WHAT IS A CHAPTER 7 BANKRUPTCYQUICK OVERVIEW OF CHAPTER 7 BANKRUPTCY
Chapter 7 of the United States Bankruptcy is commonly known as a liquidating bankruptcy, or just plain “bankruptcy”. This webpage explores the benefits and downsides to filing a Chapter 7, including what types of debts you can usually discharge (get rid of) and other frequently asked questions. Under any Chapter you are required to list all of your debts and assets on your petition. An asset is anything you own or may have a right to own at some future date within reason. For example, it is not necessary to state that you are a beneficiary in your children’s life insurance policy. Some (and in most cases, all) of your assets will be exempt. California law provides two separate sets of exemptions from which to choose. A detailed analysis of these exemptions is not possible here. This is one of the reasons why you need an attorney, to properly exempt your possession so that you can keep them. Basically, you can exempt household goods, and so forth. After you file your case, a Trustee is appointed. He or she will liquidate (sell) all of your non-exempt assets and pay your creditors according to the priority afforded to them by the Bankruptcy Code. You may voluntarily repay any debt upon agreement with the creditor. Whether this is ever advisable is questionable and is an issue to be discussed with your attorney.
SHOULD YOU FILE CHAPTER 7?
The goal of most any personal bankruptcy is to discharge your debts and allow you a fresh start on your finances. In other words, once your discharge is granted, you no longer need to repay the debts that were incurred before you filed your bankruptcy. Your creditors are entitled to share in the proceeds obtained from the liquidation of your non exempt assets. Under Chapter 7, the amount your creditors will get is fixed by the value of your non exempt assets. Certain debts are non dischargeable in a Chapter 7. Examples of these are taxes less than three (3) years old, student loans, child support and spousal support (alimony), and any debts procured by fraud, incurring a debt without a reasonably certain ability to repay the debt, and so forth. Assuming you need to file a bankruptcy, the only way to properly determine which Chapter to file is to first compare your options under the other available Chapters. Generally, Chapter 7 is the cheapest, quickest and least painful of the three major Chapters (the others being 11, which is for businesses, and 13). If you are an individual, and meet the requirements, Chapter 7 allows you to discharge most or all your debts. It allows you to do this regardless of how many assets you have or how much your creditors ultimately receive, if anything. It basically allows you to walk away from your debts and start over.
WHAT ARE SOME OF THE DISADVANTAGES?
You are only able to receive a discharge after six years have passed since the commencement of the last case in which you received a discharge. Thus, you should not file a bankruptcy, under Chapter 7, if you think that you will need the option of doing it again within the next six (6) years. If you are a corporation, you must stop operating your business immediately upon the filing of the Chapter 7 petition. Only under extraordinary circumstances will the Trustee operate the business. Another disadvantage of filing Chapter 7 comes when you are behind on your on a car or a mortgage. If you are behind on your payments on a car or a mortgage and your file a Chapter 7 you will have to immediately bring your loan “current”. This essentially means that you will have to come up with the full amount of arrears (the amount you are behind) immediately. Most of the time this is not feasible. If you cannot do this, in a Chapter 7, you will be forced to “surrender” or “give up” that asset (your house or car). However, this does not leave you with any recourse which would allow you to keep the assets. See the page on Chapter 13 bankruptcy.
IF I AM MARRIED MUST WE FILE TOGETHER OR CAN ONE SPOUSE FILE SEPARATELY?
A spouse my file separately, without the other spouse filing. However, since California is a community property state, the non-filing spouse’s income must be included in the petition. The non-filing spouse’s credit will not be affected by the other spouse’s filing for bankruptcy. This is an issue you should discuss carefully with your attorney. The spouse that doesn’t file may end up being responsible for some of the debts.
HOW LONG WILL BANKRUPTCY REMAIN ON MY CREDIT REPORT?
Bankruptcy can remain on your credit report for ten years.
CAN BANKRUPTCY REMOVE MY SECOND MORTGAGE?
Short Answer: YES-but only in a Chapter 13
If you own real estate with a second or other subsequent mortgage chances are you can remove that lien in a Chapter 13 Bankruptcy Case. This is most common these days as a result of the declining real estate market. In many instances, at least locally in San Diego County, we are seeing real estate values decline dramatically.
With real estate declining as much as it has, most second and other mortgages beyond the first are wholly unsecured. In fact, in many cases, even the amount owed on the first deed of trust/mortgage on the property is greater than the value of the house. So how can you avoid a second lien on real estate? It’s through a code provision in Chapter 13, 11 USC 1322.
For example: Suppose a debtor purchased a home at the top of the market for $700,000.00. They purchased the house with a $500,000 first deed of trust and a $200,000 second deed of trust . Suppose now the house has depreciated and is now worth $490,000. Since the second deed of trust of $200,000 is not secured by the real estate anymore, it is considered “wholly under secured.” In chapter 13, you can “avoid” a “wholly under secured” lien on your personal residence.
Thus, if one were to “avoid” the lien, then they would now have a house valued at $490,000 with only a first deed of trust for $500,000. The $200,000 second was “stripped” from the property and is treated as an unsecured creditor in the chapter 13 case no different than a credit card and would be paid back at the same percentage one is paying back unsecured creditors as set out in one’s Chapter 13 Plan. You no longer owe the $200,000 on the house.
While lien stripping is most common on under secured mortgages, there are also several other ways to avoid second mortgages in Bankruptcy. Other examples of lien stripping can take place if (1) there is a balloon payment due during the life of the chapter 13 case; (2) the second is secured by other assets in addition to the house (personal property, etc.); and, (3) the property is not the “debtor’s principal residence.”
So while many people are starting to surrender their real estate back to the bank, think twice before you make your decision and speak with a competent bankruptcy attorney. You just might be able to remove the second mortgage and keep the house with a more affordable mortgage payment! Not only might this make the payments more manageable, which just might allow you to stay in the house, it will also make it much easier to eventually sell. Hopefully when the real estate market turns around and allows you to realize a profit from the sale.
WHAT IS CHAPTER 13?
Chapter 13 is a section of the Bankruptcy Code which helps qualified individuals, or small proprietary business owners (NOT a corporation or partnership), who desire to repay their creditors but are in financial difficulty.
Among other things, it offers great opportunities to pay off past due mortgage (stop foreclosures) or car payments (stop repossessions) over 36‑60 months, giving you time to catch up and keep your property. Sometimes Chapter 13 is referred to as “reorganization” or “debt consolidation.”
One purpose of a Chapter 13, as opposed to a Chapter 7, is to enable a debtor to retain certain assets ( for example, your home) that might otherwise be liquidated by a Chapter 7 Trustee. It also provides an alternative to Chapter 7 when you have too much “disposable income” ( your net monthly income exceeds your net monthly expenses by too much) and usually yields much lower monthly payments than you were previously paying and ( here’s the real benefit) after 36 months, you are done! Your debts are gone.
It also enables you to sometimes discharge debts that would not be discharged in a Chapter 7, such as a fraud judgment, certain tax obligations, fines, penalties, and other debts. The goal of most any personal bankruptcy is to discharge your existing debts by repaying all or a portion of your debts, and allow you a “fresh start” on your finances.
In other words, once your discharge is granted, you no longer need to repay the debts that were incurred before you filed your bankruptcy. The best way to determine which chapter you should file ( 7 or 13) is to compare your options under each chapter. This is usually best done by consulting with an experienced attorney.
HOW DOES CHAPTER 13 DIFFER FROM CHAPTER 7?
The basic difference between Chapter 7 and Chapter 13 is that under Chapter 7 the debtor’s nonexempt property (if any exists) is liquidated to pay as much as possible of the debtor’s debts, while under Chapter 13 a portion of the debtor’s future income is used to pay as much of the debtor’s debts as is feasible considering the debtor’s circumstances.
As a practical matter, under Chapter 7 the debtor loses all or most of his or her nonexempt property and receives a Chapter 7 discharge, which releases the debtor from liability for most debts. Under Chapter 13, the debtor usually retains his or her nonexempt property, must pay off as much of his or her debts as the court deems feasible, and receives a Chapter 13 discharge, which is broader than a Chapter 7 discharge and releases the debtor from liability for some debts that are not dischargeable under Chapter 7. However, a Chapter 13 case normally lasts much longer than a Chapter 7 case and is usually more expensive for the debtor.
WHEN IS CHAPTER 13 PREFERABLE TO CHAPTER 7?
Chapter 13 is usually preferable for a person who:
Wishes to repay all or most of his or her unsecured debts and has the income with which to do so within a reasonable time
has valuable nonexempt property or has valuable exempt property securing debts, either of which would be lost in a Chapter 7 case is not eligible for a discharge under Chapter 7
Has sufficient assets with which to repay most debts, but needs temporary relief from creditors in order to do so; or save your house from foreclosure or your car from being repossessed.
HOW DOES CHAPTER 13 DIFFER FROM A PRIVATE DEBT CONSOLIDATION SERVICE?
In a Chapter 13 case, the bankruptcy court can provide aid to the debtor that private debt consolidation services cannot provide. For example, the court has the authority to prohibit creditors from attaching or foreclosing on the debtor’s property, to force unsecured creditors to accept a Chapter 13 plan that pays only a portion (sometimes zero) of their claims, and to discharge a debtor from unpaid portions of debts. Private debt consolidation services have none of these powers.
WHO MAY FILE A CHAPTER 13?
Only an individual with regular income who owes, on the date you file the petition, less than $290,525.00 in unsecured debt and $871,550.00 in secured debts. These debts must also be no contingent and liquidated, meaning that they must be for certain, fixed amount (or easily determinable amount) and not subject to any conditions or bona fide disputes.
HOW LONG WILL BANKRUPTCY REMAIN ON MY CREDIT REPORT?
Bankruptcy can remain on your credit report for ten years.
WHAT ARE THE BENEFITS?
Chapter 13 protects individuals from the collection efforts of creditors, permits individuals to keep their real estate and personal property, and provides individuals the opportunity to repay their debts through reduced payments. You may also be able to discharge debts in a Chapter 13 that would be non-dischargeable under other chapters, for example, fraud judgments and certain tax obligations. Certain tax obligations or repayments can be made easier by virtue of the elimination of interest payments. You may also be able to get rid of junior liens on your real property.
WHAT ARE SOME OF THE DISADVANTAGES?
If you miss any payments at all that are due under your plan, your case will be dismissed by the Court. You also cannot borrow money (incur new debt) exceeding approximately $250.00 during the pendency of your case (usually 3 years), without first obtaining court approval. This can be somewhat of a problem if, for example, your car lease expires and you need to get a new car during this period. It is entirely possible that the Court will not allow you to get a “new” car for a higher monthly payment then your last car were and if your payment is less they might require that extra money to be paid towards your plan.
HOW DOES IT WORK AND HOW LONG DOES IT TAKE?
First of all, you must have “regular income”. Meaning, you must have some source of income that is regular, or at least can be averaged regularly on an annual basis. You are usually required to pay all of your disposable income to the Trustee (the Trustee is the person who administers the debtor’s case until it is closed and collects the payments from the debtor and then distributes them to the creditors) through your plan (your plan states how much money or other property the debtor will pay to the Trustee, how long the debtor’s payments will continue, how much will be paid to each of the creditors, etc.) usually for 36 months.
Disposable income is defined as: income received by you that is not reasonably necessary for the maintenance and support of your or your dependents. The key word is “reasonably”.
For example: if you are used to spending $2,000.00 a month on a car, you would not be allowed that much of an expense for that since that is not considered “reasonable.” Thus, your disposable income is calculated by taking your monthly income and subtracting your reasonable monthly expenses. Typically, the plan payments last for 36 months, unless additional time is requested, but in no event will they last more than 60 months.
Therefore, if your payments analysis shows, for example, that you can afford to pay $200.00 per month (over & above your normal living expenses) you would pay that each month to the Chapter 13 Trustee, who would disperse it pro rata among your creditors. At the end of 36 months, you are discharged from all dischargeable unsecured debts, regardless of how much your creditors have received.
In addition, to your plan payments, you must stay current with any ongoing obligations you have to secure creditors (only if you wish to keep that item. You may “surrender” it and then it becomes an unsecured debt. “Surrender” means you give it back to the creditor) such as on your mortgage or car payment. Chapter 13 (or any other chapter) only affects debts that you owe on or before you filed the bankruptcy petition.
Therefore, on your mortgages and other secured debts, your monthly plan payment goes to pay any arrearages ( past due amounts) that existed on the date, you file and you can repay that arrearage over the life of the plan; but, you must stay current from the filing date forward with any payment on that obligation.
WHY DO YOU NEED AN ATTORNEY?
Some paralegal services charge a minimal fee to prepare and file the necessary paperwork to file a bankruptcy. While in some cases this may not be a major problem, it has been my personal experience that the risk is simply not worth it.
Much of what goes into the bankruptcy petition comes from the insightful and probing questioning from a qualified bankruptcy attorney. Paralegals and other “bankruptcy petition preparers” are strictly prohibited from practicing law and, therefore, cannot give legal advice or ask the necessary questions to make sure you are completing your paperwork fully and completely.
Even if they were legally allowed to do so, they are not able to adequately assess the laws surrounding exemptions and to determine what your best options are. Are you willing to risk possibly losing your 401(k) or other assets because the proper exemption wasn’t used or they didn’t know the exemption existed; all to save a couple hundred dollars?
In addition, most paralegals are not qualified to prepare a Chapter 13 plan. Are you willing to risk over paying, or even worse, the possibility of your plan not being confirmed by the Trustee and have your case dismissed? You also may be assuming there is no problem with listing a particular asset, or reaffirming a particular debt, only to find out months or even years from now, that because you filed the bankruptcy or didn’t take appropriate steps, that you did not get rid of that debt, or that you may lose an asset, or any number of other problems.
Perhaps most importantly, they also cannot represent you in court or at the 341 hearing (more commonly known as the meeting of creditors). Further, if you list things incorrectly in your petition, or omit necessary items it is YOUR problem, not the paralegals. You sign all your bankruptcy papers under penalty of perjury.
Ultimately you may have to spend several thousand dollars to attempt to remedy a situation that could have been prevented, or at least planned for, at the beginning. It’s your choice.
Now you are somewhat familiar with what a CHAPTER 13 is and how it works. SHOULD you HAVE THE NEED TO FILE A CHAPTER 13 BANKRUPTCY YOU now have a choice to make. You can either do nothing AND LET THE CREDITORS HARASS YOU AND POSSIBLY GARNISH YOUR WAGES, FORECLOSE ON YOUR HOUSE OR REPOSSESS YOUR CAR or you can SEE AN ATTORNEY WHO SPECIALIZES IN BANKRUPTCY TO HELP YOU PLAN AND TAKE CARE OF YOUR DEBTS. The choice is yours.
At Fees You Can Afford We can often save you more than the cost of our service alone. Call now for a free consultation. At Fees You Can Afford We can often save you more than the cost of our service alone.
Call now for a free consultation. (858) 277–0232. We are a debt relief agency.