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

Glossary

Appendix

• How to Use the Downloadable Forms on the Nolo Website
• List of Forms Available on the Nolo Website

Index

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, a 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 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, keep in mind that you’re not alone. Even during good economic times, bankruptcy remains a necessary part of our financial 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
• the debts you can cancel
• 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 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 if a business starts in Chapter 11 (although relatively new Chapter 11, Subchapter V, offers businesses a more reasonable alternative), it will often end up in Chapter 7 with a liquidation of the company. 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. Chapter 12, a bankruptcy chapter specially designed for family farm owners and fishermen, isn’t covered in this book. Chapter 13 is available to “individuals” or everyone except businesses. Specifically, an individual includes sole proprietors and independent contractors but not business entities, such as corporations or limited liability companies (LLCs). However, eligible business owners can file for Chapter 13 individually and rid themselves of personal and business debt (the company remains responsible for business debt).

In a Chapter 13 bankruptcy, you prepare and file almost the same forms as in a Chapter 7 bankruptcy. However, you also propose a three-or five-year plan to repay certain types of debt in full (such as back child support and recently incurred tax debt) 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. Also, sometimes filers with a significant amount of disposable income must pay 100% of their 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 it usually isn’t the bankruptcy of choice. Not only is Chapter 13 more costly, but most people would prefer getting a debt discharge in three months without repaying creditors instead of paying into a plan for 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 vital to obtain a filing number fast. For instance, if you’re facing an imminent foreclosure or car repossession, you’ll need the automatic stay to stop the process 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 the following forms initially:

• 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.

You’ll file the remaining paperwork within 14 days.

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.

A Brief Description of the Chapter 7 Paperwork

Ch. 10 gives you a more detailed look at these and other bankruptcy forms, and the Appendix includes a list of 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 an overview.

You can expect your Chapter 7 filing to be about 50 pages long. 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 its location and 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 might 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 a full six months before filing. 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.

If the meeting is in person, 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. Some courts continue to hold the meeting virtually (a practice started in response to the COVID-19 pandemic).

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 backed by collateral the creditor could sell to pay the obligation). 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 10 minutes or less because trustees get to the point quickly and creditors rarely show up.

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 more challenging 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, 2023, for the tax year 2022 will not qualify for discharge until April 16, 2026), and

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 soon as you file for bankruptcy, 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 10 years for some transfers), and certain types of property acquired during the six months after filing, are part of your bankruptcy estate. Marital property in community property states is included in the bankruptcy estate, even if only one spouse files. Other property types 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 Chapter 7 trustee looks for any property that, if sold, would generate a profit that could be used to pay your creditors. (The Chapter 13 trustee calculates the amount you must pay creditors to keep your property—you’ll learn more in the Chapter 13 section.) Trustees earn a living by being paid a commission on the funds paid to creditors.

Before you worry about losing property, keep in mind that all filers can protect some property from creditors using bankruptcy exemptions. In the next section, we explain how to determine whether you’ll lose property in Chapter 7.

How Exemptions Help You Keep Your Property

Fortunately, all states have bankruptcy exemption laws that allow you to keep property you’ll need to work and live. The idea behind protecting property through exemptions is everyone needs household furnishings, clothing, and a reasonably priced car to maintain a home and job. Without those things, bankruptcy wouldn’t provide much of a fresh start.

And, because most retirement accounts are protected, it’s genuinely possible to exit bankruptcy in a solid financial place. Here’s how exemptions work.

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

Sometimes, an asset will be fully exempt regardless of its value. For instance, some state exemption systems let you keep all furniture irrespective of value. Most other state systems exempt furniture up to a particular amount per item. States often apply exemption limits to appliances, musical instruments, clothing, books, animals, crops, burial plots, guns, and more, with the particular items protected and amounts varying significantly between states.

Of course, not all assets are exempt.

Determining what you can protect starts with identifying the exemption list or lists you’re entitled to use in your state.

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 and determine which list will protect the most or the specific property you wish to keep. You’ll find the federal list at the beginning of the exemption chart.

Most people can use the exemptions of the state where they file. But suppose you haven’t lived in that state for at least two years. You might have to use the federal exemptions if they’re allowed in the current state. Otherwise, you’ll use the exemptions from the state you resided in previously.

The exemption list you use can make a significant difference. For example, homestead exemptions protecting equity in a home vary drastically between states. Some states offer relatively modest protection. Others, such as Texas and Florida, sometimes protect unlimited home equity. Other timing rules can also drastically limit the home equity protected in bankruptcy.

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).

We explain these rules in more detail below.

Mortgages

If all of a home’s 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.

You’ll have a different result if you have significant equity, but the state (or federal) homestead exemption isn’t large enough to cover all of it. In that case, the trustee will sell the home, give you the exemption amount, subtract sales costs and the trustee’s fee, 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 the equity in your vehicle, you can keep it if you’re 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 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.

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. Ordinarily, the bankruptcy will cancel the $25,000 debt and the lender will take the car using the power of the lien. Marisol can keep the car if the bankruptcy court determines she can afford the car payment and lets her reaffirm the debt (enter into a new contract—usually under the same terms), making her responsible for the reaffirmed debt amount after bankruptcy.

Many courts believe filers are better off exiting bankruptcy without debt and don’t always support debt reaffirmation.

These courts would prefer that filers continue paying car payments after bankruptcy without a reaffirmation contract, if the auto lender agrees—which some do. In that case, a filer who could no longer afford to pay could give back the vehicle and owe nothing. However, without a contract in place, the lender could take back the car even if the payments were current.

One reason a lender benefits from a reaffirmation agreement is because it prevents a filer from escaping debt liability if the car is repossessed or returned. The reaffirmation agreement would require the filer to pay the amount remaining after the seller auctioned the vehicle and used the proceeds to pay down the loan. Without a reaffirmation agreement, the lender couldn’t collect that amount.

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. You should know that if you discharge your mortgage in Chapter 7 (it happens automatically) but continue making payments and stay in the home, your payments won’t appear 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 $1,500 to $2,500 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 each)
• 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 $150 and $250 depending on your jurisdiction).

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

Issues a Judge Must Decide

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

• 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.
• 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.)

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 might qualify to convert it to another type of bankruptcy (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).

The trick to successfully using Chapter 13 to get out of debt is having enough income to meet all payment obligations under the Chapter 13 laws—which isn’t always easy. Many people are surprised to learn filers must pay some debts in full through the plan, like mortgage and car loan arrears (if you want to keep the house or car), recently incurred taxes, and domestic support arrears.

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.)

How a Chapter 13 Case Begins

Before filing a Chapter 13 bankruptcy, you must complete a credit counseling course and fill out and file a packet of forms— essentially the same forms used in Chapter 7, with a few exceptions. You must also provide the court with the following:

• 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 the trustee’s 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 five years to make all required payments even if the filer qualifies for a shorter three-year plan.

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 might 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 do the following:

• 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 must also 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.

Generally, most credit card, medical, and legal debts are discharged, as are most court judgments, deficiencies from foreclosures or repossessions, and personal loans. Debts filers must fully pay in Chapter 13 include the following:

• court-imposed fines and restitution
• back child support and alimony owed to an ex-spouse or child
• recently incurred back taxes
• debts arising out of willful or malicious acts or for personal injuries or death caused by your drunk driving, and
• debts arising from your fraudulent actions or recent credit card charges for luxuries.

The last two categories will be discharged if the creditor fails to get a court order denying dischargeability from the bankruptcy court. Ch. 3 explains which debts are discharged in a Chapter 13 bankruptcy.

Property 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. This mechanism isn’t available in Chapter 7, allowing only 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 monthly amount and catch up on the arrearages over the course of the plan period. This feature is why people facing foreclosure file for Chapter 13. (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 $3,000 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 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 15 to 30 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 ensure 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 allow you 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 can question you. Secured creditors might come if they have objections to your proposed plan (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 scheduled to receive very little under your plan might object, too, if that creditor thinks you should cut your living expenses and increase your disposable income (the amount from which unsecured creditors are paid).

Come to the meeting prepared to listen to the trustee’s concerns. Ultimately, the trustee knows what the plan must contain and will informally discuss changes to avoid a full-scale hearing. If you agree to the changes, you’ll submit a modified plan and serve your creditors.

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 by agreeing to the correction or explaining why the party bringing the motion is wrong. You’ll also be able to argue your point to the judge at a hearing.

The Confirmation Hearing

In 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). In Chapter 13, you’ll also attend a hearing 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 fully pay your priority creditors and stay current on your secured debts—such as a car note or mortgage. Or, you don’t have enough income to pay your creditors the amount they’d receive for your nonexempt property had you filed for Chapter 7. 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 the judge decides 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 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

The bankruptcy court will wipe out any balances remaining on qualifying debts after you do the following:

• 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 Program.

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 (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 (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, without submitting a feasible repayment plan to the court. However, recently, the number of people finishing Chapter 13 plans appears to be increasing. 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.

---

We hope you enjoyed this sample. The complete book is available for sale here at Nolo.com.