Perhaps your credit card debt or other unsecured debt is overwhelming, with no reasonable prospect of ever paying it back. In this situation, the most responsible step to take for you and your family may be to obtain a financial “fresh start.” Or, if your mortgage company has started a foreclosure of your home or your vehicle has been seized, the possibility of working this out with your creditor is very slim. In this case, you will have a Ch 13 bankruptcy to save your property.
1) Should I File Under Chapter 7 or Chapter 13?
You must ultimately decide for yourself whether filing bankruptcy is the proper action to take, and if so, which Chapter is better for you. Some of the factors to consider are as follows:
Chapter 7 has the advantage of wiping the slate clean and enabling you to embark on your “fresh start” immediately. With a Chapter 13 you will be making payments for three to five years, during which time you will be on a "financial treadmill," unable to borrow without court approval.
If you have a particular asset that you want to keep and that is valued above the allowable exemption, then Chapter 13 may be the only alternative. For example, if you own a house with significantly more than $25,000.00 in equity and you don't want to lose it, Chapter 7 probably will not work.
If you are trying to ward off a repossession or a foreclosure, Chapter 7 will not help you, and you will need to file a Chapter 13.
If your debts are primarily consumer debts, and if your budget reveals that after filing bankruptcy your income substantially exceeds your expenses, it is possible that the United States Trustee could file a motion to dismiss the Chapter 7 case for “substantial abuse.” In such a case Chapter 13 may be the better alternative.
2) Can I File Under Chapter 7?
Under the new law (after October 2005) a person who wishes to file a Chapter 7 case must financially “qualify”, so to speak. The analysis that is involved usually is referred to as the “means test.” The first step in this process is to compile your income for the six month period prior to the date of filing. For example, if the date of filing is during the month of September, the income that must be compiled is what has been received during the months of March through August. “Income” is very broadly defined, and includes such items as wages, dividends, gifts and contributions from other persons in your household. Indeed, the only exclusions mentioned in the Bankruptcy Code are Social Security payments and certain payments made because you have been the victim of certain crimes. The total “income” then is divided by six in order to arrive at what is referred to as the “current monthly income.” If this current monthly income is under the state median income, taking into account how many people there are in your household, then you have “passed” the means test, and you are eligible to file Chapter 7. If your income is over the median income, you still might be able to file, but it is then necessary to examine your expenses in order to see if they are sufficient to bring your net income below the threshold amount. Some of these expenses are not your actual expenses, but instead involve national or state standards. Needless to say, the analysis can become extremely complicated and detailed.
3) Are All Debts Eliminated in Chapter 7?
The chief advantage and principal goal of a Chapter 7 bankruptcy is that after the discharge you will not owe any debts. However, there are important exceptions to the discharge:
Income taxes. Unless income tax liability is old enough, it is not dischargeable. Generally, in order to be dischargeable, this kind of debt must be for a taxable year for which the return was due more than three years go, with the return being filed over two years ago, and with the date of assessment being more than 240 days ago. There are some things that can increase this time, for example, offers in compromise and previous bankruptcies. In order to determine whether a tax is dischargeable, detailed analysis must usually be made.
Student loan debt. This kind of debt, if it was made or guaranteed by a governmental agency or a nonprofit institution, is not dischargeable unless you can show “undue hardship”. To prove undue hardship you have to prove 1 that you cannot maintain, based on current income and expenses, even a “minimal” standard of living for yourself and your dependents if forced to repay the loans; AND 2 that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; AND 3 that you made good faith effort to repay the loans. It is extremely hard to meet this burden of proof.
Debts incurred by false representation or fraud. One frequently litigated issue in this area concerns credit card debt. Commonly, the situation is that the debtor has made sizable charges on the card shortly before filing the bankruptcy petition, suggesting that the debtor has “loaded up”, knowing that he or she is going to file the bankruptcy petition. Normally, the burden of proof lies with the creditor, meaning that the creditor must prove that the debtor has committed fraud. However, the Bankruptcy Code provides that any credit card debt aggregating more than $500.00 from any single creditor for nonessential, “luxury” goods incurred within 90 days prior to filing the bankruptcy, or cash advances totaling over $750.00 on a credit card, taken within 70 days prior to filing, are presumed to be non-dischargeable. The effect is that the burden shifts to the debtor to show that the charges were not fraudulent. This particular provision of the Bankruptcy Code simply sets forth a presumption of fraud. It does not mean that if you wait more than 70 or 90 days, as the case may be, you are automatically free from an objection to discharge. Therefore, do not use your credit cards for anything other than food, clothing and other essentials during the applicable time periods.
Alimony and Child Support. This kind of debt cannot be discharged under any circumstance. Also, if a debt has been incurred in the course of a divorce, even if it is not alimony or child support, under the changes in the law, it is not dischargeable now. For example, if you have agreed to pay a certain debt in a property settlement agreement, that debt is not dischargeable!
Injury caused by an intoxicated debtor's operation of a motor vehicle. The Bankruptcy Code provides that not dischargeable is a debt “for death or personal injury caused by the debtor's operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance.”
4) Do I Have To List All Debts?
Yes, you do, the Bankruptcy Code requires that all debts be listed. This does not necessarily mean that the relationship with the creditor will be damaged. If the creditor has a security interest in some property, such as your home or vehicle, usually the creditor and debtor enter into a “reaffirmation agreement.” This is a special document which is also signed by your attorney and is filed with the court. The effect of the reaffirmation agreement is to again make the debtor legally responsible for the debt. The creditor usually is very happy to enter into this agreement. After all, the creditor would much rather have you pay the debt than to go to the expense and hassle of seizing and selling the collateral, usually at a loss. If the debt is an “unsecured” debt, meaning that there has been no property pledged to “secure” the debt, it almost always is not advisable to reaffirm the debt. The reason for this is that there is no benefit such as retention by the debtor of secured property to justify the reaffirmation of the debt. To reaffirm the debt, and consequently to be obligated to repay it, prevents a true "fresh start", which, after all, is the purpose of filing a Chapter 7 bankruptcy. Having said that, however, the Bankruptcy Code allows you to pay any debt on a voluntary basis, if you wish to do so. Whether this is advisable is questionable and is an issue to be discussed with your attorney.
5) Can I Lose Property In A Chapter 7?
As is true under any Chapter of the Bankruptcy Code, you are required to list all of your assets (and, as mentioned above, all of your debts) in the “schedules” filed with the court. An asset is any property you own or may have a right to own in the future. It could be “tangible”, such as a vehicle, or “intangible”, such as a legal claim or the right to receive a tax refund. Your assets become the property of the bankruptcy estate. In general, any property acquired after the date of filing the bankruptcy petition that you were not entitled to receive prior to filing is not included in the bankruptcy estate. One notable exception to this rule is inheritance rights; if you inherit property within 180 days of filing, that inherited property is considered part of the bankruptcy estate.
In a Chapter 7 bankruptcy, the trustee, who is a person appointed to take charge of the bankruptcy estate, can, if necessary, sell the property which is not exempt from seizure, and then pay creditors with the proceeds. It is very important, then, to identify in the schedules what property is protected as exempt. At least some, and perhaps most, of your assets will be exempt. In Louisiana, state law, not federal law, governs which property is exempt. It is not possible to fully cover all of these exemptions here; however, some important exemptions include the following: Homestead. This important exemption protects up to $25,000 of equity in your home. It is not available if you co-own the property with someone who is not your spouse. Household goods. Most of the items in our home that we use for our support and maintenance are included in this category. Examples are clothing, furniture and appliances.
Retirement funds. There are actually two layers of protection when it comes to retirement funds. Retirement funds that are "ERISA approved", meaning basically that they cannot be transferred to another person, are not even included in the bankruptcy estate. Thus, they cannot be administered by a trustee. The second layer of protection is a Louisiana state law that exempts 401K plans, Individual Retirement Accounts (IRA) and similar plans from seizure, to the extent of contributions made more than one year prior to the filing of the bankruptcy petition.
Tools of the Trade. This exemption covers property which we need to use in our work A carpenter's tools, for example, are exempt from administration by the trustee.
Motor Vehicles. Frequently, the question arises whether motor vehicles are exempt. In Louisiana, we are entitled to a $7,500 exemption for one motor vehicle per household. Additionally, there is a $7,500 exemption available per household for a vehicle that has been substantially modified, equipped, or fitted for the purposes of adapting its use to the physical disability of the debtor or his family and is used by the debtor or his family for the transporting of such disabled person for any use.
Wedding or engagement rings. So long as the value of the ring(s) does not exceed $5,000, it is exempt.
Federal earned income tax credit. This is totally exempt, except for seizure by the Louisiana Department of Revenue or for child support obligations.
One final note regarding exemptions: Even though you now live in Louisiana, if you have recently moved from another state you cannot use Louisiana exemptions and you must use another state's law, usually the state from which you moved to Louisiana. This analysis can become very complicated.
6) What Are The Disadvantages Of Filing Chapter 7?
One is that the bankruptcy filing will be included in your credit record for up to 10 years. But because any prospective creditors know you won't be able to file another Chapter 7 bankruptcy for at least 8 years, and the debts that you were burdened with prior to filing will be discharged, you might be more attractive to a prospective creditor than you would think. You may not get as high a credit limit as you once had, or be able to borrow large sums of money, but getting some credit (such as a secured or even an unsecured credit card) shouldn't be that difficult, and you can rebuild your credit over time. What you will likely face for some time are higher interest rates and higher down payments. Some people do have difficulty rebuilding their credit, but it is usually due to other factors besides bankruptcy, such as their employment record, other credit problems, etc.
As mentioned above, you are not able to file a Chapter 7 if you have filed a previous Chapter 7 within eight years, and received a discharge in that previous case. Therefore, you should not file a bankruptcy if you need the option of doing it again in the next eight years. (This eight year rule does not apply if the second filing is a Chapter 13).
7) What is a Chapter 13 Bankruptcy?
Chapter 13 allows individuals in financial difficulty to pay their creditors over time, while remaining under the protection of the Bankruptcy Stay. As with a Chapter 7 (excepting repeat fillers), the Bankruptcy Court issues an order, preventing creditors from taking any action against you.
8) How does a Chapter 13 Bankruptcy work?
The debtor makes monthly payments to a Chapter 13 trustee, who, then, pays the debtor’s creditors according to their legal rank. In a Chapter 13, the debtor is required to devote all disposable income to the plan in the form of monthly payments to the trustee. Additionally, in a Chapter 13 all interest may stop on many unsecured debts. (In certain situations unsecured creditors receive 6% to 10% interest.). To make these monthly payments, the debtor must have some source of income that is regular, such as employment income or rental income. Debtor is required to pay all “disposable income.” to the Trustee for 36 months or more. The Trustee will pay some creditors in full. These include secured creditors and creditors who hold “priority debts”, such as most tax debt. Unsecured debts may not have to be paid in full, at the end of the plan, the balance of these debts is discharged. (There are some exceptions, for example, student loans). You do not lose any property in a Chapter 13, unless your plan proposes surrender of this property. While in a Chapter 13 plan, you cannot borrow money without first obtaining court approval.
9) Why would I File Chapter 13 instead of filing a Chapter 7?
While this determination involves detailed analysis into your particular financial situation and the type of debts you have and should only be made in consultation with an experienced attorney, some factors suggesting a Chapter 13 filing, other than having too high an income during the preceding six months prior to filing, which might rule out a Chapter 7 entirely, are: Is there a pending foreclosure or seizure of property? If your home mortgage-lender has filed a foreclosure action or your vehicle has been seized AND you want to save the property, you will likely wish to file a Chapter 13.
In the Chapter 13 plan, you will be able to catch up on the past due amount ("cure the arrears") over an extended period of time under the protection of the Bankruptcy Court, and you will not lose the property.
Do you own property that would be lost in a Chapter 7? As explained in the previously, the job of the Chapter 7 trustee is to "liquidate" (sell) property, and then distribute the net proceeds to creditors by legal rank. If you have property at risk in a Chapter 7, AND you want to keep it, then you might want to consider a Chapter 13 filing.
Are your non-dischargeable debts large relative to your dischargeable debts? If a great deal of your debt is non-dischargeable debt, such as student loans or most taxes or for some other reason, and you need protection from your creditors, a Chapter 7 may not be the best choice. Though the automatic stay will protect you through the time that the Chapter 7 discharge is obtained, once the discharge is obtained, a creditor with a non-dischargeable debt is free to start up collection efforts again. What to do? File a Chapter 13, if possible, to pay a pro-rata portion of all your debts while under the protection of the Bankruptcy Court. If you have substantial amounts of such debts, you might only have to pay a percentage of all your debts and at the end of the Chapter 13 plan, the remainder would be discharged.
There are other kinds of debts that are not dischargeable in a Chapter 7 that may be dischargeable in a Chapter 13: Debts incurred by fraud or false representations, Debts incurred by willful injury to another person or their property. If you have such debts, you might wish to file a Chapter 13 and pay only a portion of your debts and at the end of the Chapter 13 plan, any remainder will usually be discharged.
10) Who May File a Chapter 13?
Only an individual with regular income who owes less than $336,900 in unsecured debt and $1,010,650 in secured debt. These debts must also be reasonably non-contingent and liquidated, meaning that they must be for a reasonably certain, fixed amount and not subject to any conditions or bona fide disputes.
11) How Much Do I Pay Per Month And For How Long?
You are required to pay all of your “disposable income”, which is defined as income that is not reasonably necessary for the maintenance and support of you or your dependents, during the “applicable commitment period”. Pursuant to the required "means test", the amount of your monthly income is equal to your average monthly income received during the previous six months, and not actual income at the time of filing. This can sometimes be beneficial. For example, a debtor who during the last six months had a comparatively low income (received unemployment benefits) but who now has started a new job with a high income would not have to use that higher income in calculating disposable income. Bankruptcy courts have struggled to attempt to reconcile the disposable income as determined by the means test with the amount left after deducting actual expenses from actual income. Various solutions have been arrived at. For example, a court might allow the lower disposable income amount calculated by subtracting actual expenses (rather than the IRS figures) from actual income, but require some interest to be paid to unsecured creditors.
As mentioned above, when determining “disposable income”, you are allowed to deduct “reasonable” expenses. If your income is above the state median for a household of your size, then these “reasonable” expenses are not necessarily the expenses you actually incur. Some of these expenses are based on national or regional IRS standards, irrespective of what you actually spend. Needless to say, it can require involved and detailed analysis to determine the amount you will pay in a Chapter 13 plan.
12) How long does a Chapter 13 plan last?
Typically, a Chapter 13 plan lasts from between 36 months to 60 months. If the six month average gross income is over the state median you will be forced into a 60 month plan (unless you can pay 100% of your unsecured debt within a shorter period of time.). The length of the plan depends on several factors: the monthly amount of your disposable income, the amount and kind of debt that you have, and the value of your nonexempt property. Finally, creditors in a Chapter 13 must be paid at least as much as they would be paid if the debtor filed a Chapter 7.
Other Important Things To Know About Filing Bankruptcy:
This is serious business, the new law strongly discourages repeat filings. If you miss your 341 hearing, your case will be dismissed by the Court. (In a Ch13) If you miss payments that are due under your Plan, your case will be dismissed by the Court. If you even can obtain new counsel to do a re-file, that new counsel will have to notice and set a hearing within 30 days to convince the judge why “the stay” should continue after the 30 days run and this must be “for good cause shown.” This is not easy. Otherwise you are back in the same condition as you were in prior to filing – at the mercy of your creditors. You will lose the protection of the Court, and your creditors will again be free to pursue collections, foreclosure, etc.
13) What Should I Bring To The Interview?
Driver’s license, social security card, Two years' filed tax returns (most currently filed return and last return filed prior to that), Six months of previous payroll and pay stubs, Six months of bank statements prior to visiting our office, to include every bank/investment statement you have any interest in, Tax assessment of your real property, All of your bills – medical bills, credit card bills, etc., Judgments and pending lawsuits against you, Any information of lawsuits you are pursuing,
Vehicle information and proof of insurance;
Please run complete credit checks on yourself and spouse.
THE ABOVE INFORMATION IS NOT LEGAL ADVICE. PLEASE CONSULT AN ACTUAL LAWYER FOR ADVICE ON YOUR INDIVIDUAL SITUATION.