How Does Bankruptcy Work
Bankruptcy is a method to eliminate or at least reduce your debt when bills pile up beyond your ability to repay them. It should be viewed as a last resort to be considered only when all other potential courses of action to get back on track have been exhausted.
Individuals filing for bankruptcy mostly use either Chapter 7 or Chapter 13. The biggest difference between the two is what happens to your property:
- Chapter 7, which is known as liquidation bankruptcy, involves selling some or all of your property to pay off your debts. This is often the choice if you don’t own a home and have a limited income.
- Chapter 13, also known as a reorganization bankruptcy, gives you the chance to keep your property if you successfully complete a court-mandated repayment plan that lasts between three and five years.
Depending on where you live and your marital status, some of your property may be exempt from being sold when you file Chapter 7 because of state-specific and federal exemptions. With exemptions, whether they be your home equity, retirement accounts or even personal possessions such as jewelry, you receive the allowed exemption amounts, and the rest of the proceeds will be used to pay off debts. You can read more about potential exemptions, and check out this chart for a quick rundown on the two types:
| Chapter 7 |
|---|
- Child support or alimony
- Student loans
How Much Does Bankruptcy Ruin My Credit Score
Not as much as you think, and it is pretty easy to rebuild your credit. If you have a lot of negative reports on your credit report, a bankruptcy might actually raise your credit score because all of the little reports will now be reporting discharged in bankruptcy. The bankruptcy will count against you, but sometimes not as much as all of the other negative reports.
S For Filing A Chapter 7 Or Chapter 13 Bankruptcy
ASSESS YOUR DEBT SITUATION
List your debts and your income and assets, and explore your options to see if there is a way to get out of debt without bankruptcy. Consult a non-profit credit counseling service such as Money Management International to see whether a repayment plan is feasible. This may be a difficult process, but it will help you understand your financial situation.
CONSULT A BANKRUPTCY LAWYER
If bankruptcy seems the best or only option, contact a lawyer specializing in bankruptcy to discuss your situation and how bankruptcy would work for you. Some bankruptcy attorneys offer a free first consult, or check with Legal Aid in your area.
GATHER YOUR PAPERWORK
The attorney will advise what you need to file for bankruptcy. This will include bank statements, tax returns, paycheck stubs, insurance documents and a list of debts. If you own property you will need documentation. The attorney will check debts from credit reports.
DETERMINE IF YOU ARE ELIGIBLE
Your attorney will review the requirements for Chapter 7 and see if you meet them.
ATTEND COURT MANDATED CREDIT COUNSELING
You will have to complete a credit counseling course from a government-approved organization within 180 days before you file. Check the list of approved debtor education providers online or at the bankruptcy clerk’s office in your district.
FILE A PETITION WITH THE COURT
GET RELIEF AS YOUR AUTOMATIC STAY TAKES EFFECT
ATTEND A CREDITORS MEETING
ATTEND A COURSE ON FINANCIAL MANAGEMENT
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Sixth Circuit Upholds Chapter 13 Debtors Right To Request And Receive Dismissal Of Bankruptcy Case
A statute must be interpreted and enforced as written, regardless, according to the U.S. Court of Appeals for the Sixth Circuit, of whether a court likes the results of that application in a particular case. That legal maxim guided the Sixth Circuits reasoning in a recent decision in a case involving a Chapter 13 debtors repeated filings and requests for dismissal of his bankruptcy cases in order to avoid foreclosure of his home.
In short, the Sixth Circuit held that if a Chapter 13 debtor moves to have his/her case dismissed, and no exception applies, a bankruptcy court must dismiss it.
The Underlying Facts
The case involves a Chapter 13 debtor, Ronald Smith, who obtained a loan to purchase a home. Smith defaulted on the loan, was sued by the mortgage holder and in 2007 a state court scheduled a foreclosure sale.
Four days before the sale, Smith filed for bankruptcy, resulting in the automatic stay of the sale. After the sale date passed, Smith filed a motion to dismiss the case, which the bankruptcy court granted. Smith did the same thing in 2017 when another foreclosure sale of his home was scheduled, and again the bankruptcy court dismissed his case after the foreclosure sale was cancelled.
In 2019, U.S. Bank purchased the mortgage for Smiths home, and a foreclosure sale was scheduled. On the day the sale was scheduled to take place, Smith filed for bankruptcy, and six days later he filed a motion to dismiss the case, which the bankruptcy court granted.
Can A Sole Proprietorship File A Chapter 13 Bankruptcy
Meeting Qualifications. Businesses, even sole proprietorships, cannot file Chapter 13. The bankruptcy code also prohibits stockbrokers and commodity brokers from filing under Chapter 13, even if their debts are personal. Individuals who can demonstrate they have the means to pay down debts are eligible to file.
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What Is An Automatic Stay
After you file for bankruptcy, you have the protection of an immediate, but temporary, automatic stay. The automatic stay can, for example, immediately stop a foreclosure, an eviction, car repossession, or wage garnishment. It can also stop debt collection, harassment, and disconnection of utilities.
The automatic stay may provide a powerful reason for filing for bankruptcy. In most of the situations listed above, the automatic stay can buy you a few days or weeks in which to figure out your next move. If your primary motivation in filing bankruptcy is to gain the benefits of the automatic stay, you donât need to file all of your papers at once. You just need to file the three-page petition, a signature declaration, and a listing of your creditors. In addition, within 180 days prior to filing, you will have to visit an approved credit counseling agency for advice and budget analysis. You will have to file a certification of such counseling when you file your petition. You have 15 days in which to file the rest of your papers. If you donât, your case will be dismissed.
Things That Arent The Same
The biggest difference between Chapter 7 vs. Chapter 13 is that the filer is required to make monthly payments to their bankruptcy trustee to pay a portion of their debts through their repayment plan. In a Chapter 7 bankruptcy, the trusteeâs role is limited to investigating whether there are non-exempt assets that can be sold for the benefit of unsecured creditors. If none are found, creditors donât get paid. If non-exempt assets exist, the Chapter 7 trustee sells them and uses the proceeds to pay each unsecured creditor their share.
In a Chapter 13, the bankruptcy trustee functions as a plan administrator, who receives the filerâs monthly payments and distributes the funds according to the Chapter 13 repayment plan approved by the court.
If the filer has significant non-exempt property, the plan payment has to be high enough so that all unsecured creditors get at least as much through the Chapter 13 plan than they would have received in a Chapter 7. Thatâs called the best interest test. However, not having any non-exempt assets does not get a Chapter 13 filer out of the obligation to make regular monthly plan payments.
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Early Discharge From Chapter 13 Protection
If by some chance you are able to pay off your debts before your plan endsmaybe you inherit some money, for instance, or won the lotteryyou would be able to pay off your debts and exit the plan before it ends.
But some debtors might see a drastic change in their circumstances that makes it difficult for them to make their plan payments. For instance, you might lose your job or your income could go down to the extent that you cant keep up with your chapter 13 plan commitment.
In such cases, you could apply for a chapter 13 hardship discharge. You will not get all your debts discharged this way. Before discharging your case, unsecured creditors who have made a claim should have received at least as much as they would have under a chapter 7 bankruptcy case.
Who Is Eligible For Chapter 13 Bankruptcy
Anyone with regular income can file for Chapter 13 bankruptcy, as long as the total debt is within the threshold. The individuals income level helps determine the timeline of the repayment plan.
If your income exceeds the median level in your state, youll repay your debts over five years. If your income is below the median, repayment will take place over three years.
Here are some things to consider if you are thinking about filing for Chapter 13.
- Regular income is required.
- You must provide up-to-date tax returns and payments.
- Unsecured debts, like those from unsecured credit cards and personal loans, cant exceed $394,725. Secured debt for example, from a mortgage or car loan cant exceed $1,184,200.
- You may not qualify if youve had a bankruptcy dismissed within 180 days for a failure to appear in or comply with the bankruptcy court.
- To receive a discharge at the end of a Chapter 13 repayment plan, you cant have received a discharge from a Chapter 13 bankruptcy within the previous two years or from a Chapter 7, Chapter 11 and Chapter 12 within the previous four years.
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Repaying Debts In Chapter 13 Bankruptcy
Debtors can set their own repayment plans in Chapter 13 with the approval of the court. The plan is a central part of Chapter 13 bankruptcy, and its written out on either a federal form or one from a local court. The plan describes
- Your trustee and how much that person will get paid each month.
- How youll get the money to the trustee.
- How long the plan will last.
Not all debt will be repaid, and it will generally fall into three categories.
- Priority debt such as student loans, child support and most tax obligations generally must be paid in full.
- Secured debt such as a mortgage or car loan will ultimately be paid back over time. Any missed payments can be brought current as well.
- Payments toward unsecured debt such as outstanding credit card balances are flexible. They might be reduced, and remaining balances may even be forgiven once the repayment plan is completed.
Respond To Lender Inquiries
Once you submit your preapproval application, the rest is in your lenders hands. Your lender will review your income, assets, debt and credit to see if you qualify for a mortgage. If you seem like a good candidate, your lender will send you a preapproval letter. You can use your letter to start shopping for a home.
Your lender might need to contact you to ask questions about items on your credit report. This is especially common after an adverse financial event like bankruptcy. Be honest and respond to your lenders inquiries quickly to improve your chances of approval.
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How To Stop Foreclosure On Your Home With Chapter 13
Chapter 13 is an effective approach if you are serious about keeping your home. It allows you to stop foreclosure and provides you with up to five years to make up the past-due payments while, at the same time, staying current on payments going forward.
Additionally, the bankruptcy court has established a mortgage modification mediation program that can assist in obtaining a modification on your home loan. During the Chapter 13, thebankruptcy court appoints a trustee to collect and distribute the debtors funds according to the Chapter 13 plan filed by the debtor.
For example, the Chapter 13 trustee will collect payments from you for your mortgage and will send the payment to the mortgage company according to your drafted plan.
InChapter 7, the bankruptcy court cannot generally impose a requirement on the mortgage company to let the debtor pay his mortgage in any particular fashion, other than as called for by the original note and mortgage. If you are behind on your mortgage payment and keeping your home is a priority, Chapter 13 is generally a better option.
Faqs About Chapter 13 Bankruptcy
If you are overwhelmed by debt, you might consider filing a Chapter13 bankruptcy. But it is crucial to make the right decision. Is Chapter 13 bankruptcy right for you? Will it solve your financial problems? This article answers some of the most common questions people have about this potential solution.
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Your Credit Will Take A Hit
Bankruptcy can have a more severe negative affect on your credit than mere missed payments. A Chapter 13 bankruptcy will appear on your credit reports as a derogatory mark for seven years from the date you filed the petition. The number of points your will drop will vary depending on your current scores and other factors relating to your financial situation. For more on this, check out our article on how to build credit after a bankruptcy.
Low Chances Of Chapter 13 Success Offers No Improvement To Budgeting Skills
It seems logical that the Chapter 13 will force people to sit down, develop a budget and stick to it. The court-ordered payment will not change for the agreed on timeframe usually five years and the relief from paying numerous debts has been mitigated.
This makes sense, provided the filer is diligent about payments and responsible about having bankruptcy discharged. The 30% or so of filers who are not responsible about ensuring they address what brought them to bankruptcy show they have not learned.
Those who fail to complete the payment requirements see no lasting debt relief, which makes finding the wherewithal to develop a budget and stick to it, next to impossible.
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Getting New Credit In Chapter 13
The court will permit you to incur new debt for personal, family, or household purposes if it is necessary for you to continue to make payments under your plan. Put another way, if you can demonstrate to the Chapter 13 trustee and the court that you need the credit so you can stay in the plan then the court is likely to allow you to incur it. For example, if you need a reliable car to get to work so you can earn money to make payments to the Chapter 13 plan, the trustee and court are likely to approve the car loan.
In most cases, you need to obtain the court’s permission before you incur substantial debts.
Can I File A Chapter 7 Bankruptcy Do I Qualify For Chapter 7
Not having to repay your debt must have a downside, or everyone would do it. First, you have to qualify. In order to file Chapter 7 bankruptcy, you must make less than the mean income in your state or pass what the bankruptcy code calls a means test. If you make less than the mean income in your state, check here , based on your family size, you can file a chapter 7 bankruptcy. If you make more than the mean income in your state, you can still pass the means test and qualify to file a chapter 7.
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How Chapter 13 Bankruptcy Works
When you file for Chapter 13 bankruptcy, you’ll file with your state of residence or where your business is domiciled. You will have to submit financial statements, tax returns, a list of all debt obligations, and a certificate of credit counseling, The courts will charge filing and administrative fees, which can typically be paid in installments.
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Chapter 7 Vs Chapter 13 Bankruptcy
You may be overwhelmed about the idea of filing for bankruptcy. Understanding your options can ease tension or confusion you may be feeling and help you make the right the decision for you and your family. Read on to learn about the difference between Chapter 7 and Chapter 13 bankruptcy, two of the most common types of bankruptcy.
If you believe that filing for bankruptcy may be an option for you, it is in your best interest to reach out to an experienced Ohio bankruptcy lawyer at Luftman, Heck & Associates. You can call us at , or contact us online for a free consultation.
Myth: Chapter 13 Is Useful For Getting Your Drivers License Back
One of the popular uses of Chapter 13 in recent years has been to recover your drivers license. Drivers licenses are frequently suspended by city and state governments when the driver owes a significant amount of parking or traffic tickets.
Unpaid tickets cannot be discharged in Chapter 7, but they can be discharged in Chapter 13. So many debtors file Chapter 13 to get their driverâs license back as shown in this video by ProPublica.
Parking and traffic tickets cause so many bankruptcies in Chicago, the bankruptcy court there leads the country in Chapter 13 filings. Unfortunately, ProPublicaâs research showed that less than 25% of Chapter 13 cases involving ticket debt ended successfully.
Most of these debtors end up paying thousands of dollars in legal fees before their cases were dismissed, without a dime going to pay down their traffic tickets.
As soon as their cases are dismissed, debtors risk losing their cases and licenses again, leading to a cycle of more debt and potentially more bankruptcies.
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