The New Bankruptcy

Will It Work for You?

Not sure where to start? Let's find the right bankruptcy option for you.

Is bankruptcy the right solution to handle your debts? The New Bankruptcy covers Chapter 7, Chapter 13, and nonbankruptcy options so that you can choose the best financial strategy for you. Find out:

  • which debts you can wipe out in bankruptcy
  • whether you'll lose your home, car, or other property
  • the unique benefits offered by both Chapter 7 and Chapter 13
  • Product Details
  • You know bankruptcy will help you get back on your financial feet. But which chapter type is best? The New Bankruptcy explains the benefits of Chapter 7 and Chapter 13 bankruptcy. You’ll learn that Chapter 7 bankruptcy will:

    • wipe out credit card balances, utility bills, and more
    • protect property you need to work and live, and
    • take about four to six months to complete.

    Chapter 13 bankruptcy works by keeping creditors at bay while you: 

    • catch up on a house or car payment
    • pay off an overdue tax or support balance, and
    • pay less on other debt, such as credit cards and student loans

    The 8th edition's expanded online companion page includes downloadable worksheets and easy-to-use charts, as well as a sample bankruptcy filing on the latest official legal forms.

    When it comes to self-help legal stuff, nobody does a better job than Nolo.” - USA Today

    “…it’s important to know whether [bankruptcy] remains a viable option, and this book will offer both explanations and reassurances…”-Accounting Today

    Number of Pages
    Included Forms

    Charts and Worksheets

    • Median Family Income Chart
    • Worksheet A: Current Monthly Income
    • Worksheet B: Allowable Monthly Expenses
    • Worksheet C: Monthly Disposable Income
    • Worksheet D: The Means Test
    • Worksheet E: Personal Property Checklist
    • Worksheet F: Property Value Schedule

    Sample Bankruptcy Forms

    • Form 1, Voluntary Petition
    • Form 1, Voluntary Petition, Exhibit D
    • Form 6A, Schedule A
    • Form 6B, Schedule B
    • Form 6C, Schedule C
    • Form 6D, Schedule D
    • Form 6E, Schedule E
    • Form 6F, Schedule F
    • Form 6G, Schedule G
    • Form 6H, Schedule H
    • Form 6I, Schedule I
    • Form 6J, Schedule J
    • Form 6, Summary of Schedules
    • Form 6, Declaration of Schedules
    • Form 7, Statement of Financial Affairs
    • Form 8, Statement of Intention
    • Form 201, Notice to Debtor
    • Creditor Matrix Cover Sheet
    • Creditor Mailing Matrix
    • Form 21, Statement of Social-Security Number or Individual Taxpayer-Identification Number (ITIN)
    • Form 22A, Statement of Current Monthly Income and Means-Test Calculation
    • Form 23, Debtor’s Certification of Completion of Postpetition Instructional Course Concerning Personal Financial Management
    • Attorney Fee Disclosure
    • Statement Repayment Advices (Local Northern District of CA form)
    • Statement Pursuant to Rule 2016 (B) (local form)
    • Reaffirmation Agreement Cover Sheet
    • Reaffirmation Agreement—Motion Requesting
    • Reaffirmation Agreement Documents
    • Reaffirmation Agreement Order 
  • About the Author
    • Cara O'Neill, Attorney

      Cara O'Neill is a legal editor at Nolo, focusing on bankruptcy and small claims. She also maintains a bankruptcy practice at the Law Office of Cara O’Neill and teaches criminal law and legal ethics as an adjunct professor. Cara has been quoted in bankruptcy, finance, small claims, and litigation articles by news outlets that include USA Today, CNBC, U.S. News & World Report, Nerd Wallet, and Yahoo Finance.

      Cara received her law degree from the University of the Pacific, McGeorge School of Law, where she graduated a member of the Order of the Barristers—a highly-selective honor society that gives national recognition to top law school graduates demonstrating excellent skills in trial advocacy, oral advocacy, and brief writing.

      Working at Nolo. Cara started writing for Nolo as a freelancer in 2014 and became a full-time legal editor in 2016. She has authored a number of Nolo self-help legal books, including How to File for Chapter 7 Bankruptcy, Chapter 13 Bankruptcy, The New Bankruptcy, Everybody's Guide to Small Claims (national version), and Everybody's Guide to Small Claims in California. She also co-authors and edits Solve Your Money Troubles and Credit Repair and has written hundreds of articles for,,, and

      Early legal career. Before joining Nolo, Cara spent 20 years working as a trial attorney litigating criminal and civil cases. She also served as an administrative law judge mediating disputes between auto manufacturers and dealerships and began teaching law as an adjunct professor in 2004. She added bankruptcy to her practice after the 2008 financial downturn.

      Origins of litigation and writing career. Thanks to her mother, Cara’s advocacy training began early and involuntarily. In junior high school, she took second place two years running in the local Optimist Club speaking competition. She also successfully competed on her high school speech and debate team for several years, eventually serving as president of the same. During law school, she competed on a nationally ranked ABA moot court team for two years (and was recruited for a third, but declined) and served as a law journal editor.

  • Table of Contents
  • 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
    • Renters Filing for Bankruptcy

    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
    • How Secured Debts Are Handled in Chapter 13 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



    • How to Use the Downloadable Forms on the Nolo Website



  • Sample Chapter
  • 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. Despite the recent uptick in the economy, bankruptcy remains a necessary and pervasive 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 you:

    • usually will be able to wipe out all or most of your debts in a 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—more about Chapters 7 and 13 just below.

    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 equity. 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 designed for individuals, except that Chapter 12 is specially designed for owners of family farms, while Chapter 13 is designed for everybody else, 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), 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 entails, and because people would rather get their fresh start in three months instead of three or five years.

    Chapter 7 Bankruptcy

    As we mentioned just above, Chapter 7 is a three-month process that usually only 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. You can do this by filing the full petition, or, if you need to file in a hurry, a shortened version known as a skeleton or an emergency petition (the remaining paperwork must be filed within 14 days). Either way, 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 may 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.

    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 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, which requires just a few forms, and file the rest of your paperwork within 14 days. The required forms in a skeleton filing are:

    • 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.


    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.

    In addition to the paperwork required for a Chapter 7 skeleton petition, you’ll need to file 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 need to complete a form in which you provide your average monthly gross income for the six months before the month in which you plan to file. As explained in Ch. 2, that income figure will be your starting point for deciding whether you are eligible to file a Chapter 7 bankruptcy or whether you’ll have to use Chapter 13. This form is popularly 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 either as the “creditors’ meeting” or the “341 hearing.” You and your spouse (if your spouse is filing with you) are required to attend. You both must bring photo identification and official proof of a Social Security number. This event is 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 also attend your meeting and ask questions that bear on your possible ineligibility for Chapter 7 because of your income level, although this is rare (see “The Bankruptcy Trustee,” later in this chapter).

    The primary purpose of the creditors’ meeting is to have you affirm under oath that the information contained in the papers you filed is honest, complete, and accurate to the best of your ability. The trustee might also question you about property you’ve described in your paperwork, to see whether you gave it a proper value and whether you have equity that could be used to make some payment toward your unsecured debt (debt that isn’t secured by collateral). Also, the trustee might inquire further about:

    • anticipated tax refunds
    • recent large payments you made to creditors or relatives, if applicable
    • methods you used to arrive at the value of big-ticket property items you are claiming as exempt, such as a house or car
    • whether you should be required to proceed under Chapter 13 rather than Chapter 7
    • your failure to file any of the required documents, if applicable, and
    • inconsistencies in information you provided that might indicate you are being less than honest.

    If you’ve done a good job on your paperwork, your income and expenses qualify you for filing under Chapter 7, and you filed all required documents, your participation in the creditors’ meeting will likely be brief. Creditors rarely show up at these meetings, and the bankruptcy trustee is typically the only one asking the questions. Before ending the meeting, the trustee will ask whether all the information in your papers is 100% correct and whether you expect to receive any further money.

    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. When the trustee questions you, you—not your lawyer—must answer the questions. That’s because you are required to cooperate with the trustee and are expected to be knowledgeable about the information you provided in your papers.

    Having an experienced lawyer at your side can be helpful if anything you’ll need to explain to the trustee requires legal analysis. Also, having a lawyer can help you relax and soothe your nerves.


    Which Debts Are Discharged

    In 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 say that all legally dischargeable debts are discharged (wiped out) in your case. In a Chapter 7 bankruptcy, absent a successful objection by a creditor (which is rare), most credit card, medical, and legal debts are discharged, as are court judgments, deficiencies owed because of a foreclosure or repossession, and personal loans. For many filers, this means that all of their debts are discharged.

    Some types of debts are not discharged in Chapter 7 bankruptcy. The most common of these are:

    • 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 first became due less than three years before your bankruptcy filing date (for example, taxes due on April 15, 2017, for tax year 2016 will not qualify for discharge until April 16, 2020), 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 bankruptcy court and the 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 are: debts arising from your 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. In addition, property you transferred within the previous two years (up to ten years for certain transfers) for significantly less than its value, and certain types of property you have come to own within the six-month period after you file, 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 property from the bankruptcy estate that they sell to benefit creditors. For this reason, the trustee has no interest in property that is worth less than what you owe. The trustee must sell the property and use the sales proceeds to pay off any outstanding loans before paying other creditors. Property that lacks equity won’t produce any proceeds for your creditors. 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).

    How Exemptions Help You Keep Your Property

    Fortunately, all states have laws that allow you to keep a portion of your certain types of property when you file for Chapter 7 bankruptcy. The idea is that you need things such as household furnishings, clothing, a reasonably-priced car, and your retirement savings to maintain a home and job, and to get the fresh start promised by bankruptcy.

    This is accomplished through laws—called exemptions—that let you protect the equity you have in various property items from being used by the trustee to benefit your creditors. Each state has a set of exemption laws for use by its residents, and some states allow filers to choose between the state’s list and the federal exemptions. Either way, the state decided on the particular property you’ll be able to protect.

    In some instances, property is exempted regardless of its equity value. For instance, under one of the two California exemption systems, your furniture is exempt regardless of what it’s worth. In the other California exemption system, furniture is only exempt up to $725 per item (as are appliances, animals, musical instruments, personal effects, and clothing).

    You can keep up to $145,425 worth of equity in your home in Ohio, and up to $500,000 in Massachusetts.

    Most people who file for bankruptcy use the exemptions in 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 exemptions from the state from which you came.

    In 15 states, you have a choice of exemptions—you can use your state’s exemptions or a list of 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 say either that federal exemptions are allowed or (in most cases) that they are not. If your state allows the federal exemptions, you can find those exemptions after Wyoming.

    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.


    If there is no nonexempt equity, 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, although the trustee won’t be interested in selling the house, 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 equity that you can’t protect with an exemption. The trustee will sell the home, give you the exemption amount, and use the remaining proceeds to pay creditors.

    Car Loans

    Cars and car notes work pretty much the same way as houses. If you can protect all of the equity in your car with an exemption, you can keep it as long as you are current on the note, but if you are behind, the lender could attempt to get permission from the judge to proceed with repossession. Once the bankruptcy closes, the lender can repossess the car without the court’s permission.

    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 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 on 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 so you don’t, at some point in the future, trash the car, give it back, and walk away from the whole thing. Bankruptcy gives them the option of requiring you to sign an agreement reaffirming the underlying promissory note (called a “reaffirmation agreement”) so you can’t just walk away from the debt after bankruptcy.

    EXAMPLE: Marisol owes $25,000 on her GMC Denali 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.

    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 $335. 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

    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 before 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 bankruptcy, thinking 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 which means the trustee can sell the property and distribute Jake’s share to his unsecured creditors. Jake wants to keep the property and so requests that his case be dismissed. His request is denied 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 a Chapter 13 bankruptcy 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. (See below, to learn more about the Chapter 13 repayment plan.)

    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 you can’t in Chapter 7 (all benefits are discussed in detail elsewhere):

    • 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.

    Not All Disposable Incomes Are Equal

    One of the oddities of Chapter 13 law is that your qualifying disposable income could be different than your actual disposable income. It’s usually more than what you have left over after paying your monthly expenses—which is one of the reasons why finishing a plan can be tough. Here’s how it works.

    Your first step will be determining whether you will have a three- or five- year “commitment period.” Your average gross income over the six months before your filing date will determine the plan length. If your gross income falls above the median for your state, you’ll pay into a five-year plan. If it falls below, you’ll be obligated for three years.

    Your disposable income comes into play only if you must pay into a five-year plan, and you’ll determine what it is by deducting expenses from your gross income. In some cases, you’ll deduct your actual expense. In others, you’re limited to the amount allowed by law, which is why after completing the dispo calculations, it would be unusual if your qualifying disposable income mirrored your actual disposable income, the amount of funds remaining after paying your monthly bills. (Ch. 2 explains qualifying disposable income in more detail.)


    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.

    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, as mentioned earlier, the value of your non- exempt property can be the determining factor regarding your ability to propose a valid repayment plan. In that case, you might be able to lower the payment by choosing to sell property and using the funds to pay down debt.

    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.

    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, as discussed above. You can also pay off arrearages you owe when you file, which is a mechanism particular to Chapter 13 that will allow you to keep your house. For instance, if you are $5,000 behind on your mortgage payments, you can pay an extra amount and catch up over the course of the plan. That’s why Chapter 13 has typically been 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 $310. 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 some 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 bank- ruptcy 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.

    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.


    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.)

    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.

    While any objections raised by creditors won’t be ruled on during the creditors’ meeting (because the judge won’t be there), the trustee might raise these objections by filing a motion with the bankruptcy court, which will be scheduled for a couple of weeks later. Your creditors can file a motion objecting to the plan, as well. 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

    Unlike Chapter 7, Chapter 13 bankruptcy requires at least one appearance in court. 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 can be discharged only if the judge decides that it should be (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 complete your full three- or five-year repayment plan, are 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, the remaining unpaid balance on any of your debts that qualify for discharge will be wiped out. 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 less sale costs and the trustee’s commission).

    If the bankruptcy court won’t let you modify your plan or 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. 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.

    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 TANF (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.

    We hope you enjoyed this sample of The New Bankruptcy: Will It Work For You? To read the rest of this chapter, please purchase the book.

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