Are you unable to pay your bills?
Filing bankruptcy is becoming commonplace. Most people who find themselves in financial trouble have gotten there through no fault of their own. These days, if “life happens” most people are just a couple of paychecks away from disaster. Bankruptcy was developed by our Legislature as a way for people to start fresh, to get a second chance. There is no shame in filing a bankruptcy. That being said, there may also be other options to resolve your debt. Give me a call and we can go over your circumstances and develop the best plan for you.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is a federal court proceeding under chapter 7 of the U.S. Bankruptcy Code. Filing under this chapter allows you the opportunity to obtain a “fresh start.” Once your debts are wiped out (“discharged”) in bankruptcy, you will be able to move forward without the burden of debts you cannot pay. You will have no remaining liability for the debts that are discharged and there are no tax implications for filing bankruptcy.
To obtain a chapter 7 discharge the law requires that you give up your property so that it can be liquidated (sold and turned into cash) for the benefit of your creditors. However, much of your property is “exempt” property that the law allows you to keep. In fact, in most cases, all of your property will be exempt. In other words, in most chapter 7 cases, you will be able to discharge your unsecured debts and keep most or all of your property. Still, you should keep in mind that if you have substantial, valuable property and you are filing for chapter 7, you will probably need to turn over some of that property to the trustee to be sold for the benefit of creditors.
It is important to understand that not everyone qualifies for chapter 7. If your income is above the median for your state, you will be required to pass the “means” test before being allowed to file for chapter 7. (The median income in Maine right now is $43,881 for a one-person household and $54,701 for a two-person household.) If your income is below the median for your state, you are automatically eligible to file and do not need to take the means test. The means test was added to the bankruptcy laws in 2005 to try and stop wealthy debtors from discharging debts without paying anything back to creditors. (This was not nearly as big a problem as certain legislators believed, but that was their rationale for changing the law.) Under the means test, if the debtor earns too much money in relation to expenses, the debtor will be required either to forgo bankruptcy entirely or to set up a payment plan through chapter 13.
Even for those who pass the means test and qualify for a chapter 7, not all debts will be discharged. Certain categories of debt are non-dischargeable under the Bankruptcy Code and survive the bankruptcy. For example, domestic support obligations, recent income taxes, and student loans cannot be discharged.
In addition, chapter 7 does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt. For that reason, if you are behind on the mortgage or car loan payments and want to keep the home or the car, a chapter 7 case may not be the right choice for you and you may wish to consider a payment plan under chapter 13.
Filing a chapter 7 case triggers the “automatic stay.” This stops all collection actions including foreclosures, garnishments, attachments, lawsuits, and collection calls. In most cases the automatic stay remains in effect until the case is closed. If creditors continue to contact you after the automatic stay goes into effect, they can be held liable for “stay violations” and can be sued under different sections of the code.
About five weeks after the petition is filed, the chapter 7 trustee will hold a “meeting of creditors.” This meeting has that name because creditors can show up and question the debtor. But creditors rarely attend. This meeting is usually a short and non-threatening meeting where the trustee confirms some of the information provided in the bankruptcy filing. The judge is not present. As long as the information provided to the trustee is truthful and complete, and all required documents are submitted, the meeting of creditors should go smoothly. This is usually the only time a chapter 7 debtor is required to appear in person.
About four months after the case is filed the discharge will be issues. This will release you permanently from personal liability for most debts and it will prevent creditors from taking any collection actions against you for those debts.
What is Chapter 13 Bankruptcy?
A chapter 13 bankruptcy is sometimes described as a “wage earner’s plan.” If you have a regular income chapter 13 gives you the opportunity to create a plan to repay all or part of your debts over a period of time. A chapter 13 plan is something like a debt management plan, but it is one that your creditors are forced to accept. As long as you meet all your obligations under the plan, creditors are not allowed to take any collection actions against you.
Chapter 13 plans generally last three to five years, depending on your income. If you earn less than the state median, the plan will generally run for three years. If you earn more than the state median, the plan will generally run for five years. (The median income in Maine right now is $43,881 for a one-person household and $54,701 for a two-person household.)
During the course of the chapter 13 plan you will be required to pay over to the trustee all of your “disposable income.” Disposable income is the amount left over after paying reasonable living expenses for you and your dependents. The trustee will then distribute that money to creditors according to the terms of the plan. Upon completion of the payments called for in the plan, you will be released from liability for the remainder of your dischargeable debts.
A Chapter 13 bankruptcy is available to individuals with less than $360,475.00 in unsecured debt and $ 1,081,400.00 in secured debt.
Chapter 13 offers a number of advantages over chapter 7. Probably the most important advantage is that chapter 13 can provide you with an opportunity to save your home from foreclosure.
Other advantages include:
(1) Keeping Your Assets. Under a chapter 13 plan, as long as you make your plan payments you can keep your home, vehicle, and other assets.
(2) Curing Your Loan Delinquencies. Chapter 13 allows you to cure your late payments by gradually catching up on past due amounts. Throughout the course of the plan you will need to pay both the regular monthly payment and also a certain amount extra each month. Paying this “extra” amount allows you to gradually catch up on amounts that were overdue at the time of the filing of the bankruptcy.
(3) Paying priority debts first. In a Chapter 13 you can pay any taxes and domestic support obligations on a priority basis, so that, at the end of the plan, you have paid all your taxes in full and become current on child support or alimony, without paying your credit cards in full.
(4) Co-signer Protection. If someone co-signed for any of your consumer loans, these co-signers are usually protected. Under chapter 13, creditors usually cannot collect from co-signers until the chapter 13 case has ended. In contrast, under chapter 7 creditors have the right to demand payment from co-signers immediately.
(5) Filing Chapter 13 More Often. By law you can file chapter 7 only once in 8 years. However, under chapter 13 you are allowed to file more often as long as the filings are made in good faith (that is, that you actually intend to set up a three to five year plan and repay a portion of your debts).
(6) Chapter 13 Bankruptcy “Cram Down.” One additional benefit of filing for chapter 13 is the “cram down.” In many cases the value of an item is much less than the balance you still owe on it. By “cramming down” your debt, you are required to pay only what your property is actually worth, as opposed to the amount you owe. Cram downs can help reduce the total owed on vehicles, work equipment and other secured purchases.
While chapter 13 has many benefits, it also has challenges. The most significant challenge is that you are subject to administration by the trustee for the entire length of the plan. You must give up control over all your disposable income for three to five years. (That does not mean that you will live in poverty. Income is only “disposable” after living expenses are deducted.) You will be required to establish and live under a firm budget during the repayment period. And there are some additional costs involved beyond just debt repayment, as the trustee is entitled to a commission on payments to creditors.
Nonetheless, for the unique benefits it provides, chapter 13 should be strongly considered for certain debtors. This is especially true those trying to avoid foreclosure on a home.