BANKRUPTCY

The three most common types of bankruptcy are Chapter 7 bankruptcy, Chapter 13 bankruptcy, and Chapter 11 bankruptcy. Each Chapter number relates to a Chapter in the US Bankruptcy Code.

Chapter 7 bankruptcy allows for legal clemency for individual debt and will result in the discharge of the debt. Allowances are provided under bankruptcy law that generally permit the individual who is filing to keep most of their possessions, including their cars, homes, and retirement savings.

Should the Chapter 7 codes not allow for the retention of those possessions or the reported income level is too high to qualify for Chapter 7 bankruptcy, then a Chapter 13 bankruptcy may prove more feasible. If monthly payments are made via a three-to-five-year plan, then a Chapter 13 bankruptcy will prevent the loss of any possessions or assets that would be forfeited under a Chapter 7 bankruptcy. The Chapter 13 codes may also allow for the prevention of foreclosure by allowing the debtor to catch up on overdue mortgage payments. Furthermore, it contains provisions for the “stripping” of a home equity line of credit or a second mortgage.

Chapter 11 bankruptcy, which is less common than Chapter 7 and Chapter 13, is filed by companies, cooperations, business partners, or those who have secured debt that totals more than $1,150,000. This process involves a proposal of a reorganization that will eventually reimburse creditors.

In essence, Chapter 7 bankruptcy results in the forgiveness of all unsecured debt, but may result in the loss of assets. Chapter 13 is the systematic repayment of unsecured debt according to the debtor’s ability to repay, and allows for the retention of more assets. Chapter 11 is a reorganization plan used by businesses and large debtors.

Consideration of bankruptcy usually is initiated by serious financial or legal situations like lawsuits, bank levys, foreclosure, wage garnishments, car repossessions, or unrepayable debt. However, each situation is unique and should be individually evaluated by legal professionals to see whether or not there are other options. If there are other options, then bankruptcy may not be the best decision. If it is, however, then a legal professional should advise which chapter of bankruptcy is most feasible and what the ramifications of that chapter will entail. Bankruptcy provides a clean slate for many people. Instead of seeing it as a disaster, look at bankruptcy as an opportunity to take charge of life.

Even filing bankruptcy, regardless of Chapter filed, cannot eliminate certain debts. These include, but are not limited to: alimony, child support, guaranteed student loans, restitution, fines, debts for injuries due to driving while intoxicated, debts accumulated because of a debtor’s fraudulent actions, excessive credit card debt incurred immediately before filing should the creditor file an objection, and some forms of taxes, though income taxes more than three years old may be discharged. Certain actions, such as transferring assets to prevent their being seized by creditors, may also result in the denial of a bankruptcy discharge.

Filing for Chapter 7 bankruptcy will postpone a trustee sale for at least thirty days, though the postponement sometimes lasts for sixty days or more.

The structured payments made under Chapter 13 bankruptcy force banks to recognize and accept mortgage payments and payments for the amount still due over the course of thirty-five to sixty months.

Provided that regular payments on the mortgage are maintained, many homeowners have filed for Chapter 7 bankruptcy, retained their homes, and had their debts discharged. Each situation carries its own unique, distinct factors, and the rules and codes of bankruptcy are intricate, so every situation should be evaluated by trained legal counsel, to determine whether or not the house may be retained.

Chapter 13 bankruptcy, with its structured plan of payments, allows the debtor to retain their home as long as they make both their regular mortgage payments and the designated payments included in their plan.

Should the debtor not have any equity in their home, they may retain roughly $25,000 in assets. Assets include, but are not limited to: cash, personal possessions, and the equity in their vehicles. If the debtor has, but elects to save, the equity in their home, then the bankruptcy codes dictate what can be kept, contingent on the type of other assets are available. Generally, cash assets that can be retained are limited to roughly twenty-five percent of the monthly income. Each chapter of bankruptcy contains different strategies, so it is essential to consider each before filing for bankruptcy so that as many personal possessions as possible can be protected and retained.

After filing for bankruptcy, roughly $25,000 in assets can be retained by the debtor, which includes the financial equity in a vehicle. In many cases, this allows for debtors to keep their vehicles after they file for bankruptcy.

Married couples are given a choice between filing for bankruptcy separately or filing a joint case. Although, should the spouse not wish to join the case, they are not required to join a case, and the combined household income must be divulged on the bankruptcy paperwork.

Before filing for bankruptcy as a consumer case, each individual in the household with an income must compare their earnings to the median income for households of the same size. Should that income exceed the median, under the dictates of the “Means Test,” the amount of debt to be repaid are calculated using IRS expense standards applied to the debtor’s various expenses.

Debts fall under two basic distinctions: dischargeable and non-dischargeable debt. Dischargeable debt is forgivable debt while non-dischargeable debt is non-forgivable debt. Each chapter of bankruptcy has some variation of dischargeable and non-dischargeable debt, but what specifically falls into each category varies depending on which chapter of bankruptcy is filed. The discharge of debt is the most common reason for filing for bankruptcy, and debt discharge gives the debtor an opportunity for a new start.

Once bankruptcy is filed, many creditor collection efforts are automatically ceased, including wage garnishments. This cessation is referred to as a “stay.” Some who file for bankruptcy are even able to regain some of the wages lost due to garnishment.

For the duration of the stay, creditors included in the bankruptcy case are unable to garnish wages, including those ordered prior to the debtor’s filing for bankruptcy, or enact any collection efforts not approved by the court.

Because it takes time for creditors to receive notification that the debtor has filed bankruptcy, bankruptcy stays and cessations of wage garnishments are not in effect instantaneously. In order to cease wage garnishments as quickly as possible, it is best if the debtor informs their place of employment’s payroll department of the bankruptcy case as soon as the case is filed.

In order to regain garnished wages, often referred to as “clawing back,” there are a couple of criteria that must be met. First, the recoverable wages are those garnished in the 90 days immediately before the bankruptcy was filed. Second, the debtor must have enough exemptions, particularly when filing under Chapter 7 bankruptcy, to cover the regained funds. Finally, the amount of money that was garnished from the debtor’s wages must be more than $600.

Credit card companies are among the last repaid when the debtor liquidates their estate because courts do not view credit card debt as a priority debt. Because there is generally no property during the liquidation of the estate that the debtor can sell to repay the creditor, credit card debt is classified as no-asset unsecured debt, and the credit card companies usually do not recoup anything when the estate is liquidated in the bankruptcy process. Whatever credit card debt is left after the estate is liquidated is generally discharged, though there are some exceptions to this.

However, if the charges to the credit card were made under false pretenses, then the credit card debt will likely not be discharged after the estate liquidation. False pretenses, or “not acting in good faith” is automatically presumed when:

• The debtor charges the purchase of “luxury goods or services” to the card within ninety days of filing. “Goods or services reasonably necessary for the support or maintenance” of the debtor’s household, like gas and food, are not “luxury goods or services.”
• There are charges of $925 or more due to cash advances within seventy days of filing for bankruptcy. This policy is in effect regardless of what the money is spent on, and charges of the aforementioned nature can decrease the likelihood of the credit card debt being discharged.

Although it is one of the most common reasons for bankruptcy, medical debt is considered to be a nonpriority unsecured debt, much like credit card debt. There is, however, no established limit on how much medical debt can be discharged during bankruptcy.

In general, courts are reluctant to discharge student loan debt, but there are options depending on what Chapter of bankruptcy is filed.

Chapter 7 bankruptcy may allow for a discharge of student loan debt provided that the debtor can prove to the court that the debt creates an undue hardship on their finances. The test to determine “undue hardship,” however, varies depending on the court or the judge, so it is hard to establish an exact standard. Those who have been recently been granted relief under Chapter 7 include some debtors with very low incomes and some who took out loans in order to attend for-profit institutions.

Those who file bankruptcy under Chapter 13 will likely never be able to get their student loans discharged, but the structured payment plans they establish will often allow for reduced payments.

The only government debt that is generally dischargeable is income tax debt, but this may not eliminate all of the ramifications related to income tax debt.

If each of the following conditions met, then a court may discharge income tax debt:

• The debt must be older than three years of age.
• All past and necessary tax returns must have been filed.
• The IRS assessed the tax 240 days or more before the bankruptcy was filed.
• No fraud was committed, nor was there an attempt to avoid paying the income tax debt.

Even if all of conditions for discharge are met and the debt discharged, the government may still demand that the debtor repay the full debt due at some point in the future. This often happens when the government places a tax lien on a debtor’s property. When the property is sold, the government is able to recoup the full amount of the tax money owed. Should the lien be filed prior to the bankruptcy, even if the debt is discharged, the full amount of the lien must be paid when the property is sold.

In general, personal loans, such as loans from a friend or relative, can be discharged by a court. If paying back the personal loans has taken precedence over the repayment of other debts, however, the court may decide that this prioritization was an instance of showing favoritism or even committing fraud.

Under Chapter 7, the debtor has a few options. They can continue to pay the loan and keep the car as if the bankruptcy was never filed. The car could be relinquished so that the debt can be discharged. There are other miscellaneous options where the debtor can retain the car and pay its value. In these cases, however, the full value of the car must be paid in one payment soon after the bankruptcy is filed.

In a Chapter 13 bankruptcy, the structured payment plan allows for a reduction in the amount to be repaid. In addition, the interest rate is generally much lower than that specified in the original ownership contract, and, should the value of the car be less than what is owed and the car has been owned for more than two-and-a-half years before the bankruptcy, only the actual value of the car must be repaid.

Chapter 7 bankruptcy does not allow for the discharge of parking tickets.

With Chapter 13 bankruptcy, however, the debtor is able to only pay a fraction of the ticket’s debt, according to their ability to pay.

In general, filing for bankruptcy does not affect the repayment of child support; it cannot be discharged in bankruptcy. The only exception to this is a repayment plan used to fulfill back child support in a Chapter 13 bankruptcy case.

Generally, a payday loan can be discharged, and filing for bankruptcy will protect paychecks and bank accounts from wage garnishment. However, if the payday loan was acquired shortly before the bankruptcy was filed, then there may be legal complications. Make sure to seek legal advice if this is the case.

Bankruptcy is designed to protect the individual who files for bankruptcy, not those who co-sign their loans, so, unless the co-signer also files for bankruptcy, the cosigner will still be held legally responsible for the debt. However, the debtor can elect to pay the debt in order to keep the co-signer from bearing the weight of the debt.

Under a Chapter 7 bankruptcy, there are tighter parameters that apply to the payment of the debt. The debt can be discharged, but tax consequences can arise.

Chapter 13 allows the loan to be treated like any normal debt, which allows it to be either repaid or discharged.

A lien functions like an additional mortgage, and it is only able to be paid if the value of the house is enough to pay off all of the previous unpaid mortgages. In many bankruptcy cases, the liens can be avoided or discharged by the court because the house is often not worth enough to pay the mortgages in full.

Bankruptcies show up on credit reports for a period of ten years, but the credit report is only one factor lenders consider when evaluating whether or not an individual should be able to get a mortgage. Other factors include, but are not limited to: income, total quantity of debt, and how well the individual has repaid their debt following their filing for bankruptcy. Each individual lender devises the terms they are willing to offer on a loan agreement, and they may have differing evaluations on the importance of bankruptcy in deciding whether or not to offer a loan. However, with the passage of time, the importance of the bankruptcy diminishes on the credit report, and loan terms become more favorable.

Every bankruptcy case is different, but filing for Chapter 7 bankruptcy does not immediately cost the debtor their home. The value of all of the debtor’s possessions is calculated and compared against the debt owed. If the sale of the house would not result in a great profit, then the house is not sold.

Unless a property transfer took place more than four years prior to the bankruptcy, the transfer can be reversed in a bankruptcy court. If the transfer happens immediately prior to filing bankruptcy, then it can damage the debtor’s chances of successfully filing for bankruptcy.

Regardless of whether or not the debt is listed when the case for bankruptcy is filed, every debt is a part of the case. The debtor, however, can opt to retain certain debts, should the court approve, and can continue making payments on them. This generally does, however, require the debtor to sign a document known as a “reaffirmation agreement” that indicates that the court will not discharge the selected debts in the bankruptcy case.

If the debtor does not sign a reaffirmation agreement, then their debt will be discharged, provided that the debts are dischargeable. The creditor reserves the right to repossession of any property still connected to a loan, so the debtor must continue to pay for vehicles or homes if they are to be retained.

If a debtor working on a payment plan under a Chapter 13 bankruptcy falls behind on their payments and cannot catch up on their own, then they may file a motion with the court to modify their plan. Should they completely lose the ability to make payments, then the court can take actions to alleviate the burden of the payments such as reducing the payments, suspending the payments for a period of two or three months, or granting the debtor a hardship discharge.

All of an individual’s debts are included in the provisions of the bankruptcy, and the listing of debts can be updated to include a debt or creditor that was neglected when the case was originally filed on the condition that the debt to that newly-listed creditor was owed when the case was actually filed. There is a fee for adding the debt or creditor, but payments can be made on the debt after the conclusion of the bankruptcy case.

At the meeting of creditors, the debtor appears before the bankruptcy trustee to evaluate whether or not the total value of the debtor’s assets surpasses the number of exemptions they are permitted. Should the trustee rule that the value of the assets does in fact surpass the exemptions, then the trustee can opt to seize and sell some of the excess assets and use the profits to repay some of the creditors. It is recommended to seek legal counsel in a bankruptcy case to, among other things, evaluate the assets and determine the likelihood of a meeting of creditors with the bankruptcy trustee and to decide how best to negotiate in the event that the meeting takes place.

At the meeting, the debtor is identified by their driver’s license and social security card. The meeting will take place under oath, so the debtor will be sworn in before the meeting is continued. Then, the bankruptcy trustee will proceed to ask the debtor questions such as, “Did you read and sign your bankruptcy petition?”; “Have you sold or transferred any forms of property within the last four years?”; “Did you list all of your assets and debts?”; “Is the last tax return filed correct?”

At the conclusion of this meeting, the trustee excuses the debtor, and information regarding the discharge of debt is generally received within ninety days.

Filing for bankruptcy provides immediate legal protection from creditors. Once bankruptcy is filed, creditors cannot legally contact a debtor, continue their suit, garnish wages, or make any other attempt to collect money from the debtor.