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What Is Bankruptcy?
THE INFORMATION CONTAINED HEREIN IS GENERAL IN NATURE AND DOES NOT CONSTITUTE LEGAL ADVICE. THE ANSWERS TO MANY OF THESE QUESTIONS MAY BE DIFFERENT DEPENDING ON WHAT DISTRICT YOUR CASE IS FILED IN. YOU SHOULD CONSULT WITH AN ATTORNEY IN REFERENCE TO YOUR SPECIFIC SITUATION. THE AUTHOR HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES, EITHER EXPRESS OR IMPLIED, AND MAKES NO REPRESENTATIONS REGARDING THE INFORMATION CONTAINED HEREIN.
Chapter 7 Bankruptcy Questions
Click the questions to read Sam’s answers.
Chapter 7 is that part of the federal bankruptcy law that permits you to discharge certain debts by filing a case in the bankruptcy court, turning all of your non-exempt property over to a trustee (while retaining certain items of exempt property), and obeying the orders and rules of the court. A person who files under chapter 7 is called a debtor.
Any person who resides in, who does business in, or who has property in the United States may file under chapter 7, except a person who has been involved in another bankruptcy case that was dismissed within the last 180 days on certain grounds. Additionally, before filing, a person must have consulted an approved credit counseling agency and received advice from them regarding his or her financial situation.
While chapter 7 is a powerful tool to use when you have debt problems, it is not always the only option available to you. Congress wants to make sure you have explored all of the possible options you may have. Therefore, Congress requires that within the 180 day period before filing a bankruptcy, you must have requested and completed a briefing session (with very limited exceptions) from an approved credit counseling agency whose duty is to outline the opportunities for credit counseling and assist you in performing a budget analysis.
The “Means Test” is a mathematical formula designed to identify people filing under chapter 7 who can afford to repay their debts. If your household income is below average, the “Means Test” will not prevent you from receiving a discharge under chapter 7. However, if your household income is above average and the “Means Test” indicates you can pay more than $125 / month towards your general unsecured debt (after taking into consideration payments for your home, car and other essential living expenses), your case may be presumed abusive. Abusive cases are subject to dismissal by the Court unless one can show that special circumstances exist which overcome the presumption of abuse established by the “Means Test.” If the “Means Test” reveals that you have a presumptively abusive case which cannot be overcome by a showing of special circumstances, filing a chapter 13 is the next option to consider.
The chapter 7 filing fee is $335.00 (effective June 1, 2014) regardless of whether you are filing bankruptcy individually or jointly with your spouse. The attorney’s fees vary with regard to the complexity of the case.
It is a court order releasing you from all of your dischargeable debts and ordering creditors not to attempt to collect them from you. A debt that is dischargeable is one that you are released from and do not have to pay. Some debts, however, are not released by a chapter 7 discharge, and some persons are not eligible for a chapter 7 discharge.
While there are certain reasons the court can deny a discharge, almost all of those reasons are related to dishonest conduct (such as incurring debt through misrepresentation or without the intent to repay). In order to receive a discharge, a person must be truthful, honest, and cooperative with the court and the trustee (the person assigned to administer the case). You can not have received a previous chapter 7 discharge in a case filed within eight years of the present one. Lastly, you must complete an instructional course concerning personal financial management offered by an approved provider within a short period of time after filing your case. Your attorney can direct you to an approved provider.
All debts of any kind or amount, including debts incurred in other states, are generally released by a chapter 7 discharge. However, as with any law, there are certain exceptions such as those listed below:
debts for certain taxes, including taxes that became due within the last three years;
if the creditor files a complaint and if the court so rules, debts for obtaining money, property, services, or credit by means of false pretenses, fraud, or a false financial statement (included here are certain debts for luxury goods or services and for certain cash advances made within 70 – 90 days before the case is filed);
debts not listed on your chapter 7 papers, unless the creditor knew of the case in time to file a claim;
if the creditor files a complaint and if the court so rules, debts for embezzlement, or larceny;
debts for domestic support obligations (alimony, maintenance, or support);
if the creditor files a complaint and if the court so rules, debts for intentional or malicious injury to the person or property of another;
debts for certain fines or penalties payable to a governmental unit;
debts for student loans or educational assistance, unless not discharging the debt would impose an undue hardship on you and your dependents;
debts arising from a judgment or court decree entered against you for damages resulting from the operation of a motor vehicle, vessel, or aircraft while legally intoxicated;
debts that were or could have been listed in a previous bankruptcy case of yours in which your were denied a discharge;
debts arising from any act of fraud while acting in a fiduciary capacity committed with respect to depository institutions or credit unions;
debts for malicious or reckless failure to fulfill any commitment by the debtor to a Federal depository institution’s regulatory agency to maintain capital of an insured depository institution;
debts for any payment of an order of restitution issued under the United States Code;]
debts incurred to pay a tax to the United States, or other governmental unit, that would be non-dischargeable pursuant to number above; or
any other additional debts falling under the descriptions contained in 11 U.S.C. §523(15) – (18).
Both husband and wife should file if some of the debts to be discharged are owed by both spouses. In a community property state, such as Texas, debts incurred during the marriage may be the joint responsibility of each spouse (depending on the nature of the debt incurred) even if only one spouse’s name is on the debt. If both spouses are liable for some of the debts and if only one spouse files under chapter 7, the creditors often try to coerce the non-filing spouse into paying the debts, even if he or she has no income or assets.
If you have never filed bankruptcy before, the filing of a chapter 7 case automatically stays or stops most lawsuits that have been filed against you (there are some exceptions). A few days after a chapter 7 case is filed, the court will mail a notice to all creditors ordering them to refrain from any further action against the debtor. If you cannot wait this long, it is permissible for you or your attorney to notify one or more of the creditors of the filing of the case. The most common actions not affected by the filing of a chapter 7 case are criminal proceedings, paternity actions, and collection of domestic support obligations (child support) through wage withholding.
Your credit rating is a record of all your past credit performances. The fact that you filed a chapter 7 will be reflected on your credit report and will remain there for ten years in contrast to most other information remaining on your credit report for seven years. However, some financial institutions openly solicit business from persons who have recently filed under chapter 7, in part, because of the decreased debt load you have after filing. If there are compelling reasons for filing under chapter 7 that are not within your control (such as an illness or injury), some credit rating agencies may take that into account in rating your credit after filing.
Under State and Federal Laws certain property is declared to be exempt and cannot be taken by a person’s creditors, except those creditors with valid mortgages or liens when the payments are not being made. You can generally keep exempt property provided you are current on any payment due a lender for a valid lien. All nonexempt property must be turned over to the trustee for liquidation. The Texas and Federal exemptions are as follows:
THE STATE OF TEXAS:
Homestead, subject to purchase money or improvement liens thereon, consisting of a lot or lots not exceeding ten acres if located in town, or 100 acres if home is rural (200 acres for family); and
Personal property having a value not in excess of $30,000.00 for single person or $60,000.00 for a family comprising of the following items:
Provisions for consumption;
Farming or ranching vehicles and implements;
Tools of your trade or profession;
Jewelry not to exceed 25% of the values listed above;
One passenger car or light truck for each family member that is a licensed driver;
Household pets and a limited number of farm animals;
Present value of life insurance to the extent that a member of the family of the insured claiming this exemption is a beneficiary of the policy;
Professionally prescribed health aids;
Alimony, maintenance or support received or to be received; and
Other very specific types of property.
FEDERAL (PER PERSON):
$22,975 in value in real or personal property used as a residence;
Up to $3,675.00 in any one motor vehicle;
Up to $575 in value in any particular item of household furnishings, or wearing apparel, up to a total of $12,250.00;
Up to $1,550.00 in jewelry held for personal use;
Up to $2,300.00 in tools of trade;
Any unmatured life insurance contract on the Debtor other than credit life;
Professionally prescribed health aids;
The right to receive certain support and disability payments;
The right to receive certain payments as a result of personal injury or wrongful death proceedings; and
Any property selected by Debtor in an amount not exceeding $1,225.00 plus any unused amount of the $22,975.00 listed in #1 above, up to $11,500.00. This can include income tax refunds.
In the office of the clerk of the bankruptcy court in the district where you have lived, maintained your principal place of business, or had the greatest part of your assets for the greatest portion of the 180 days before filing. The bankruptcy court is a federal court and is a unit of the United States District Court.
When a chapter 7 case is filed, it becomes a public record which any one has access to. Credit reporting agencies will reflect in their reports that you have filed a chapter 7. Also, some newspapers will list all filings made in any court on a regular basis. Therefore, it is likely that your name will be published at least once in the local paper.
No. Filing under chapter 7 is not a criminal proceeding, and you do not lose any of your civil or constitutional rights by filing.
It is illegal for either private or governmental employers to discriminate against a person as to employment solely because that person has filed under chapter 7. It is also illegal for local, state, or federal governmental units to discriminate against a person as to the granting of licenses (including a driver’s license), permits, and similar grants because that person has filed under chapter 7.
Generally, you will only have to appear in court once. It will be about a month after your case has been filed for what is called “The First Meeting of Creditors”. There you will be put under oath and questioned about your bankruptcy papers and your assets by the trustee in bankruptcy. In all probability few, if any, of your creditors will appear.
After the meeting of creditors, the trustee may contact you regarding the collection or existence of non-exempt property, and the court may issue orders to you. These orders will be sent by mail and may require you to turn certain property over to the trustee, or provide the trustee with certain information. You should contact your attorney if there is any question with regard to any of these matters.
The trustee is an officer of the court, usually an attorney, appointed by the bankruptcy court to administer your case. The law gives the trustee in bankruptcy the power and the means to perform his or her duties, the principal one of which is to collect, on behalf of your creditors, any non-exempt property. A trustee is appointed in a chapter 7 case, even if you have no property for the trustee to collect.
The law requires you to cooperate with the trustee in the administration of a chapter 7 case, including the collection by the trustee of your non-exempt property. If you refuse to cooperate with the trustee, then your case may be dismissed and your debts may not be discharged.
It is usually converted into cash, which is later used to pay the administrative expenses of the trustee and to pay the claims of creditors. The trustee is permitted to pay himself a fee, which is based on a percentage of the amount collected from you.
If you have no money or property having value over the exemptions allowed by law, your case will be considered a “no-asset” case. If your case is a no-asset case, your discharge will be granted a short time later, unless a creditor files an objection to your discharge. Your case will probably be closed shortly after your discharge is granted.
23. What if I wish to repay one or more of my discharged debts after filing under chapter 7 (and What is a Reaffirmation Agreement)?
You may repay as many of your discharged debts as you wish after filing under chapter 7. By repaying one creditor, you do not become legally obligated to repay any other creditor. The only debts that you are legally obligated to repay after filing under chapter 7 are those which you have elected to reaffirm. A Reaffirmation Agreement is a binding agreement entered into between you and a creditor which effectively removes that debt from your discharge. A Reaffirmation Agreement must meet certain requirements of the law in order to be valid. Among other things the Reaffirmation Agreement must be made prior to the date the discharge is granted and must contain the statement that it may be rescinded at any time prior to the discharge or within sixty (60) days after it is filed with the court.
When a discharge is granted, the court enters an order prohibiting your creditors from attempting to collect from you any debt that was discharged in the case. If a creditor violates this court order he may be held in contempt of court. If a creditor attempts to collect a discharged debt, you should give the creditor a copy of the order of discharge and inform him that the debt has been discharged under chapter 7. If the creditor persists, you should contact your attorney. If the creditor files lawsuit against you, it is important to not ignore the matter, because even though any judgment entered against you on a discharged debt can later be voided, voiding the judgment may require the services of an attorney, which could be costly to you.
25. Does a chapter 7 discharge affect the liability of other parties who may be liable to a creditor on a discharged debt?
A chapter 7 discharge releases only the debtor. The liability of any other party on a debt (such as a non-filing spouse or other co-signers) is not affected by a chapter 7 discharge.
The debtor’s attorney performs the following functions in a chapter 7 case of a typical consumer:
Analyze the amount and nature of the debts owed by the debtor and determine the best remedy for the debtor’s financial problems;
Advise the debtor of the relief available under both chapter 7 and chapter 13 of the bankruptcy laws, and of the advisability of proceeding under each chapter;
Assemble the information and data necessary to prepare the chapter 7 forms for filing;
Prepare the petitions, schedules, statements and other chapter 7 forms for filing with the bankruptcy court;
File the chapter 7 petition, schedules, statements, and other forms with the bankruptcy court, and, if necessary, notify certain creditors of the commencement of the case;
If necessary, assist the debtor in redeeming certain personal property and in setting aside certain mortgages or liens against exempt property;
Attend the meeting of creditors with the debtor;
If necessary, prepare and file amended schedules and certain statements and other documents with the bankruptcy court in order to protect the rights of the debtor; and
If necessary, attend the discharge and reaffirmation hearing with the debtor and assist the debtor in reaffirming certain debts and in overcoming obstacles to the granting of his chapter 7 discharge.
The fee paid, or agreed to be paid, to an attorney representing a debtor in a chapter 7 case must be disclosed to the bankruptcy court and must be approved by the court. The court will allow the attorney to charge only a reasonable fee for representing the debtor. It is customary for the debtor’s attorney to collect the entire fee before the case is filed.
Chapter 13 Bankruptcy Questions
Click the questions to read Sam’s answers.
Chapter 13 is that part of the federal bankruptcy law that permits you to repay all or a portion of your debts under the supervision and protection of the bankruptcy court. Under chapter 13, the person filing the case, who is called the debtor, submits a plan for the repayment of all or a portion of his debts to the court. The court must approve the plan for it to become effective. The court prohibits creditors from attempting to collect their claims from the debtor and permits the debtor to make regular payments in the amounts called for in the debtor’s plan to the chapter 13 trustee for the period of time specified in the plan. The chapter 13 trustee collects the money paid in by the debtor and disburses it to the creditors as set forth in the debtor’s plan. Upon the completion of the payments called for in the plan, the debtor is discharged from any liability for the remainder of his debts (with very limited exceptions).
It is a written plan presented to the bankruptcy court by a debtor that states which of the debtor’s debts should be paid, how much should be paid on each debt, how much of the debtor’s earnings or other property should be paid to the chapter 13 trustee, how long the payments should continue, which debts should be paid outside of the plan, and certain other technical matters.
A chapter 13 trustee is an officer of the court appointed to collect payments from the debtor, make payments to creditors in the manner set forth in the debtor’s chapter 13 plan, and administer the chapter 13 case until it is closed. The chapter 13 trustee is required to perform certain other technical duties in a chapter 13 case. The debtor is required to cooperate with the chapter 13 trustee.
A discharge is a court order releasing a debtor from all of his or her dischargeable debts and ordering the creditors not to attempt to collect them from the debtor. A debt that is discharged is one that the debtor is released from and does not have to pay. There are two types of chapter 13 discharges: one that is granted to a debtor who has completed all of the payments called for in his plan, and one that is granted to a debtor who is unable to complete the payments called for in his plan due to circumstances for which he should not justly be held accountable.
You must comply with your plan by making all of the payments called for. Additionally, you must show that all “domestic support obligations” (alimony, maintenance & support) coming due during the life of the plan have been made. Lastly, you must have completed an instructional course concerning personal financial management (your attorney can direct you to an approved provider of such courses).
The chapter 13 discharge granted after the completion of all payments under a chapter 13 plan generally releases a debtor from all debts except:
- debts that are paid outside of the plan;
- debts for certain types of taxes;
- debts for “domestic support obligations” (alimony, maintenance, or support);
- unlisted debts;
- debts incurred for educational purposes;
- debts incurred in a fraudulent manner;
- debts as a result of death or personal injury caused by the debtor’s operation of a motor vehicle if debtor was intoxicated;
- installment debts whose last payment is due after the completion of payments under the plan;
- restitution, or a criminal fine, included in a sentence on the debtor’s conviction of a crime; and
- debts incurred during the time the plan was in effect that were not paid under the plan.
The chapter 13 discharge granted when a debtor is unable to complete the payments under a plan due to circumstances for which he should not justly be held accountable releases the debtor from fewer debts than the discharge granted upon completion of all payments.
Any debts whatsoever, whether they are secured or unsecured. Even debts that are non-dischargeable, such as debts for alimony, maintenance, or support, may be paid under a chapter 13 plan.
No. while certain debts (such as debts for taxes and fully secured debts) must be paid in full under a chapter 13 plan, only what you are deemed to afford must be paid on most unsecured debts. The unpaid balance of most debts not paid in full under a chapter 13 plan may be discharged upon the completion of the plan.
A typical chapter 13 case will last anywhere from thirty-six (36) months to no longer than sixty (60) months (five years).
10. Is credit counseling mandatory? Why do I have to get credit counseling if I already know I want to file chapter 13?
While chapter 13 is a powerful tool to use when you have debt problems, it is not always the only option available to you. Congress wants to make sure you have explored all of the possible options you may have. Therefore, Congress requires that within the 180 day period before filing a bankruptcy you must have completed a briefing session (with very limited exceptions) with an approved credit counseling agency. The agency’s duty is to outline the opportunities for credit counseling and assist you in performing a budget analysis. If you do not complete such a briefing, you will most likely be ineligible to file chapter 13. Your attorney can direct you to an approved counselor.
A chapter 13 case is filed in the bankruptcy court in a federal district where the debtor has lived, had his or her principal place of business located, or had his or her principal assets located, for the greatest portion of the last 180 days. The bankruptcy court is a unit of the United States Federal District Court.
Usually not. Under chapter 13, debts are normally repaid out of the payments made to the chapter 13 trustee and not out of your property. However, if you have considerable non-exempt property and cannot make sufficient payments to pay enough of your debts to satisfy the court, some of your property may have to be used to pay creditors. Also, if a secured creditor is not being paid under the plan, he may be permitted to repossess the property securing his claim if the debt owed to him is not paid.
The filing of a chapter 13 case automatically stays (stops) all lawsuits, attachments, garnishments, and other actions by creditors against you and your property for as long as the chapter 13 case lasts. A few days after the case is filed, a notice is mailed to all creditors advising them of the automatic stay. The creditors may be notified sooner by either the debtor or his attorney, if necessary. Creditors are not permitted to file lawsuits or attachments against you during the chapter 13 case, and, if the debtor is granted a chapter 13 discharge, they will be prohibited from attempting to collect any discharged debt from you after the case is closed.
As a general rule, secured creditors’ claims must be paid in full under a chapter 13. However, it is important to realize that certain types of secured creditors are considered to have a secured claim only to the extent of the value of its secured interest (which cannot exceed the “replacement” value of the property securing the claim). For example, if a secured creditor has a purchase money mortgage on an automobile incurred more than 910 days before filing, and if the automobile would cost $500 for debtor to replace, then that creditor has a secured claim for only $500, regardless of how much is owed. The difference in the amount owed and the value of the property is called a deficiency. The deficiency need not be paid in full if you cannot afford to do so.
If a consumer debt (non-business) that has been co-signed or guaranteed by another person is being paid in full under a chapter 13 plan, the creditor will be prohibited from collecting the debt from the other person. However, if the debt is not being paid in full under the plan, the creditor will be permitted to collect the unpaid portion of the debt from the other person.
Student loans are not dischargeable except under very limited circumstances. Therefore, if you have a small balance remaining to be paid on your student loan debt (less than five years of repayment), it is advisable to include it in your chapter 13 plan of reorganization. If you have a large balance remaining (more than five years of repayment), it will probably be necessary for you to continue to pay your student loan debt outside of your chapter 13 plan. If your budget will not allow you to make both your chapter 13 plan payment plus your student loan payment, it may be possible to defer payments on your student loan debt until after you complete your chapter 13 plan. However, interest on your student loan debt will continue to accrue during this period.
Your chapter 13 payments begin 30 days after your chapter 13 case is filed with the court and continue to become due on that day of each month thereafter. The payments must be made regularly and timely. If you are employed and work for wages, you will be required to make the payments through a payroll deduction.
The fact that you filed a chapter 13 will be reflected as a bankruptcy on your credit report and will remain there for up to ten years. This is in contrast to most other negative information remaining on your credit report for seven years. Additionally, you are not allowed to use credit while going through your chapter 13 plan. Notwithstanding the long time that chapter 13 appears on your credit, most debtors are able to qualify for credit soon after completion of their plan.
When a chapter 13 case is filed, it becomes a public record which any one has access to. Credit reporting agencies will reflect in their reports that you have filed a chapter 13. Also, some newspapers will list all filings made in any court on a regular basis. Therefore, it is likely that your name will be published at least once in the local paper.
Filing under chapter 13 is not a criminal proceeding, and a person does not lose any of his civil or constitutional rights by filing.
It is illegal for either private or governmental employers to discriminate against a person as to employment because that person has filed under chapter 13. It is also illegal for local, state, or federal governmental units to discriminate against a person as to the granting of licenses (including a driver’s license), permits, and similar grants because that person has filed under chapter 13.
There are many different tests a plan must pass before being approved by the court. In general, the court will confirm (approve) a chapter 13 plan if:
- the plan complies with the legal requirements of chapter 13;
- all required fees, charges, and deposits have been paid;
- the plan has been proposed in good faith;
- each unsecured creditor will receive under the plan at least as much as he would have received had the debtor filed under chapter 7; and
- it appears that the debtor will be able to make the required payments and comply with the plan.
Each debtor is required to attend the first meeting of creditors held in the case. This is the first opportunity any creditors have to question the debtor about the proposed plan of repayment. Debtors are placed under oath and the meeting is presided over by the trustee. Debtors will receive information about the specific date, time, and location of the first meeting of creditors approximately two weeks after the chapter 13 is filed. Debtors whose plans will pay 70% or more to their unsecured creditors (with limited exceptions) do not have to appear at any other hearings. Debtors whose plans will pay less than 70% to their unsecured creditors must attend a confirmation hearing held approximately one month after the meeting of creditors. The purpose of the confirmation hearing is to allow the court to examine the plan and decide whether it meets the requirements outlined in question 22 above.
If the court will not approve a chapter 13 plan proposed by you, you are permitted to modify the plan and seek court approval of the modified plan. If you do not wish to change your proposed plan, you may either convert the case to a chapter 7 case or dismiss the case. If the court refuses to approve a plan, it will usually give the reasons for its disapproval so that the plan may be appropriately modified so as to become acceptable.
A Proof of Claim is a document filed with the court by creditors which indicates what type of debt you have and the amount owed. Non-governmental creditors must file their claims with the bankruptcy court within 90 days after the first date set for the meeting of creditors in order for their claims to be allowed. Governmental creditors have 180 days after the filing of the case in which to file claims. Unsecured non-priority creditors who fail to file claims within those periods will be barred from filing a claim, and after the completion of the plan their claims will be discharged. A debtor may file a claim on behalf of a creditor if he wishes to do so. Additionally, when the claims have been filed, the debtor is given an opportunity to file objections to any claim that he disputes.
The court will not allow the debtor to incur any new debt during the case unless prior approval by the court is given. Therefore, if a debtor needs credit or wishes to incur a debt after the case has been filed, he should obtain the approval of the court beforehand. Only two types of credit obligations or debts incurred after the filing of the case may be included in a chapter 13 plan. These are: (1) debts for taxes that become payable while the case is pending, and (2) consumer debts arising after the filing of the case that are for property or services necessary for the debtor’s performance under the plan and that are approved in advance by the court. Any other debts or credit obligations incurred after the case is filed must be paid by the debtor outside the plan.
You should immediately notify your attorney, the bankruptcy court, and the chapter 13 trustee in writing of your new address. Most communications in a chapter 13 case are by mail, and if you fail to receive an order of the court or a notice from the chapter 13 trustee because of a faulty address, the case may be dismissed.
You have the right to either dismiss a chapter 13 case or convert it to a chapter 7 case at any time, regardless of your reason for doing so. However, you should discuss this matter with your attorney to make certain that it is the best course of action.
A debtor who is unable to complete his chapter 13 payments has three options:
- he may dismiss the chapter 13 case;
- he may convert the chapter 13 case to a chapter 7 case; or
- if he is unable to complete the payments due to circumstances for which he should not justly be held accountable, he may seek to obtain the second type of discharge which was described above.