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Bankruptcy: What You Need to Know

If you are overwhelmed with debt and live pay check to pay check, hoping nothing goes amiss, you are not alone. In 2016, nearly 800,000 people filed for bankruptcy so they could relieve themselves of their financial burdens and get a fresh start. There are several types of bankruptcy, but there are two common types used by individual consumers: Chapter 7 and Chapter 13. Which one will work best for you depends on your specific financial circumstances and the type of debt you have.

One way to educate yourself about the different types of bankruptcy and have an idea about which one is the best for you is to use a good bankruptcy worksheet designed to help you evaluate your financial situation and prepare you for consulting a bankruptcy attorney.

Although the bankruptcy court will allow you to file a petition without an attorney, the court recommends that, due to the complexity of bankruptcy laws, you have the assistance of a bankruptcy attorney. Before going forward, you need to know the differences between Chapter 7 and Chapter 13 bankruptcy so you can be prepared to meet with an attorney and get ready to file your petition.

Chapter 7 Bankruptcy

The bankruptcy court refers to Chapter 7 bankruptcy as one that “gives an honest individual debtor a ‘fresh start.’” Debts are discharged, which means the debtor does not have to pay them and creditors can no longer attempt to collect them. Your debt slate is wiped clean and you are ready to begin your new financial life, no longer looking over your shoulder for the debt collector.

Chapter 7 bankruptcy is also known as "liquidation bankruptcy," and is available for individuals. Businesses may file under Chapter 7 if they are willing to have all assets liquidated and sold to pay the debts. Individuals may be able to keep some assets.

Each state has a list of assets that are exempt from being taken by the trustee. Most commonly, your automobile will be exempt as well as personal items. However, objects of great value may be taken by the trustee and sold to help pay your debt. Using a Chapter 7 bankruptcy worksheet designed to assist you in your Chapter 7 preparation can help you work toward keeping your assets.

Eligibility for Chapter 7 Bankruptcy: The Means Test

Before you file your bankruptcy petition, you need to be sure you are eligible. Each state has its own “means test” in order to see if you qualify for Chapter 7 bankruptcy. This is to determine if you really do not have enough income to pay your debts. Your income must be lower than the medium income for your state. If your income is too high, you likely are not eligible for Chapter 7 bankruptcy. In some cases, when expenses are very high, you may still qualify. Also, Chapter 13 bankruptcy, which does not require a means test, may provide the option you need.

Types of Debt Discharged in Chapter 7

Not all debt is discharged in Chapter 7 bankruptcy. Debts that will be discharged include:

  • any unsecured debt, including credit card debt and personal loans;
  • medical bills;
  • past due rent;
  • past due utility bills; and
  • income taxes that are more than three years old.

If this is the type of debt you need relief from, then Chapter 7 bankruptcy will most likely work for you.

Types of Debt Not Discharged in Chapter 7

Even if you go through Chapter 7 bankruptcy and unsecured debts are discharged, you will still owe:

  • any outstanding alimony or child support;
  • any fine imposed upon you by a court because you broke the law, even fines imposed for driving infractions or misdemeanors; and
  • student loans, unless you can convince the court that repaying them will create an extreme hardship. This is very difficult to do. The law is changing in this area, and an attorney can help you determine whether your situation may qualify.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a plan for those who have gotten behind in their debts, but earn enough money to eventually pay them off over a three- to five-year period. It particularly helps those who are trying to save a home from foreclosure. The bankruptcy court refers to this as “a wage earner’s plan.”

A Chapter 13 bankruptcy worksheet can help you organize your finances and help your attorney determine if this is the best approach for you. When you file your petition for Chapter 13 bankruptcy, the following schedules must be filed with your petition:

  • A statement of all assets
  • The source of all your income, including the amount and frequency you receive it
  • A list of all creditors along with the amount and nature of the debt (if you leave off a creditor, that debt will not be included in your payment plan, nor will it be discharged at the end of the bankruptcy proceeding)
  • A list of all monthly expenses such as food, clothing, shelter, utilities, taxes, medicine, etc.

Within 14 days of filing, you must also file your repayment plan. A worksheet can help you analyze your financial situation and, in turn, help your attorney work with you to present a realistic and workable repayment plan to the court.

You must have enough income to keep current on your existing financial obligations while making payments on your back debt. If the trustee approves the plan, you then make one monthly payment to the trustee who then pays your individual creditors.

The repayment plan can be spread over three to five years. As long as you keep up your payments to the trustee, no creditor can take collection action. There are three types of debts that must be paid during the reorganization period.

  • Priority debt – These are debts like taxes and costs of the bankruptcy proceeding, which the court itself deems have priority.
  • Secured debt – This is where there is collateral that is secured by the debt, like a home or automobile. The repayment plan must at least account for repayment of the value of the collateral. In some cases, repayment of the full value of the debt may be required instead of just the value of the collateral. This depends on when the debt was incurred in relationship to the time the bankruptcy petition was filed.
  • Unsecured debt – This is credit card debt, medical bills, personal loans, and the like. These do not need to be paid in full as long as you use all of your disposable income to pay back your debts during the reorganization period.

Meeting of Creditors: Chapter 13 Bankruptcy

Before the trustee approves your plan, he or she will hold a meeting of the creditors. You must attend and be prepared to answer questions from your creditors and the trustee about your financial situation. Your attorney will help you to prepare for this meeting and can be present with you.

Court Confirmation of Your Repayment Plan

No later than 45 days after the meeting of the creditors, the court will hold a confirmation hearing and decide whether you are financially able to comply with the terms of the plan, and to make sure the plan meets all legal requirements. If so, the court approves the plan and you are set on your road to financial freedom.

If you comply with all the terms of your plan, then at the end of the repayment period, any debts not yet paid, with a few exceptions, will be discharged and you will be relieved of any further collection action.

During your repayment period, you may not incur any further debt without first obtaining authorization from the trustee. This is because any new debt may compromise your ability to comply with your repayment plan.

The bankruptcy court cautions potential filers about the complexity of bankruptcy law and encourages them to contact an attorney to help. This will, of course, also cost money. You can help save time spent with your attorney and assist in your own case by using prepared worksheets, which will help you and your attorney determine which is the best approach for you: Chapter 7 or Chapter 13.

General Bankruptcy Provisions Applicable to Both Chapter 7 and Chapter 13

Both types of bankruptcy begin by filing the proper petition in the bankruptcy court. Before you file your petition, there are certain rules to follow in order to be eligible for either Chapter 7 or Chapter 13 bankruptcy.

  • You must take a court-approved credit counseling course and file a certificate of completion with your petition. These courses are generally offered economically online and can be completed quickly. You must have completed it no more than 180 days prior to filing your petition. The counselor will discuss with you your financial situation and whether or not there are alternatives to filing for bankruptcy.
  • After you file, before your debts are discharged, you will need to provide proof of completion of a debtor education program. Like the credit counseling, the course can be completed by phone or online in one to two hours for a fee of approximately $50.00. This education program covers topics like developing a budget, how to use credit wisely, and how to manage money in general.
  • If you transferred any property within 90 days prior to filing your bankruptcy petition, or gave preference to one creditor by paying the debt down or in full, the transfers may be set aside by the trustee.
  • You must pay a court filing fee. The filing fee is generally about $235.00 with another $75.00 required for court costs and a nominal fee for the trustee. You may be able to pay these costs in installments. If you are filing under Chapter 7, you may be able to get a waiver. You will need to provide an affidavit of your financial situation explaining why paying the filing fee will create a hardship.
  • If you filed a previous bankruptcy petition within the previous 180 days, and it was dismissed due to your failure to appear, you will not be able to file a new petition under either chapter.
  • Each petition, either Chapter 7 or Chapter 13, must be accompanied by what are called “schedules.” These are documents on which you list your debts, to whom you owe the debt (your creditor), and the amount and nature of the debt. The different chapters may require different schedules. It is important that you list every creditor. If you leave one off, that debt will not be discharged at the end of the bankruptcy proceeding and you will still owe it.
  • The most important thing to you is that, on the date you file your bankruptcy petition, all collection procedures by all creditors must stop. This is true whether you file for Chapter 7 or Chapter 13 bankruptcy. The only way collections can continue is if a creditor seeks, and is granted, a court order allowing collections to continue.
  • When you file for bankruptcy, a trustee will be appointed to handle the proceedings and will be in charge of your case. For Chapter 7 bankruptcy, the trustee’s duties are to review your petition and make sure you provide factual support for all your claims. For Chapter 13 bankruptcy, the trustee reviews your assets, income, and proposed plan to determine if the reorganization plan will work.