Bankruptcy Frequently Asked Questions & Blog

I have a car. What will happen if I file for Chapter 7 bankruptcy

by Gabriel Katzner on 04/12/11

In large part the answer to this question is entirely up to you. There are a wide range of avenues which one can travel with respect to their automobile in a Chapter 7 bankruptcy, so let's discuss specifics.

Let's take the simplest situation first. You have completed all required payments and own your car free and clear. If the Kelly Blue Book value of your car is under the applicable exemption amount (usually $2,400) you will be able to keep your car without issue. If the value of your car is somewhat above $2,400 it may make sense for you to delay your bankruptcy filing for a short period of time, as more particularly described here. If the value of your car is above $2,400 the Trustee may have you surrender the car and it will then be sold and used to pay your creditors. However, if the value is right around the exemption amount, or sale of your car would be difficult, the Trustee may abandon your car thereby allowing you to remain in possession regardless of it's value.

Things get more complicated when you are still making payments on your car. You'll have the option to either walk away from your car or continue to make payments.

In a Chapter 7 bankruptcy, if you want to walk away from your car things are quite simple. You merely state your intent to surrender your car and that is it. Once the car is returned to the lender, and the bankruptcy case is concluded, any liability you previously had on the car will be discharged. If you're leasing your car things are just as simple – just state that you are rejecting the lease, return the car and all liability will be discharged.

If you wish to keep a car for which you are still making payments things get more complicated. You will often find yourself redeeming the car or reaffirming the contract. Specifics can be discussed when we go over the particulars of your case.

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I'm facing foreclosure, can bankruptcy help?

by Gabriel Katzner on 04/12/11

The short answer is Yes, and often very much so, however, let's discuss in greater detail. First, click here for details regarding recently enacted bankruptcy court supervised loss mitigation / mortgage loan modification procedures which can help you avoid foreclosure of your home.

As previously discussed, one of the key benefits of filing for bankruptcy is the automatic stay. Once the automatic stay goes into effect, if your home is scheduled for foreclosure sale, such sale will be put on hold while the bankruptcy is pending (typically a three to five month period). One possible issue with this approach is that the lender can file a motion to lift the automatic stay. If this occurs, and the court agrees to lift the stay, you would still typically find that the foreclosure sale is put off by approximately two to three months.

I want to keep my home – what should I do? If this describes you then one will often find that filing for Chapter 13 bankruptcy lends itself best to achieving your goal; especially when utilized in connection with loss mitigation / mortgage loan modification that can result in, among other things, the principal balance on your loan being decreased, the interest rate being lowered or the time period for repayment being extended. Chapter 13 bankruptcy allows you to catch up on the amounts you have fallen behind in your mortgage payments over the length of your repayment plan. Keep in mind that you'll need to evidence to the bankruptcy court that you can afford both these catch up payments as well as your usual monthly mortgage payments for your repayment plan to be approved (this is why loss mitigation / mortgage loan modification is so powerful; if you're able to lower your monthly payment it will be that much easier to evidence that you have the income necessary to support your proposed repayment plan). So, if your repayment plan is approved, you'll have three to five years to catch up on past due mortgage payments, avoid foreclosure and live happily in your home.

I have more than one mortgage, is there anything that can be done? You may be able to have 2nd and 3rd lien mortgages reclassified as unsecured debt, which often does not get paid back at all in a Chapter 13 bankruptcy. It will be best to examine how this works with an example. Let's assume that you purchased your home for $400,000 in 2002 with a $50,000 down payment and a $350,000 1st lien mortgage. By 2005 your home was worth $500,000, so you took out a 2nd mortgage on your home for $100,000. Fast forward to 2009 and let's assume that your home now has a fair market value of $300,000, however you have a 1st lien mortgage with an amount owed of $310,000 and a 2nd lien mortgage with an amount owed of $90,000. Since the 1st lien mortgage is secured by the entire value of your home you no longer have any equity in your home to secure the 2nd lien mortgage. So, the 2nd lien mortgage can be reclassified as unsecured debt, and whether or not this unsecured debt gets paid at all will depend on the particulars of your case. You often end up paying nothing at all on this 2nd lien mortgage and it is discharged in full.

There is no way I can afford to stay in my home and I want to give it up, can Chapter 7 bankruptcy help me in any way? Prior to discussing the effects of Chapter 7 bankruptcy on foreclosure, please be sure to have reviewed the information here regarding loss mitigation / mortgage loan modification as it may be that you can afford to stay in your home if the bank lowered your principle balance, interest rate or extended the time period for repayment.

Let's assume that you've determined that even with loss mitigation / mortgage loan modification you are unable to afford to stay in your home, what benefits can Chapter 7 bankruptcy afford you when facing foreclosure? First, Chapter 7 bankruptcy will grant you, via the automatic stay, several months to remain in your home free of charge. Since you'll be living in your home without having to make any payments under your mortgage you'll be able to save money. This money can be put towards a down payment on a more affordable home, security deposit for a lease, etc. Second, Chapter 7 bankruptcy will discharge all debt secured by your home, including first and second lien mortgages as well as home equity loans. Chapter 7 bankruptcy can also save you money regarding having a tax liability based on amounts your lender lost as a result of your having defaulted on the mortgage loan. This is a nuanced provision that we should discuss in detail if applicable.

Please remember that although Chapter 7 bankruptcy will get rid of seemingly all debts you owe under your various mortgages and home equity loans it will not allow you to stay in your home forever. You will still lose your home due to foreclosure, however, you'll gain the benefit of being able to remain in your home free of charge during the automatic stay as well as, usually, a few months after the bankruptcy process has concluded while the mortgage loan holder processes your foreclosure.

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I'm ready to file for Chapter 13 bankruptcy, now what? A guide from A to Z

by Gabriel Katzner on 04/12/11

We've determined that filing for Chapter 13 bankruptcy is preferable to filing for Chapter 7 bankruptcy (click here for details). The first question one usually asks us is “How long will all of this take?” Time wise, from start to finish, one can expect the Chapter 13 bankruptcy process to take between three to five months, although actual repayment will last from three to five years.

The second question one usually asks us is “How much will all of this cost?” The costs to file Chapter 13 bankruptcy will be comprised of filing and attorney fees. The bankruptcy court filing fee is $274. We can discuss attorney fees during your initial call to discuss your case, as fees are based on the complexity of your particular case, but be assured that our fees are among the lowest in the greater New York area. Also, the majority of the attorney fees will be paid via the repayment plan (not out of your pocket prior to filing).

Getting back to the actual process, the first step will be our initial meeting. This meeting is a free in-person consultation. At this meeting we will discuss the specifics of your case as well as complete an intake form detailing the same. We will also discuss the documentation as well as information that you will need to provide us with so that we can properly prepare your case for filing.

Prior to our second meeting we will complete a draft of what is referred to as the bankruptcy petition and repayment plan, as well as a number of other forms, all of which will be filed with the bankruptcy court. These forms will set forth, among other things, your plan of repayment, income, expenses, debts, assets as well as reasons why certain of your property should be deemed “exempt property”.

Among the various documents that will be submitted to the bankruptcy court, the most important is the repayment plan. The repayment plan will detail how much you will pay to each creditor and how you will be able to afford paying such amount. The plan must provide for full payment of certain debts such as support obligations and tax debts. The plan must also provide for payments on secured debts (such as a car loan or mortgage - for more details regarding avoiding foreclosure please click here) as well as additional amounts for secured debts when you have fallen behind on required payments. This additional amount will be used to “catch up” and bring your account current. Finally, the repayment plan will document that income left over, if any, after making the foregoing payments will go towards paying unsecured debts (such as credit cards).

The length of time that the repayment plan will remain in effect is mainly determined by your average monthly income over the six months prior to filing, how that amount compares to the median income figure in your state as well as the size of your family. The U.S. Trustee has a website setting forth the median income for each state / family size which can be found here. If you average monthly income is greater than the median income you will have to propose a five year plan, however, if your average monthly income is less than the median income you can propose a three year plan.

In a Chapter 13 proceeding one often asks which creditors must be paid back 100% of amounts owed and which can be paid less (or nothing at all). To briefly summarize, your repayment plan will provide that (i) administrative claims (trustee's commission, filing fee and attorney's fee), (ii) priority debts (support obligations and tax debts for example), (iii) mortgage arrears (click here for important information regarding avoiding foreclosure of your home / lowering payment amounts, etc.) and (iv) other secured debts (to the extent you wish to keep possession of the property) must be paid 100%. The amount that will be paid back for unsecured debts can vary, as more particularly described above.

At our second meeting you will review and sign off on the the petition and repayment plan, and they will then be electronically filed with the bankruptcy court and the automatic stay will immediately go into effect. As previously discussed, the automatic stay prevents most creditors from continuing their collection efforts (as everything is now handled via the bankruptcy court proceeding). Note that prior to filing you will need to have completed a credit counseling course. This course takes approximately two hours and can be completed at your convenience anytime prior to the bankruptcy filing. The course is usually taken online or over the telephone, however in-person programs are also available if needed.

A “meeting of creditors” is usually held 20 to 40 days after the petition for bankruptcy is filed. You must attend this meeting and I will of course accompany you. Creditors may also appear and ask questions regarding your financial affairs and property, but in practice, they rarely do. The Trustee will also attend this meeting and question you on the same matters. It is important for you to cooperate with the Trustee and to provide any financial records or documents that the Trustee requests. The Trustee is required to examine you at the meeting of creditors to ensure that you are aware of the potential consequences of seeking a discharge in bankruptcy, including the effects on credit history, the ability to file a petition under a different chapter, the effect of receiving a discharge, and the effect of reaffirming a debt. In some courts, Trustees may provide written information on these topics at or in advance of the meeting to ensure that you are aware of this information. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the meeting of creditors.

After the meeting of creditors is concluded, the bankruptcy judge must determine at a confirmation hearing whether the plan is feasible and meets the standards for confirmation set forth in the Bankruptcy Code. Creditors, who will receive 25 days notice of a hearing, may appear and object to confirmation. While a variety of objections may be made, the most frequent ones are the payments offered under the plan are less than creditors would receive if the debtor’s assets were liquidated, or that the debtor’s plan does not commit all disposable income for the three or five-year period of the plan.

Within 30 days after the filing of the plan, even if the plan has not yet been approved by the Bankruptcy Court, you must start making payments to the Trustee. If the plan is confirmed by the bankruptcy judge, the Chapter 13 Trustee commences distribution of the funds received in accordance with the plan “as soon as practicable.” If the plan is not confirmed, you have the right to file a modified plan. You also have a right to convert the case to a Chapter 7 bankruptcy filing. If the plan or modified plan is not confirmed and the case is dismissed, the bankruptcy court may authorize the Trustee to retain a specified amount for costs, but all other funds paid to the Trustee will be returned.

On occasion, changed circumstances will affect one's ability to make payments pursuant to the repayment plan, a creditor may object or threaten to object to a repayment plan, or a debtor may inadvertently have failed to list all creditors. In such instances, the repayment plan may be modified either before or after confirmation. Modification after confirmation is not limited to an initiative by the debtor but may be at the request of the Trustee or an unsecured creditor.

The provisions of a confirmed repayment plan are binding on yourself and each creditor. Once the court confirms the repayment plan, it is your responsibility to make the repayment plan succeed. You must make regular payments to the Trustee, which will require adjustment to living on a fixed budget for a prolong period. Alternatively, your employer can withhold the amount of the payment from your paycheck and transmit it to the Trustee. Furthermore, while confirmation of the repayment plan entitles you to retain property as long as payments are made, you may not incur any significant new credit obligations without consulting the Trustee, as such credit obligations may have an impact upon execution of the repayment plan.

As mentioned above, you may consent to the deduction of the repayment plan payments from your paycheck. Experience has shown that this practice increases the likelihood that payments will be made on time and that the repayment plan will be completed. In any event, failure to make the payments may result in dismissal of the case or its conversion to a liquidation case under Chapter 7 of the Bankruptcy Code.

You are entitled to a discharge upon successful completion of all payments under the repayment plan. The discharge has the effect of releasing you from all debts provided for by the repayment plan or disallowed (under section 502), with limited exceptions. Those creditors who were provided for in full or in part under the repayment plan may no longer initiate or continue any legal or other action against you to collect the discharged obligations.

In return for your willingness to undergo the discipline of a repayment plan for three to five years, a broader discharge is available under Chapter 13 bankruptcy than in Chapter 7 bankruptcy. As a general rule, you are discharged from all debts provided for by the repayment plan or disallowed except certain long term obligations (such as a home mortgage) on which payments will not be completed until after the last payment under the Chapter 13 repayment plan is due, debts for alimony or child support, debts for most government funded or guaranteed educational loans or benefit overpayments, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, debts for restitution or a criminal fine included in a sentence on your conviction of a crime. To the extent that these types of debts are not fully paid pursuant to the repayment plan, you will remain responsible for these debts after the bankruptcy case has concluded. One last note, prior to receiving the discharge, you must complete a budget counseling course with an approved agency.

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I'm ready to file for Chapter 7 bankruptcy, now what? A guide from A to Z

by Gabriel Katzner on 04/12/11

The first question one usually asks us is “How long will all of this take?” Time wise, from start to finish, one can expect the Chapter 7 bankruptcy process to take between three to four months.

The second question one usually asks us is “How much will all of this cost?” The costs to file Chapter 7 bankruptcy will be comprised of filing and attorney fees. The bankruptcy court filing fee is $299. We can discuss attorney fees during your initial call to discuss your case, as fees are based on the complexity of your particular case, but be assured that our fees are among the lowest in the greater New York area.

Prior to our second meeting we will complete a draft of what is referred to as the bankruptcy petition, as well as a number of other forms, all of which will be filed with the bankruptcy court. These forms will set forth, among other things, your income, expenses, debts, assets as well as reasons why certain of your property should be deemed “exempt property”.

At our second meeting you will review and sign off on the the petition and other forms, and they will then be electronically filed with the bankruptcy court and the automatic stay will immediately go into effect. As previously discussed, the automatic stay prevents most creditors from continuing their collection efforts (as everything is now handled via the bankruptcy court proceeding). Note that prior to filing you will need to have completed a credit counseling course. This course takes approximately two hours and can be completed at your convenience anytime prior to the bankruptcy filing. The course is usually taken online or over the telephone, however in-person programs are also available if needed.

Once you file for bankruptcy, for practical purposes, you have placed the debts you owe and the property you own in the hands of the bankruptcy court via the Trustee. Without the court's consent, you are forbidden from paying debts that arose prior to your bankruptcy filing or selling any of your assets. However, with respect to income you earn, as well as property acquired, post-filing you can do as you see fit.

As mentioned above, the Trustee now has control over your assets and debts. The Trustee's primary responsibility is to make sure that the bankruptcy process is correctly followed. The Trustee will, among other things, examine your petition as well as other forms for accuracy and completeness, inquire into whether there exist non-exempt assets that can be sold to pay off debts and examine past payments and other transfers to determine if anything should be unwound (click here for more details regarding preferential transfers and fraudulent conveyances).

Let's assume you have some non-exempt property – what happens to this property? The Trustee may require you to either (i) surrender the property to the Trustee so it can be sold or (ii) provide the Trustee with the cash value of the property. However, the cash value is the value that would be obtained at a distressed sale (think garage sale), and selling property is often difficult, so it is often more trouble than it's worth for the Trustee to take the property and sell it. In such instances the Trustee will often abandon the property thereby allowing you to keep it even though it is technically non-exempt property. In practice, most property owned by those who file Chapter 7 bankruptcy is either exempt or has little value and therefore debtors will not often end up surrendering any property (unless the property is secured as discussed below).

Let's now assume that you have certain property which has been pledged as collateral for a loan (secured property). A typical example arises in connection with a car loan pursuant to which the car is pledged as collateral to guarantee payment on the loan (also arises in instances of home foreclosure). If you are behind on your payments, the creditor can request that the bankruptcy court remove the automatic stay and repossess the property. If you are current on your payments you are allowed to continue making payments and keep the property, however, if there is enough equity in the property the Trustee may wish for it to be sold.

We are now at the end of the Chapter 7 bankruptcy process. The final step is the discharge. The discharge releases you from personal liability for discharged debts and prevents the creditors owed those debts from taking any action against you or your property to collect the debts. In most cases, unless a complaint has been filed objecting to the discharge or you have filed a written waiver, the discharge will be granted relatively early in the case, often in as little as 60 to 90 days after the date first set for the meeting of creditors.

The grounds for denying a discharge in a Chapter 7 case are very narrow and are construed against a creditor or Trustee seeking to deny the discharge. Among the grounds for denying a discharge are that the debtor failed to keep or produce adequate books or financial records; the debtor failed to explain satisfactorily any loss of assets; the debtor committed a bankruptcy crime such as perjury; the debtor failed to obey a lawful order of the bankruptcy court; or the debtor fraudulently transferred, concealed, or destroyed property that would have become property of the bankruptcy estate.

Most claims against an individual Chapter 7 debtor are discharged. A creditor whose unsecured claim is discharged may no longer initiate or continue any legal or other action against you to collect the obligation. A discharge under Chapter 7, however, does not discharge from specific types of debts listed in section 523 of the Bankruptcy Code. Among these types of debt are alimony and child support obligations; certain taxes; debts for certain educational benefit overpayments or loans made or guaranteed by a governmental unit, debts for willful and malicious injury by the debtor to another entity or to the property of another entity; debts for death or personal injury caused by the debtor’s operation of a motor vehicle while the debtor was intoxicated from alcohol or other substances, and debts for criminal restitution orders. To the extent that these types of debts are not fully paid in the Chapter 7 case, the debtor is still responsible for them even after the bankruptcy case has concluded.

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I've decided that filing bankruptcy is right for me. Should I file now or wait?

by Gabriel Katzner on 04/12/11

Something that individuals do not often take into account when deciding to file for bankruptcy is the timing of their filing. While it makes sense for one facing a car repossession or wage garnishment to file immediately, in certain instances it may be advantageous to delay your filing.

Let's discuss some examples of when delaying your bankruptcy filing may be to your advantage:

1. Your income over the last six months has been greater than what you anticipate it to be going forward. As discussed in greater detail herein, the bankruptcy court will examine your income over the six months prior to filing to determine whether you are eligible to file for Chapter 7 bankruptcy. If your income is greater than the median income, and you also fail the means test, you may only file for Chapter 13 bankruptcy. However, let's assume that your income has recently declined because of a cutback in hours or you were laid off. If you allow a few months to pass, these months of low income will become part of the six month median income / means test calculations, thereby lowering your average income and possibly resulting in your being eligible to file for Chapter 7 bankruptcy.

2. You are aware of new debts that you'll incur shortly. Generally speaking, Chapter 7 bankruptcy is only able to eliminate debts that exist as of your filing date. Any debts that arise after filing for bankruptcy are yours to deal with without the benefits bankruptcy provides. So, let's assume that you know that a few months from now you will need to incur significant medical expenses. If you wait until after these expenses are incurred to file for Chapter 7 bankruptcy you will be able to wipe out these debts as part of your Chapter 7 bankruptcy discharge. However, this sort of bankruptcy planning is not to be taken advantage of and should be discussed with your attorney – please see directly below for additional details.

3. You have recently incurred debt or transferred property. The bankruptcy court frowns upon preferential transfers and fraudulent conveyances. I know we've avoided “lawyer talk” so let me set forth some examples:

Let's assume that you have decided that you are going to file for bankruptcy in the near future, so you decide to go out and use your credit card to make some purchases with the belief that since you're filing for bankruptcy you'll never have to pay this debt. However, the bankruptcy court forbids this in that to the extent you charge greater than $550 on a credit card within 90 days of filing for bankruptcy the bankruptcy court can presume that you made these charges with no intent to ever pay back the amount owed and therefore this debt would not be discharged and would survive your bankruptcy.

Similar to the above, if you pay greater than $600 to certain categories of creditors within 90 days of filing for bankruptcy, the Trustee can “recapture” this money and distribute it as part of the payments to all creditors.

Cash advances totaling greater than $825 on a credit card incurred within 70 days of filing for bankruptcy can also be considered fraudulent and therefore not be discharged in bankruptcy.

Let's assume that you have decided that you are going to file for bankruptcy in the near future, so you decide to transfer some of your property to others, either by giving it away or selling it for less than its true value, thereby keeping such property out of the pool of assets from which creditors can recover for your debts. Unless there is an exemption applicable to a particular piece of property, the Trustee can (i) take the property back and use proceeds from its sale to distribute to creditors or (ii) bar you from filing for bankruptcy because you transferred property with the intent to defraud your creditors.

So, by properly timing your bankruptcy in light of these various time periods, you can avoid the risk that the bankruptcy court will (i) refuse to discharge certain debts or (ii) prevent you from filing for bankruptcy.

4. You have property above applicable exemption amounts. Let's assume that you have an automobile that is worth, according to Kelly Blue Book, $3,000. Also assume that pursuant to law, you are granted an exemption of $2,400 for an automobile. So, if you file now issues could arise as the value of your automobile is greater than the applicable exemption. However, we know that the value of your automobile is based on, primarily, age and mileage. By putting off your bankruptcy filing for a few months you will thereby allow your car to depreciate in value whereby it would be possible for the automobile's value to fall below the exemption amount.

5. You have an asset for which an exemption does not exist. You may feel at first glance that there is no way you can prevent the Trustee from reaching this asset. However, if you sell this asset for it's fair market value, and then spend the money received on necessities, you would gain the benefit from the sale rather than your creditors. A similar situation may arise with respect to tax refunds. Please be aware that the law in this area is quite nuanced so you should speak with an attorney prior to taking any such action.

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When filing for Chapter 13 bankruptcy may be preferable to filing for Chapter 7 bankruptcy

by Gabriel Katzner on 04/12/11

Many debtors initially say that they prefer to file for Chapter 7 bankruptcy rather than Chapter 13 bankruptcy because Chapter 13 bankruptcy requires repayment of at least some portion of one's debt. While this repayment requirement is true, there will be circumstances where filing for Chapter 13 bankruptcy is the better option for certain individuals.

Filing for Chapter 13 bankruptcy is of course advantageous when one is prohibited from filing for Chapter 7 bankruptcy, as more particularly described above. In this section we are going to discuss situations where filing for Chapter 13 bankruptcy is advantageous regardless of one's eligibility to file for Chapter 7 bankruptcy.

Let's assume that you are behind on your car loan, however, you desire to keep the car (or other non-exempt asset) and catch up on the payments you have fallen behind over a period of time. With a Chapter 7 bankruptcy you are only able to keep exempt property, however, with a Chapter 13 bankruptcy you are able to repay your debts out of your income over a period of time and you are not required to give up your property. This ability to avoid surrender of property, and catch up on missed payments, is a key advantage of Chapter 13 bankruptcy. Note that this example would also apply if you find yourself behind on your mortgage payments and facing possible foreclosure, however, this is a topic that is discussed herein in greater detail.

As previously discussed certain debts such as taxes, support obligations or other debts can't be discharged in a Chapter 7 bankruptcy, however, by including these items in your Chapter 13 repayment plan you gain the ability to get current on your payments over a period of time that is manageable.

Chapter 13 also allows for the possibility of a “cram down” procedure. In essence, if you owe more on an asset than that asset is worth it is sometimes possible to pay only the replacement value of the asset via the repayment plan and have the rest of the debt discharged. There are many nuances with respect to this area of bankruptcy law, so it is best discussed when we discuss the particulars of your case.

Chapter 13 bankruptcy is also able, under certain circumstances, to wipe out 2nd and 3rd lien mortgages as well as home equity loans. Click here for more details.

Filing for Chapter 13 bankruptcy may be preferable for those individuals who are simply not comfortable wiping out their debts, or they owe debts to close friends or associates, and while they want to stop creditor harassment and the like they also wish to repay their debts. Also, in instances where there is co-debtor on a debt you owe, if you are paying back the debt via a Chapter 13 repayment plan the creditor will not look to the co-debtor for payment. This could be helpful when the co-debtor is a family member or someone else with whom you have a relationship and you do not wish that person to be harassed with various collection efforts. A Chapter 13 bankruptcy proceeding is the best avenue via which to accomplish these goals.

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Am I eligible to file Chapter 13 bankruptcy?

by Gabriel Katzner on 04/12/11

There are two main requirements in order to be eligible to file for Chapter 13 bankruptcy; (i) evidence of income sufficient to support the repayment plan and (ii) secured and unsecured debt below applicable thresholds.

Since a Chapter 13 bankruptcy requires you to file a repayment plan, you will have to provide evidence to the bankruptcy court that you will have sufficient income, after subtracting permitted expenses as well as required payments on secured debts (a car loan for example), to make the payments set forth in the repayment plan. If you are unable to provide evidence that you will have the income required to support your repayment plan you will not be eligible for Chapter 13 bankruptcy. As drastic as this sounds, please note that a wide range of income sources can be used to evidence your ability to make payments pursuant to the repayment plan. Everything from your salary to child support to proceeds from the sale of property may count towards determining your income and hence ability to abide by the repayment plan.

The dollar amount of your debt also plays a role regarding your eligibility to file for Chapter 13 bankruptcy. Thankfully the government has seen fit to set these amounts whereby they will not impact the vast majority of individuals. One can have approximately $1,000,000 in secured debt and $330,000 in unsecured debt and remain eligible to file for Chapter 13 bankruptcy.

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Am I eligible to file Chapter 7 bankruptcy?

by Gabriel Katzner on 04/12/11

I'm sure many of you have heard mention of the “means test”, among other topics, when determining one's eligibility to file for Chapter 7 bankruptcy. Let's discuss the various requirements in more detail to clear up any confusion.

The first question we need to ask is "what is your income over the six months prior to filing for bankruptcy?" We need to compare this number with the median income for a family of your size in your state. The U.S. Trustee has a website setting forth the median income for each state / family size which can be found here. We will then proceed in one of two ways. First, if your income is less than the median income you can file for Chapter 7 bankruptcy. Second, if your income is greater than the median, you must then pass the “means test” in order to file for Chapter 7 bankruptcy.

Let's discuss the means test in greater detail:

At its most basic level, the means test is designed to prevent those with higher incomes from filing for Chapter 7 bankruptcy when filing for Chapter 13 bankruptcy would be more appropriate. In essence, the court does not want those with the means to repay some of their debts via Chapter 13 bankruptcy to eliminate their debts entirely via Chapter 7 bankruptcy. However, as we'll discuss, the means test does not automatically disqualify from Chapter 7 bankruptcy all of those with high incomes as you are allowed to offset certain permitted expenses against your income to qualify.

Here is where things get a little tricky. The means test requires that we take your average income over the six months prior to filing, subtract out certain permitted expenses, and determine if you have enough left over to pay some portion of your unsecured debts (credit cards for example). If the amount left over is above a certain amount you fail the means test and are not eligible for Chapter 7 bankruptcy. If the amount left over is below a certain amount you pass the means test and are eligible to file for Chapter 7 bankruptcy. We can perform this calculation relatively quickly when we discuss the particulars of your case.

Let's assume that you failed the means test – now what? It is not as if you are unable to file for bankruptcy. You are merely required to file bankruptcy pursuant to Chapter 13.

Let's Discuss Bankruptcy Basics

by Gabriel Katzner on 04/12/11

Bankruptcy is a process developed to allow consumers and businesses to (i) eliminate debt (Chapter 7) or (ii) repay / eliminate debt over a period of years (Chapter 13).

Let's discuss some of the strengths and limitations of bankruptcy in terms of what bankruptcy can and cannot do and what types of debts bankruptcy can / can not discharge.

Bankruptcy is a very powerful tool in terms of eliminating unsecured debts (such as credit cards and the like) and stopping harassing collection activities (everything from phone calls and letters to repossession and foreclosure) via the "automatic stay." The very act of filing for bankruptcy puts into immediate effect the "automatic stay"; no judicial action is required. This is an extremely powerful tool and one that should not be overlooked when considering whether bankruptcy is right for you. The automatic stay goes further than merely stopping harassing phone calls and other collection efforts from creditors or even the government. It can put a stop to foreclosure proceedings, disconnections of water, telephone or other utilities, eviction, court proceedings for failure to pay support obligations and even prevent your wages from being garnished. Keep in mind that, as helpful as the automatic stay is, it is not a magic bullet that can prevent all things. For example, it can't put a stop to a lawsuit seeking to establish or modify various types of support, it won't get you out of any criminal proceedings and the IRS can still proceed in a variety of ways against you such as conducting an audit.

As powerful a tool as bankruptcy is it does have its weaknesses. For example:
While a discharge in bankruptcy will wipe out debt owed to a secured creditor, that creditor's lien survives and your property can be repossessed
Certain support obligations such as child support and alimony survive as if the bankruptcy filing never occurred
It is very difficult, though not impossible, to have student loans discharged in bankruptcy
It is very difficult, though not impossible, to eliminate tax debts.
If you fail to list certain debts in the papers submitted to the bankruptcy court then these debts will not be discharged

Chapter 7 bankruptcy is also known as straight bankruptcy or liquidation. It is simple, straightforward and is a legal excuse from paying most unsecured debts, such as credit cards and personal loans. Also, don't let the word “liquidation” scare you, as individuals are granted exemptions of various dollar amounts for items such as basic household furnishings, cash in bank accounts, an automobile, most pension plans and equity in a home. However, to the extent you have non-exempt property, such property may be sold to pay back some of your outstanding debt and then any remaining unsecured debts are discharged. One should note that the Trustee often "abandons" your non-exempt property, since the amount of money raised via a sale is often not worth the effort of having to conduct a sale, thereby allowing you to remain in possession.

So, in a Chapter 7 bankruptcy proceeding, some of your non-exempt property may be sold to pay your creditors and in exchange for this payment seemingly all of your unsecured debts will be wiped out. Exempt property includes, among other things, basic household furnishings, cash in bank accounts, an automobile, most pension plans and equity in a home. Quite often an individual who files for Chapter 7 bankruptcy will end up keeping almost all of their property as it will be exempt pursuant to applicable law.

Things get a little trickier when you have debt that is secured. A good example is a car loan. Pursuant to your agreement with the car dealer, the car is pledged as collateral to guarantee your payment on the loan. You have several choices in such a situation. You can simply allow the creditor to repossess the car in which case your debt would be discharged. With lender consent, you can continue your payments under the lease contract. You could even pay the creditor an amount equal to the current replacement value of the car in a lump sum. Which of these routes is best for you will depend on your particular situation and is something we will need to discuss.

Let's touch briefly on one's eligibility to file for Chapter 7 bankruptcy (we delve into greater detail here). The main issue that would prevent one from being eligible to file for Chapter 7 bankruptcy would be if your income, after subtracting appropriate expenses and payments, is too high and would therefore be sufficient to support a repayment plan pursuant to Chapter 13 bankruptcy.

Also, remember, as mentioned above, that although Chapter 7 bankruptcy can eliminate many debts, it cannot absolve you of debts arising from child and spousal support obligations, secured debts or most tax debts.

To briefly summarize, a Chapter 7 bankruptcy discharges most of the debts you owe in exchange for your turning over non-exempt property which can be sold by the Trustee to pay creditors.

Chapter 13 bankruptcy is a “reorganization” frequently referred to as a "wage earner" plan where one has a source of income from which they can repay some portion of their debt. We will file a repayment plan with the bankruptcy court which is essentially a proposal outlining how much you will pay back to each group of creditors. You will get to keep all or most of your property, however, you will be required to pay back a percentage of the debt owed over a period of three to five years. The amount which must be paid back, if you cannot afford a full payback, is based on, among other things, the difference between your monthly income and expenses.

To the extent you have secured debts (such as the car loan mentioned above), you are able to catch up on missed payments to avoid repossession or foreclosure (click here for information if you're a homeowner seeking to avoid foreclosure as the law has come very far very quickly in this area and the bankruptcy courts are really trying to help individuals avoid foreclosure and keep their homes). If you are unable, or do not desire, to catch up on payments you have missed, you can simply "abandon" the secured property via the bankruptcy process. The underlying debt will be discharged, however, the lender will be allowed to repossess the property.

There are limits on the amount of debt you can have to be eligible to file for Chapter 13 bankruptcy, however, thankfully the government has seen fit to set these amounts whereby they will not effect the vast majority of individuals. One can have approximately $1,000,000 in secured debt and $330,000 in unsecured debt and remain eligible to file for Chapter 13 bankruptcy.

Please note that prior to filing for bankruptcy, you must take part in credit counseling from an approved agency (see http://www.justice.gov/ust/eo/bapcpa/ccde/index.htm for a list of approved agencies). Once credit counseling is complete you are eligible to file for bankruptcy.

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Bankruptcy Frequently Asked Questions &amp; Blog

Bankruptcy Frequently Asked Questions & Blog