Bankruptcy Frequently Asked Questions

An individual might choose a bankruptcy when a life event, such as a job loss, divorce or medical emergency, causes a disruption in income or a complete lifestyle change. For a consumer, when income is disrupted and debts can be repaid, a chapter 13 may be the best option to repay home, vehicle or tax arrears over a period of 3 to 5 years. In other situations, such as when the mortgage has not fallen behind, or income is below average, a chapter 7 may be the best option. It is important to consult with a bankruptcy attorney since bankruptcy is extremely complex. Your circumstances may not fit neatly into the descriptions listed here.

The petition is the document filed in bankruptcy court which commences the case. The bankruptcy petition contains information such as the debtor’s name; address; partial social security number or EIN; previous bankruptcy filings; residential lease information; creditor, asset and debt estimations and other primary data. Filing fees will also be attached to the bankruptcy petition and in a consumer case, a credit counseling class will be attached as well.

As soon as your bankruptcy case is filed, you will be given bankruptcy protections, called the automatic stay. This means your creditors are precluded from taking action against you while you are in the case unless they obtain court permission. As a result, your assets are protected because your property cannot be repossessed or foreclosed, your wages may not be garnished or seized, your creditors may not contact you or sue you while you are in the case unless the court has ordered otherwise. 

According to Section 362 of the Bankruptcy Code, the automatic stay prevents entities from taking action against the debtor relating to property of the bankruptcy estate. This means entities may not take any action to continue processes to foreclose, collect, reposes, pursue a judgment, garnish, setoff or other enforcement actions which may violate the automatic stay. The automatic stay is in place as soon as the bankruptcy petition is filed.

In some cases, the debtor may need to request an extension or imposition of the automatic stay. For instance, if a consumer debtor was dismissed within the previous 12 months, but wishes to refile, the consumer debtor will need an order from the bankruptcy court extending the automatic stay. During the 2^ndcase, the automatic stay will only be effective for 30 days unless the court extends the stay for the duration of the bankruptcy. If a consumer debtor is dismissed again and wishes to file a 3^rd case within the 12-month period, there shall be no automatic stay at all unless a consumer debtor is able to obtain a court order granting an automatic stay.

Bankruptcy schedules are a list of a debtor’s assets, liabilities, contracts, co-debtors, income and expenses. Usually, the bankruptcy schedules are several dozen pages, even in a consumer case.

The bankruptcy statements include the statement of intentions (in a chapter 7 case), the statement of financial affairs and the statement of current monthly income.

In the statement of intentions, consumer debtors make their intentions regarding secured and ongoing leased debts known by declaring whether they intend to surrender the property, retain the property and redeem it or retain the property and continue making contractual payments.

In a consumer case, bankruptcy liquidation means liquidating non-exempt assets for the benefit of creditors. This could happen under any chapter, but it is most common in a Chapter 7 Bankruptcy. Although Chapter 7 Bankruptcy is known for liquidation, this is unusual in a consumer case. Typically, all assets owned by a consumer are exempt and beyond the reach of creditors or the bankruptcy estate. In this case, the Chapter 7 Bankruptcy is very short, typically 3 to 5 months. Chapter 7 Bankruptcy is named after Chapter 7 of the Bankruptcy Code. Unlike a Chapter 13, which is restricted to consumers, businesses and consumers may file Chapter 7 Bankruptcy.

However, Chapter 7 Bankruptcy contains other restrictions. For instance, since Chapter 7 is a liquidation bankruptcy and does not contain a plan payment, consumer clients interested in filing Chapter 7 must meet eligibility requirements. First, clients wishing to file Chapter 7 must meet certain filing requirements.  Clients can only file Chapter 7 Bankruptcy once every 8 years. Second, consumer clients must show they have below median income or that they have budget deductions to overcome the presumption of abuse.  However, a person with a majority of business debt may overcome the income requirement.  This is very helpful for small business owners who have signed personal guarantees for business debts. Upon completion of the case, the consumer client will receive a discharge. If a business chooses to file Chapter 7 Bankruptcy, the business is not eligible to claim exemptions nor is it eligible for a discharge. Despite this, many businesses choose to file Chapter 7 as a means to satisfy creditors.

In a consumer case, bankruptcy reorganization typically happens in the context of a Chapter 13. It is called a Chapter 13 Bankruptcy because Chapter 13 is the section under the Bankruptcy Code only available to consumer debtors. When a consumer reorganizes in a Chapter 13, the consumer proposes a Chapter 13 Plan Payment. As an example, the consumer client might propose a plan that would catch up back mortgage payments and repay IRS debt, but surrender an old car. In addition to the proposed treatment of secured creditors and government debt, the plan could propose to pay 0% to unsecured creditors if no funds or non-exempt assets are available. In this way, the consumer is reorganizing debts by repaying the secured debts he or she wants to keep, repaying government and priority debts and only repaying unsecured creditors if there is enough disposable income or non-exempt assets available for distribution.

A bankruptcy plan is a plan of reorganization. When a plan of reorganization is filed, it is a document filed in court explaining how debts will be paid. Under the bankruptcy code, a consumer may be entitled to pay some creditors less than the contractual rate or the claim for payment. For instance, if a consumer has owned a vehicle longer than 910 days and the value of the vehicle is less than the contract rate, the consumer can propose a plan which pays the value of the vehicle rather than the contract rate. The plan of reorganization will also list secured property to be surrendered to the lender, ongoing leases to be rejected or assumed, payment to priority debts and whether there will be a distribution to unsecured creditors. Interested parties, such as creditors, may object to the plan. The chapter 13 Trustee has a duty to object to the plan if the plan does not meet the standards of the bankruptcy code. If the debtor, creditors and the Trustee cannot come to an agreement to confirm the plan, the bankruptcy judge will resolve disputes.

A consumer could file a reorganization plan under chapter 11, chapter 12 or chapter 13. The most straightforward consumer reorganization is chapter 13. Chapter 12 is only available to family famers and family fisher people. Although chapter 11 is available to consumers, it is typically chosen as a last resort when a consumer exceeds the debt limit of a chapter 13. This is because debtors have more flexibility and protection in a chapter 13.

Chapter 7 eligibility is partly determined by your income. However, chapter 13 eligibility is determined by the amount of your debt. Individuals and married couples may not use chapter 13 as a means to reorganize debts if their debts exceed the debt limit. The debt limit is an exact figure and is regularly updated, but to keep things simple, an individual or married couple is ineligible from chapter 13 if their unsecured debts are in excess of approximately $419,275 and their secured debts are in excess of approximately $1,257,850. An individual or married couple with debts in excess of these figures will need to use chapter 11 to reorganize debts. However, since married couples are not required to file together, it may be possible for married couples to file separate bankruptcy cases to avoid the debt limit.

According to the Bankruptcy Code section 101, Current Monthly Income is average monthly income from all sources during the 6-month period preceding the commencement of the case. A debtor must include all income received for the benefit of the household expenses of the debtor or debtor’s dependents. This means a debtor must include a spouse’s income even if the spouse does not file.

The Bankruptcy Code only excludes a few sources of income from Current Monthly Income, such as benefits received under the Social Security Act; veterans’ disability benefits; payments to victims of war crimes or crimes against humanity; or payments to victims of international or domestic terrorism.

The Statement of Current Monthly Income is important because it is partly used to determine Chapter 7 eligibility. If your income is below the average income in your county for your household size, then there is no presumption of abuse. Per the Bankruptcy Abuse Prevention and Consumer Protection Act, this means your income is below the threshold to file a Chapter 7 Bankruptcy.  

However, it is common that a debtor will exceed the income standards set out by the Current Monthly Income requirement. In this case, the debtor will continue by completing a Chapter 7 Means Test Calculation. The Chapter 7 Means Test Calculation allows high earning debtors to deduct allowable expenses from the Chapter 7 Means Test. Many debtors whose income is over the Current Monthly Income requirements are able to file Chapter 7 bankruptcy because they have allowable deductions.

The Statement of Current Monthly Income is not the only way courts and the United States Trustee determine Chapter 7 eligibility. If a debtor meets the eligibility requirements under the Current Monthly Income standards but has filed a recent bankruptcy, the debtor may not qualify for Chapter 7. Furthermore, if a Debtor meets the income requirements but has assets in excess of the allowable exemptions, it would be unwise to file Chapter 7 because the non-exempt assets will be used to satisfy debts. The United States Trustee has also been known to examine disposable income to evaluate whether a debtor can afford a Chapter 13 plan payment, even if the debtor otherwise meets the Chapter 7 qualifications. Many factors determine Chapter 7 eligibility, and the Statement of Current Monthly Income is only one prong of a multi-factored test.

In a chapter 13 case, the statement of Current Monthly Income is used to determine disposable income and the commitment period. According to the Bankruptcy Code section 1325, a Chapter 13 plan shall be at least 3 years, or up to 5 years. Only debtors whose income is below median, or debtors who agree to repay 100% of their debts, can qualify for a 3-year plan.  Debtors with above median income must complete the Statement of Current Monthly Income and the Chapter 13 Calculation of Disposable Income. Collectively, these forms are often referred to as the Chapter 13 Means Test Forms.

 Fortunately, the Chapter 13 Calculation of Disposable Income provides above- median debtors with allowable deductions. After deductions are inputted, if disposable income remains, debtors must repay this amount to unsecured creditors.

 The Means Test is not the only factor which determines a chapter 13 plan payment. Many factors determine a chapter 13 plan payment, such as debts which must be repaid (like mortgage arrears, child support and IRS debt) determinations made from the means test, disposable income, windfalls and non-exempt property.

In a consumer case, the goal of bankruptcy is to receive a bankruptcy discharge. A discharge is a Court Order stating dischargeable debts, such as medical bills, credit card debt, pay day loans, repossessions, charge-offs and other unsecured debts are no longer collectable. The creditor is barred by Court Order from making attempts to collect, and the discahrgeable debts will be noted as discharged on the client’s credit report. 

The term of a bankruptcy depends on the chapter you have filed, your repayment plan and your current monthly income. If you have filed a chapter 7, your case is likely to last 3 to 5 months. In a chapter 13, the term is 36 to 60 months. In a chapter 7, the term is shorter because you are not proposing a repayment plan.

Only if you have non-exempt assets. Exempt assets are beyond the reach of your creditors. Non-exempt assets may be used to pay your debts. Since the exemption statutes are generous, most clients do not have any non-exempt assets. However, it is important to disclose all your assets.

When you receive your discharge order, your discharged creditors cannot act to collect against you. This helps to build your credit because you will no longer be legally liable for discharged debts. A bankruptcy will stay on your credit report for 8 to 10 years. However, most clients find their credit scores improve shortly after their bankruptcy case is discharged. This is because many of their debts had been negatively reported, and the bankruptcy may clear the negative remarks. You can continue to rebuild your credit by paying your bills on time. Some companies offer to help you remove inaccuracies from your credit report to further improve scores, but you can do this on your own by writing to the company falsely reporting your debt and the credit reporting agencies.