always. If you’ve filed more than one bankruptcy case within a year, you might not receive as much or any protection. Depending on the number of times you’ve filed during the previous year, the stay could be limited to 30 days (you filed one other matter) or might not apply at all (you filed two or more cases). If you find yourself with this problem and want the protection of the stay, you’ll have to file a motion asking the court to extend it or put it in place. The court will consider doing so if you explain why you filed the previous case and demonstrate that you aren’t gaming the system by repeatedly filing for bankruptcy. Also, it’s common for a creditor to file a motion to lift the automatic stay (a motion to remove the stay order) if, in a Chapter 13 case, you stop making your house payment and the creditor wants to move forward with a foreclosure. If the court grants the request, the judge will withdraw the stay order and allow the creditor to continue with collection efforts. When you file for Chapter 7 bankruptcy, you get to keep only exempt property—property 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 bankruptcy, you don’t have to give up any property. Instead, you repay your debts out of your income. But that doesn’t mean that you get to keep more property than you would have had you filed for Chapter 7 bankruptcy. All filers can protect (exempt) the same amount of assets. Only the Chapter 7 trustee sells nonexempt assets. In Chapter 13 bankruptcy you must pay for the value of the nonexempt assets you keep through your three- to five-year repayment plan. So, if you have nonexempt property that you can’t bear to part with, Chapter 13 bankruptcy might be the better choice—if you can afford to pay for your nonexempt assets in addition to other required payment amounts.
Common Reasons for Dismissed Chapter 13 Cases
There are several reasons why someone might have a dismissed Chapter 13 case. Some common reasons for dismissed Chapter 13 cases include:
• Failing to pay the Chapter 13 payments
• Failing to attend the First Meeting of Creditors
• Failing to meet certain deadlines
• Failing to file the correct forms with the bankruptcy court
• Failing to complete the Credit Counseling Course or the Debtor Education Course
• Failing to submit the required documentation to the Chapter 13 trustee or the bankruptcy court
• Failing to file tax returns
Bankruptcy Terms to Know
Throughout bankruptcy proceedings, you’ll likely come across some legal terms particular to bankruptcy proceedings that you’ll need to know. Here are some of the most common and important ones:
• Bankruptcy trustee: This is the person or corporation, appointed by the bankruptcy court, to act on behalf of the creditors. He or she reviews the debtor’s petition, liquidates property under Chapter 7 filings, and distributes the proceeds to creditors. In Chapter 13 filings, the trustee also oversees the debtor’s repayment plan, receives payments from the debtor and disburses the money to creditors.
• Credit counseling: Before you’ll be allowed to file for bankruptcy, you’ll need to meet either individually or in a group with a nonprofit budget and credit counseling agency. Once you’ve filed, you’ll also be required to complete a course in personal financial management before the bankruptcy can be discharged. Under certain circumstances, both requirements could be waived.
• Discharged bankruptcy: When bankruptcy proceedings are complete, the bankruptcy is considered discharged. Under Chapter 7, this occurs after your assets have been sold and creditors paid. Under Chapter 13, it occurs when you’ve completed your repayment plan.
• Exempt property: Although both types of bankruptcy may require you to sell assets to help repay creditors, some types of property may be exempt from sale. State law determines what a debtor may be allowed to keep, but generally items like work tools, a personal vehicle or equity in a primary residence may be exempted.
• Lien: A legal action that allows a creditor to take, hold and sell a debtor’s real estate for security or repayment of a debt.
• Liquidation: The sale of a debtor’s non-exempt property. The sale turns assets into a “liquid” form cash which is then disbursed to creditors.
• Means test: The Bankruptcy Code requires people who want to file Chapter 7 bankruptcy to demonstrate that they do not have the means to repay their debts. The requirement is intended to curtail abuse of the bankruptcy code. The test takes into account information such as income, assets, expenses and unsecured debt. If a debtor fails to pass the means test, their Chapter 7 bankruptcy may either be dismissed or converted into a Chapter 13 proceeding.
• Reaffirmed account: Under Chapter 7 bankruptcy, you may agree to continue paying a debt that could be discharged in the proceedings. Reaffirming the account and your commitment to pay the debt is usually done to allow a debtor to keep a piece of collateral, such as a car, that would otherwise be seized as part of the bankruptcy proceedings.
• Secured debt: Debt backed by reclaimable property. For example, your mortgage is backed by your home, and for an auto loan, the vehicle itself is the collateral. Creditors of secured debt have the right to seize the collateral if you default on the loan.
• Unsecured debt: A debt for which the creditor holds no tangible collateral, such as credit cards.
Bankruptcy Lawyer
When you need to file a chapter 13 bankruptcy, please call Ascent Law for your free consultation (801) 676-5506. We want to help you!
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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