CHAPTER 7 BANKRUPTCY EXPLAINED
Below is a fairly detailed explanation of Chapter 7 bankruptcy protestion. It is intended as a guide only, and the specifics of your matter will most certainly differ from generalizations. This should not be relied upon as legal advice. Please consult an experienced bankruptcy attorney for any questions you may have.
The laws for bankruptcy are presented in Title 11 of the United States Code, and divided in to Chapters. Chapter 7 of the United States Bankruptcy Code is commonly known as “liquidation” bankruptcy, or simple bankruptcy. This page explores the positives and negatives to filing a Chapter 7, including what types of debts you can usually discharge (get rid of) and other frequently asked questions. Under any Chapter, you MUST list ALL of your assets and ALL of your debts on your petition. This includes items you owe on but wish to keep (a financed car or home, for example) and credit cards you wish to keep (more on that later!).
WHAT IS AN ASSET?
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 AND that person has died). Some (and in most cases, all) of your assets will be exempt. California law provides two separate sets of exemptions from which to choose (one or the other only). It is important to have a qualified and experienced attorney determine the appropriate exemption scheme and correctly apply the exemptions. Generally, you can exempt any items normally used for your support and maintenance, such as clothing, furniture, household goods, etc. After your case is filed, a Trustee is appointed at random from a group (depending on the date you file). 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.
WHAT IS A DEBT?
Obviously, anyone you owe money to is a creditor and MUST be listed as a debt. You may not “keep a debt off your bankruptcy” because you want to pay that person. You may, however, voluntarily repay any debt upon agreement with the creditor (with some exceptions; be sure to ask your lawyer). This repayment,, known as a “reaffirmation,” is usually not advisable with unsecured debts (credit cards, medical bills, etc. for which the creditor does not retain an interest in some piece of personal or real property).
SPECIAL NOTE: If you have a credit card in which the balance is zero, you do not list it on your petition. The credit card company may cancel your card anyway once they find out about the bankruptcy from public records, so it is usually pointless to pay off a credit card just before filing in order to keep it!
SHOULD YOU FILE CHAPTER 7?
Please review the information on the 2005 Bankruptcy Reform Act regarding Chapter 7 cases. The goal of most any personal bankruptcy is to discharge your existing debts and allow you a “fresh start” on your finances. From the minute you file, you no longer need to repay the debts that were incurred before you filed your bankruptcy—permanently!. 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.
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.
Certain debts are non-dischargeable in a Chapter 7. Examples of these are taxes less than three (3) years old, student loans (with the sole exception listed below), child support and alimony, and any debts incurred 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 painful of the Chapters available for consumers (individuals, married persons, and small businesses). The alternative is Chapter 13, covered elsewhere in this website. The filing fee is $299.00. Attorneys fees vary depending on your circumstances, but range from approximately $750.00 to $1,550.00 or more, and includes preparing and filing the paperwork, attending the meeting of creditors, preparing a filing reaffirmations, etc. Obtaining your credit report for you costs an additional $30.00 for an individual, $50.00 for a married couple.
KEEP IN MIND neither the Court nor your attorney are allowed to become creditors, so these fees must be paid prior to filing. Those TV commercials that say "no money down!" Read the fine print!!!! I guarantee you, the attorneys fees and filing fees must be paid prior to the filing of your Chapter 7 case (certain emergencies being excepted).
Do not be fooled or misled by fancy advertising—your relationship with your attorney is extremely important and very personal. Hire a "bankruptcy mill" ONLY if you feel comfortable with the attorney assigned to your case (and make darn sure that is the same attorney who will be at your creditor’s meeting with you!!).
WHAT ABOUT THE DISADVANTAGES?
You are only able to receive a discharge after eight years have passed since the filing of the last case in which you received a discharge. Therefore, you should not file a bankruptcy if you need the option of doing it again in the next eight years.
AND MY CREDIT REPORT?
The bankruptcy will appear on your consumer credit report for up to ten (10) years after you file. (Be sure to order a copy of your credit report from Experian). Other accurate negative reports on your credit must be removed after seven (7) years from the date of original delinquency (late payments on credit cards, foreclosures, etc).
HOWEVER, in many cases, a bankruptcy can actually improve your ability to get credit! For one, your debt to income ratio is now raised as you no longer are responsible for debts discharged through bankruptcy, and two, the credit lending agencies know you won't be able to file another bankruptcy for at least 6 years, and therefore, they don't have that risk to bear. 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. Financing vehicles and homes, etc., is not difficult after a bankruptcy. Surprisingly, the one major area where it may be a problem is when it comes to renting an apartment. Go figure!? The reason is usually that apartment owners and managers don’t know or understand the first thing about bankruptcy and don’t have a clue that it actually increases your ability to pay rent (see above). They see it as simply a “negative” because that is what they’ve always done. I have a letter that I send out for clients seeking a new apartment after a bankruptcy to try to educate landlords. Sometimes it works, sometimes it doesn’t.
RECENT CREDIT CARD PURCHASES AND CASH ADVANCES
Any debt aggregating more than $1,075.00 from any single creditor for non-essential "luxury" goods, or cash advances totaling over $1,075.00 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 (obviously, 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. Speak with your attorney about your particular situation. Remember, though, this 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).
DISCHARGING STUDENT LOANS
Student Loans are only dischargeable if (1) You can prove that having to repay it would impose an "undue hardship" on you (this is almost never granted by court and the burden of proof is substantial), OR, (2) If the program under which your student loan is issued, insured, and administered is a FOR-profit, PRIVATE (non-government) entity, it may be dischargeable. (If the program itself, such as LAL, GSL, etc. receives nonprofit funding by participation of nonprofit entities, the loan is not dischargeable in bankruptcy).
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), but as a general minimum rule, income taxes may be discharged if (1) it has been over 3 years since the returns were LAST due (including extensions), (2) the returns were timely 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. Again, discharging taxes is an extremely complicated area, and you should consult with a knowledgeable attorney before deciding whether to file based on dischargeability of your taxes. Certain taxes that cannot be discharged in a Chapter 7 MAY be dischargeable in a Chapter 13 (for example, if the returns were not filed on time or there was some fraud or attempts to evade the tax). Tax Liens that have already been recorded against your property may also be removed under certain circumstances. This is very rare, as liens usually survive a bankruptcy: 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
CHAPTER 13 EXPLAINED
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.
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.(See below) It also enable you sometimes to discharge debts that would not be discharged in a Chapter 7, such as a fraud judgment, certain tax obligations, fines, penalties, and other debts.
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.
WHO MAY FILE?
Only an individual with regular income who owes, on the date you file the petition, less than $394,725 in unsecured debt and $1,184,200 in secured debts. These debts must also be noncontingent and liquidated, meaning that they must be for a certain, fixed amount and not subject to any conditions or bona fide disputes.
WHAT ARE THE BENEFITS?
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.
Certain tax repayments can be made easier by virtue of elimination of interest payments.
HOW DOES IT 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. If you are interested in a consultation on Chapter 13, you should complete these forms prior to consultation. Visit my consultation page for information.
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. (Click here for more information on this!!)
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 Ch. 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 Ch. 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.
WHAT DEBTS CAN BE DISCHARGED IN CHAPTER 13?
First of all, any debt that you CAN discharge in a Chapter 7, will also be dischargeable in a Chapter 13. 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. In addition, Chapter 13 enables you to discharge:
(a) Debts incurred by fraud or false representations, embezzlement or larceny;
(b) Income Tax debts that are over 3 years old from the date the returns were due (i.e. April 15) and that were assessed more than 240 days prior to the filing of the bankruptcy case--even if you never filed the returns. Assessment of a tax can only be determined by obtaining a transcript of your taxes from the taxing agency in question (and for state entities, sometimes that isn't even sufficient.
(c) Sales and excise taxes that are over 3 years old from the date the transaction occurred giving rise to the tax, or from the date the returns were due.
(d) Debts incurred by willful and malicious injury to another person or their property.
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 bankruptcy for at least 6 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. 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.
The filing fee is currently $310.00. Attorney's fees range upwards from around $1,500 to $3,600 depending on the circumstances. However, most often a portion of these fees can be taken from the monthly payment amount you are submitting to the Trustee so it is money you would be paying anyway. Ask your attorney for details.
LEGAL DISCLAIMER Nothing contained herein should be construed to constitute advice for your personal circumstances. This document is intended as an overview of the various options available, but by no means is this a comprehensive or exhaustive analysis of bankruptcy law. Whether or not you should file a bankruptcy will vary depending on your personal circumstances and should only be undertaken after careful consideration and analysis, and after consultation with a professional. This informative summary may contain information and rules peculiar to the Southern District of California.
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Law Offices of David A. Pomeranz
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