Law Office of Daren A. Webber

CHAPTER 7 & 13 INFORMATION

Chapter 7 bankruptcy (Title 11 of the United States Bankruptcy Code) is commonly known to attorneys,  lawyers, and others as a liquidating bankruptcy, personal bankruptcy, or just plain "bankruptcy."   It is also referred to as consumer or personal bankruptcy, although businesses can also file under Chapter 7.   For cases filed after October 17, 2005, eligibility to file Chapter 7 is to be determined by a means test if your annual income exceeds the median income for your geographic area as determined by the IRS.  Under any Chapter, you are required to list all of your assets and all of your debts on your petition.

An asset is anything you own or may have a right to own at some future date (for example, if you are in someone's will). Some (and in many cases, all) of your assets will be exempt. Basically, you can exempt any items normally used for your support and maintenance, such as clothing, furniture, household goods, and so forth. After you file your case, a Trustee is appointed. He (or she) will liquidate (sell) all of your non-exempt assets and pay your creditors according to the priority afforded to them by the Bankruptcy Code. You may voluntarily repay any debt upon agreement with the creditor. Whether this is ever advisable is questionable and is an issue to be discussed with your attorney.

Should you file Chapter 7?

The goal of most any personal bankruptcy is to discharge or bankrupt your existing debts and allow you a "fresh start" on your finances.   In other words, once your discharge is granted, you no longer need to repay the debts that were incurred before you filed your bankruptcy. Your creditors are entitled to share in the proceeds obtained from the liquidation of your non-exempt assets. Under Chapter 7, the amount your creditors will get is fixed by the value of your non-exempt assets.

Technically, the word "bankrupt"  is not the correct terminology when referring to getting rid of debts, but most people use that phrase.  "I want to bankrupt my credit cards or bankrupt my student loan debts".   The correct legal term is "discharge".  You discharge your obligation to pay on debts.

Certain debts are non-dischargeable in a Chapter 7. Examples of these are alimony and child support obligations, taxes less than three (3) years old, student loans (with the sole exception listed below), and any debts procured by fraud (fraud debts may be dischargeable in a Chapter 13), incurring debt without a reasonably certain ability to repay the debt, and so forth.

Assuming you need to file a bankruptcy, the only way to determine which Chapter to file under is to first compare your options under the other available Chapters. Generally, Chapter 7 is the cheapest, quickest and least burdensome of the three major Chapters (the others being 11 and 13) of bankruptcy law. Costs and fees vary depending on the number of creditors you have, complexity of your case, and other factors.

If you are an individual, and meet the requirements, Chapter 7 allows you to discharge most or all of your debts. It allows you to do this regardless of how many assets you have or how much your creditors ultimately receive. It basically allows you to walk away from your debts and start over.

Corporations do not receive discharges of debts, but there still may be some benefit to allowing a trustee to liquidate the assets.

What are some of the disadvantages?

You are only able to receive a discharge after eight (8) years have passed since the commencement of the last case in which you received a discharge, although you can file another Chapter 13 case sooner.  Thus, you should not file a bankruptcy if you need the option of doing it again in the next eight years.

If you are a corporation, you must stop operating your business immediately upon filing the Chapter 7 petition. Only under extraordinary circumstances will the Trustee operate a business.

Payments made to or on behalf of any relatives within twelve (12) months prior to filing your bankruptcy case are recoverable by the Trustee in your case.  That's right.  If you repaid money during that period to your brother, or made payments on a credit card that your mother let you use, they will have to pay back that money to your Trustee who will then distribute it equally to all your creditors.  This is one of the biggest mistakes people make, often innocently because they don't know they will be filing a bankruptcy, but that's the law.  It's designed to prevent debtors from preferring one creditor over another.  The same is true for non-relatives, although the lookback period for them (such as credit cards, etc.) is only ninety (90) days and most people don't really care if their Trustee sues the credit card company to recover the money.

What about your credit?

The bankruptcy will appear on your credit report for up to ten (10) years after you file. Other accurate negative reports on your credit must be removed after seven (7) years (like late payments on credit cards, foreclosures, etc). However, according to my former clients, this is usually not as big a problem as most people think. Credit lending agencies know you won't be able to file another chapter 7 bankruptcy for at least 8 years, and therefore, they don't have that risk to bear. You will not get as high a credit limit as you once had, or be able to borrow a large sum of money, but getting some credit (such as a secured credit card) shouldn't be that difficult and you can rebuild your credit over time (generally two years). What you will likely face is higher interest rates, required higher down payments, more points, etc. 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. In any event, I can provide you with excellent materials for helping you rebuild your credit should you so desire.

A word about credit cards and cash advances

Any debt aggregating more than $1,150.00 from any single creditor for non-essential,"luxury" goods, or cash advances totaling over $1,150.00 on a credit card, incurred or taken within 60 days prior to filing the bankruptcy, are presumed to be nondischargeable. The obvious reason for this is to discourage would-be debtors from "running up" their credit charges, then filing bankruptcy. To be safe, do not use your credit cards for anything other than food, clothing and other essentials during this two month period (actually, it's best not to use them at all). It may also be considered grounds for objecting to your discharge if you have taken cash advances on one credit card to pay the minimum balances on the others, or if you transfer balances from one card to another shortly before filing bankruptcy. You should consult with your attorney about your personal situation. This particular provision is just a presumption of nondischargeability. It does not mean that if you wait more than 60 days you are magically free from nondischargeability issues; nor does it mean that if you file the bankruptcy within the 60 days that you won't be able to discharge that debt. What it basically does is shift the burden of proving that the debt should or shouldn't be discharged onto the debtor during that 60 day period (rather than on the creditor where it would otherwise be).

What debts can be discharged?

Discharging taxes and removing tax liens

Certain types of tax obligations, such as income taxes, may be discharged under specific circumstances. Many required factors must be met before any tax can be discharged under Chapter 7 or Chapter 13. In Chapter 7, the minimum requirements for discharging federal or state income taxes are: (1) it has been over 3 years since the returns were last DUE (including extensions), (2) the returns were timely filed or it has been at least 2 years since the returns were filed, (3) there was no fraud involved or attempts to evade the tax, AND, (4) the taxes were not assessed within the last 240 days.

If it has been over 3 years since your returns were last due and they have not been assessed in the last 240 days, BUT you have not yet filed the returns or there was some kind of fraud involved in filing them, then they may be dischargeable in a Chapter 13. Again, discharging taxes is an extremely complicated area, and you should definitely consult with a knowledgeable attorney before deciding whether to file based on dischargeability of your taxes and before you take any further steps with your taxes (such as filing past due returns) Sometimes filing a late return can work against you as far as being able to discharge those taxes in a Ch. 13, so definitely speak to an attorney before doing anything.

Tax Liens that have attached to property will survive a bankruptcy. What does that mean? It means that the lien will stay against your property regardless of your discharge of the underlying debt. So, when you ultimately sell that property, if there is extra money available, the lien will be paid first from those proceeds unless you have the lien removed.

Discharging fraud judgements or debts where fraud may have been involved

Debts that you incurred which were the result of an intentional or even negligent misrepresentation on your part are not dischargeable in a Chapter 7. Examples of these might be if you misstated your income on a credit card application, made false statements in order to induce someone to give you a loan, ran up your credit card debt shortly prior to filing bankruptcy, used your credit card or obtained a loan without any intent to repay it, or if someone has obtained a court judgment against you based on fraud. However, the news isn't all bad. These types of debts may be discharged in a Chapter 13.

Can you be fired or denied employment because of a bankrutpcy?

No. While an employer can usually find some reason to fire anyone, they cannot use bankruptcy as a basis for doing so. Again, this is set forth in Section 525 of the Bankruptcy Code.

Retirement accounts and pension plans

Whether or not you can exempt amounts held in a retirment account depends on numerous factors.  According to the United States Supreme Court, if your retirement plan is ERISA approved, meaning that it contains a trust "anti-alienation" provision making it impossible to transfer or withdraw the funds prematurely, it is automatically exempt. Individual Retirement Accounts may be exempted only up to the amount reasonably necessary for the debtor's support and maintenance, taking into account all other anticipated and existing sources of income and expenses. Obviously, exempting retirement funds is very tricky and requires the expertise of an experienced bankruptcy attorney.

So Why Do You Need An Attorney?

Some paralegal services charge a minimal fee to prepare and file the necessary paperwork to file a bankruptcy. While in some cases this may not be a major problem, it has been my personal experience that the risk is simply not worth it.

We are a debt relief agency. We help people file for bankruptcy relief under the bankruptcy code.

Chapter 13 is a section of the Bankruptcy Code which helps qualified individuals, or small proprietary business owners (NOT a corporation or partnership), who desire to repay their creditors but are in financial difficulty. Among other things, it offers great opportunities to pay off past due mortgage or car payments over 36-60 months, giving you time to catch up and keep your property. It is often referred to as a "mini Chapter 11" because you usually repay something to your creditors and you retain your property and make payments under a Plan. 

To be clear: Chapter 13 bankruptcy is a debt repayment plan for individuals, but often times the repayment can be anywhere from zero to 100% of your unsecured debt.

Chapter 13 vs. Chapter 7 - One purpose of a chapter 13, as opposed to a chapter 7, is to enable a debtor to retain certain assets (for example, your home) that might otherwise be liquidated by a chapter 7 Trustee. It also provides an alternative to Chapter 7 when you have too much "disposable income" (your net monthly income exceeds your net monthly expenses by too much) and usually yields much lower monthly payments than you were previously paying and (here's the real benefit), after 36 months, you are done! Your debts are gone.

The goal of most any personal bankruptcy is to discharge your existing debts by repaying all or a portion of your debts, and allow you a *fresh start* on your finances. In other words, once your discharge is granted, you no longer need to repay the debts that were incurred before you filed your bankruptcy.

Assuming you need to file a bankruptcy, the only way to determine which Chapter to file under is to first compare your options under the other available Chapters and be sure you have consulted with an experienced bankruptcy attorney to properly analyze your options.

Who may file Chapter 13 bankruptcy?

Only an individual with regular income who owes, on the date you file the petition, less than $307,675 in unsecured debt and $922,975 in secured debts. The debts used to calculate these limits must also be noncontingent and liquidated, meaning that they must be for a certain, fixed amount (or easily determinable amount) and not subject to any conditions or bona fide disputes. If they are legitimately disputed or not liquidated, then those amounts may not be factored into the debt limit calculations.

For cases filed after October 17, 2005, you may be required to do a Chapter 13 if your annual income exceeds the median income for the region where you are filing and if the "means test" shows you have more than $100-$167 per month to pay to your creditors.  Also at that time, your allowable monthly expenses will primarily be whatever is allowed under local IRS guidelines.

What are the benefits of Chapter 13?

Chapter 13 protects individuals from the collection efforts of creditors; permits individuals to keep their real estate and personal property; and provides individuals the opportunity to repay their debts through reduced payments.

You may be able to discharge debts in a Chapter 13 that would be nondischargeable under other chapters, for example, fraud judgments and certain tax obligations.

You may be able to get rid of junior liens on your real property. If the fair market value of your property is less than the total amount owed to the 1st mortgage, then you can eliminate the security interest to any junior lienholders and treat them as general unsecured creditors in your plan (thereby being able to possibly pay them less than 100%).

Certain tax repayments can be made easier by virtue of elimination of interest payments.

How does Chapter 13 work and how long does it last?

First of all, you must have "regular income". Meaning, you must have some source of income that is regular, or at least can be averaged regularly on an annual basis, for example.

You are usually required to pay all of your disposable income to the Trustee (through your Plan) for 36 months (see below). Your disposable income is defined as: income received by you that is not reasonably necessary for the maintenance and support of you or your dependents. The key word in the definition is "reasonably". For example, if you are used to spending $2,000 a month on a car, you would not be allowed that much of an expense for that since that is not considered "reasonable". This is calculated by taking your monthly income and subtracting your reasonable monthly expenses.

Typically, the Plan payments last for 36 months, unless additional time is requested, but in no event will they last more than 60 months. Therefore, if your payment analysis shows, for example, that you can afford to pay $200.00 per month (above and beyond your normal living expenses), you would pay that each month to the Chapter 13 Trustee, who would disperse it pro rata among your creditors. At the end of 36 months, you are discharged from all dischargeable unsecured debts, regardless of how much your creditors have received.

In addition to your plan payments, you must stay current with any ongoing obligations you have to secured creditors, such as on your mortgage. Chapter 13 (or any chapter of bankruptcy for that matter) only affects debts that you owe on or before you filed the bankruptcy. Therefore, on your mortgages and other secured debts, your monthly Plan payment goes to pay any arrearages (past due amounts) that existed on the date you file and you can repay that arrearage over the life of the Plan; but, you must stay current from the filing date forward with any mortgage payments, etc.

Secured debts (your mortgages) must be repaid in full, but Chapter 13 enables you to cure the defaults (reinstate the loans) over 36 months (or up to 60 months with creditor consent and court approval). You also have the ability to eliminate junior liens from your real property under certain circumstances and restructure mortgage and certain other payments.

Another thing to bear in mind is that approval of ANY Chapter 13 Plan of repayment requires a determination by the court that the case is filed and the plan proposed in Good Faith.

How much will I have to pay each month?

The size of your monthly plan payments is determined by the amount you can afford to pay after paying necessary living expenses (including insurance, mortgage payments, etc.). You must prove your income to the Trustee. Usually this is done with paycheck stubs. In the case of a business, you would need to average out your income and expenses for the last 6-12 months. When calculating monthly expenses you should include everything you pay money for such as food, clothing, utilities, auto maintenance, etc. You cannot include payments on unsecured debts, since those will be discharged in the bankruptcy. Also, deductions from your payroll for retirement accounts are considered voluntary and, therefore, will be added back in to your total income. Assessing the amount you will pay in a Ch. 13 is very tricky and is one of the reasons you need an experienced attorney.

Another "catch" is that you must pay out at least as much in the Chapter 13 Plan as your creditors would have gotten if you filed a Chapter 7. Therefore, if you have a lot of non-exempt assets, you would need to account for this in your plan. Depending on what your disposable income is (see above), you may have to sell some of your non-exempt assets to fund your Chapter 13 plan. If this is the case, you might just as well file a Chapter 7, but not necessarily.

If you miss any payments at all that are due under your Plan, your case will be dismissed by the Court.

You cannot borrow money (incur new debt) exceeding approximately $250.00 during the pendency of your case (usually 3 years), without first obtaining court approval. This can be somewhat of a problem if, for example, your car lease expires and you need to get a new car during this period.