FAQs - Bankruptcy

• It depends on which chapter you wish to file right now, what chapter you filed previously, the length of time between filings, and whether you received a discharge in your previous bankruptcy filing.

• You can only get a Chapter 7 discharge if a previous Chapter 7 case was filed more than 8 years ago.

• If you got a Chapter 13 discharge within 6 years, the Chapter 13 plan has to meet certain repayment requirements to permit a Chapter 7 case earlier than 6 years from the filing of the prior case.

• Keep in mind that if your previous case was dismissed before discharge, it does not count towards these considerations.

• You can file a Chapter 13 case after a Chapter 7 case without any statutory time restrictions. However, under the newly amended Bankruptcy Code, you can only get a discharge in that Chapter 13 case if the previous Chapter 7 case was filed more than 4 years ago. If the previous case was a Chapter 13, two years must elapse between filings. Some courts, however, question the debtor’s “good faith” – which is a necessary element to confirm a Chapter 13 plan – if they have recently filed a Chapter 7 and received their discharge.

• You can freely convert from one chapter to another. It is the same case, even though the chapter is different, so time considerations would not apply in that situation. Generally, you can only convert from a Chapter 7 to a Chapter 13 before the discharge is entered.

• Choosing which chapter of bankruptcy is best for you depends on several factors, including – what kind of debts you have, whether you are behind on your secured debts, and whether you have the regular income necessary for Chapter 13. The means test may require some consumers to file Chapter 13 for the sole reason of their apparent ability to repay some part of their debts.

• Chapter 7:

  • Sometimes referred to as “Straight Bankruptcy” or “Liquidation” – is the process that will result in eliminating almost all of your debt, including credit card debts, medical bills, unsecured bank loans, debts resulting from a repossession, debts from unpaid rent, unpaid attorneys’ fees, old utility bills, and other types of debts.

• Chapter 13:

  • Chapter 13 is an individual debt repayment plan. A debtor pledges a payment out of future disposable earnings for a period of 36 to 60 months. During the plan, all creditors are prevented from collecting or harassing the debtor. A Chapter 13 Trustee administers the plan and pays creditors with the funds received from the debtor. At the end of the plan period, most unpaid debts are eliminated.

    • Chapter 13 can be filed even if a person has recently filed a Chapter 7.

    • Chapter 13 can stop a foreclosure and can be used to catch up on a mortgage or car loan, thereby saving the secured property.

    • Chapter 13 can preserve property that cannot be protected in a Chapter 7 case.

• CHAPTER 13 AND CHAPTER 7 QUICK COMPARISON

• If you’re receiving debt-collection phone calls and threatening letters because you’re behind on your payment obligations, we can assess your situation and figure out our best course of action. A bankruptcy filing grants an automatic stay protection – where creditors can no longer call you or write you threatening letters.

• However, your particular situation may not warrant a bankruptcy. Perhaps your problems can be solved by negotiating with your creditors and settling up your accounts for less. All of this will be assessed when you make an appointment for a confidential, free consultation with Heller & Thyen, P.A.

• No. The Bankruptcy Code provides that a debtor may keep certain assets and “exempts” them from the bankruptcy estate.

• A good portion of bankruptcy cases are “no asset” cases, where the debtors have claimed an exemption for everything they own. When this happens, there are no assets from which to pay creditors.

• Both state and federal exemptions are available to the debtor, and we would be happy to go over each of them with you in detail to identify which set of exemptions best suits your needs!

• Yes, you must list all of your debts on your bankruptcy schedules. This includes debts that are co-signed for, debts that are non-dischargeable, and secured debts.

• However, you can choose to reaffirm any debt you would like to after the filing. Or, you can voluntarily pay a creditor after you receive a discharge, without becoming legally liable to continue paying on that debt. In other words, listing a creditor does not prevent you from paying creditors you wish you pay after bankruptcy.

• Omitting a credit card from your schedules, because you want to retain the use of the card, does not assure continued access to the card. Most major credit card issuers use a national database to determine who has filed bankruptcy, independently of the court’s notice to them of the bankruptcy filings. They routinely cancel every card for anyone who has filed bankruptcy – whether or not a balance is owed. Omitting a debt constitutes perjury, which could result in your discharge being denied and/or you still being liable for the unlisted debt. See denial of discharge.

• Not necessarily. Whether you will be able to keep your house depends a great deal on whether there is equity in the property.

• First – Determine if there is equity in the property:
  • Equity = today’s value – cost of sale – payoff balances on all liens
  • If there is no equity in the house, the trustee in a Chapter 7 will abandon the house to you. In other words, you keep it, so long as you continue to pay the mortgage.
  • A bankruptcy does not relieve the property of the liability for voluntary liens, like mortgages or deeds of trust, or tax liens. In those situations, the lender retains the right to foreclose on the property if you don’t continue to pay.
  • If you continue to pay, everyone is happy. Keep in mind – the lender doesn’t want the property; it wants your regular loan payments. Foreclosure is a last resort after the lender has concluded that it can’t get its money by any other means.
• If there is equity in the property:
  • Determine whether an exemption is available to you that will equal or exceed the value of the equity in the property. If all of the equity can be exempted, you can keep the house – so long as you pay the mortgage.
  • If the exemptions available are not sufficient to protect the equity, we may need to consider a Chapter 13.
• Also, ask yourself – should you keep the house?
  • If your home is fully encumbered, meaning the debt on the house is equal to or greater than the value of the house, you may want to consider surrendering the home.
  • Sometimes, debtors have taken out home equity loans that amount to all of the value of the property being pledged to lenders. Or, the cost of paying the mortgages is greater than the cost of renting a comparable house or apartment.
  • Part of getting your “fresh start” may be choosing to walk away from property that is a greater burden than it is an asset.
• Inquire as to whether you can strip involuntary liens from the property.

• The filing of bankruptcy triggers the automatic stay, which prevents all creditors from any action to collect their claim – including foreclosure.

• In Chapter 7, the stay lasts only as long as the property is not abandoned by the trustee, as either being valueless to the estate or being exempt, or until the case is closed.

• A creditor secured by the house can ask the court for relief from the stay to complete their foreclosure if there is danger that the secured claim will become greater than the value of the security during the bankruptcy. Since the creditor’s lien is not eliminated by the bankruptcy, Chapter 7 provides only a temporary relief from foreclosure, but no lasting solution.

• By contrast, in Chapter 13, the automatic stay lasts as long as the case is pending. Chapter 13 is designed to allow debtors to cure their mortgage defaults by paying the arrearage over as long as 3 to 5 years.

• It is VERY RARE for a trustee come to your house. In most jurisdictions, no one will come to your home to examine your personal belongings, unless there is a suspicion that you have hidden assets or undervalued what you own.

• A trustee and the judge assume that you have truthfully disclosed your assets.

• Yes. The requirements for keeping the car through a Chapter 7 vary depending on whether you have non-exempt equity in the car.

• Will the trustee take the car?

  • Equity = car’s present-sale value – car loan – exemption

  • If there is no equity in the car after taking the car’s present-sale value and subtracting the car loan and any available exemption, then the bankruptcy trustee will not take the car.

  • If there is equity in the car over and above the value of the exemptions available to you, the debtor can still usually buy any unprotected equity back from the Chapter 7 trustee.

• Will the creditor take the car?

  • If you still owe money to the secured creditor for the car, you can choose to reaffirm the debt to the secured lender, keep the car, and continue paying under the existing terms.

  • Alternatively, you can redeem the car – meaning you can buy the car from the secured creditor in a single payment for its present value. See Redemption.

  • Sometimes you can even keep the car without reaffirming the debt – so long as you continue making the payments called for in your contract agreement.

  • Lastly, you can surrender the car and be free of any obligation to pay for it.

• No, you may file without your spouse. A bankruptcy filing by one spouse does not bring the non-filing spouse into bankruptcy. Similarly, the filing of one spouse does not give the non-filing spouse the full protection of the automatic stay or the bankruptcy discharge.

• Joint Debts

  • If you and your spouse are jointly liable to a creditor, the bankruptcy of one spouse does NOT relieve the other of the obligation to pay the debt. Upon a bankruptcy, the creditor may look to the other spouse for payment, unless the bankruptcy case is under Chapter 13. If the debt is a consumer debt which is to be paid 100% through the Chapter 13 plan, the co-debtor is protected by the co-debtor stay in § 1301.

  • Generally, marriage alone does not make both spouses personally liable for a debt. Rather, liability on contracts such as home loans and credit cards arise by agreement between the creditor and the debtor. Only persons who signed the loan or credit application are liable for the debt.

  • A joint tax return, however, makes both spouses liable for the total of the tax amount due.

• Credit Reports

  • Each person is supposed to have a separate credit file for credit reporting purposes. Your debts, if they are solely yours, are not supposed to show in your spouse’s credit file. Similarly, your bankruptcy should not show in your spouse’s report if you have no joint debts. Even so, it pays to monitor your credit report.

• Yes. Once your case is filed, the automatic stay goes into effect and creditors are no longer entitled to garnish your wages for debts that exited at the beginning of the case. The only exception to this may be for on-going child support or family support obligations ordered by a court.

• A discharge of debt will forever eliminate a creditor’s right to garnish your wages on account of that particular debt.

• Yes, bankruptcy can help you catch up on past-due payments. You can include past-due payments within your Chapter 13 repayment plan and eliminate concerns about penalties or losing state-issued licenses.

• You cannot, however, eliminate the child support payment debts. However, we can help determine the best course of action to help make you current on those payment obligations.

• Yes. The scope of your discharge will vary by chapter.

  • In Chapter 7, debts incurred by fraud, intentional harmful actions, dishonesty, priority taxes, unfiled taxes, family support obligations/debts to a former spouse, student loans, criminal fines, and restitution cannot be discharged.

  • In Chapter 13, you can discharge non-support debts to a former spouse, government fines, and some intentional torts that you could not discharge in a Chapter 7.

SUMMARY OF DISCHARGEABILITY OF DEBTS IN CHAPTER 7

• The IRS must cease collection after a bankruptcy is filed due to the automatic stay. The automatic stay protects the debtor and the debtor’s property from further collection activities.

• Whether the tax claim will survive the bankruptcy and be non-dischargeable depends on many factors. We would be happy to discuss those with you.

• Even those taxes that can’t be discharged may be able to be paid without interest in a Chapter 13 plan.

• The amount of relief available to the debtor with respect to taxes depends on a variety of factors including –

  • How old the tax is,

  • The type/kind of tax involved,

  • Whether you filed a tax return, and

  • Which chapter of bankruptcy you elect.

• Generally speaking, unsecured income taxes that were first due more than three years before the date of filing, for which you completed a non-fraudulent and timely tax return, can be fully discharged in any bankruptcy chapter.

• For the average individual debtor, receiving a discharge in bankruptcy has absolutely no tax consequences. Internal Revenue Code § 108 excludes the debt from a bankruptcy discharge within its definition of “cancellation of debt income.” Outside of the debt discharged in your bankruptcy, any cancellation of debt there may be treated as if it were income for taxation purposes.

• Keep in mind that the debtor’s tax attributes, such as loss, carry forwards and exclusions of gain on a sale of a primary residence, as they exist before bankruptcy, pass on to the bankruptcy estate and may be used or even exhausted by the trustee in the administration of the estate.

• If you have received an IRS 1099(c) on a debt discharged in a bankruptcy case, you can file Form 982 to tell the IRS that the sum on the 1099 should be excluded from your income by reason on your bankruptcy.

• Generally, no, you cannot discharge your student loans, absent showing that repaying the loan creates an undue hardship on you or your family.

• Proving hardship generally requires a showing that you can’t provide a minimum standard of living for yourself and your dependents if you have to repay the loan. Some courts have been willing to discharge a portion of the loan upon a showing that repaying it all would be a hardship.

• Chapter 13 can provide a way to cure defaults on your student loans, or to pay them off over the course of the plan.

• Helpful Student Loan Websites:

  • www.ibrinfo.org - Information on income-based repayment options

  • www.studentloanborrowerassistance.org - Information about options and rights of student loan borrowers and their families

• Prior to filing bankruptcy, the debtor(s) must obtain a “credit counseling” from an approved agency. Failure to do so will result in a dismissal of your bankruptcy case.

  • Click here for a list of approved credit counseling agencies.

• A bankruptcy case is started by the filing of a petition, schedules of your assets and your liabilities, and a statement of your financial affairs with the bankruptcy court and paying the filing fee.

  • Examples of the official forms can be obtained at the following website: http://www.uscourts.gov/FormsAndFees/Forms/BankruptcyForms.aspx

  • Our bankruptcy worksheet and packet materials can also be found here here.

• In order to qualify to file a Chapter 7, an individual whose debts are primarily consumer debts must pass the “means test” or face a motion to dismiss the case or convert it to another chapter. Any individual with debts above the means test, but below the debt caps, and who has a regular income can file a Chapter 13.

• Individual debtors must file paystubs for the 6 months prior to the filing of their case with the court or the trustee, and also provide the trustee with tax returns for the past two years.

• The individual debtor will be required to attend at least one meeting of creditors (the § 341 Meeting), where the trustee, and occasionally creditors, place you under oath and ask you questions about your financial affairs.

• For Chapter 7 Cases:

  • From filing to discharge, the process takes around 90 days.

  • During that time period, the debtor must attend the 341 Meeting of Creditors.

  • Within 75 days of discharge, the debtor must complete a financial management education course and submit proof of completion to the court.

• For Chapter 13 Cases:

  • Discharge is granted anywhere between 36 to 60 months, depending upon the length of your plan.

  • Approximately 30 days after filing, the debtor will need to attend the 341 Meeting of Creditors.

  • After filing, but before discharge, the debtor must complete the post-filing credit counseling.

• No. Transferring your assets to someone else prior to bankruptcy does not prevent the trustee from reaching out and bringing those assets back into the bankruptcy estate.

• A trustee can recover assets that were transferred within one year of the bankruptcy filing where the debtor did not get reasonably equivalent value for the asset, or where the transfer was made with the intent to hinder or defraud creditors.

• No. Most forms of retirement savings accounts are unaffected by the bankruptcy filing because they are not property of the estate, or because they may be claimed as exempt from the creditors’ claims.

• Pension plans that are qualified under ERISA are not property of the estate. Therefore, the trustee cannot cash it in for the benefit of creditors.

• Retirement savings that ARE property of the estate, such as some Keogh plans and IRAs, can be claimed as exempt up to approximately one million dollars.

• Omitting a credit card from your schedules, because you want to retain the use of the card, does not assure continued access to the card. Most major credit card issuers use a national database to determine who has filed bankruptcy, independently of the court’s notice to them of the bankruptcy filings. They routinely cancel every card for anyone who has filed bankruptcy – whether or not a balance is owed.

• Omitting a debt constitutes perjury, which could result in your discharge being denied and/or you still being liable for the unlisted debt.

• One of the benefits of a Chapter 13 plan is that the plan is voluntary, and you can dismiss it freely at any time – prior to discharge.

• Another option is to ask the court to modify, reduce, or suspend your plan payments for a couple of months. This is particularly helpful if you come upon a temporary interruption in income, or you have an unexpected increase in your expenses.

• Be ware, however, that if you miss payments and you do not take any action to modify the plan or get a temporary suspension, the court will dismiss your case. If your case is dismissed by the court

• Filing for bankruptcy doesn’t mean you’ll never be able to get a credit card again. In fact, quite a few lenders cater to the recently bankrupt as customers.

• Immediately after filing for bankruptcy, you can expect that it will be more difficult to get credit, more expensive, and you’ll get it in limited amounts.

• About two years after your bankruptcy discharge, debtors are generally eligible for a mortgage loan on terms that are similar to individuals with similar financial traits who have not filed for bankruptcy. In other words, the size of your down payment and proof of the stability of your income will be much greater considerations than the fact that you had filed for bankruptcy in the past.

• There is no “right” to credit. Landlords and credit card companies are well within their rights to consider your financial history when making their credit decision. Debtors are protected, however, from discrimination in employment and governmental licenses based solely on the fact that they have filed for bankruptcy.

• The fact that you filed bankruptcy stays on your credit report for 10 years, but it becomes less significant the more time passes on. Truth be told – you’re probably a better credit risk after your bankruptcy than before!