The Bankruptcy Law: A Work in Progress

1. What Is Bankruptcy?

• Types of Bankruptcy
• Chapter 7 Bankruptcy
• Chapter 13 Bankruptcy
• How Bankruptcy Stops Collection Efforts
• The Bankruptcy Trustee
• Business Bankruptcies

2. Who Can File for Bankruptcy

• Getting Help With Eligibility Issues
• Credit Counseling
• Calculating Your Income Status
• Chapter 7 Eligibility Requirements
• Chapter 13 Eligibility Requirements
• Other Issues That Might Affect Your Decision to File

3. How Bankruptcy Affects Your Debts

• Debts That Will Be Discharged in Bankruptcy
• Debts That Survive Chapter 7 Bankruptcy
• Debts That Survive Chapter 13 Bankruptcy
• Debts Discharged in Chapter 13 (But Not in Chapter 7)
• How Joint Debts Are Handled

4. Your Property and Bankruptcy

• Your Bankruptcy Estate
• Inventory Your Property
• Value Your Property
• Understanding Exemptions

5. Your Home

• Homeowners Filing for Bankruptcy Under Chapter 7
• Homeowners Filing for Bankruptcy Under Chapter 13
.

6. What Happens to Personal Property That Secures a Loan

• What Are Secured Debts?
• How Secured Debts Are Handled in Chapter 7 Bankruptcy
• Eliminating Liens in Chapter 7 Bankruptcy

7. Making the Decision

8. Your Credit Cards

• If Your Balance Is Zero
• If You Owe Money But Are Current

9. Your Job, Freedom, and Self-Respect

• Will You Lose Your Self-Respect?
• Will You Lose Your Job?
• Effect of Bankruptcy on Job Applicants
• Other Forms of Discrimination Because of Bankruptcy
• Effect of Bankruptcy on Child Custody
• Effect of Bankruptcy on Your Freedoms

10. Bankruptcy Forms and Procedures

• The Means Test
• Challenges for Abuse
• Valuation Hearings
• Common Chapter 7 Motions and Proceedings
• Converting From One Chapter to Another
• Potential Problems in Chapter 13
• Filling Out the Bankruptcy Forms

11. Getting Help With Your Bankruptcy

• Debt Relief Agencies
• Bankruptcy Petition Preparers
• Bankruptcy Lawyers
• Legal Research

12. Alternatives to Bankruptcy

• Do Nothing
• Negotiate With Your Creditors
• File for Chapter 11 Bankruptcy
• File for Chapter 12 Bankruptcy

Glossary

Appendix

• How to Use the Downloadable Forms on the Nolo Website

Index

Chapter 1: What Is Bankruptcy?

If you’ve picked up this book, you probably have more debt than you can handle.

You might feel overwhelmed by your financial situation and uncertain about what to do next. Maybe a friend, relative, or even a lawyer suggested bankruptcy, describing it as the best thing for you. Someone else might have said the opposite—that bankruptcy is a huge mistake and will ruin your life.

This book will help you sort through your options and choose the best strategy for dealing with your economic plight. It explains:

• how bankruptcy works
• how filing for bankruptcy under Chapter 7 or Chapter 13 (the two bankruptcy options for consumers) will affect your debts, property, home, and credit
• the procedures you’ll follow and paperwork you’ll have to complete to file for bankruptcy
• how to avoid common mistakes people make before, during, and after bankruptcy, and
• some alternative ways to handle your debt problems outside of the bankruptcy system.

Armed with this information, you’ll be ready to decide whether you qualify for Chapter 7 or Chapter 13 bankruptcy and, if so, which chapter makes the most sense.

As you consider the strategies available to you, keep in mind that you’re not alone.

Even during good economic times, bankruptcy remains a necessary part of our economic system.

And bankruptcy might be just the ticket for you. You might be able to stop creditor collection actions (such as wage garnishments and bank account levies) and:

• wipe out all or most of your debts in Chapter 7 bankruptcy while hanging on to your home, car, and other necessary items, or
• use Chapter 13 bankruptcy to stop foreclosures, reinstate mortgages, remove junior mortgages, and pay back a portion of your debts over three to five years and discharge the rest.

Bankruptcy might seem like a magic wand, but it also has its drawbacks. And, because everyone’s situation is a little bit different, there is no one-size-fits-all formula that will tell you whether you absolutely should or should not file. For many, the need for and advantage of bankruptcy will be obvious. Others will be able to reach a decision only after closely examining their property, debts, income, and recent financial transactions—and how persistent their creditors are. For some, simple nonbankruptcy options might do the trick—these are explained in Ch. 12 of this book.

This chapter provides some basic background information about the two types of bankruptcies most often filed by individuals: Chapter 7 and Chapter 13.

In the chapters that follow, you’ll find more detailed information on the issues you are likely to be interested in, including:

• whether you are eligible to file
• which debts will and will not be canceled
• what will happen to your home, car, and other essential property items
• how your postbankruptcy credit will be affected
• how bankruptcy will affect your personal life, and
• whether you need to be represented by a lawyer or can represent yourself, perhaps with some outside help.

Types of Bankruptcy

Consumers and small business owners can choose from among several types of bankruptcy “chapters,” including Chapter 7, Chapter 11, Chapter 12, and Chapter 13. Let’s look at each one quickly.

Chapter 7. Chapter 7 bankruptcy is by far the most popular. In Chapter 7 bankruptcy, you fully disclose your property, debts, and financial activities over the past several years. Approximately three months later you receive a discharge (cancellation) of most types of debts and emerge with all or most of the property you owned going in—except luxury items and investment real estate in which you have more equity than you can keep. These are the types of property you might have to give up in Chapter 7.

Chapter 11. Chapter 11 bankruptcy helps a business stay afloat by encouraging negotiation and compromise by all concerned so that the business can keep going and at least pay the creditors something. While individuals can file under Chapter 11, the process is unaffordable for most primarily because attorneys’ fees can easily surpass $20,000. Even a business that starts off in Chapter 11 will often end up in Chapter 7, where the business is liquidated. Because this book is intended primarily for individual consumers, we don’t discuss Chapter 11 further (except briefly in Ch. 12).

Chapters 12 and 13. Chapter 12 and Chapter 13 are reorganization programs for individuals, except that Chapter 12 is specially designed for owners of family farms, while Chapter 13 can be used by everybody else who qualifies, including farmers if they wish. Here we discuss only Chapter 13. As used in Chapter 13, the term “individual” includes sole proprietors and independent contractors, but not business entities, such as corporations or limited liability companies (LLCs). However, if you own a corporation or an LLC to operate a small business, you are still eligible to file for Chapter 13 as an individual and thereby get rid of your liability for the business debts (but your business will still owe the debts).

In a Chapter 13 bankruptcy, you prepare and file the same basic forms as you do in a Chapter 7 bankruptcy. However, you also propose a three- or five-year plan under which you typically must repay certain types of debt in full (such as back child support) and usually some portion of your unsecured debt (such as credit card balances, medical bills, and personal loans), although some judges will approve of plans that pay 0% of unsecured debt. Chapter 13 provides some remedies that aren’t available in Chapter 7—such as the opportunity to pay off missed mortgage payments over the life of the plan so you can keep your house—but usually isn’t the bankruptcy of choice because of the extra legal fees it involves and because people would rather get their fresh start in three months instead of three or five years.

Chapter 7 Bankruptcy

As we mentioned above, Chapter 7 is a three- to four-month process that requires the filing of some paperwork and one brief appearance before the bankruptcy trustee, the official appointed to handle the case for the court. You might have to make additional brief appearances before a bankruptcy judge if you seek approval of a reaffirmation agreement you signed in order to keep a car or other property you are making monthly payments on, or if a creditor wants payment for a luxury purchase made shortly before the bankruptcy filing.

(You can learn more about the presumption of fraud in Ch. 2 and about reaffirmation agreements in Ch. 6.)

Prefiling Credit Counseling Requirement

Before you can file your papers, you must have completed a credit counseling session from a nonprofit agency, which typically costs about $50 or less, depending on your income. The agency provides a certificate of completion that you file with your other papers. There are a couple of exceptions to this prefiling counseling requirement, discussed in Ch. 2. The counselor is available online, over the telephone, and through the mail. Take the time to shop around; you might be able to get counseling for much less.

The Automatic Stay

After completing the credit counseling, your next step is to file your case and obtain a bankruptcy filing number. Once you have a filing number, you have a powerful shield—called the automatic stay—against any efforts by most creditors to collect their debts. All you have to do if a creditor calls you after you file is to produce your case number, the date of filing, and the name of the court in which you filed. The creditor will immediately back off. All proceedings to garnish wages, repossess cars, and foreclose homes will also grind to a halt, with a few exceptions.

Collection of child support and alimony can proceed, and the stay might expire sooner than you would want if you have had a bankruptcy case dismissed in the previous year. Still, as a general rule, filing for bankruptcy will give you almost total relief from your creditors while the bankruptcy is pending. For more information about the automatic stay, see “How Bankruptcy Stops Collection Efforts,” later in this chapter.

The Skeleton Petition

Sometimes it’s important to obtain a filing number fast. For instance, if you’re faced with an imminent foreclosure or car repossession, you’ll need the automatic stay to keep things as they are so you can figure out a way to keep your house or car. But a complete bankruptcy filing involves a lot of forms and disclosure of information, and you might not have the time to prepare them all. Fortunately, you can file a skeleton petition. You’ll file a few forms initially and the remaining paperwork within 14 days.

The forms in a skeleton filing include:

• the petition (three pages plus exhibits)
• a mailing list of your creditors
• a form showing your complete Social Security number, and
• the certificate showing you’ve completed your credit counseling.

 

Lifting the Stay

In some situations, creditors can successfully request that the court remove (lift) the stay in their particular situation. For instance, if the automatic stay derailed a foreclosure action, the mortgage owner can request permission from the bankruptcy judge to proceed with the foreclosure. Other common reasons for lifting the stay are car repossessions and evictions of month-to-month tenants.

The Big Choice: Use a Lawyer or Handle Your Own Case?

When you file your bankruptcy, your case will automatically fall within one of two categories: You will be represented by a lawyer who will sign your petition as your representative. You will be representing yourself (that is, you’ll be acting as your own lawyer). If you are represented by a lawyer, the lawyer’s responsibility is to help you select the type of bankruptcy that will best work for you, get the right information in your forms, and make the choices that will be most appropriate for your situation. If, on the other hand, you are acting as your own lawyer, you will be responsible for these same tasks. While print and online resources will give you the information you need to make informed decisions and properly complete the paperwork, you will be solely responsible for the outcome of your case. The court wants to make sure you understand these duties. It requires you to sign a form that explains: the different types of bankruptcies (discussed earlier) the services available from credit counseling agencies the penalties for knowingly and fraudulently concealing assets or making a false statement under penalty of perjury, and the fact that all information you supply is subject to examination by the employees of the U.S. Department of Justice.

 

A Brief Description of the Chapter 7 Paperwork

Ch. 9 gives you a more detailed look at these and other official forms, and in Appendix A, you’ ll find a list of the resources you can download from this book’s online companion page, including a sample of the paperwork involved in a typical Chapter 7 case. The text that follows is just an overview.

You can expect your Chapter 7 filing to be about 50 pages in length. Along with the paperwork required for a Chapter 7 skeleton petition, you’ll prepare forms that:

• describe all your personal property and real estate, including where it is located and its approximate value
• provide information about your debts and creditors
• describe certain economic and financial transactions that occurred within the previous several years, such as property you sold or gave away within the previous two years, or certain payments you may have made to creditors, especially family and other “insiders”
• state how you want to handle debts concerning cars and other property that is collateral for loans (called secured debts)
• disclose your monthly income and monthly expenses
• state whether you want to keep any leases and contracts you have in effect or cancel them, and
• summarize your assets and liabilities.

Also, you’ll demonstrate that you qualify for Chapter 7 by disclosing your average monthly gross income for the full six months before you file on one or more forms. As explained in Ch. 2, that income figure will be your starting point for determining if you’re eligible to file a Chapter 7 bankruptcy or whether you’ll have to use Chapter 13. These forms are known as the “means test” and must be filed in every Chapter 7 case.

The Creditors’ Meeting

About 30 days after you file your bankruptcy papers, you will be required to attend a hearing known as the “creditors’ meeting” or the “341 hearing.” You and your spouse (if you filed jointly) are required to attend.

You’ll each bring photo identification and proof of your Social Security numbers to the meeting, which will be held in a hearing room in the courthouse or federal building, but not in the bankruptcy court itself. A bankruptcy trustee, the official appointed to handle your case for the court, conducts the meeting. Another official known as the U.S. Trustee might attend and ask questions if it seems you

might be ineligible for Chapter 7—perhaps because your income or debt totals are too high—but this rarely happens. (See “The Bankruptcy Trustee,” later in this chapter.)

The primary purpose of the creditors’ meeting is to verify your identity and check that the information contained in your papers is honest, complete, and accurate. You can expect the trustee to ask you— and all other debtors appearing at that time—whether all of the information in your papers is 100% correct and whether you expect to receive any money from any source.

The trustee might ask particular questions about your filing, too. For instance, it isn’t uncommon for a trustee to question property values to determine whether equity exists that could be used to pay toward your unsecured debt (debt that isn’t secured by collateral). Other areas the trustee might want to discuss include:

• a tax refund you expect to receive
• recent large payments made to creditors or relatives
• the value of big-ticket property items you’re claiming you can keep under exemption laws, such as a house or car
• whether you should proceed under Chapter 13 rather than Chapter 7
• your failure to file any required documents, and
• inconsistencies that might indicate you’ve been less than honest.

If you’ve done a good job on your paperwork and you qualify for Chapter 7, your participation in the creditors’ meeting will be brief. Most meetings take ten minutes or less because trustees get to the point quickly and creditors rarely show up.

The Role of Lawyers in Creditors’ Meetings

Many people hire lawyers to represent them because they don’t want to attend creditors’ meetings on their own. Having a lawyer by your side can be reassuring, especially if an answer to one of the trustee’s questions requires legal analysis. But when the trustee asks you basic questions about your income, debts, assets, and transactions, you—not your lawyer— must answer the questions. You are expected to be knowledgeable about the information you provided in your papers.

 

Which Debts Are Discharged

Approximately 60 to 90 days after the creditors’ meeting, you will receive a discharge order from the court. The discharge order won’t refer to your specific debts but instead will indicate that all legally dischargeable debts are discharged (wiped out) in your case. It will also include a list of the most common types of debts wiped out in bankruptcy.

In a Chapter 7 bankruptcy, absent a successful objection by a creditor (which is rare), most credit card, medical, and legal debts are discharged. Court judgments, balances owed after a foreclosure or repossession (called “deficiencies”), and personal loans will also be erased. For many filers, all of their debts are discharged.

But not all debts get wiped out in Chapter 7 bankruptcy. You’ll remain responsible for paying some obligations, the most common being:

• debts incurred to pay nondischargeable taxes (see Ch. 3)
• court-imposed fines and restitution
• back child support and alimony
• debts owed to an ex-spouse as a result of a divorce or separation
• loans owed to a retirement plan, such as a 401(k) (because you are the creditor as well as the debtor in this situation, bankruptcy doesn’t discharge the debt)
• student loans (unless you can show that repaying the loans would be an undue hardship, which is tougher than you might think and requires a separate trial in the bankruptcy court)
• federal and state taxes that became due less than three years before your bankruptcy filing date (for example, taxes due on April 15, 2021, for the tax year 2020 will not qualify for discharge until April 16, 2024), and
• debts for personal injuries or death resulting from your drunk driving.

Keep in mind that property liens remain after bankruptcy unless you file a motion with the court and the bankruptcy judge agrees to lift the lien. So while a money judgment will be discharged, a lien filed against your property as a result of a money judgment will remain. You’ll have to repay the lien amount, plus interest, before transferring the property to someone else.

Some types of debt will survive your bankruptcy, but only when the creditors seek and obtain orders from the bankruptcy court excluding the debts from your bankruptcy. These debts arise from fraudulent actions, recent credit card charges for luxuries, and willful and malicious acts causing personal injury or property damages. (For more on which debts are and are not discharged in a Chapter 7 bankruptcy, see Ch. 3.)

What Happens to Your Property?

With few major exceptions, as of your filing date all the property you own or are entitled to receive becomes part of your bankruptcy estate and is managed by the bankruptcy trustee. Also, property transferred within the previous two years for significantly less than its value (up to ten years for some transfers), and certain types of property acquired during the six-month period after filing, are also considered part of your bankruptcy estate. Marital property in community property states is also part of the bankruptcy estate, even if only one spouse files. There are other categories of property that might belong in your estate, but these are the main ones. (See Ch. 4 for more on what property belongs in your bankruptcy estate.)

What does the bankruptcy trustee do with the bankruptcy estate? The trustee looks for any property that, when sold, will generate a profit that can be used to pay your creditors. In fact, that’s how these trustees earn a living—from commissions on the bankruptcy estate property sold to benefit creditors.

Before you worry about losing property, keep in mind this rule: A trustee who sells property must use the sales proceeds to pay off any outstanding loans related to the property before paying other creditors. Property that lacks equity won’t produce any proceeds for your creditors, so the trustee has no interest in property that is worth less than what you owe.

For example, if you owe more on your house or car than it’s worth, you have no equity and the trustee won’t be interested in selling it. The proceeds from the sale would, by law, all go to the lender. On the other hand, if you have equity in your house or car (or any other property, for that matter), the trustee will evaluate the property’s worth and consider selling it for the benefit of the creditors (and the trustee).

In many cases, you’ll be able to protect some property equity from creditors using bankruptcy exemptions, and, if it’s enough, keep the property out of the trustee’s reach. We explain how to do this in the next section.

How Exemptions Help You Keep Your Property

Fortunately, all states have exemption laws that allow you to keep property you’ll need to work and live when you file for Chapter 7 bankruptcy. The idea is that everyone needs basic items like household furnishings, clothing, and a reasonably-priced car to maintain a home and job. And, because most retirement accounts are protected too, it’s truly possible to get a fresh start using bankruptcy exemptions. Here’s how it works.

Exemption laws keep certain possessions out of the reach of the trustee and creditors. Each state has a set of exemption laws for its residents and a federal list of exemptions exists, too.

In some instances, an asset will be fully exempt regardless of its value. For instance, under one of the two California exemption systems, you can keep all of your furniture no matter how much it’s worth. In the other California exemption system, furniture is only exempt up to $725 per item. The same limit applies to appliances, musical instruments, clothing, books, animals, and crops.

Of course, not all assets are exempt. Finding out what you can protect starts with identifying the exemption list or lists you’re entitled to use.

Some states require a bankruptcy filer to use the state exemptions. However, many states allow filers to choose either the state list or the federal exemptions.

To find out whether your state gives you this choice, turn to the exemption chart on the online companion page and look at the entry just below your state’s name. It will indicate whether federal exemptions are allowed. If you have a choice, you’ll want to compare the state and federal sets to determine which list will protect the property you’d like to keep. You’ll find the federal list at the end (it follows the Wyoming exemptions).

Most people can use the exemptions of the state where they file. But if you haven’t been residing in that state for at least two years, you might have to use the federal exemptions if they’re allowed by the current state or exemptions from the state you resided in previously, and it can make a big difference. For example, filers can keep up to $60,000 worth of equity in a home in New Mexico and up to $500,000 in Massachusetts (other timing rules can drastically limit how much home equity you can protect, too).

Houses and Cars

People often ask whether they can keep their home and car in a Chapter 7 bankruptcy. The answer is yes in the following circumstances:

• You are current on your mortgage or car note.
• You have no significant nonexempt equity in the house or car (you can protect all of your equity with an exemption).

Mortgages

If all of the home equity is exempt, the trustee won’t be interested in selling the house, which means you can keep it—unless you are behind on your mortgage payments.

If you’re behind, your mortgage lender can initiate foreclosure proceedings and will probably be able to get permission from the bankruptcy judge to proceed.

It works a bit differently if you have significant equity but the state (or federal) exemption isn’t large enough to cover all of it. The trustee will sell the home, give you the exemption amount, and use the remaining proceeds to pay creditors.

Car Loans

Cars encumbered by car notes work pretty much the same way as houses. If an exemption protects all of the equity in your car, you can keep it as long as you are current on the note. However, if you’re behind on the payment, the lender could ask the bankruptcy judge for permission to proceed with repossession or simply wait to repossess the car after the bankruptcy closes.

Your Car or Home After Bankruptcy

Meeting the requirements for keeping your home or car as described just above doesn’t mean that your bankruptcy will end your obligation to the mortgage holder or bank. To understand what happens next, let’s back up a little bit.

When you take out a mortgage or car loan, you are actually doing two things:

• signing a promissory note for the amount of the loan, and
• agreeing that if you default on the loan, the lender can foreclose or repossess the property and use the proceeds to pay down the loan.

What Happens If You Have Nonexempt Equity in Property?

If your equity in property is worth more than an exemption allows, the trustee can: seize and sell the property at auction, even if you own the property jointly with others pay any lender in the picture the amount that’s owed on the property, if any give you the amount you are entitled to under the exemption system you are using distribute what remains to your unsecured creditors, and put in for a commission on the sale. Frequently, before selling property with nonexempt equity, the trustee will give you an opportunity to buy it back at whatever amount you can agree upon. For instance, if you have a motorcycle that could be sold for $8,000 and you only have $3,000 worth of exemption (meaning $5,000 is nonexempt), the trustee might let you buy it back for the amount the trustee would end up with after a sale. Since sales of personal property cost time and money, the trustee might let you buy the motorcycle back for 20% less, or for as little as $4,000.

 

When the mortgage is recorded at your local land records office, it becomes a lien (a claim) against the house. Similarly, when you take out a car loan, you are signing a promissory note and a “security agreement” that allows the car to be repossessed in case you default. When the seller records the security agreement, it becomes a lien against the car.

When you file for bankruptcy, the promissory note part of a secured debt is canceled. However, the lien securing your payment remains. For example, if you owe $400,000 on your house when you file, the $400,000 promissory note is canceled. The lender cannot come after you and force you to make a payment.

However, that doesn’t mean that you can stop paying your mortgage and keep your home. If you don’t pay (default), the mortgage lender still has the lien—which hasn’t been affected by your bankruptcy— and can foreclose on the lien, take the home, and sell it at auction. Similarly, for secured debts involving a car, your Chapter 7 bankruptcy will cancel the amount you owe on the promissory note but it won’t affect the lien—which means that even though the lender can’t force you to pay the debt by garnishing your wages or through some other collection means, the lender can repossess the car if you default. To avoid foreclosure or repossession, you must continue paying the amount that you owe.

Especially in the case of car notes, many lenders don’t like the idea of your not being legally liable for the balance after bankruptcy. While many will let you keep the car after a debt discharge as long as you continue making the payment, most lenders would prefer to keep you on the hook for the underlying debt. The lender doesn’t want you to trash the car, give it back, and wash your hands of the whole thing. Bankruptcy gives them the option of requiring you to sign an agreement reaffirming the underlying promissory note (called a “reaffirmation agreement”). Once in place, you wouldn’t be able to walk away from the debt.

EXAMPLE: Marisol owes $25,000 on her Tesla Model 3 when she files for Chapter 7 bankruptcy. If she doesn’t reaffirm the debt, the bankruptcy will cancel the $25,000 debt, which means she’ll still have to make her payments under power of the lien but won’t owe the actual debt. If, after her bankruptcy, Marisol decides to turn in the car, she won’t owe a cent on it. On the other hand, if Marisol reaffirms the debt, she will continue to be liable for the entire amount of the reaffirmed debt after bankruptcy, even if she turns in the car. Many courts believe that Marisol is better off not owing the money (that is, not reaffirming). By contrast, the lender will be better off having her owe the money to prevent her from escaping liability if the car is repossessed or she gives it back.

See Ch. 6 for more on reaffirmation agreements and how secured debts are treated in Chapter 7 bankruptcy.

As for houses, reaffirmation is rare. Instead, lenders have historically relied on foreclosure as their enforcement remedy and haven’t worried about your walking away from the house. Keep in mind that payments won’t show up in your credit history, which could impact your future borrowing ability. See Ch. 5 for more about houses in bankruptcy.

RELATED TOPIC
Later chapters include detailed information on exemptions. Ch. 4 covers exemptions in general, Ch. 5 explains exemptions for a home, and Ch. 6 covers cars and other property that secure a loan.
 

Costs and Fees

As of this writing, the filing fee for a Chapter 7 bankruptcy is $338. If you can’t afford the fee, you can apply for a fee

waiver or permission to pay in installments. You’ll have to file an Application to Have the Chapter 7 Filing Fee Waived (or an application to pay in installments) when you file your bankruptcy papers. The court clerk will let you know whether you must appear before the judge—who will decide whether you qualify for the waiver—or whether you’ll receive a determination in the mail. If your request isn’t approved, the judge will set a payment schedule. The form, rules, and eligibility guidelines for getting a fee waiver are available at www.uscourts.gov/forms/bankruptcy-forms. If you want to be represented by a lawyer, you will likely have to pay an additional $1,200 to $2,000 in attorneys’ fees. Not everyone has that kind of money, however, especially when you’re facing bankruptcy.

If you decide to handle your own case, you will probably want to get some outside help. This will typically consist of some of the following:

• one or more do-it-yourself books on bankruptcy (roughly $30 a pop)
• telephonic legal advice from a lawyer (roughly $100 an hour, although many lawyers provide one free consultation), and
• clerical assistance with your form preparation from a bankruptcy petition preparer (between $100 and
• $200 depending on your jurisdiction).

See Ch. 11 for more on resources you can use to file for bankruptcy.

Issues That Must Be Decided by a Judge

Chapter 7 bankruptcy is designed to run smoothly with very few bankruptcies requiring a decision by an actual judge. Instead, the bankruptcy trustee oversees the case for the most part. However, you and your attorney (if you have one) will have to appear before a judge in the following cases:

• Your income appears to make you ineligible for Chapter 7 bankruptcy and you want to argue that an exception should be made in your case.
• A creditor contests your right to file for Chapter 7 bankruptcy or discharge a particular debt (which is rare, but it does happen).
• You want the judge to rule that you are entitled to discharge a particular type of debt (such as student loans— see Ch. 3 for more information on debts that can be discharged in Chapter 7 bankruptcy only with the judge’s approval).
• You want to eliminate a lien on your property that will survive bankruptcy (see Ch. 10).
• You are handling your own case, are making payments on a car or other personal property, and want to keep the property and continue the contract after bankruptcy. This is called “reaffirming” the contract. (See Ch. 6 for more on reaffirmation agreements.)

See Ch. 10 for more on these and other types of issues that require action by a judge.

How a Chapter 7 Case Ends

If you complete all of the necessary requirements, Chapter 7 bankruptcy ends with a discharge of all qualifying debts. (For information on which debts can be discharged in Chapter 7, see Ch. 3.) When a debt is discharged, the creditor is forever barred from trying to collect it from you. However, the debt will still appear on your credit report as “discharged in bankruptcy.” Government entities cannot discriminate against you simply because you’ve received a bankruptcy discharge, but private companies can and do in some circumstances. (See Ch. 9 for more on the consequences of receiving a bankruptcy discharge.)

Mandatory Budget Counseling
In addition to the requirement that you obtain credit counseling before you file for bankruptcy, you must also participate in a course on budget management be-fore you can get your discharge. Most filers use the same agency for budget counseling as they used for prefiling credit counseling. See Ch. 2 for more information about this requirement.

Changing Your Mind

If you file for Chapter 7 bankruptcy and then change your mind, you can ask the court to dismiss your case. As a general rule, the court will not do so if it wouldn’t be in the best interests of your creditors.

For example, your request to dismiss might be denied if you have significant nonexempt assets that the trustee could sell to raise money to pay your creditors.

EXAMPLE: Jake files for Chapter 7 assuming that all of his property is exempt. Shortly after he files, Jake’s mother tells him that he is on the deed for a 20-acre ranchette that he, his sister, and his mother inherited from his father. Under the exemption laws applicable to Jake’s bankruptcy, his share of the ranchette is not exempt.

The trustee can sell the property and distribute Jake’s share to his unsecured creditors. Because Jake wants to keep the property, he files a motion asking the court to dismiss his case. The judge denies his request because it would not be in the best interest of Jake’s creditors. The point should be clear: Don’t file Chapter 7 unless you know what property you own and what will happen to it in bankruptcy.

If you do dismiss your case, you can file again later, although in some circumstances you might have to wait 180 days and pay a new filing fee. Instead of dismissing your Chapter 7 case, you can always convert it to another type of bankruptcy for which you qualify (typically Chapter 13 for individuals). In Jake’s case, for example, he could convert to Chapter 13 to save the ranchette. However, in his plan, Jake would have to pay his unsecured creditors at least as much as they would have received had Jake filed under Chapter 7—essentially, the market value of his share of the ranchette, less sale costs and the trustee’s commission. Jake should plan to pay an amount equal to the unprotected equity amount, minus sales costs, throughout his three- or five-year bankruptcy plan. (Learn more about the Chapter 13 repayment plan below.)

Chapter 13 Bankruptcy

Chapter 13 bankruptcy works quite differently from Chapter 7 bankruptcy. In Chapter 13, the trustee does not sell your property and assets to repay your creditors. You use a portion of your income to pay some or all of what you owe to your creditors over time (anywhere from three to five years, depending on your income and how much of your debt you can afford to repay). But, many people are surprised to learn that a significant number of debts, such as some taxes and domestic support arrears, must be paid in full through the plan. The trick to successfully using Chapter 13 to get out of debt is to make sure you have enough income to meet all of your payment obligations under the Chapter 13 laws. Being unable to fund a plan is the most common reason people aren’t able to qualify for Chapter 13. (See Ch. 2 to learn about the eligibility requirements for filing under Chapter 13.)

Why File a Chapter 13 Bankruptcy?

Most people who have a choice between Chapters 13 and 7 choose Chapter 7. After all, it lasts about three months instead of three to five years, it is cheaper than Chapter 13 if you hire a lawyer, and you don’t have to pay down any of your dischargeable debt. So, why would you choose to file a Chapter 13 bankruptcy? You can accomplish some things in Chapter 13 that wouldn’t be available to you in Chapter 7. Here are some examples: In Chapter 13, you can get rid of a second mortgage lien on your real estate—called a lien strip—if the market value of the house is less than the amount owed on the first mortgage. Chapter 13 can provide a way to reduce your secured debts to the value of the collateral so you pay only what the property is worth currently (for instance, reducing a $10,000 car note on a $5,000 car to $5,000). Chapter 13 lets you make up for missed payments on a house, car, or other collateral over a three- to five-year period so you can keep the property instead of losing it to foreclosure or repossession. Chapter 13 gets rid of certain types of debts that aren’t discharged in Chapter 7 (for instance debts owed because of property division in a divorce, but not support). Chapter 13 allows you to operate a business while you are in bankruptcy (unlike Chapter 7, which might require that you close the business). If you previously received a Chapter 7 discharge, you can’t get another Chapter 7 discharge for eight years, but you can get a Chapter 13 discharge after only four years. And you can file for Chapter 13 immediately after a Chapter 7 discharge (but you won’t get a discharge). (See Ch. 2 for reasons why this can help.) See Ch. 7 for an example of a conversation between a bankruptcy lawyer and client in which they discuss whether the client should file a Chapter 7 or Chapter 13 bankruptcy.

 

How a Chapter 13 Case Begins

Before filing a Chapter 13 bankruptcy, you must complete a credit counseling course, then fill out and file a packet of forms— mostly the same forms as you would use in a Chapter 7 bankruptcy—and provide the court with:

• a feasible plan to repay some or all of your debts over the plan period (three years if you qualify for Chapter 7 and are electing to file for Chapter 13; five years otherwise)
• proof that you’ve filed your federal and state income tax returns for the previous four years, and
• a copy (or transcript) of your most recently filed IRS income tax return. (See Ch. 10 for more on Chapter 13 paperwork.)

The Repayment Plan

Under a Chapter 13 repayment plan, you make payments, usually monthly, to the bankruptcy trustee, the official who oversees your case. The trustee uses that money to pay the creditors covered by your plan and to pay his or her statutory fee (usually 10% or less of the amount distributed under your plan).

Under Chapter 13, you are required to devote all of your “projected disposable income” to your plan (essentially, the amount left over after paying your allowed expenses) or the value of your nonexempt property, whichever is more. Your repayment period could be as short as three years if you qualify for Chapter 7 (your gross average income over the six months before you file is below your state’s median income) and five years if your income is above the amount allowed for a Chapter 7 discharge. (See Ch. 2 for more on making this calculation.) In some cases, the filer needs a five-year plan to make all required payments regardless of whether his or her income is above or below the median income.

Postconfirmation Increases in Income

If your repayment plan is based on an income level that increases after the court confirms your plan, the trustee can request the court to order a jump in your monthly payments due to your new ability to pay this extra amount. The basic idea in Chapter 13 is that you have to devote all your disposable income to your plan payments.

In Chapter 13, some creditors are entitled to receive 100% of what you owe them, while others may receive a much smaller percentage or even nothing at all. For example, a Chapter 13 plan must propose that any child support you owe to a spouse or child (as opposed to a government agency) will be paid in full over the life of your plan; otherwise, the judge will not approve it. On the other hand, the judge could approve a plan that doesn’t repay any portion of your credit card debts if you won’t have any projected disposable income left after paying obligations that must be paid in full under the Chapter 13 laws, such as support arrearages or recent tax debt.

To have your debts fully discharged under Chapter 13, you must usually make all payments required by your plan and:

• remain current on your federal and state income taxes
• remain current on any child support or alimony obligations, and
• annually file a copy of your federal income tax return or transcript of the return with the court.

You also have to provide your creditors with copies of the income tax returns or transcripts you file with the court if they request them.

Which Debts Are Discharged

If your Chapter 13 bankruptcy pays your unsecured debts in full, then you will receive a complete discharge of those debts no matter what type they are. If your plan pays less than 100% of a debt, the balance will be discharged unless it is a type of debt that isn’t discharged in Chapter 13 bankruptcy.

As a general rule, most credit card, medical, and legal debts are discharged, as are most court judgments, deficiencies from foreclosures or repossessions, and personal loans. Debts that have to be fully paid in a Chapter 13 bankruptcy are:

• court-imposed fines and restitution
• back child support and alimony owed to an ex-spouse or child
• recent back taxes
• unfiled taxes, and
• debts you owe because of a civil judgment arising out of your willful or malicious acts or for personal injuries or death caused by your drunk driving.

Debts arising from your fraudulent actions or recent credit card charges for luxuries will not be discharged if the creditor gets a court order to that effect.

Ch. 3 explains which debts are discharged in a Chapter 13 bankruptcy.

Chapter 13 Plan Must Pay Unsecured Creditors as Much as They Would Receive in a Chapter 7 Bankruptcy

People sometimes choose to avoid Chapter 7 bankruptcy because they stand to lose certain property that isn’t exempt. Chapter 13 bankruptcy initially looks like a good alternative, because in Chapter 13 you don’t have to give up any property. Rather, your obligations under your plan are based on your disposable income. However, even though Chapter 13 won’t take your property, it does require that you pay your unsecured creditors the value of what they would have received in Chapter 7. For example, if you have $50,000 equity in your home that isn’t protected by an exemption, you wouldn’t lose the home in Chapter 13 bankruptcy, but you would have to propose a plan that pays your creditors at least $50,000 less sale costs and the trustee’s commission. This rule often makes it difficult to propose a feasible Chapter 13 plan, due to the size of the required payment, although making such large Chapter 13 payments occurs more frequently than you might suspect.

 

Which Property Is at Risk in Chapter 13 Bankruptcy

As mentioned, you are not required to give up any property you own when you file your Chapter 13 bankruptcy case. In

Chapter 13, your income is used to pay off some portion of your debt. However, the value of your nonexempt property can be the determining factor regarding your ability to propose a valid repayment plan. The amount received by creditors through the plan must equal or exceed the value of your nonexempt property (minus sales costs). If you don’t have enough income to comply with this rule, you might be able to lower the payment by selling some property and using the funds to pay down debt.

Houses and Cars

Filing for Chapter 13 bankruptcy lets you keep your house and car as long as you stay current on the payments and can afford to pay for any nonexempt equity. You can also pay off owed arrearages over time—a mechanism that isn’t available in Chapter 7 and that allows Chapter 13 filers to catch up on monthly payments to keep homes. For instance, suppose you are $5,000 behind on your mortgage payments. In that case, you can pay an extra amount and catch up on the arrearages over the course of the plan. That’s why Chapter 13 is typically the remedy of choice for people facing foreclosure. (See Ch. 5 for more on what happens to your home when you file for either type of bankruptcy.)

Costs and Fees

The filing fee for a Chapter 13 bankruptcy is currently $313. If you want to be represented by a lawyer, you will probably have to pay $2,500 to $4,000 in legal fees, most of which can be paid through your plan.

If you decide to handle your case (as relatively few do), you will likely want to get some outside help. This will typically consist of one or both of the following:

• using one or more self-help law books on Chapter 13 bankruptcy (roughly $40), and
• retaining a lawyer to provide legal answers as needed.

Unlike the situation in Chapter 7, bankruptcy petition preparers are seldom, if ever, willing to prepare Chapter 13 cases. Also, keep in mind that due to the complexity of Chapter 13 cases, bankruptcy courts strongly recommend retaining a bankruptcy attorney. See Ch. 11 for more on resources you can use to file for bankruptcy.

The Meeting of Creditors

When you file your Chapter 13 bankruptcy petition, the court schedules a “meeting of creditors” (usually within about a month) and sends an official notice of the bankruptcy filing and the meeting to you and all of your creditors. You (and your spouse if you have filed jointly) are required to attend. You’ll need to bring two forms of identification—a qualifying picture ID and proof of your Social Security number.

A typical creditors’ meeting in a Chapter 13 case lasts less than 15 minutes. The trustee will briefly go over your paperwork with you. No judge will be present. The trustee is likely to be most interested in whether your repayment plan meets all legal requirements and whether you will be able to make the payments you have proposed. (See Ch. 2 for more on Chapter 13 requirements.) The trustee has a vested interest in helping you successfully navigate the Chapter 13 process because the trustee gets paid a percentage of all payments doled out under your plan; however, the trustee’s first responsibilities are to the creditors and ensuring that legal requirements get followed.

For instance, the trustee will make sure you have filed your tax returns for all taxable periods during the four prior years. If not, the trustee will continue the creditors’ meeting to give you a chance to file these returns or provide proof of filing if you’ve already done so. You cannot proceed with a Chapter 13 bankruptcy unless and until you bring your tax filings up to date.

When the trustee is finished asking questions, any creditors who show up will have a chance to question you. Secured creditors might come if they have any objections to the plan you have proposed as part of your Chapter 13 filing (but will usually file a motion with the court instead). They might claim for example, that your plan isn’t feasible, or that you’re not paying sufficient interest on a secured debt. (See Ch. 6 for more information on collateral and other property that secures a loan.)

Challenging the Legality of a Mortgage in Chapter 13 Bankruptcy

When you file Chapter 13 bankruptcy, creditors are supposed to file a proof of claim setting out how much they think you owe. This proof of claim will determine how much they get paid as part of your Chapter 13 plan. If a secured creditor fails to file a proof of claim, you can file one on their behalf. If the court does not approve the claim, don’t expect to get out from under the mortgage entirely. It’s much more likely that legal defects in lenders’ claims will result in negotiated settlements reducing the amount of your mortgage principal and interest. You’ll likely want to retain an attorney to help you navigate this process.

 

An unsecured creditor who is scheduled to receive very little under your plan might object, too, if that creditor thinks you should cut your living expenses and thereby increase your disposable income (the amount from which unsecured creditors are paid).

Come to the meeting prepared to listen to disgruntled creditors or the objections of the trustee. If you agree to make changes to accommodate objections, you must submit a modified plan and have it served on all of your creditors.

Objections raised by creditors or the trustee won’t be ruled on during the creditors’ meeting (because the judge won’t be there). Instead, if the objections aren’t resolved informally, the trustee or creditor will raise any objections by filing a motion with the bankruptcy court, which will be scheduled for a couple of weeks later. You will want to respond in writing to any motion, either by agreeing to make the correction, or by explaining why the party bringing the motion is wrong. In most cases, you’ll probably choose the former approach (because let’s face it, if you file on your own behalf, the likelihood of making an error is high), but, if you are right, you’ll also have an opportunity to argue your point to the judge at a hearing.

The Confirmation Hearing

In both Chapters 7 and 13, you’ll attend a meeting of creditors before the bankruptcy trustee (this is the meeting we discussed earlier in the chapter). Unlike Chapter 7, you’ll have a second appearance in Chapter 13 bankruptcy in court before a judge. At this appearance, called the confirmation hearing, the judge either confirms (approves of) your proposed plan or sends you back to the drawing board for various reasons—usually because your plan doesn’t meet Chapter 13 requirements in one or more particulars. For example, a judge might reject your plan because you don’t have enough projected disposable income to at least pay your priority creditors in full and stay current on your secured debts— such as a car note or mortgage. For more information on Chapter 13 confirmation hearings, see Ch. 10.

You are entitled to amend your proposed plan until you get it right or until the judge decides that it’s hopeless. Each amendment requires a new confirmation hearing and appropriate written notice to your creditors.

You’ll pay the proposed monthly payment while you go through this process. You don’t wait until the plan confirmation to start paying. Because it’s not unusual for it to take upwards of six months to confirm a plan, paying the proposed payment amount from the beginning helps ensure that you complete your plan no later than five years after the initial filing date.

Other Common Reasons to Go to Court

In addition to attending the confirmation hearing, you might need to go to court to:

• modify your plan after it has been confirmed
• value an asset (if your plan proposes to pay less for a car or other property than the creditor thinks it’s worth)
• respond to requests by a creditor or the trustee to dismiss your case
• respond to a creditor who opposes your right to discharge a particular debt (perhaps because of an allegation that you engaged in fraud when incurring the debt)
• discharge a type of debt that must be allowed by a judge (such as discharging a student loan because of hardship)
• eliminate a lien on your property that will survive your Chapter 13 bankruptcy unless the judge removes it, or
• oppose a secured or unsecured claim filed by a creditor.

These procedures are described in Ch. 10.

How a Chapter 13 Case Ends

If you do the following, the remaining unpaid balance on any debts qualifying for discharge will be wiped out:

• complete your three- or five-year repayment plan
• stay current on your income tax returns and your child support or alimony payments, and
• complete a budget management course approved by the U.S. Trustee.

If any balance remains on a long-term debt that doesn’t qualify for discharge, such as a student loan or your home mortgage, you will continue to owe the unpaid amount. (The debts that qualify for discharge in a Chapter 13 bankruptcy are explained in Ch. 3.)

Modifying the Plan and Alternatives to Full Discharge

If you can’t complete your Chapter 13 plan as written, you can ask the court to modify it. As long as it’s clear that you’re acting in good faith, the court is likely to approve your request. If it isn’t feasible to modify the plan, you might still be able to get what’s called a “hardship” discharge if both of the following apply:

• You failed to complete your plan due to circumstances “for which you should not justly be held accountable” (like a job loss).
• Your unsecured creditors have received at least what they would have gotten if you had filed for Chapter 7 bankruptcy (that is, at least the value of your nonexempt property minus sale costs and the trustee’s commission).

If the bankruptcy court doesn’t let you modify your plan or won’t give you a hardship discharge, you can:

• convert your Chapter 13 bankruptcy to a Chapter 7 bankruptcy, unless you received a Chapter 7 discharge in a case filed within the previous eight years (this is explained in Ch. 10), or
• dismiss your Chapter 13 case. In this case, you’ll owe your creditors the balances on your debts from before you filed your Chapter 13 case, less the payments you made, plus the interest that accrued while your Chapter 13 case was open.

As you can imagine, Chapter 13 bankruptcy requires discipline. For the entire length of your case, you will have to live strictly within the Chapter 13 plan budget. The Chapter 13 trustee will not allow you to spend money on anything deemed nonessential. In past years, only about half of Chapter 13 plans were completed. Some Chapter 13 filers drop out early in the process, without ever submitting a feasible repayment plan to the court. However, recently, the number of people finishing Chapter 13 plans appears to be on the rise. And, keep in mind that even if you fail to complete your plan, filing Chapter 13 bankruptcy could provide you with valuable time to get your finances under control or make other adjustments.

How Bankruptcy Stops Collection Efforts

One of the most powerful features of bankruptcy is that it stops most debt collectors dead in their tracks and keeps them at bay for the rest of your case. Once you file, all collection activity (with a few exceptions, explained below) must go through the bankruptcy court—and most creditors cannot take any further action against you directly.

TIP
You don’t need bankruptcy to stop your creditors from harassing you. Many people begin thinking about bankruptcy when their creditors start phoning their homes and places of employment. Federal law prohibits this activity by third-party debt collectors once you tell the collector, in writing, that you don’t want to be called. (See Ch. 12 for a sample letter.)

The downside to this strategy is that you leave the creditor with no choice other than to forget about the debt or sue you.

Credit Card Debts, Medical Debts, and Attorneys’ Fees

Anyone trying to collect credit card debts, medical debts, attorneys’ fees, debts arising from breach of contract, or legal judgments against you (other than child support and alimony) must cease all collection activities after you file your bankruptcy. They cannot:

• file a lawsuit or proceed with a pending lawsuit against you without court permission
• record liens against your property
• report the debt to a credit reporting bureau, or
• seize your property or income, such as money in a bank account or your paycheck.

Public Benefits

Government entities that are seeking to collect overpayments of public benefits, such as unemployment, SSI, Medicaid, or welfare benefits, cannot do so by reducing or terminating your benefits while your bankruptcy is pending. If, however, you become ineligible for benefits, including Medicare benefits, bankruptcy doesn’t prevent denial or termination of the benefits on that ground.

Domestic Relations Proceedings

Almost all proceedings related to a divorce or paternity action continue as before—they are not affected by the automatic stay. These include:

• the setting and collection of current child support and alimony
• the collection of back child support and alimony from property that is not in the bankruptcy estate (see Ch. 4 for more on what’s in the bankruptcy estate)
• the determination of child custody and visitation
• a lawsuit to establish paternity
• an action to modify child support and alimony
• proceedings to protect a spouse or child from domestic violence
• withholding of income to collect child support
• reporting of overdue support to credit bureaus
• the interception of tax refunds to pay back child support, and
• withholding, suspension, or restriction of drivers’ and professional licenses as leverage to collect child support.

Criminal Proceedings

If you have a case filed against you, the criminal component will be allowed to continue. For example, if you were convicted of a minor vandalism offense and have been sentenced to community service, your obligation to do community service will not be stopped by the automatic stay.

Landlord-Tenant Proceedings

With a few exceptions (check your state law), the automatic stay does not stop the eviction of a tenant if:

• the landlord obtained a judgment of possession before the bankruptcy filing, or
• the tenant is endangering the property or using controlled substances on it.

Ch. 5 explains when evictions on these grounds may occur. It also covers the law in a few states allowing a tenant to remain after paying back rent.

Tax Proceedings

The IRS can continue certain actions, such as a tax audit, issuing a tax deficiency notice, demanding a tax return, issuing a tax assessment, or demanding payment of a post-petition assessment. The automatic stay does, however, stop the IRS from issuing a lien or seizing (levying against) any of your property or income.

Pension Loans

The stay doesn’t prevent withholding from a debtor’s income to repay a loan from an ERISA-qualified pension (this includes most job-related pensions and individual retirement plans). See Ch. 4 for more on how pensions are treated under bankruptcy.

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