Learn About Chapter 7 & 13 Bankruptcy
Items Needed Prior to Filing:
|Chapter 7:||Completed Worksheet||Chapter 13:||Completed Worksheet|
|Previous Year’s Tax Return||Previous Year’s Tax Return|
|Six Months Proof of Income||Six Months Proof of Income|
|Most Recent Paycheck||Most Recent Paycheck|
|Picture ID/SS card||Picture ID/SS card|
|Credit Counseling Certificate||Credit Counseling Certificate|
|Car Insurance Dec. Page|
Credit Counseling must completed by the debtor prior to filing and again prior to discharge. Clients may complete this course online at www.accesscounselinginc.org.
Frequently Asked Questions:
What is a bankruptcy?
A bankruptcy is a legal procedure designed to let people get out of debt without putting them in prison like some countries do. The Constitution gives Congress the authority to write the bankruptcy laws instead of the states, which is why the bankruptcy courts are a branch of the federal court system instead of the local state courts where divorces, crimes, and most other matters are handled. Congress created two different procedures for consumers to get out of debt: Chapter 7 and Chapter 13. These laws were recently updated by Congress in 2005.
What is Chapter 7?
Chapter 7 is also referred to as “straight bankruptcy” because it is a liquidation of assets and a complete discharge of debts. The goal in a Chapter 7 is to get rid of as much debt as possible without having to give up too much property to your creditors. Some debts like taxes, child support, alimony, court fines, court costs, and student loans cannot be discharged at all or only in very rare circumstances.
The law provides debtors with some exemptions to protect certain kinds and amounts of property. Exemptions on real property range from $5,000 to $50,000 depending on the facts of your case. Each debtor has a $10,000 exemption to cover all other personal property including vehicles. Some property like clothes, work tools, a family Bible, and retirement plans are completely exempt and cannot be taken under any circumstances.
Secured debts, which are debts with collateral like houses, cars, and furniture, can be kept by the debtor if the creditor agrees to enter into a reaffirmation agreement that allows the debtor to keep the collateral so long as they keep their payments current. Collateral for secured debts usually cannot be saved in a Chapter 7 if the debtor is behind in payments when they file.
What does it take to qualify for a Chapter 7 Bankruptcy?
Any debtor who wishes to file Chapter 7 bankruptcy must first pass a means test to determine whether their case would have a presumption of abuse. When Congress amended the bankruptcy code in 2005, they instituted this test to reduce the amount of people who could qualify for Chapter 7 bankruptcy. Basically, they don’t want debtors who earn more than the median household income for their state to file Chapter 7 bankruptcy.
The first step in this means test is to determine what your six-month average household income is and see if it is above or below the median household income for your state and household size. If your income is above the median income then you must complete the rest of the means test by deducting certain qualified expenses like health care, mortgage/rent, health insurance, health costs, child expense, and more. Once theses calculations are entered into a standardized form in our bankruptcy software we can determine whether or not your case would have a presumption of abuse. If you fail the means test then you would have to file a Chapter 13 bankruptcy.
Check out this online calculator if you aren’t sure if you would qualify for Chapter 7 bankruptcy: http://www.legalconsumer.com/bankruptcy/nolo/
What is the automatic stay?
The word “stay” is used like a “stay of execution,” meaning that an order is automatically issued in every case to stop all collection efforts as soon as the case is filed. This is the immediate relief that many debtors want the most since it will stop all harassing phone calls, lawsuits, foreclosures, repossessions, or garnishments. This means that if you are being sued and you file the day before your court date, then the creditors cannot take a judgment against you.
If you have been in another bankruptcy case in the past twelve months then your attorney will have to file a motion to extend or impose the automatic stay to protect you. The court wants to know why this case will be different from the last one before they extend protection to you.
Will I lose my house or car?
That depends on the facts of your case, but generally if you are behind in payments to secured debt such as a house or car, then you will have to surrender the collateral to the creditor. However, if you are current on the payments then you can sign a reaffirmation with the creditor, which means you are agreeing to continue paying the debt after the bankruptcy and you get to keep the collateral.
The other way to lose your assets is for the trustee to seize them, sell them, and give the money to your creditors. In your bankruptcy petition there will be a list of real estate and personal assets, and if there is any cash value in those assets after all state exemptions are applied and all liens paid, then the trustee may try to sell them to earn some money to pay your creditors. Real estate equity determinations take sales costs into account, and the state exemptions in Tennessee range from $5,000 for a single debtor to $50,000 for married debtors with minor children. There is also a general personal property exemption of $10,000 per debtor, which means a married couple could exempt all other assets up to $20,000. Your attorney will review your asset list and exemptions and advise you if you are in danger of losing assets, but most cases don’t involve any seizures of assets.
What kind of debt cannot be discharged in a Chapter 7 Bankruptcy?
Government or court-ordered debts are generally not dischargeable, and this includes taxes, court costs, court fines, child support, alimony, and student loans. Federal income taxes can be discharged if three years have past since you filed your tax returns, which means after April 15, 2010 it is possible to discharge taxes filed for the 2006 tax year and before, but not 2007 or later. Also, student loans may be discharged with a showing of a severe hardship, but the standard is so high that virtually no one qualifies for a hardship discharge.
It is also possible that your divorce decree has made you responsible for paying a certain debt, so you couldn’t discharge those debts without being in contempt of court in your divorce. This is common when one spouse is paying a car note that was financed in both spouses’ names prior to the divorce. Sometimes it may be best to file a Chapter 13 bankruptcy if you have a lot of non-dischargeable debt so that you can pay it off under the bankruptcy court’s protection.
Can I choose to discharge some debts and not others?
You have to list every debt that you owe without exception, but you can reaffirm secured debts if you are current and in good standing with the creditor as discussed above. You cannot leave off debts without committing perjury in your petition since you are stating to the court under oath that you listed every one that you owe. One of the goals of the bankruptcy process is to treat your creditors fairly, and that is not possible if you don’t tell the court the full truth.
What if I don’t know what I owe?
The first step to getting out of debt is figuring out what you owe, and it is your responsibility to list all of your debts. Everyone should get a free copy of their credit report once a year by going to www.annualcreditreport.com. We will also pull a credit report just to be sure everything that’s out there with your name on it is included in your petition. However, not all creditors report their debts to the credit reporting agencies, so you need to be sure you’ve told us about every debt you have. If you find something that needs to be added after we file your case, there is an additional fee to add a creditor and to re-open your case if your case has already been discharged by the court.
Can I file alone if I am married?
Yes, but any debt that is in both you and your spouse’s name will still be owed by your spouse after you file. Any debt that has a co-signor will still be owed by the non-filing debtor. Also, both you and your spouse’s income and expenses will be used to determine whether you pass the means test, so filing alone will not affect the means test calculation unless you and your spouse are separated.
Will my Chapter 7 bankruptcy affect the credit score of a co-signor to my debts?
A Chapter 7 bankruptcy filing will only show up on the credit report of the person filing, but it is your responsibility to make sure your credit is reported accurately by monitoring your report each year. Any co-signor who did not file bankruptcy will still be responsible for the debt after the bankruptcy case has been discharged.
How long does the process take?
How long it takes to file your case primarily depends on how quickly you return the information and documents we need to draft your petition. Most petitions will be ready in about a week from when you gave us the information.
Once your case is filed, you will have to attend a Meeting of Creditors, which is a court date downtown at the bankruptcy courts at 200 Jefferson Avenue, Memphis, TN 38103. This takes place about four weeks after you file, and once that is over you should receive a discharge notice in the mail about three months later. There may still be things for you to do before your case is discharged like sign and return reaffirmation agreements or complete the second credit counseling requirement.
What happens at the Meeting of Creditors?
The meeting of creditors does not usually involve any kind of confrontation with your creditors. What happens is the Chapter 7 Trustee assigned to your case asks you a few questions to make sure you are the person who filed the petition and that there is no fraud or errors in your case. This is a casual setting, but you are testifying under oath that you are the person who filed the petition, that you provided the attorney with all the information used, and that you read and signed the petition before it was filed. They will also ask you questions regarding any large sums of money you may be receiving in the future from a lawsuit or other benefit or if you owe any back child support. The trustee may also have questions about your particular case if they believe there are assets that can be seized. The only thing you need to bring to the meeting is your ID and Social Security card.
You may also be questioned by a lawyer from the U.S. Trustee’s Office, which is a part of the Department of Justice. This would only occur if there is some discrepancy or question regarding the legality of your case. This most often involves determinations of whether you pass the means test. However, you shouldn’t panic if the U.S. Trustee is interested in your case because usually a simple review of other financial documents or a clarification of a particular item in your petition will resolve any concerns they have. They also randomly audit cases to check up on the attorney’s practices.
Your creditors may be at the meeting just to have you sign a reaffirmation agreement while they know where you are. Generally though, the meeting of creditors is nothing to be concerned about, and you should bring a book or something quiet to do while you wait to be called. They call the Chapter 7 docket alphabetically according to the attorney’s last name, but they go in reverse order on odd numbered months to be fair to attorneys at the end. If your attorney is at the end of the docket then you may be waiting for two hours or more.
What documents do I need to file?
Before we can file your case we will need a copy of your most recent pay stub, the last tax return you filed, a credit counseling certificate, a copy of your ID and Social Security card. If you only receive Social Security, retirement, or unemployment, then you would need to give us a copy of a statement showing what you receive each month instead of a pay stub. You must complete an online credit counseling course prior to filing any bankruptcy. You must also complete another credit counseling course prior to receiving your discharge, so remember that you have one credit counseling session prior to filing and another after filing.
What if I’m being sued by a creditor?
Filing a Chapter 7 bankruptcy will stop that lawsuit or any collection effort made to collect on a judgment. The creditor that sued you will receive notice that you filed and we will also file a Plea in Bankruptcy with the court in which you were sued. If the creditor has not received a judgment, then you should go to court on your court date and ask the judge for a continuance, which they are required by law to give you on the first setting. If the creditor has received a judgment, they cannot attempt any collection efforts like a garnishment or lien until ten days have passed since the judgment was entered.
If the creditor has already received a judgment and is garnishing your paycheck or bank account, then you can go to the General Sessions Court Clerk’s Office and file a Motion to Set Payments. This motion will be set for a hearing in front of a judge who will stop the garnishment and issue an order that you make payments directly to the court or the creditor. The judge will usually only approve the monthly payment amount you request if it is sufficient to get ahead of the interest on the judgment.
What if I am behind on my mortgage and seeking a loan modification?
The loan modification process is totally separate from bankruptcy, and you would need to talk to your mortgage lender about qualifying for a loan modification. It is also best if you complete the loan modification process before filing Chapter 7 bankruptcy because there is always the chance that your loan modification will be rejected by your mortgage company and then they will take your home. Debtors often get two stories from their mortgage company: one person says everything is fine so long as you comply with the loan modification steps while another person is preparing your foreclosure. The mortgage company leads you on with the loan modification process and then rejects your application right before they foreclose.
The bottom line is that the loan modification program has not been successful for most debtors and generally adds to the economic anxiety experienced by debtors in this tough economy. Before you attempt a loan modification you should probably ask yourself if your home is worth saving in this market. If your home is now worth less than your mortgage walking away can be the best economic choice. That is not something your attorney can tell you. That is something you must decide for yourself.
Could a debt consolidation program be better for my credit than a bankruptcy?
Any situation that allows you to avoid filing bankruptcy is worth considering, but there are a lot of debt counselors out there and most of them won’t really help your situation. Many debtors feel they were ripped off by unscrupulous debt counselors who made big promises they couldn’t keep. Debt counseling agencies usually ask you to stop paying your debts directly and begin making large payments into an escrow account with them, which they will use to negotiate with your creditors for lower payments.
This process has a very serious flaw, and that is the debt counselors have no legal authority to force your creditors to negotiate. What often happens is that you get further behind in your debts and you pay these debt counselors a lot of money for very little economic relief. These agencies also can’t stop you from being sued or getting called ten times a day by your creditors. Bankruptcy remains the only comprehensive debt solution that forces your creditors to listen to you, reduce or eliminate your debts, stop lawsuits, and stop harassment from collection agencies.
Is there any way my case could be rejected by the court?
The only way for the court to reject your case would be that you didn’t qualify for a discharge due to a previous Chapter 7 case within the past eight years or that you didn’t pass the means test and your case is determined to be an abuse of the system. Your creditors could also object to you receiving a discharge of debts incurred within 90 days prior to filing. If you use your credit cards within 90 days of filing bankruptcy then there is a presumption of fraud that can be rebutted by claiming the charges were necessary living expenses. These objections are not that common and would require an adversary proceeding to determine the dischargeability of the charges in question.
What is an adversary proceeding?
An adversary proceeding is a mini-trial within your bankruptcy case. These are not that common and require additional attorney fees. Examples include stripping a mortgage where the value of a home has declined below the value of the second mortgage, objections to discharge, complaints for turnover of seized property that were improper, discharging of student loans, or avoiding liens. Basically any contested issue that cannot be resolved by a motion must go through an adversary proceeding.
What is a Chapter 13 bankruptcy?
A Chapter 13 bankruptcy is a reorganization of your debt into a single payment that is deducted from your paycheck. It has been called “wage earner” in the past because you usually have to be working to successfully complete a Chapter 13 bankruptcy. It resembles a consolidation loan where everything is lumped together into one payment except that the amount of debt you owe is usually reduced significantly.
Why would someone file a Chapter 13 bankruptcy instead of a Chapter 7 bankruptcy?
There are two basic reasons why a person would file Chapter 13 instead of Chapter 7: you make too much money to file Chapter 7 or you want to try and save a piece of property that would be lost in a Chapter 7 because you are behind in payments or there is equity that attracts the attention of the Chapter 7 trustee.
Will I lose assets in a Chapter 13 bankruptcy?
The court is not looking to seize your assets in a Chapter 13 bankruptcy, but you could volunteer to surrender a piece of collateral to a secured creditor to make your plan payments more affordable. For example, you could turn in your car to free up more money to afford your mortgage payments.
How is my Chapter 13 plan payment determined?
In your petition there will be a proposed plan that breaks down your debts and pays them off in five years. After the plan is filed your creditors file claims against your case stating what the final amount of the debt was before you filed, which could alter the plan payments slightly. Also, the Chapter 13 trustee could change your plan payments if there is a legal problem with your proposed plan.
The basic construction of the plan involves dividing your mortgage arrears by 60 months, adding the ongoing monthly mortgage payment, refinancing your car note to 60 months at the market interest rate, and reducing your total unsecured debt to around 10% of its value and dividing by 60. Attorney fees and the trustee’s interest payment of 6% are then added to get the monthly total. The monthly payment will be spread out according to your pay schedule.
Here’s an example: John Doe is three months behind on his $1200 per month mortgage, has two cars, and $50,000 of general unsecured debt (credit cards, medical bills, etc.). First we add another three months of arrears to the mortgage because the court won’t pay the mortgage until the plan is confirmed, which may be months after filing, so that would be a total arrears of $7200.
$7,200 ÷ 60 = $120/month arrears
$10,000 x 5.25% interest ÷ 60 = $190/month car note
$5,000 x 5.25% interest ÷ 60 = $95/month car note
$50,000 x 10% ÷ 60 = $84/month unsecured debt payment
$3,000 ÷ 60 = $50/month attorney fee
$539 total x 6% interest = $572 + $1,200 mortgage payment = $1,772/month plan payment or $818 every two weeks deducted from a paycheck.
As you can see, the monthly Chapter 13 payment will almost certainly be less than the minimum monthly payments on those debts, but the mortgage payment doesn’t change.
Can I include non-dischargeable debt to the Chapter 13 plan?
Yes, taxes, child support, alimony, court costs, court fines, student loans, and any other non-dischargeable debt can be paid in the Chapter 13 plan, but the amounts will not be reduced but only spread over 60 months and some may have interest included. Student loans are usually lumped in with the unsecured debt and paid at whatever percentage the other debts are paid (10% in the example above). However, whatever student loan funds remain unpaid will still be owed by you after the plan is over.
Can I keep some debts out of the Chapter 13 plan?
Yes, if you are current on your mortgage, then it can be kept out of the plan payment and you would continue paying it directly to the mortgage company. Child support can also be kept out if you are current and it is deducted from your paycheck. If there is a co-signor on one of your debts who wants to pay the debt, then it can be kept out as well so long as the co-signor remains current with the payments. This most often involves parents co-signing for children’s vehicles.
Can I pay the court directly instead of having a payroll deduction?
Usually the answer is no because the trustee wants to have a regular payment schedule. Exceptions are made when the debtor receives most of their income from another source such as retirement funds or Social Security or if a debtor is self-employed. Also, if your paycheck is not enough to pay the plan payment then it can be split between multiple paychecks if you have more than one job or your spouse is filing with you. Asking that you pay directly to the court because you don’t want your employer to know you filed bankruptcy is not a good enough reason to set up direct payments. If you do have direct payments, then you would have to send in a cashier’s check or money order to the Chapter 13 trustee’s office each month. They don’t take personal checks for obvious reasons.
Will my payments change as my case progresses?
It is rare for the original proposed plan payment to remain unchanged throughout the life of the case because your creditors file proofs of claim adjusting what you owe according to their records. We can object to proofs of claim if you don’t believe you owe that creditor or if the claim is filed too late, but usually the claims are pretty close to what was filed in your petition and the adjustments are minor. Big changes could occur if there was something inadvertently left out of your petition or categorized incorrectly. This most often involves a secured creditor such as a furniture bill that you thought was a store credit card but is really an installment loan. IRS problems also can cause problems with the plan payments, and it could take three to six months to fix the problem if you have to file back tax returns due to long processing times with the IRS.
Another reason your payments could change is because the trustee determines that you have more income available each month than is listed on your petition. This happens when the trustee objects to an expense as unnecessary or too large and demands that the amount be added to monthly plan payment. This could be because of large, voluntary expenses like retirement planning, private school, luxury goods (boats, vacation/retirement home, etc.) or excessive insurance. Having unexempt assets could also increase your plan payments because you cannot pay less in a Chapter 13 than you would in a Chapter 7. This means that if your house would have been sold in a Chapter 7 because you have $25,000 of unexempt equity, then you would have to pay at least $25,000 back to your unsecured creditors. If your unsecured debt is equal to or less than $25,000, then you would have to pay 100% back instead of 10%. Basically, you must divide your unexempt asset value by the amount of unsecured debt to determine what percentage you must pay to unsecured creditors, but most people don’t have many assets so 10% is fine.
These determinations of the plan payment take place between the Meeting of Creditors and the confirmation hearing. Confirmation is where the court approves your plan payment and locks in the payment for the rest of your case. Your payments could still change if you miss payments and get behind, and the trustee will adjust your payments to finish paying out the plan within five years. We can also file a motion to modify your plan if your circumstances change in a way that could affect your ability to pay.
When do I have to start making payments?
You should make your first payment right after we file your case, and it should be a cashier’s check or money order made out to the Chapter 13 trustee assigned to your case and should include your case number. Once your employer deduction kicks in, you need to monitor your paycheck to make sure they are taking out the correct amount of money. Sometimes people get dismissed for not making payments because their employer sends in the wrong amount or less than the ordered amount because you made less that pay period. It is your responsibility to make sure all plan payments are made to the court timely and accurately. Your lawyer will not know you missed payments until the trustee files a motion to dismiss for failure to pay.
What happens if I miss payments?
The main problem with Chapter 13 bankruptcies is that debtors often can’t make the plan payments just like they couldn’t make their debt payments before they filed. If you get too far behind, the trustee will file a motion to dismiss your case. Once your case is dismissed, your attorney can file a motion to reinstate your case if you have the ability to put some money down to catch up the missed payments and explain to the court what happened and how you plan to make the payments going forward.
You should notify your attorney as soon as something happens that would make you incapable of making your plan payments such as being laid off or taking a leave of absence for an illness. Your attorney can file a motion to suspend your payments or advance your mortgage for a few months. You might also need to surrender a secured item to lighten the load if you are getting behind. If all else fails, then you can re-file and start over or convert your case to a Chapter 7.
How do attorney fees work in a Chapter 13 bankruptcy?
The court has pre-approved a maximum attorney fee of $3,000 for Chapter 13 cases, and any request for fees above $3000 must be approved by the judge. This attorney fee is paid to your lawyer each month as you make your payments. Most lawyers take a portion of that fee up front prior to filing to cover the initial time spent preparing the petition, but most of the fee is paid through the plan.
What documents do I need before filing?
Generally, the document requirements for a Chapter 13 bankruptcy are the same as a Chapter 7 bankruptcy. Every debtor needs to provide their most recent tax return and pay stub, driver’s license, Social Security card, and certificate of credit counseling. Chapter 13 debtors with car notes in the plan also need to provide proof of car insurance by submitting a declarations page of the insurance policy showing the lienholder’s name on it. If you don’t have car insurance or fail to provide proof of insurance, then the court will place insurance on your car on behalf of the creditor and charge a large fee to your plan payment.
What happens at the Meeting of Creditors in a Chapter 13 case?
About a month after you file your case you will be required to attend a meeting of creditors at the bankruptcy court at 200 Jefferson, Memphis, TN 38103. You will need to bring your driver’s license and Social Security card with you to check in. Your lawyer will be sitting at the table with you and the Chapter 13 trustee. The trustee will announce proofs of claims filed in your case and ask the lawyer if they should be set up in the plan as filed. If the claims are relatively close to the numbers in the petition then they are usually accepted. Your lawyer could also ask that a claim be held with an objection if it appears incorrect. The trustee will ask you some simple questions about your case to verify that it is you who filed the petition and to clear up any questions they had about any debt, income, or expense in your petition. After the meeting of creditors your case will ready to be confirmed once all objections are resolved.
Do Chapter 13 debtors still have to do the second credit counseling class before discharge?
Yes, all bankruptcy cases require that a debtor provide a certificate of credit counseling prior to filing a petition and that a certificate of financial management counseling prior to receiving a discharge of their debts.