Chapter 13 filers have more options. A Chapter 13 debtor behind on mortgage payments can use the three- to five-year Chapter 13 plan to catch up on missed payments and keep the house. The filer can also use the plan to pay for home equity they can’t protect with a bankruptcy exemption. Read on to learn more about how to keep a house in bankruptcy Chapters 7 and 13.
Yes, in many instances, if you file for bankruptcy, you can keep your house. To ensure you won't lose your home in bankruptcy, you'll want to start by determining whether you can protect all of your home equity. Whether you're current on your payments will also play into the bankruptcy chapter you choose. We explain the steps of the analysis below.
Start by determining whether you can protect your home equity in bankruptcy.
You must complete this critical step in Chapter 7 and Chapter 13 because, in both bankruptcy chapters, you can protect or keep assets when a bankruptcy exemption covers the equity amount. Each state has a list of exemptions, so the property type and amount of equity you can protect using state exemptions will vary widely. Sometimes you can use the federal bankruptcy exemptions instead.
Only a few states let you keep all home equity when you file for bankruptcy. For instance, Texas and Florida allow residents to keep their homes regardless of worth. (But this is the first hurdle. You must meet the payment requirements discussed below.)
Most states have a much lower “homestead exemption” amount, and they vary widely between states. For instance, your state might have a $50,000 homestead exemption, and the neighboring state's exemption is $500,000.
Other states allow filers to stack a "wildcard" exemption onto a homestead exemption when the homestead doesn't fully cover your equity. A wildcard exemption applies to a more extensive variety of property, although in most cases, limitations exist, so read the statute carefully.
Here’s how these exemptions work in Chapters 7 and 13.
If the exemption isn't enough to cover your home equity, the Chapter 7 court-appointed trustee will sell your house. With the proceeds, the trustee will pay off the mortgage, give you the homestead exemption amount, and deduct sales costs and the trustee's fee. The trustee will use the remaining amount to pay other debts.
Chapter 13 bankruptcy works differently. Instead of giving up property you can't protect with an exemption, you'll pay for the nonexempt portion in your plan.
Of course, this could get expensive if you have significant nonexempt equity. If you can't prove you have enough income to pay the house's nonexempt equity and other required amounts, the bankruptcy court won't approve or "confirm" your plan.
But being able to protect or pay for your home equity isn't enough to keep your house in bankruptcy. Keep reading to learn about the other requirements you must meet.
Determining whether you can protect all home equity is one piece of the puzzle. Your payment status is another important consideration.
Chapter 7 bankruptcy is often more attractive than Chapter 13 because it's simpler and gets you on the road to financial stability sooner. Most Chapter 7 cases are over in about four months because, unlike Chapter 13, filers don't pay into a three- to five-year Chapter 13 plan.
However, because Chapter 7 doesn't have a lengthy plan to help you manage mortgage debt, keeping a house in Chapter 7 bankruptcy can be more challenging. To keep your house in Chapter 7, you'll need to meet the following criteria:
If you're behind on payments or fall behind after bankruptcy, the lender will use its lien rights to foreclose on the home. In many cases, if you're behind when you file, the lender will ask the court to lift the automatic stay to allow the lender to move forward with foreclosure. However, some lenders wait to foreclose until the bankruptcy case ends.
If you can't meet the requirements, Chapter 13 bankruptcy will be worth looking into. The Chapter 13 repayment plan gives you a better chance of keeping the home because you can address past-due payments and nonexempt equity. Chapter 13 might also allow you to eliminate a junior mortgage or home equity line of credit (HELOC) using a lien stripping procedure (more below).
If you're behind on your mortgage payments, the Chapter 13 payment plan can help you get caught up and keep the house. However, it can be expensive depending on how far you've fallen behind and, as discussed above, if you must pay for nonexempt equity.
In Chapter 13 bankruptcy, you propose a repayment plan allowing you to pay your creditors over three to five years. You can treat your mortgage arrearage as a separate debt and add it to your payment plan. The benefit is you can catch up on arrearages over three to five years.
Using the Chapter 13 plan to catch up on your arrearages will work if you have enough income to make your regular monthly mortgage payment and plan payment while in bankruptcy. The mortgage holder can't foreclose as long as you're paying your house and plan payments and keeping to your mortgage terms, like ensuring you have homeowners insurance.
If you have a junior lien or HELOC on your home, you might be able to get rid of it through a process called "lien stripping." Lien stripping is available in a Chapter 13 case when your property is worth less than the primary loan balance.
To strip the lien, you must alert the court either in your Chapter 13 plan or by motion (the procedure will depend on your particular court). You'll present evidence of the property's value and mortgage loan balances. If the court finds one of the loans "wholly unsecured," meaning if the house were sold and the loans paid in order, not even a dollar would be available to pay the loan, the court will remove the lien from the loan.
You'll pay the lien-stripped loan with other unsecured debts, which must share your disposable income. In most instances, the remaining balances get wiped out at the end of the case (student loans are a common exception).
Learn about lien stripping and getting rid of second mortgages in Chapter 13 bankruptcy.
Did you know Nolo has made the law accessible for over fifty years? It’s true, and we want to ensure you find what you need. Below, you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>If you're hesitant to use bankruptcy to eliminate medical debt, it's understandable. No one wants to file for bankruptcy. But taking action is almost always more beneficial than doing nothing. In this article, we explain bankruptcy and non-bankruptcy options for handling oppressive medical debt.
Yes, you can get rid of or “discharge” medical debt in bankruptcy. People regularly file for bankruptcy after serious illnesses and unexpected accidents, especially when medical bills aren’t covered by medical insurance or the patient can’t afford a high deductible.
Medical debt is one of the many obligations that qualify for discharge in bankruptcy. A bankruptcy filing will also eliminate credit card balances, gym memberships, internet and cellphone bills, past-due rent, and more. You can even erase car and house payments if you're willing to return the vehicle or home to the lender.
But bankruptcy doesn't erase everything. Bankruptcy filers typically remain responsible for paying child support and alimony, recently incurred tax debt, and student loans. However, student loans can be discharged in rare instances.
Learn more about the obligations bankruptcy eliminates and nondischargeable debts you’ll remain responsible for paying.
The bankruptcy chapter you use will determine how quickly you erase your medical debt. Most people prefer Chapter 7 because it’s fast and doesn’t require creditor repayment, but Chapter 13 can solve more financial problems.
Chapter 7 bankruptcy erases medical bills in months without a repayment plan. This chapter works best for people who don’t earn much money because a filer’s income must be low enough to pass the Chapter 7 means test.
Also, it isn’t suited for people who own significant valuable property. Each state decides the property necessary to maintain a home and employment. Any property exceeding the limits isn't “exempt” and gets sold for the benefit of creditors. Learn how your state’s bankruptcy exemptions can protect your property.
Example. Judith required back surgery after being hit by an uninsured motorist and was left with $8,000 in medical bills. She met with a bankruptcy lawyer to learn about her options. Because she worked as a cashier, her income was low enough to pass the Chapter 7 means test. She also was able to protect her older car and apartment furnishings.
Example. Emma found herself left with $20,000 in medical debt after her baby was born premature and required an extensive hospital stay. Emma contacted a bankruptcy lawyer, who explained that as CEO of a well-known toy store, she likely earned too much to qualify for Chapter 7. She’d also lose her vacation home in the Bahamas and the RV she purchased in 2022. Emma decided to take a loan against her 401k to pay the medical bill.
You won’t complete a medical bankruptcy as quickly using Chapter 13 because it involves paying what you can afford into a three- to five-year Chapter 13 payment plan. But it can help lower how much you pay toward medical debt substantially.
You’ll want to consider Chapter 13 if your income is too high to qualify for Chapter 7. Chapter 13 also offers other benefits, such as giving you time to catch up on late payments so you can keep a car or protect a home if you’ve fallen behind.
Example. Julio’s earnings were low enough to qualify for Chapter 7. However, during his extended illness, he fell behind on his house payment and was facing foreclosure. Julio’s bankruptcy lawyer explained that because the mortgage wasn’t current, he would lose his house in Chapter 7. However, if he filed for Chapter 13, he could pay the mortgage arrears over five years, discharge almost all credit card and medical debt, and save his home. Julio decided to file for Chapter 13.
Example. Siena owned a successful interior design business in a busy metropolis. Finding herself fatigued, she underwent numerous expensive diagnostic tests and, ultimately, chose nontraditional treatment. However, her insurance company refused to cover $50,000 of her expenses. Siena wasn’t able to pay the medical bills, and met with a bankruptcy lawyer after a debt collector filed a lawsuit against her. Because of her high earnings, she didn’t qualify for Chapter 7, and had to pay 100% of the medical debt over five years in Chapter 13. However, she avoided a lawsuit and was protected from creditors during the repayment period, effectively forcing the creditor into an extended payment plan.
Bankruptcy isn’t always the right approach, especially if you want to protect good credit. Fortunately, there are ways to resolve medical bills without bankruptcy.
To start, make sure you’ve resolved all insurance payment issues. Once you have gotten all of the available insurance coverage, consider negotiating a settlement with the creditor. The provider might waive a percentage if the bill was for uninsured medical costs. Many hospitals and other medical providers routinely waive or discount bills for uninsured patients.
Most hospitals have assistance programs that, if you qualify, will give you free or reduced hospital care, depending on your income level. For instance, the Hospital Care Assurance Program (HCAP) will cover expenses for medically necessary services in some states.
Also, non-profit hospitals with federal tax-exempt status might have to go easier on you and other cash-strapped patients regarding medical billing. Contact your hospital's financial aid counselor for more information and apply for applicable coverage.
To learn more about these and other options, see Managing High Medical Debts.
Not everyone needs to settle medical debt or file for bankruptcy. Suppose you don’t have income or property your creditors can take, and your financial situation isn’t going to improve. In that case, you’re likely “judgment proof.”
People with limited property and income protected from creditors, such as Social Security benefits, are often judgment proof and don’t need to file for bankruptcy or settle medical debt.
Example. Henriette, a retired widow, received a medical bill that wasn’t covered by her Medicare benefits. Because her income consisted of Social Security benefits only, and she owned nothing other than the furnishings in her rent-assisted apartment, she was judgment proof and immune from collection activities. Instead of paying a lawyer to file bankruptcy on her behalf, Henriette turned off her phone ringer and let the collection calls go to voicemail.
Suppose you can’t settle the debt, and it looks as if the creditor may pursue you for payment. You can expect the lender to take steps to collect the debt.
The process will start with telephone calls and late payment notices. Eventually, the medical provider might sue you and get a money judgment—and you’ll want to file for bankruptcy before that occurs.
You'll likely lose money and property once a creditor has a money judgment. The creditor can use the money judgment to get a wage garnishment or withdraw money from your bank account with a bank levy. The creditor could also place a lien against your real estate.
Learn about lawsuit judgments in bankruptcy.
If you’re not judgment proof, and settling your debt with the hospital isn’t feasible, talking to a bankruptcy attorney is a good idea. Not only will you learn which bankruptcy chapter will eliminate medical debt and solve other financial challenges, but the sooner you file for bankruptcy, the sooner you’ll return to financial stability.
Did you know Nolo has made the law accessible for over fifty years? It’s true, and we want to ensure you find what you need. Below, you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>When first exploring bankruptcy, it’s common to wonder whether it is better to file for Chapter 7 or Chapter 13 bankruptcy. The short answer is that it will depend on your financial circumstances and what you’d like to accomplish with bankruptcy.
Many people prefer to file for Chapter 7 because it’s quick, with most people receiving a debt “discharge” eliminating qualifying debts in about four months. Also, filers can usually keep all or most of their property, and don't pay into a three- to five-year Chapter 13 repayment plan.
But not everyone qualifies to file for Chapter 7 bankruptcy, and in some cases, Chapter 7 doesn't provide the help needed. In this article, you'll learn when Chapter 7 bankruptcy might be more advantageous than Chapter 13 bankruptcy and when Chapter 13 might be the better choice.
Chapter 7 bankruptcy is an efficient way to get out of debt quickly, and most people would prefer to file this chapter, if possible. Here's how it works:
Find out what happens to cars in Chapter 7 bankruptcy.
Chapter 7 works very well for many people, especially those who own little property, have predominately credit card balances, medical bills, personal loans, and other debts that get wiped out in bankruptcy. To qualify for Chapter 7, you'll need to meet requirements that include having an income low enough to pass two financial tests.
You'll take the means test to see if your income qualifies for Chapter 7 bankruptcy. You'll automatically be eligible if your gross income for the six months before filing is below the average for a family of the same size in your state. If your income exceeds the median, you'll deduct expenses on the second portion of the means test, giving you another opportunity to pass.
Example. Helen is a single woman whose gross yearly income is $75,000, according to the means test calculation. Her state’s median income for a single person is $65,000, so Helen won’t pass the first part of the Chapter 7 means test. Helen will deduct actual and allowed expenses in the second portion of the means test and pass if the calculation demonstrates that she doesn’t have extra funds to pay creditors.
The means test evaluates past income. However, the Chapter 7 trustee responsible for managing the case will also evaluate your current income and actual budget. If your current budget would allow you to make reasonable monthly payments to creditors, you won’t qualify for Chapter 7 bankruptcy.
Example. Jesse received a promotion and salary increase the month before filing for bankruptcy, but his monthly expenses remained unchanged. As a result, Schedules I and J of his bankruptcy paperwork showed he had an extra $200 monthly to pay creditors. Even though he passed the means test, the Chapter 7 trustee recommended that the bankruptcy judge convert Jesse’s Chapter 7 case to Chapter 13. The bankruptcy judge granted the request.
You must live in your state for a particular period before filing and before using that state's exemption laws to protect property in Chapter 7. Also, people who have filed for bankruptcy before must wait several years before qualifying for another debt discharge.
Find out more about multiple bankruptcy filings and who can’t qualify for Chapter 7 bankruptcy.
Chapter 7 bankruptcy isn't the best choice for everyone. Chapter 7 won't help people whose debts don't qualify to be "discharged" or wiped out, such as recently incurred income tax debt, student loans, and domestic support obligations.
High-income filers find it hard to qualify, and Chapter 7 isn't a good fit for people who would lose a home or other property if they filed for Chapter 7 bankruptcy. Also, Chapter 7 doesn’t help those facing foreclosure or repossession keep a house or car.
For those people, Chapter 13 bankruptcy would likely be a better choice.
Before exploring options afforded by Chapter 13, check whether you meet these criteria:
If these factors don't preclude you from filing, you might be able to take advantage of these exclusive Chapter 13 benefits.
If you fall behind on a house or car payment, you risk losing it if you file for Chapter 7. Why? Because these debts are "secured,” you must give the property back to the lender if you don’t pay as agreed, and Chapter 7 doesn’t have a mechanism to help you bring the loan current.
However, in Chapter 13 bankruptcy, you can make up the missed payments over time and keep the home, car, or other property securing the debt. Learn more about making up mortgage arrears and car loan arrears in Chapter 13 bankruptcy.
Some debts are "nondischargeable" and don’t qualify for a discharge in bankruptcy, such as newer income tax balances and domestic support arrearages. The past-due amounts for these types of debt can be hefty.
If you filed for Chapter 7, your creditor could immediately collect the entire balance owed when the bankruptcy case closed by garnishing your wages, levying your bank account, or even seizing property.
Instead, you can use the Chapter 13 plan to pay these debts off over three to five years without the threat of harsh collection actions hanging over your head. Learn more about debts in Chapter 13 bankruptcy.
If someone with good credit helped you buy a car or get an apartment by signing your auto loan or apartment lease contract as a responsible party, that person is a codebtor on that debt. They’ve guaranteed your loan and are responsible for paying it if you don’t.
Chapter 7 will discharge your obligation to pay only, not your codebtor’s responsibility. If you were to file for Chapter 7 bankruptcy, your codebtor would still be on the hook, and the creditor would likely pursue the codebtor for payment.
By contrast, if you file for Chapter 13 bankruptcy, the creditor will leave your codebtor alone if you keep up with your bankruptcy plan payments and pay the debt in full. Learn more about what happens to codebtors in bankruptcy.
When you file for Chapter 7 bankruptcy, you can keep property protected or “exempt” from creditors under state or federal law. The bankruptcy trustee appointed to your case will sell any “nonexempt” property not covered by a bankruptcy exemption and use the proceeds to pay creditors.
In Chapter 13 bankruptcy, you don't have to give up any property. However, there’s a catch. You must pay its value through the repayment plan. So, if you have nonexempt property you can't bear to part with and can afford to pay to keep it, Chapter 13 bankruptcy might be the better choice.
Sometimes, you can use a Chapter 13 “cramdown” to reduce the amount you owe on income-producing real estate, cars, and other financed property that the lender could take back if you don’t pay. A cramdown reduces the amount you owe to the collateral’s actual value, so it works great when you owe more than the property is worth.
But here are the catches. A cramdown doesn't apply to the home you live in, and you must pay the entire reduced balance through the repayment plan. If you’d like to cram down the mortgage on your vacation home in the Poconos, expect a hefty monthly plan payment.
Chapter 13 offers a powerful benefit if your residential home is worth less than you owe. Chapter 13’s “lien stripping” mechanism lets you remove a “wholly unsecured lien” from your home. A wholly unsecured lien would be a junior loan that wouldn’t receive a penny if you were to sell your house.
For instance, suppose you owe $500,000 on your first mortgage and $70,000 on a second junior mortgage, but your house is worth only $460,000. If you sold the house, the sales proceeds wouldn’t fully pay the first mortgage, so there’d be nothing to pay toward the second. The second would qualify as a wholly unsecured junior mortgage, and you could eliminate the lien and essentially the loan using Chapter 13’s lien stripping procedure.
Here are a few things filers are surprised to learn about Chapter 13 bankruptcy and often find a bit challenging:
Despite these potential problems, Chapter 13 bankruptcy is a good option for people with regular income who would otherwise lose their house to foreclosure or need time to pay back tax or support arrearages.
Some debtors make too much to qualify for Chapter 7 bankruptcy, and Chapter 13 is the only bankruptcy option available. If you don’t know if you qualify, take the Chapter 7 bankruptcy means test.
However, making too much for Chapter 7 doesn’t automatically qualify someone for Chapter 13. You’ll need to take additional steps to determine whether you have sufficient income to repay everything required in a Chapter 13 repayment plan.
Most people prefer Chapter 7 bankruptcy because, unlike Chapter 13 bankruptcy, it doesn't require you to repay a portion of your debt to creditors. In Chapter 13 bankruptcy, you must pay your creditors all of your disposable income—the amount remaining after allowed monthly expenses—for three to five years.
Disposable income is the amount that remains after subtracting allowed bankruptcy expenses from your monthly gross income. When you claim your deductions, you can use the actual cost of some expenses and the national and local standards for others, such as the allowance for food, clothing, and housing.
Here’s a list of some of the deductions you’ll be allowed to take:
In a Chapter 13 matter, you’ll fill out the Chapter 13 Calculation of Your Disposable Income form. The amount remaining after deducting expenses is your monthly disposable income. You’ll pay your disposable income to the lowest priority creditors in your three- to five-year repayment plan.
You’ll have one additional hurdle to meet. The amount you pay unsecured creditors must meet or exceed the value of your nonexempt property. Otherwise, you won’t qualify. This is known as the “best interest of creditors” or “best efforts” Chapter 13 test.
It’s not unusual to find you don’t earn enough to propose a Chapter 13 plan the bankruptcy court will approve or “confirm.” A local bankruptcy attorney can review your finances and explain your options.
Did you know Nolo has made the law accessible for over fifty years? It’s true, and we want to ensure you find what you need. Below, you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>If you aren’t sure how Chapter 7 and Chapter 13 bankruptcy differ, you’re not alone, and this article can help you learn about the benefits of each bankruptcy chapter. We've arranged the article into three sections. Start with the table highlighting key differences between Chapters 7 and 13, then read the brief bankruptcy chapter descriptions that follow for more detailed information. The Chapter 7 and 13 frequently asked questions sections provide answers to common bankruptcy questions.
Chapter 7 |
Chapter 13 |
|
Type of Bankruptcy |
Liquidation |
Reorganization |
Who Can File? |
Individuals and Business Entities |
Individuals Only, Including Sole Proprietors |
Eligibility Restrictions |
Disposable Income Must Be Low Enough to Pass the Chapter 7 Means Test |
Debt Cannot Exceed $2,750,000 (as of February 5, 2024) |
How Long Does It Take to Receive a Discharge? |
Typically About Four Months |
Upon Completion of All Plan Payments |
What Happens to Property in Bankruptcy? |
Trustee Can Sell All Nonexempt Property to Pay Creditors |
Debtors Keep All Property But Must Pay Unsecured Creditors an Amount Equal to Value of Nonexempt Assets |
Allows Removal of Junior Liens from Real Property Through Lien Stripping? |
No |
Yes, If Requirements Are Satisfied (Learn about lien stripping.) |
Allows Reduction of Principal Loan Balance on Secured Debts? |
Yes, but on Tangible Personal Property Only, not Real Estate (Learn about redemption.) |
Yes, If Requirements Are Satisfied (Learn about cramdowns in bankruptcy.) |
Benefits |
Allows Debtors to Discharge Qualifying Debts and Get a Fresh Start Quickly |
Allows Debtors to Keep Their Property and Catch Up on Missed Mortgage, Car, and Nondischargeable Priority Debt Payments |
Drawbacks |
Trustee Can Sell Nonexempt Property. Does Not Provide a Way to Catch Up on Missed Payments to Avoid Foreclosure or Repossession. |
Must Make Monthly Payments to the Trustee for Three to Five Years. May Have to Pay Back a Portion of General Unsecured Debts. |
If you’re a small business owner, you’ll want to understand how each bankruptcy chapter will affect your company. Find out how Chapter 7 or Chapter 11 bankruptcy can help you unwind a closed company or help a struggling business thrive.
The “automatic stay” order stops most creditors from pursuing collection efforts as soon as you file. Three to four months after filing, Chapter 7 bankruptcy “discharges” or erases qualifying debts, such as credit card balances, medical bills, and personal loans.
One of the most significant benefits of Chapter 7 is that you won’t repay creditors through a repayment plan. Instead, the court appoints a bankruptcy trustee to sell your nonexempt property, property you can’t protect with a bankruptcy exemption, for the benefit of your creditors.
Chapter 7 bankruptcy works well for low-income debtors with little or no assets or those who can protect all household belongings. If you don’t have any assets to sell, creditors receive nothing.
But even if you’d lose property, Chapter 7 might still be worthwhile. Just figure out whether the amount of debt you’d erase would exceed the value of the property you’d lose.
Also, losing property isn’t necessarily bad if you have nondischargeable debt, such as child support arrearages or back taxes. The trustee will first apply the sales proceeds to nondischargeable debt in most cases (but not student loans). After the case ends, the amount you’d owe would be lower.
However, not everyone qualifies for Chapter 7 bankruptcy. If you make too much money to meet income requirements, explore filing under Chapter 13 bankruptcy.
You’ll take the two-part Chapter 7 means test. If your household income is lower than the median household income in your state, you’ll pass. However, if you don’t qualify after the first part, you’ll have another chance. The second portion of the means test lets you subtract some monthly expenses from your income. If you don’t have enough remaining to pay a meaningful amount to creditors through a Chapter 13 repayment plan, you’ll qualify for Chapter 7.
Your state decides whether you can use federal bankruptcy exemptions or state exemption laws. Although exemption laws differ, you’ll typically be able to keep these types of property in bankruptcy:
This list represents a snapshot of common exemptions. Many more exist, so check your state exemption laws.
Most people who file for bankruptcy choose Chapter 7 if they meet the eligibility requirements. Chapter 7 is a popular choice because, unlike Chapter 13, it doesn't require filers to pay back debts. Learn if it is better for you to file Chapter 7 or 13 bankruptcy.
Chapter 13 will make more sense if you’re behind on your mortgage and want to keep your house. You can repay the missed payments over time using the Chapter 13 repayment plan. You can also force a creditor to allow you to repay nondischargeable debts, like back taxes or support arrearages, over three to five years.
Chapter 13 is a reorganization bankruptcy designed for debtors with regular income who have enough left each month to pay back at least a portion of their debts. The amount you'll repay will depend on how much you earn, your debt, and how much property you own.
Typically, Chapter 13 bankruptcy is for debtors who:
Other benefits exist, too, such as the ability to "cram down" the amount owed on a vehicle or investment property to the property's value. Some filers can also strip wholly unsecured junior liens from your residence.
In Chapter 13 bankruptcy, the trustee doesn’t sell your property. However, you must pay creditors an amount equal to the nonexempt property value. But that's not all you'll pay. The total amount of your repayment plan will depend on your income, expenses, and debt type.
It will depend on the type of debt you have. Here are the general guidelines:
If your gross household income exceeds the median yearly income for a household of your size in your state, your plan must last five years—unless you can pay 100% of your unsecured debt in a shorter period. If your income is less than your state’s median yearly income, you can propose a three-year plan. Learn whether you’re eligible for Chapter 13.
Chapter 13 bankruptcy will be a good option if you're trying to save your home from foreclosure. You can pay off a mortgage "arrearage" (late, unpaid payments) over the length of a three- to five-year repayment plan. You'll need enough income to meet your current mortgage payment while paying off the arrearage and other required debts for this to work.
Once you file your Chapter 13 bankruptcy petition, the "automatic stay" stops foreclosure proceedings until the court approves your repayment plan. If approved, the mortgage lender must accept payments towards the arrearage over the length of your repayment period. If you make all the required payments and stay current on your monthly mortgage payments, you'll avoid foreclosure and keep your home. Learn more about your home in Chapter 13 bankruptcy.
An essential part of a Chapter 13 bankruptcy plan is proving to the judge that you have enough reliable income to meet your payment obligations. Courts allow debtors to use income from many sources to fund their plan, retirement benefit income included. Find out if you’re eligible for Chapter 13 bankruptcy.
Yes. Although you must repay 100% of your tax debt (unless it qualifies for discharge because of its age), you can do so over three to five years.
Did you know Nolo has made the law easy for over fifty years? It’s true, and we want to ensure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
Updated February 5, 2024
If you're one of the millions struggling financially due to inflation, illness, job loss, or another unexpected event, you're not alone, and filing for bankruptcy can help. But first, you need answers to a few essential bankruptcy questions, which we answer below. The good news is that if you find filing for bankruptcy is the answer, you can expect the weight to lift from your shoulders. But the best part? Bankruptcy filers say that getting the bankruptcy discharge, the order that wipes out your debt when filing for bankruptcy, feels even better.
We explain the differences between the three types of bankruptcy, Chapters 7, 13, and 11, and how each bankruptcy type works below.
No one is immune from debt or life’s challenges. The bankruptcy system exists because, sometimes, people need help getting back on their feet. It helps by unwinding the contract between you and your creditor. Without a contract, you have no obligation to pay the debt and get a fresh financial start.
As powerful as bankruptcy is, filing for bankruptcy won't solve every financial problem, so it’s crucial to learn what bankruptcy can and cannot do.
Everyone needs things to maintain a home and employment. You’d hardly get a fresh start if you lost all your belongings when filing for bankruptcy. So don’t worry about losing everything you own.
Each state decides the type of property a filer will need after filing for bankruptcy. Bankruptcy exemptions, the state laws that tell you what you can keep, vary widely. Even so, you’ll likely be able to protect some equity in a home and car, household furnishings, a retirement account, and more.
But you might also learn that some of your assets aren’t covered or are "nonexempt," especially if you own luxury property like artwork, collections, boats, stocks and bonds, and rental property. If you have nonexempt property, check for a “wildcard” exemption you can use to protect the nonexempt property of your choice.
It doesn’t matter which of the three types of bankruptcy you file. The exemptions are the same regardless of whether you file for Chapter 7 or Chapter 13 (the two types most people file), or Chapter 11 (the kind of bankruptcy businesses and individuals who make too much for Chapter 13 bankruptcy file).
However, the type of bankruptcy will determine what will happen to your nonexempt property.
The system ensures that creditors receive the same amount in both bankruptcy chapters.
In most cases, yes. In Chapter 7, you must be able to protect all equity with an exemption to keep the trustee from selling it. You'll also need to be current on the payment if it's financed. Otherwise, the lender could ask the bankruptcy court to allow the repossession or wait until after the Chapter 7 case ends to recover it. Learn more about keeping a car in Chapter 7.
Keeping a car in Chapter 13 or several vehicles is relatively easy. If you can't protect all the equity with an exemption, you can pay creditors for the nonexempt portion through the plan. Also, if you're behind on your car payment when you file, you can catch up on the arrearages in the plan.
If you want to take a peek at what you’d be able to protect, check out bankruptcy exemption laws by state.
You already know that filing for bankruptcy works by wiping out debt, such as credit card balances. And you'll be able to erase overdue utility payments, medical bills, and personal loans. You can even get rid of a mortgage or car payment if you're willing to give up the house or car you put up as collateral to secure the debt.
But did you know you can't discharge all debts? For instance, child support will never go away in bankruptcy, and student loans are difficult to wipe out. You'd have to win a separate lawsuit.
These types of debts are known as "nondischargeable debts." Before deciding to file, be sure that bankruptcy will "discharge" or eliminate enough bills to make it worthwhile.
Not all bankruptcy chapters work the same way, which is good because when your financial situation is unique (as all are), having options helps. Your next step will be to determine which type of bankruptcy will be best for you: liquidation or reorganization bankruptcy.
Chapter 7 bankruptcy is most filers’ first choice. It wipes out qualifying debt without creditor repayment. It's also quick, taking about four months to complete. And if you're an individual, you don't lose everything. You can keep the property you need to work and live.
Chapter 7 doesn't solve all problems and has some downsides. Because it's quick and doesn't involve creditor repayment, Chapter 7 won't help you permanently stop a foreclosure or repossession. You'll want to explore Chapter 13 to save a home from foreclosure or keep your car from being repossessed.
Learn whether you'll lose your home in Chapter 7 bankruptcy.
Also, it's called “liquidation bankruptcy” because the Chapter 7 trustee appointed to handle the case sells the debtor’s property for the benefit of creditors. In an individual bankruptcy, the trustee sells the filer's nonexempt luxury property, so losing things like sporting equipment, gun collections, boats, recreational vehicles, and rental property is common. In a bankruptcy brought by a business, the trustee sells all of the business assets.
Individuals and businesses with extra income to pay debts but insufficient to cover current expenses use "reorganization" bankruptcy chapters. The debtor, creditors, and the court agree on a plan that redistributes the debtor’s income among the creditors. Here’s who typically uses each of these types of bankruptcy:
This type of bankruptcy requires a filer to pay creditors through a three- to five-year repayment plan. While the repayment requirement is often too costly for many, it has benefits.
For instance, if a creditor is playing hardball, a filer can avoid collection efforts and force the creditor into a Chapter 13 payment plan. However, one of the most significant benefits of Chapter 13 is that a debtor can avoid foreclosure and keep a house that would be lost otherwise.
Because debts aren’t treated equally in Chapter 13, a debtor can often channel the monthly payment toward what the debtor wants to accomplish, such as catching up on a house or car payment and paying off nondischargeable tax balances and support obligations over time. Creditors holding debts that filers don’t care much about, credit card, medical, personal loan balances, and the like, are left dividing what remains, which usually isn’t much.
Other benefits exist, too. For instance, a filer can strip off a junior residential mortgage if a home is significantly underwater. It's also possible to reduce the amount owed on personal property or nonresidential real estate if the debtor can pay the reduced amount in full through the plan, in what is known as a “cramdown.”
Overall, drafting a Chapter 13 plan is an involved process, and retaining a bankruptcy lawyer is highly recommended. Other reorganization plans are even more complex. But because they involve extensive negotiations, even more options are available.
You don't need a particular amount of debt to file for bankruptcy, but there are many other eligibility rules. These are the most common.
Debt discharges aren’t unlimited. If you've filed for bankruptcy before, you might not qualify immediately. The waiting period will depend on the chapter you filed previously and the chapter you intend to file now.
For instance, suppose you filed for Chapter 7 two years ago. The waiting period between Chapter 7 and 13 filings is four years. It’s eight years if you want to file another Chapter 7. So you’ll need to wait for another two to six years.
Almost everyone must pass the "means test." There are three ways to meet this requirement.
First is the easy way. Check whether you’re exempt. If you are, you can skip the means test altogether. Filers who have more business debt than personal debt are exempt. So are certain military members and veterans.
Next is the reasonably straightforward method. You’ll compare your gross household income to your state's median income for a family of the same size. Add the gross income you and your family earned over the last six months and multiply by two. Then, compare it to the figures posted on the U.S. Trustee website (select "Means Testing Information" under the "Consumer" tab). You'll pass if your income is less than or the same as the state's median income for your family size.
Finally, the complicated approach. If your gross income is too high, you can take the second portion of the means test. You’ll use the means test forms to deduct allowed expenses (beware, this sounds easier than it is). You'll be eligible for Chapter 7 if you don't have enough income to pay into a Chapter 13 plan.
Fewer people file for Chapter 13 than Chapter 7 primarily because the benefits offered by Chapter 13 bankruptcy come at a hefty price, and many can't afford it. The first set of requirements is relatively easy to meet:
The tricky part is the required payment. While it’s possible to “pay pennies on the dollar,” for most, Chapter 13 bankruptcy gets expensive fast because, in addition to your monthly living expenses, you must make enough to cover the larger of the following over five years:
People who qualify for Chapter 7 bankruptcy but elect to file for Chapter 13 bankruptcy don’t need to follow these rules. They pay according to their budget over three years, but they can extend the period to five years if it’s more manageable. Find out more about calculating a Chapter 13 bankruptcy payment.
Much like Chapter 13 bankruptcy, filers must propose an acceptable plan. But the process is significantly different and even more complicated. Find out more about individual and business Chapter 11 bankruptcies.
Retaining a professional to help you with your case is well worth the cost. Not only will you have peace of mind that you’ve filed a correctly prepared case, but you’ll also receive guidance throughout the process. Most importantly, a bankruptcy lawyer will ensure that you don’t lose important property unexpectedly and don’t find yourself facing bankruptcy fraud charges.
Attorneys’ fees for a Chapter 7 case can range from $1,200 for a simple matter to $3,500 or more for a more complicated case, depending on where you live. Most filers can expect to pay somewhere between $1,500 and $2,000. Remember that a Chapter 7 bankruptcy lawyer will require you to pay the fees in full before filing your matter. Why? Because the bankruptcy case would wipe out any unpaid amount.
By contrast, Chapter 13 lawyers' fees will be significantly more, but unlike Chapter 7, many will accept a downpayment as low as $100. You’ll likely be able to pay the remainder through the repayment plan.
If you have a relatively simple case, filing for Chapter 7 without a lawyer is possible. An example of a simple case would be one in which you can protect all property with exemptions, and your income is low enough to qualify easily.
By contrast, it's far more difficult to represent yourself in Chapter 13. Most people find it challenging to draft a plan the bankruptcy court will confirm without the help of specialized bankruptcy software.
Learn about your options if you can’t afford a bankruptcy lawyer.
While most people hire a bankruptcy lawyer to prepare their bankruptcy paperwork and guide them through the process, it's possible to do your bankruptcy yourself if it's simple enough. You can get a feel for your case's complexity using our bankruptcy quiz. We'll alert you to issues you might want to run by a bankruptcy lawyer.
Your bankruptcy case will begin when you file the bankruptcy paperwork with the bankruptcy court. Go to your state's bankruptcy article for specifics on where and how to file.
The court will issue an automatic stay that will prevent most creditors from continuing to collect from you. Even court cases and trials related to debt collection will have to stop. Keep in mind that bankruptcy won't stop all lawsuits. For instance, you'll still have to make support payments, and criminal actions can go forward, too.
Don't assume that what you say in your paperwork will be accepted at face value. The court will assign a professional called the bankruptcy trustee to check out your filing thoroughly.
When reviewing your paperwork, the trustee will compare the figures in the petition and schedules to your tax returns, bank statements, paycheck stubs, profit and loss statements, and the other financial documents you’ll be required to provide. The trustee will also look for signs of bankruptcy fraud.
If the trustee spots an issue, the trustee might do any number of things. For instance, it isn’t unusual for a trustee to ask for additional documents or photos or inspect an item of property, storage space, or real estate. A trustee will usually attempt to work out a problem informally before or at the 341 meeting of creditors. If you can’t resolve it, the trustee will file a motion or adversary proceeding (although these actions are relatively unusual).
Every filer must attend at least one bankruptcy hearing, the 341 meeting of creditors. It isn't a court appearance, but you must take it seriously. The trustee, not the judge, holds the meeting in a conference room at the courthouse or elsewhere, and about ten filers are assigned to appear during the same hour.
When it starts, the trustee will take attendance and provide initial instructions. Here's what you’ll do next:
A trustee who is satisfied with your responses will conclude the meeting. Otherwise, the trustee will continue the case until another day—something that often happens when one of the following applies:
In most cases, the debtor’s appearance at the creditors' meeting takes less than ten minutes.
At this point, Chapter 7 filers will be in the final stretch, with one more responsibility to complete, filing a financial management course certificate. By contrast, Chapter 13 filers will just be getting started. They’ll need to do the following:
After completing all steps, the debtor will receive a debt discharge wiping out qualifying debt.
To make the most of your discharge and ensure life after bankruptcy goes smoothly, you’ll want to do a bit of planning.
Some areas of your life will be more challenging to negotiate for a year or two after filing for bankruptcy, such as renting or leasing housing, financing a car, and establishing a bank account. So, it’s essential to have these things in place before filing. And don’t plan on making changes soon.
Tip. If you’ll be letting go of a house and you're worried about moving your children's schools, rent something in the area, if possible, before filing.
You can start rebuilding credit soon after completing a bankruptcy. Most filers are surprised by how quickly they receive credit offers. But it makes sense. Creditors know you won’t be able to file again for quite a few years, so if you’re employed, you’ll be a reasonable credit risk. Take the opportunity to find out about credit-building strategies.
Many filers are relieved that they don’t need to push aside a dream of buying a home. You could be eligible two to four years after your bankruptcy case. Find out more about post-bankruptcy homebuying requirements so you can plan accordingly.
After filing for bankruptcy, it’s common to want to secure your future. The first step is following a sound financial plan, of course. But you’ll also want to safeguard yourself against unexpected financial hardships. Putting money aside in a savings account is always a good idea.
But you might want to contribute to a 401k plan or another ERISA-qualified retirement account. Not only would it be exempt if you needed to file for bankruptcy again (it happens), but you could draw on it in an emergency. Obtaining life insurance and making a will are other ways to provide for your family.
Filing for bankruptcy isn't always needed, especially if you're "judgment proof" and don't have any assets that creditors could take. If you're judgment proof and anticipate that your financial situation won't change, a simple bankruptcy alternative would be to avoid creditor calls.
Other options include working out arrangements with creditors. You might find you can negotiate an agreement to pay less than you owe or work with a credit counseling agency to lower monthly payments by reducing the interest rate.
Did you know Nolo has made the law accessible for over fifty years? It’s true, and we want to ensure you find what you need. Below, you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>I transferred property out of my name, and now I need to file for bankruptcy. But is it a good idea? Should I file for bankruptcy now, or would it be better to wait?
(You’ll find additional answers to common questions about transferring property before filing for Chapters 7 and 13 at the end of the article.)
It depends. Valid reasons exist for transferring property before bankruptcy. However, transferring property from your name before filing for bankruptcy is often problematic. The bankruptcy trustee might be able to avoid the transfer and get the property back for the benefit of your creditors.
Whether the trustee will be able to reverse the property transfer will largely depend on the following:
Not all property transfers are inappropriate. Suppose you must pay necessary bills, such as your rent or a utility bill, or buy food or a warm coat. In that case, you can sell a car, boat, guitar, or any other property you own and use the money to pay bills.
If you plan to file for bankruptcy soon after that, you can usually avoid a problem by:
Plan to disclose the property transfer when filling out your bankruptcy paperwork. You’ll also want to take your records to the 341 meeting of creditors so that you’re prepared to answer any questions posed by the bankruptcy trustee overseeing your case.
Learn what to do with bank accounts, automatic payments, and utility deposits before bankruptcy.
If you intended to defraud your creditors by making the transfer, the court might deny your bankruptcy discharge altogether. You could also face other bankruptcy fraud consequences, such as criminal penalties.
The bankruptcy trustee could object to your bankruptcy discharge if you intentionally transferred property out of your name within one year of the bankruptcy filing to defraud, hinder, or delay your creditors.
The trustee also has grounds to object if you destroyed, harmed, or hid your assets. As a result, it is never a good idea to transfer or conceal property to defraud your creditors before filing for bankruptcy.
Learn more about what will happen if the bankruptcy trustee suspects fraud.
Even if the bankruptcy trustee can’t object to your discharge, the Chapter 7 trustee might be able to recover an asset you transferred out of your name if any of the following occurred:
A trustee in a Chapter 7 case would “liquidate” or sell the property and distribute the proceeds to your creditors.
If you made a transfer that might put you in danger of losing your discharge or allowing the trustee to get the property back, delaying your bankruptcy might be an option. However, it’s not advisable unless you made the transfer to get money to pay for necessary goods.
Here’s the problem.
No matter how long you delay filing, you could face criminal prosecution if you intend to commit bankruptcy fraud. If you’ve transferred property and are considering bankruptcy, seek advice from a bankruptcy lawyer.
Learn more about timing your bankruptcy filing.
Here are a few other answers to common questions about transferring property and selling assets before bankruptcy.
Can I sell my house before filing for Chapter 7 bankruptcy? Yes. However, you’ll need a bankruptcy exemption to protect the home equity converted to cash due to the sale. Suppose you can’t protect the funds using a homestead exemption (some homestead exemptions protect proceeds for six months or so), wildcard exemption, or cash exemption. In that case, you’d lose the money in Chapters 7 and 13—at least the amount covering your debt. However, you’d also pay a hefty trustee’s fee, making it more economical to repay your debt outside of bankruptcy.
What happens if I transfer assets or sell property before Chapter 7 bankruptcy? It will depend on the circumstances. Nothing will happen if you use the proceeds for necessary purchases before filing for Chapter 7 or can protect any remaining funds with a bankruptcy exemption. You could face a problem if you don’t disclose the transfer and can’t exempt the property.
Can I transfer assets or sell property before Chapter 13 bankruptcy? As with Chapter 7, nothing will happen if you use the proceeds for necessary purchases before filing for Chapter 13 or can protect any remaining funds with a bankruptcy exemption. Before filing, you’ll want to discuss any other circumstances with a bankruptcy attorney.
]]>However, keep in mind that most people rebuild credit reasonably quickly after bankruptcy. You'll find information about the effects of bankruptcy at the end of the article.
Surprisingly, the best approach for some people in debt is to take no action. If you're living with little income and property and don't anticipate that much will change in the future, you might be "judgment proof."
If you're judgment proof, anyone who sues you and obtains a court judgment won't be able to collect from you because you don't have anything they can legally take. Most states protect or "exempt" essential property like basic clothing, ordinary household furnishings, food, Social Security income, unemployment, or public assistance benefits.
If you own significant property and assets, you might not be bankrupt. Consider selling your property and paying off debt, especially if you'd lose property in Chapter 7.
An easy way to determine whether a private sale would be better than filing for Chapter 7 bankruptcy is by comparing the total debt you could erase in Chapter 7 to the amount of property you'd lose. You can check potential property loss by reviewing your state's bankruptcy exemptions.
This approach will likely make sense if a relatively small loan will help you get by financially. But if you anticipate needing help on an ongoing basis, many friends and family will help but would prefer you use the money to pay for bankruptcy and stop the problem for good.
Find out how people file for bankruptcy when they can't afford to hire a bankruptcy lawyer.
If you have some income, you might be better off negotiating with your creditors instead of filing for bankruptcy. Negotiating more favorable payment terms can buy you some time to get back on your feet, or your creditors may agree to settle your debts for less than you owe.
Many people aren't comfortable negotiating with their creditors or with collection agencies. If you aren't confident with your negotiation skills, or the creditors and collectors are so hard-nosed that the process is too unpleasant to stomach, contact an attorney for help.
Otherwise, start by learning more about debt settlement and negotiating with creditors.
If you don't want to do the negotiating yourself, another alternative can be seeking help from a nonprofit credit or debt counseling agency. These agencies can work with you to help you repay your debts and improve your financial picture.
You can find agencies in your area on the United States Trustee Program website. Clicking "Credit Counseling and Debtor Education" will lead you to a list of approved agencies that provide the credit counseling debtors must complete before filing for bankruptcy.
Participating in a credit or debt counseling agency's debt management program is a bit like filing for Chapter 13 bankruptcy. The agency will help you develop a plan to repay your creditors over time, somewhat like a Chapter 13 plan.
But working with a credit or debt counseling agency has one advantage: No bankruptcy will appear on your credit record. However, successfully finishing the plan won't necessarily improve your credit. You should discuss this with the counselor before agreeing to the program.
A debt management program also has some disadvantages when compared to Chapter 13 bankruptcy.
Chapter 13 protects you from creditors who would start collection actions. A debt management program has no such protection. Any single creditor can pull the plug on your plan.
A debt management program usually requires you to repay your debts entirely. In Chapter 13 bankruptcy, you often pay only a small fraction of your unsecured debts. Finally, debt management and debt settlement scams abound. Many companies don't care about helping you; they want to collect fees for their services. So tread carefully before you sign up for a plan.
Consumer advocates have also raised concerns about credit counseling agencies. Why? Because they receive most of their funding from creditors. As a result, critics say, these agencies could face a conflict between their funders' and clients' interests.
Yes, it's possible. If you decide to do nothing, or you're resolving debt problems without bankruptcy, you'll likely want the creditor abuse to stop. You can get creditors off your back by taking advantage of federal and state debt collection laws that protect you from abusive and harassing debt collector conduct.
In many cases, asking the creditor to stop calling is all you'll need to do. To learn about the specific process, read What to Do If a Bill Collector Crosses the Line. But remember, this approach won't resolve the debt itself.
Did you know Nolo has been making the law easy for over fifty years? It’s true—and we want to make sure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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What to Consider Before Filing Bankruptcy |
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>These days, many people file for bankruptcy to delay a foreclosure. While bankruptcy can be a good solution in this situation, many people file much earlier than they need to, which makes it more difficult to obtain a mortgage modification. Once you file for bankruptcy, many lenders will refuse to enter into or continue negotiations over your mortgage. Because your bankruptcy will cancel the promissory note part of your mortgage (but not the lien on the house), technically there will be nothing left to negotiate. If you might want to seek a mortgage modification in the future, you probably should avoid bankruptcy -- at least until you know which way the modification winds are blowing.
When you file for Chapter 7 bankruptcy, the court will look at your income over the past six months to determine whether you are eligible, using what's called the "means test." If your income is too high, you may file only for Chapter 13 bankruptcy, which requires you to repay a portion of your debts.
If your income has dipped recently because of a pay cut or layoff, you can often become eligible for Chapter 7 by simply waiting a few months. Once several months of decreased income are figured into the means test, your average income over the past six months may be low enough to qualify.
For example, assume that your average gross income for the previous six months is $8,000 per month, but that you were just laid off and are now getting $1,500 per month in unemployment. If you wait two months to file, your six-month average gross income will drop from $8,000 to less than $5,900 a month, which will bring you into eligibility for Chapter 7 bankruptcy in most states.
You may have property that you would lose in a Chapter 7 bankruptcy if you file now, but that you could keep if you wait -- or at least have time to sell and use the proceeds. For example:
It's a good idea to hold off on filing for bankruptcy if you foresee other significant expenses in the near future. As a general rule, Chapter 7 bankruptcy only erases debts you have as of your filing date. Debts that come along later will be yours to deal with, sometimes for years to come. For example, if you will be having knee replacement surgery in the next year and you will have to pay some or all of the expenses, those expenses will be wiped out if you wait to file for Chapter 7 bankruptcy until after your surgery.
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]]>Ultimately, you'll want to assess whether you’re vulnerable to creditors. In some cases, doing nothing, at least for now, might be the best option.
Everyone considering filing for bankruptcy will look at the same set of factors. Here's where you'll start.
Most creditors need to file and win a money judgment in court before they can take your property. If, however, you don’t have anything a judgment creditor can collect, you’re “judgment proof.” You won’t need to file for bankruptcy.
If you have assets and your creditor sues you, you find out what will happen in Creditor Lawsuits: What to Expect When the Case Is in Court.
Generally, you’re judgment proof if:
Being judgment proof can be a temporary situation. For instance, you might be out of a job now but employable in the future. If you're relatively sure your financial situation won’t improve substantially, and if collection pressure doesn’t bother you, there might not be a reason to file for bankruptcy.
Not all debts get discharged in bankruptcy. If you’ll still have to pay your most worrisome bills after filing for bankruptcy, then filing probably won’t be a good idea. On the other hand, if filing for bankruptcy gets rid of enough debt that you’ll have more money to devote to nondischargeable debt, bankruptcy might still help.
Below are some debts that are either difficult or impossible to eliminate in bankruptcy. Also, creditors with these types of debt can use collection techniques like wage garnishments or bank levies even without a judgment.
A Chapter 7 bankruptcy filing won’t eliminate or reduce child support debt. So filing for Chapter 7 bankruptcy won’t help unless you can free up future income you can use to pay your child support by discharging other debt.
A Chapter 13 bankruptcy case, however, can be a better option. You can stop collection actions by entering into a three- to five-year repayment plan to pay off your past-due support payments in full. Be aware that if you have a hefty outstanding balance, your monthly payment might be steep because you must pay off all of the arrearages in the plan. You’ll still have to continue making your ongoing child support payment, as well.
If you can catch up in Chapter 13 bankruptcy, here are some of the complications you’ll avoid:
Find out more by reading What Are the Differences Between Chapter 7 and Chapter 13 Bankruptcy?
Taxpayers with outstanding tax debts are subject to a levy on assets or other income sources. A levy is a legal seizure of your property to satisfy a debt. Once a levy is in place, it usually remains until you pay off your tax debt.
If you owe past-due income taxes and you do nothing, you could face the following:
Understand that a bankruptcy filing won’t eliminate recent tax debts. However, through a Chapter 13 case, you might be able to pay off the tax debt over a period of three to five years.
To find out when you can discharge tax debts, see Tax Debts in Chapter 7 Bankruptcy.
If you’re in default on your student loans, the lender could result in a:
It’s not easy to discharge student loan debt in bankruptcy. You must prove that paying your loans will cause an undue hardship, which is a tough standard to meet, although not impossible in every situation.
If bankruptcy can help you save your home or car, it might be a good choice for you.
If you’re behind in your mortgage or car loan payments, you can catch up on those payments through Chapter 13 bankruptcy. You might also be able to get rid of second mortgages or home equity lines of credit or reduce your car loan to the market value of the car.
Learn more in Your Home and Mortgage in Chapter 13 Bankruptcy and Your Car in Chapter 13 Bankruptcy.
In Chapter 7 bankruptcy, you can’t bring a loan payment current, but if you can get rid of other debts to free up money to pay your mortgage or car loan, it might be worthwhile to file. Keep in mind that to keep a house or car in this chapter, you’ll want to be current on your payment when you file.
You'll find more information in Your Home in Chapter 7 Bankruptcy and Chapter 7 Bankruptcy and Your Car.
Before you decide on filing for bankruptcy or doing absolutely nothing, consider other options for dealing with debts by reading Alternatives to Bankruptcy.
The easiest way to decide your best course is by speaking with a bankruptcy attorney. A bankruptcy professional will help you weigh and balance your needs and help you determine whether it would be more beneficial to file for Chapter 7 or 13 or explore another option.
Did you know Nolo has been making the law easy for over fifty years? It’s true—and we want to make sure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>In this article, you’ll learn why filing for Chapter 13 bankruptcy without an attorney almost always ends poorly.
Chapter 13 bankruptcy has always been more complex than Chapter 7 bankruptcy. Even seasoned attorneys often need to amend a Chapter 13 plan more than once to get it “confirmed” or approved.
It’s even more difficult for people filing without a lawyer. A bankruptcy court known for many “pro se” or self-represented bankruptcy filers found that the court confirms less than 1% of plans filed without an attorney. This statistic includes cases prepared by non-lawyer petition preparers.
When you represent yourself, you are responsible for researching the law, following the bankruptcy court rules, preparing and filing your documents, and making all the decisions in your case.
When you file your case, the court appoints a Chapter 13 trustee. The Chapter 13 bankruptcy trustee will likely notify you if your plan is not in compliance with bankruptcy rules, laws, or local procedures. It will be up to you to correct the problem.
Similarly, court employees can answer simple procedural questions but cannot provide legal advice.
The trustee is not your lawyer. The trustee can’t provide you with legal advice and is rarely, if ever, able to respond to calls or emails requesting help with your case.
Also, although most Chapter 13 trustees are polite and personable, remember that the trustee is incentivized to collect as much money from you for creditors as possible. How does this work? The trustee gets a percentage of all the funds paid toward your bills.
Learn more about how trustees get paid in bankruptcy.
Some of the pitfalls to filing for Chapter 13 without a lawyer could lead to the dismissal of your case. Common reasons for a Chapter 13 dismissal include failing to do the following:
Learn about the steps in a Chapter 13 case.
Successfully representing yourself in Chapter 13 involves learning federal bankruptcy laws and procedural rules. It isn't easy to know what's expected or determine who to send information to because it depends on the hearing type.
For instance, self-represented filers often forget to provide copies of motions and responses to creditors and others involved in the case. Courts won’t rule in your favor on matters you haven’t appropriately served.
There are almost always local rules, forms, guidelines, and procedures in Chapter 13 that vary widely between districts. And even different trustees in the same bankruptcy court district might have additional requirements.
Putting this information together is challenging and will require many trips back to these sites. Filing Chapter 13 on your own can quickly become a full-time job because you must understand all the obligations required by a Chapter 13 plan.
Many trustees maintain a website with the trustee’s requirements, such as payment procedures. Each bankruptcy court website has local rules, guidelines, and helpful links for self-represented debtors.
Use the Federal Court Finder tool to find your local bankruptcy court and website.
Some Chapter 13 requirements are especially laborious. Suppose you filed Chapter 13 to take advantage of legal strategies such as lien stripping or cramdown. In that case, you must file the appropriate motions with the court and attend hearings. If a creditor objects, the bankruptcy court would set the matter for an evidentiary hearing where you must present evidence and witness testimony.
While judges often have patience with pro se debtors, all parties, represented or not, have to comply with the rules of evidence. Even if you have a good legal position to win at the hearing, you'll lose if you don’t know how to get your proof before the court.
If you aren’t successful, the court will dismiss your bankruptcy matter. If this happens, at best, you are back in the same spot you were before you filed. But you could also end up in a worse position.
With the passing of time, additional interest and late charges will accrue. Even more important, if you want to get an attorney and file again, you might run into roadblocks because of your previous filing.
You might have to wait to file again. Courts often dismiss cases with prejudice for some time. You won’t be able to file during the prohibited period unless you or your new lawyer gets the prejudice period shortened.
The automatic stay might be limited. But even then, you have another hurdle. The automatic stay that stops collection actions during bankruptcy might be limited to 30 days or unavailable. You’d have to file a motion and convince the judge to impose or continue the stay for an extended period.
Even if successful, this means much more work for your new lawyer and a higher fee.
You might be surprised to learn that even though filing for Chapter 13 is more costly than Chapter 7, many bankruptcy lawyers require a small deposit before filing the case. A Chapter 13 lawyer can roll the remaining attorneys’ fees into the repayment plan, allowing you to pay your legal fees over time.
Did you know Nolo has been making the law easy for over fifty years? It’s true—and we want to make sure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>Most people learn that filing for Chapter 7 bankruptcy works well for unemployed and employed people with little to no money after paying monthly expenses.
Yes, bankruptcy is intended to help people who can’t pay their debts, and if you don’t have income or make much, you’ll likely file for Chapter 7 rather than Chapter 13.
Chapter 7 bankruptcy helps people with low or no income (and sometimes even higher-income people) cancel qualifying debt in about four months. By contrast, Chapter 13 is for wage earners who can repay creditors through a three- to five-year repayment plan and requires an income source.
If you’re worried about having no money for a bankruptcy attorney, read about options when you can’t afford a bankruptcy lawyer.
Yes. Most people receiving unemployment benefits choose to file Chapter 7. Usually, they qualify no later than six months after the job loss. It’s even possible to qualify for Chapter 13 while unemployed, although less likely.
Learn why some people must delay filing in the “Newly Unemployed Chapter 7 Filers Might Not Qualify Immediately” section. Potential Chapter 13 filers can skip ahead to “Filing for Chapter 13 Bankruptcy While Unemployed.”
Most people who qualify for Chapter 7 bankruptcy use it, whether employed or unemployed. It's quick, takes only four months to complete, and doesn't require creditor payment.
Chapter 13 requires filers to earn enough to repay creditors through a lengthy three- to five-year Chapter 13 plan, which eliminates most people with low or no income. Also, filing for Chapter 13 can be costly.
That’s not to say it isn’t possible to file for Chapter 13 when your only source of income is unemployment benefits, but it’s not probable. If you’re one of the rare unemployed people considering Chapter 13, skip to the “Can Unemployed People Use Chapter 13 Bankruptcy?” section toward the end of the article.
Chapter 7 bankruptcy wipes out qualifying unsecured debts, such as credit cards, past-due rent, utility balances, and medical bills. Filers can keep “exempt property” necessary to maintain a household and employment so they don't lose everything they own.
Unnecessary nonexempt property gets sold for the benefit of creditors. Still, it rarely happens because unemployed people often sell luxury goods for rent and other expenses before considering bankruptcy.
It's likely. But not everyone qualifies for a Chapter 7 debt discharge, the order that wipes out debt. Only people whose earnings don’t exceed income limits. You can determine whether you qualify by taking the Chapter 7 bankruptcy means test.
The first part of the means test compares your gross household income to your state’s median income. You’ll pass if your income doesn’t exceed the median amount for your family size.
The second part allows people whose income exceeds median limits to deduct expenses from their gross income. They'll pass if the calculations show they don't have enough income to fund a Chapter 13 repayment plan.
Here are the particulars.
Find out about expenses that can help you pass the means test.
Passing the means test can be challenging if you’ve recently lost a high-paying job—at least temporarily. Even if you aren’t earning anything currently, you’ll still have to report the amount you received during the prior six months on the means test. If the figure is high enough, you’ll fail.
The solution? Wait a few months. If you remain unemployed, your six-month average income will drop quickly. However, remember that you’ll also report any unemployment earnings you receive.
Chapter 7 qualification depends on more than the means test. The bankruptcy court also considers the amount you have remaining after paying your monthly bills. So, if you land a new job with a hefty salary and your expenses are low, you could face a qualification problem even if you pass the means test.
If you’re wondering how the court would find out, the Chapter 7 trustee assigned to your case would likely be the cause.
When reviewing your bankruptcy filings, the trustee will compare the monthly expenses reported on Schedule J: Your Expenses to the monthly income on Schedule I: Your Income. Also, the trustee will ask if your petition information is accurate at the 341 meeting of creditors, the one appearance all bankruptcy filers must make.
After reporting your new job, the trustee would instruct you to “amend” or change incorrect information on your bankruptcy forms. The bankruptcy trustee assigned to your matter will recommend that the court “convert” or switch your Chapter 7 to Chapter 13 if the amended information reveals you can repay creditors.
If you are filing a Chapter 13 and you’re unemployed, you’ll likely have difficulty getting a Chapter 13 “confirmed” or approved. Why? Chapter 13 debtors must be able to repay creditors over time, which takes income.
In a Chapter 13 bankruptcy, a debtor proposes a three- to five-year repayment plan to pay back all or a portion of debts—a benefit not available in Chapter 7 bankruptcy. For instance, a debtor can use the plan to catch up on mortgage arrears, get rid of a second mortgage, cram down car loans, or pay back nondischargeable debts you can't wipe out in bankruptcy such as domestic support or certain taxes through the repayment plan.
Learn about keeping a house in Chapter 13 bankruptcy.
You can file for Chapter 13 bankruptcy if you’re unemployed. Still, you must show you have a verifiable source of income and can afford your plan. Otherwise, the bankruptcy court will dismiss your case.
Where would this income come from if you’re not employed? Sources could include:
As long as you show that you have enough income from a verifiable source to fund your plan, the bankruptcy court will “confirm” or approve your case.
Did you know Nolo has been making the law easy for over fifty years? It’s true—and we want to make sure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>You can learn about the benefits of bankruptcy by reading Should I File for Chapter 7 or Chapter 13 Bankruptcy?
Filing for bankruptcy can be an easy way to wipe out debt and maximize the amount of money available to pay monthly bills. However, many seniors don’t feel comfortable filing for bankruptcy, and it isn’t always necessary or even a good idea.
Here are two situations that make filing bankruptcy of questionable value for seniors:
Find out what bankruptcy can and cannot do to improve your financial position.
Even though bankruptcy isn’t always necessary, or even beneficial, it can work for some seniors. Here are a few things to ask yourself:
Additional issues seniors will want to consider include:
When dealing with assets, it’s a good idea to set up a consultation with a knowledgeable bankruptcy attorney. For more information, see Should I File for Bankruptcy?
]]>If you’re dealing with an eviction, you’ll want to act quickly. Start by reading about evictions and the automatic stay in bankruptcy.
When a "debtor" or the person owing debt files a bankruptcy case, an order called the automatic stay prevents creditors from continuing any collection activity, including attempts to win a money judgment in a civil lawsuit.
The stay ensures creditors don't get an unfair share of the debtor's available funds. Freezing the collection action gives the court time to sort out the available assets and divide them appropriately among all creditors.
Bankruptcy doesn't help people avoid all legal actions. Here are a few matters that will continue despite a bankruptcy case:
The automatic stay will stop most other lawsuits.
Bankruptcy affects your debts and assets. Therefore, the bankruptcy court will have jurisdiction over (the right to decide) any case involving an allegation that you owe money because you either failed to pay a debt or harmed someone somehow.
A few examples include cases involving:
In almost all of these situations, the bankruptcy “discharge” order that wipes out qualifying debt will eliminate the underlying debt, and the court case will go away. But not always. Sometimes the court allows the creditor to pursue an action.
In any action, the creditor can ask the bankruptcy judge to lift the automatic stay and allow a state lawsuit to proceed. Bankruptcy courts regularly approve such motions in the following situations:
In some cases, the suing party might have the right to continue the case but will ask permission from the court before doing so. For instance, a governmental agency pursuing an enforcement action, such as the clean-up of a toxic site, might delay the case and, in an abundance of caution, file a motion to lift the automatic stay before continuing to prosecute the matter.
It’s always better to file a bankruptcy case before the lawsuit is over. For instance, you’d want to do so for the following reasons:
However, even if you lose the lawsuit, you can still file a bankruptcy case. The automatic stay will stop a creditor’s attempts to collect most money judgments. This is true even if there’s a garnishment against your paycheck or bank account.
The bankruptcy will also temporarily stop a creditor’s attempt to sell your property to satisfy a judgment. However, you’ll need to address the judgment lien in bankruptcy to prevent collection after the bankruptcy case.
Bankruptcy will also stop the government’s attempt to revoke your driver’s license or occupational license because you failed to pay traffic tickets or other required fees. For more details, see Lawsuits You Can't Stop By Filing for Bankruptcy.
When a tenant files bankruptcy, landlords find it relatively easy to proceed with eviction. But landlords must still abide by rules that respect the tenant's rights.
Because the windows for action are short and the rules aren't easy to implement, if you’re in this situation as a landlord or a tenant, it’s best to consult with a knowledgeable attorney.
If you file for bankruptcy before the eviction court finds it in the landlord’s favor by issuing an order for possession or eviction judgment, the automatic stay goes into effect to stop the eviction. However, you might have to ask the court to put the automatic stay in place if you had bankruptcy cases pending in the last year.
But the automatic stay won’t last long if the eviction alleges that you’re endangering the property or using illegal drugs. In that case, the landlord can file a certification with the court and proceed with the eviction. You can object to the certification, but you’ll have to attend a hearing and convince the bankruptcy court that the landlord is wrong.
Filing bankruptcy won’t stop an eviction if the landlord has already obtained an order of possession or an eviction judgment from the state court. However, a few states allow you to catch up or “reinstate” the rent after the eviction court issues the order for possession.
But, you must act quickly. You’ll have to deposit the rent that will come due within 30 days with the bankruptcy court. You’ll have 30 days to verify you paid the landlord the past due rent. Learn more about evictions in bankruptcy and how the automatic stay can help or hinder them.
Did you know Nolo has been making the law easy for over fifty years? It’s true—and we want to make sure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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Consider Before Filing Bankruptcy |
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Helpful Bankruptcy Sites |
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>An annuity is usually an investment account that pays the owner (also called the beneficiary or annuitant) on a regular basis, typically monthly or yearly. Annuities are designed to provide a steady income for the beneficiary, are often set up with a lump sum deposit, and are especially attractive for managing:
A beneficiary can receive payments immediately, or the annuity can be set up to pay when an event occurs, such as reaching age 65. It can run for a set duration, for instance, 20 years, or it can provide payments for the life of the annuitant.
One element common to most annuities is that once created, the annuitant cannot change its terms. The terms are often relevant to the bankruptcy court when a trustee challenges the validity of an annuity's exemption (more below).
When you file a bankruptcy case, you can protect particular types of assets with property exemptions. Every state has a list of exemptions for its residents. The federal bankruptcy code has a list of federal exemptions, as well.
In most states, the bankruptcy debtor (filer) can only use the state’s exemptions, but some states allow the debtor to choose whether to apply the state or the federal exemption scheme (but mixing between the two sets isn’t allowed). If you opt to use your state’s exemptions, you can also use the federal nonbankruptcy exemptions.
State exemptions. State annuity exemptions vary widely. An annuity that qualifies in one state can fail to be eligible in another based on just one term, such as whether the annuity has a triggering event or whether the periodic payments exceed a given amount. A few states provide exemptions for virtually all annuities. On the other end of the spectrum, a few states don’t provide any protection.
Federal retirement exemption. Regardless of whether you choose state or federal exemptions, you can exempt your annuity if it meets the Internal Revenue Code qualified retirement account requirements. You can also use a federal exemption for an annuity funded by an IRA or certain other non-qualified retirement plans, but your exemption will be capped at $1,283,025 (as of September 2017). This amount adjusts every three years with the next adjustment scheduled for 2019.
Other federal exemptions. In addition to the exemption for retirement accounts, the bankruptcy code includes an exemption for an annuity that pays “on account of illness, disability, death, age, or length of service.” (Bankruptcy Code § 522(d)(10)(E).) Also, several exemptions apply to specific awards for bodily injury, wrongful death, or lost future earnings (states often have similar exemptions, too). You might be able to use one of these exemptions to protect an annuity funded by such an award; however, these exemptions cannot exceed an amount reasonably necessary to support you and your dependents.
The federal bankruptcy code also has a wildcard exemption that can be used for anything up to a value of $1,250, or $13,100.00 if you don’t use the homestead exemption (figures valid as of September 2017). Many states have wildcard exemptions, as well, but most are less than the federal exemption.
The timing of the creation of the annuity can affect the exemption validity. Some states will only protect annuities purchased more than six months before the bankruptcy case filing. Even without this restriction, the Chapter 7 trustee appointed to administer your case will pay particular attention to the timing of your annuity. Converting a nonexempt asset (like cash in a deposit account) to an exempt asset (like an annuity) is not strictly prohibited by the bankruptcy code. However, when it happens shortly before filing, the court can disallow the exemption if it concludes that the debtor purchased the annuity solely to protect the funds from the reach of the bankruptcy court.
Annuities are valuable assets, and, as with any other valuable property, it’s prudent to talk to local bankruptcy counsel before proceeding with a bankruptcy case.
]]>This article applies primarily to Chapter 7, the type of bankruptcy that might require you to turn over property to pay debts. Some of the downsides of filing a Chapter 7 case by yourself can be managed or eliminated for a married couple when one spouse files a Chapter 13 repayment plan case. A qualified bankruptcy attorney can analyze your circumstances and suggest the best course of action to meet your goals or save you money.
Married couples usually file jointly, but filing as an individual might be a better choice. Whether to file alone is an important decision, because your individual bankruptcy case won’t offer your spouse much relief from debt that you own jointly with your spouse, and could still jeopardize your spouse’s share of property. Here are some factors that can influence your decision. To learn more, visit Should I File a Joint Bankruptcy With My Spouse?
A spouse who has a small amount of debt will not likely need bankruptcy protection, whether the debt is joint or individual. So why expose your spouse to the trauma and publicity of a bankruptcy? Filing on your own will also help protect your spouse’s credit rating, because your bankruptcy case will not appear on your spouse’s credit reports.
If you and your spouse used a prenuptial or a postnuptial agreement to separate your debts and property, your spouse should already be insulated from the effects of your bankruptcy case. But the courts are wary of last-minute gifts and transfers to one spouse only, arguably made to protect that property from the gifting spouse’s creditors. To protect any such transfers, you’ll need to wait a year after the transfer before you file your case.
Inheritances, gifts, and personal injury settlements are your spouse’s separate property, which won’t be affected by your bankruptcy. Spouses who received any of these assets can rest assured that they are not available to satisfy your debt. But suppose your spouse expects to receive an inheritance, gift, or personal injury settlement? If you file together and your spouse becomes entitled to receive one of these “windfalls” within six months of filing, you would have to turn over any nonexempt amounts.
Owning a business can complicate the bankruptcy. Regardless of the business’s legal form (sole proprietorship, partnership, LLC, or corporation), an ownership interest in a business is often a valuable asset. If your spouse joins you in filing bankruptcy, your spouse will probably find it difficult and expensive to protect that asset.
Someone who receives a discharge in a Chapter 7 case must wait eight years to file another Chapter 7 case that will discharge new debt. If the prior case was filed as a Chapter 13, the wait can be as short as two years. Your spouse could choose to file with you anyway and forgo another discharge if other bankruptcy protections, like the automatic stay, are beneficial. Read more about bankruptcy filing restrictions at Multiple Bankruptcy Filings: When Can You File Again?
Your spouse could feel that the time is not right, fear that the bankruptcy will affect employment or personal relationships, or want to avoid disclosing financial transactions. Your spouse might not be able to protect all financial information, however. To determine if you qualify for Chapter 7 bankruptcy, you’re required to provide an accurate picture of your household finances. That includes disclosing your nonfiling spouse’s income and expenses if you live together. The court could also order that your spouse produce documentation like pay stubs, tax returns, and business records to substantiate those figures.
If you file on your own, the financial consequences for you and your spouse depend on two main factors:
To understand what can happen to the property and debt acquired before and during the marriage when only one spouse files bankruptcy, read the sections below that correspond to the state where you live.
As explained above, couples in community property states might own a mix of community and separate property. In addition, the marriage might have shared debt, and the spouses could each have separate debt. When you file bankruptcy alone, here’s what will happen to the marital property, the separate property, and the debts that were incurred before and during the marriage.
For the most part, your spouse’s separate property is safe and won’t become a part of your bankruptcy. Be careful, though. A bankruptcy trustee could challenge a gift, a prenuptial or postnuptial agreement, a trust, a property sale, or any other transfer you make to your spouse less than a year before you file for bankruptcy. This rule is designed to prevent you from transferring valuable and nonexempt (unprotected) property to your spouse on the eve of bankruptcy. You’ll have to disclose any transfers in your bankruptcy paperwork.
As a general rule, it’s best that you disclose all your spouse’s separate property so that the trustee can verify that it’s not part of your bankruptcy.
When you file for bankruptcy in a community property state, the bankruptcy will wipe out your separate debt, but it won’t discharge your spouse’s separate debt.
All of your property, including community property, becomes a part of your bankruptcy case, even if you file without your spouse. You and your spouse won’t lose any community property if you can exempt (protect) its entire value.
If you can’t exempt the entire value of a community asset, you could run into trouble if the trustee assigned to your bankruptcy case decides to sell it for your creditors. Your spouse might not be happy about the sale, but your spouse probably can’t block your bankruptcy or prevent the sale. Once you file your case, the trustee has the right to the value of the nonexempt property. The trustee will try to partition (divide) the property and sell only your share. When partition isn’t practical, the trustee will ask the court for permission to sell the entire asset and pay part of the proceeds to your spouse. Before taking this drastic step, the trustee must convince the court that the benefit of selling the property outweighs the detriment to your spouse.
Exempting all of the equity in community property can be difficult if you file without your spouse. If you live in a state that allows a couple to double the exemption amount, it might make sense for both spouses to file together.
Your spouse’s income is also community property. If you and your spouse are living in the same household, you’ll probably have to disclose your spouse’s income and living expenses in your bankruptcy paperwork so that the court can get a full picture of your family finances.
You and your spouse will share responsibility for most of the debt you incur during your marriage, but the bankruptcy will discharge only your liability. Your spouse will remain responsible for all the community debt. Your spouse does receive an important benefit. After the bankruptcy is over, community property is off limits to discharged creditors. This “phantom” or “community” discharge protects all community property and lasts as long as both spouses are alive and still married. Keep in mind, though, that your spouse’s separate property will still be fair game for creditors.
Common law property is often easier to protect than community property when only one spouse files Chapter 7 bankruptcy. On the other hand, the nonfiling spouse in a common law state may end up solely responsible for the couple’s joint debt.
Property that you own separately becomes a part of your bankruptcy. Your spouse’s separately owned property will not be a part of your bankruptcy.
When you file for bankruptcy in a common law state, your liability will be discharged on your separate debts and any debts you and your spouse owe jointly. Your bankruptcy will not affect your spouse’s separate debts. Your spouse will also remain responsible for any debts the two of your owed jointly.
Property Purchased with Assets Earned During the Marriage
In a common law state, your portion of jointly owned property becomes a part of your bankruptcy case. Your spouse’s portion is usually safe, but under one scenario it still could be at risk. If your interest in the property is not fully exempt, the trustee might consider selling it and using the proceeds from your part to pay your creditors. Your spouse can oppose the sale but probably can’t prevent it. If practical, the trustee will divide the property. If that isn’t possible, the trustee will sell the entire piece and reimburse your spouse’s portion. But first, the trustee must satisfy the court that the benefit to the creditors outweighs the detriment to your spouse.In a few states, married couples can hold property together in a special way, called “tenancy by the entirety,” which allows the couple to own the property as a single marital entity. Depending on the state, tenancies by the entirety can be exempt in bankruptcy when only one spouse files but fair game if both spouses file.
To compare the various types of joint property ownership, visit Joint Property and Concurrent Ownership.
Your bankruptcy will not discharge your spouse’s liability for any debts you and your spouse incur together during your marriage.
In any state, applying the law of marital property and marital debt is complicated and fraught with pitfalls. Every bankruptcy case is unique, and predicting the effect of marital property laws in a bankruptcy case requires close attention to many details. An error can be very expensive and take years to overcome. Before you take any action to file a bankruptcy case, transfer property, or pay off debts in anticipation of filing bankruptcy, visit a qualified consumer bankruptcy attorney.
]]>Prepare yourself before filing for bankruptcy by finding out when you might lose a home, how bankruptcy exemption laws protect a filer’s home equity, and why it’s easier to protect a home in Chapter 13 than Chapter 7.
Yes. Filing for bankruptcy won’t help you keep your home if you can’t afford the monthly mortgage payment, or catching up on past-due mortgage payments will spread you too thin. You’ll also lose your home in Chapter 7 bankruptcy if you have more home equity than you’re allowed to keep or can’t afford to pay Chapter 13 creditors an amount equal to the unprotected equity.
If you don't quite understand this yet, don't worry. We explain each part in detail so it will make sense by the end of the article.
But that's not all. Bankruptcy exemptions protect other property, too.
You likely already know that bankruptcy doesn’t strip you of all your assets, leaving you destitute, but you might not know why. You won't lose everything because exemption laws protect your property from creditors. The exemption laws let you keep or “exempt” the things you and your family need to maintain a home and job.
Understanding exemptions is powerful because most state exemption laws apply to other creditor actions. Once you familiarize yourself with your state's exemption laws, you'll know what you can protect from creditors before, during, and after filing for bankruptcy.
To find out whether exemption laws protect your home equity and other property, you'll review the exemptions that apply in your case. We cover that in the "How Do You Find Bankruptcy Exemptions for a Home and Other Property?" section below.
You can use a homestead exemption to protect at least some of the home’s equity from creditors if the house is your primary residence. However, you can’t use it to help you keep other real property, like a commercial building, rental unit, or vacation property you stay at occasionally.
This rule is universal across almost all states. You'll also need to be a resident for a particular time before using the state's exemptions. However, other aspects of the homestead exemption will vary by state, and the differences can be striking. Watch for these things.
Amount. Some states' homestead exemptions are meager, while others let you protect equity up to $500,000 or more. Most fall somewhere between the two extremes.
Property size. Some states include size and acreage limitations in the homestead exemption law. For instance, farming states often limit the number of acres of farmland you can protect. Or you might live in a state that allows large landholdings in rural communities but much smaller city parcels.
Spousal doubling. If you and your spouse own your home together and file a joint bankruptcy, you might be able to double the homestead amount and protect twice as much equity.
Start by reviewing your state’s property exemptions. Each state has exemption laws that tell residents and creditors the type of property residents can keep out of collection actions, including bankruptcy. You'll find your state's bankruptcy exemptions here.
Also, you’ll want to know whether you must use your state’s bankruptcy exemptions or if the federal bankruptcy exemptions are available. Most people who can choose between the two exemption lists will use the set that best protects their home or protects more property overall (you can't mix and match between groups).
If the homestead exemption doesn’t fully cover your home equity, check for a “wildcard” exemption that you can use on any property of your choice. But verify that you can use it on real estate. Not all states have a wildcard exemption, and some don’t let filers use the wildcard on homes and other real property.
Yes, you’ll lose your home in Chapter 7 bankruptcy if you can’t exempt your home’s equity. The trustee will sell it, give you the exemption amount, and distribute the remaining proceeds to creditors.
You can lose a nonexempt house in Chapter 13 bankruptcy if you can’t afford to pay your creditors an amount equal to the nonexempt equity. But you can keep it if you can pay for the home's nonexempt equity and all other amounts due through the Chapter 13 repayment plan.
Learn about nonexempt property and the best efforts rule in Chapter 13.
You’ll need to do more than exempt your equity to keep your home in Chapter 7 bankruptcy. You must also be current on the mortgage when filing and remain current after bankruptcy. Otherwise, the lender can use one of two options to take the home back:
Learn more about foreclosure in bankruptcy.
If your mortgage isn't current or your home's equity is partially nonexempt, you’ll have a better chance of retaining your property in Chapter 13 than in Chapter 7 bankruptcy.
Chapter 13 bankruptcy lets you make monthly payments for three to five years to a bankruptcy trustee who distributes those payments to creditors who’ve filed proper proof of claim forms. The benefit of the repayment plan is that you can use the Chapter 13 repayment plan to do the following:
If you have enough income to do these two things while paying your monthly payment and meeting your other Chapter 13 payment obligations, you’ll be able to keep your home. Also, if your home is worth less than what you owe, you might be able to remove a wholly unsecured junior loan. Most people can't do this, but lien stripping is a powerful tool when available, so check it out, just in case.
Sometimes a Chapter 7 trustee won’t find your home is worth pursuing and will abandon it. When the trustee does, it reverts to you without restrictions.
Abandonment happens when the money available to pay creditors doesn’t justify the time and money involved in selling the home. The trustee will determine whether a sale will generate enough cash to make a meaningful payment on your unsecured debt, such as credit card balances, personal loans, and medical and utility bills.
Here are things the trustee will consider:
Example. Suppose your home appraises at $200,000, the mortgage payoff is $140,000, and your exemption is $20,000, leaving $40,000 in nonexempt equity. The trustee estimates that the costs of sale and commission will total $22,000, leaving $18,000 to pay creditor claims. The trustee will likely sell the house.
If the trustee is interested in the equity in your house, you might be able to protect your property from sale by striking a deal with the trustee to substitute exempt assets or cash to “buy” back the property from the trustee.
For instance, in the example above, you could agree to pay the trustee $18,000 from exempt retirement funds, a home equity loan, borrowing from a sympathetic friend or relative, or selling other exempt property like jewelry or artwork.
Did you know Nolo has been making the law easy for over fifty years? It’s true—and we want to make sure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
Our Editor's Picks for You |
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Which Bankruptcy Chapter Should I File to Keep My House? Keep Your House in a Chapter 13 Bankruptcy |
Consider Before Filing Bankruptcy |
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Helpful Bankruptcy Sites |
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>The exemption system you're entitled to use will also come into play. Read on to learn more about protecting the equity in your house when filing for bankruptcy.
The two bankruptcy chapters, Chapters 7 and 13, offer different benefits, but both allow you to "exempt" or protect the same amount of equity in your home. What happens to any nonexempt equity, or the amount you can’t protect, will depend on the chapter you file.
In Chapter 7 bankruptcy, the trustee assigned to your case will review your paperwork to determine if you have any nonexempt property. If so, you’ll be required to turn it over so it can be sold to pay off some of your debt. Here’s how it works:
If you’d like to keep a homestead with nonexempt equity, you’ll probably be better off pursuing a Chapter 13 bankruptcy.
Instead of handing over your house or other nonexempt property to a Chapter 7 trustee, you can keep the property in this chapter. It’s not free, however. You’ll pay your creditors the nonexempt amount as part of your three- to five-year monthly payment.
This system works well for everyone involved. Creditors will receive as much as they would have in a Chapter 7 case, and you’ll preserve the equity in the house.
In every bankruptcy case, you can claim some property as exempt. You won’t have to give it up to a bankruptcy trustee who will use it to pay your creditors’ claims. State law defines the types and value of the property you can exempt.
Some states give you a choice between the state exemptions or the federal exemption scheme. Start by learning the exemption options provided to you by your state.
Most states allow an exemption for equity in your "homestead" or primary residence. If you own other real property, you’ll only be able to exempt the equity in the other properties if there is a specific exemption under state or federal law that would cover it (and there usually isn’t).
To determine which scheme you’re entitled to use and whether you’re subject to an equity cap, you’ll want to ask yourself a few questions.
If you’ve moved to a new state within the last two years, you won’t be able to apply for the new state’s exemptions. Instead, you’ll have to use the homestead exemption allowed by the state where you lived for the 180 day period that preceded that two years (called the 730-day rule).
Example. Suppose that you lived in Tennessee from February 1, 2013, to August 15, 2018, and, on August 16, 2018, you moved to Alabama. If you filed a bankruptcy case on April 23, 2019, you’d be limited to the Tennessee scheme because after going back 730 days before the move, you were living in Tennessee during the 180 days immediately before.
Someone who owns a homestead for less than 40 months before filing for bankruptcy will be subject to a $189,050 exemption cap (this amount is current for cases filed between April 1, 2022, and March 31, 2025) regardless of the exemption scheme. This limitation was designed to discourage people from moving to take advantage of generous homestead exemptions offered by a handful of states.
Did you know Nolo has been making the law easy for over fifty years? It’s true—and we want to make sure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
Our Editor's Picks for You |
|
More Like This |
How to File for Bankruptcy in Your State The Homestead Exemption in Bankruptcy |
What to Consider Before Filing Bankruptcy |
What Not to Do Before Bankruptcy |
Helpful Bankruptcy Sites |
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
Updated April 7, 2022
]]>Many older adults use reverse mortgages as a way to manage house payments or to tap into their home equity without having to put the house on the market. Depending on the lender and the program you choose, you can structure your reverse mortgage in a variety of ways. For instance, your program might let you:
All of these options draw on the equity in your house. You’ll qualify if you’re at least 62 years old and meet certain income, credit, and equity guidelines.
If you have a reverse mortgage and you’re considering filing for bankruptcy, you’re right to wonder whether you might face some problems. For instance, you’ll want to know whether you’ll default on your reverse mortgage when you file, as well as the ramifications of doing so.
Three other questions to consider before filing for bankruptcy include whether you’ll be able to:
Typically, you must have equity equal to at least half the value of the property to qualify for a reverse mortgage. The problem is that most states don’t allow you to protect (exempt) substantial amounts of equity in bankruptcy. In short, you’ll lose your nonexempt equity in a Chapter 7 bankruptcy, and have to pay for it in a Chapter 13 bankruptcy.
Here are some bankruptcy concepts you should understand:
It might be worth waiting to file the bankruptcy case until the reverse mortgage payments or withdrawals reduce your equity. The longer you wait, the less exempt equity you’ll have in a future bankruptcy case.
If you took your equity in a lump sum, and still have the money in a deposit account, it won’t be protected under the homestead exemption in most states. Or, in the best case scenario, it will be subject to the exemption for a short period—typically six months. If it’s not exempt under the homestead exemption, you’ll have to protect it under another exemption (and finding another exemption will likely be difficult).
Under some reverse mortgage contract provisions, filing a bankruptcy case is considered an event of default (breach of contract) that can trigger foreclosure. These contracts are rare, but they still exist. If your reverse mortgage has this kind of clause, there’s a chance your lender won’t act on it during your bankruptcy.
To enforce the default and foreclose during bankruptcy, the lender must file a motion with the bankruptcy court for permission to start foreclosure proceedings. If you still have equity in the property, the bankruptcy court will likely deny the lender’s motion; however, there’s no guarantee. Also, the lender might be able to initiate foreclosure once the bankruptcy case closes.
Many lenders will stop making payments to you or will block your access to a line of credit when you file for bankruptcy because you're taking on more debt with each payment. Ordinarily, the lender will resume payments after the bankruptcy case closes, but if you can't wait, you can ask the court to allow the bank to make payments during the case.
For most, home equity is the largest asset that an individual possesses. While this article should provide helpful information, it isn’t legal advice. You should contact a knowledgeable bankruptcy attorney for an assessment of your particular situation.
]]>I have debts from a business. I don't have much income, but my spouse has a good job. Should I file for bankruptcy?
If creditors can collect from jointly owned assets, bankruptcy might be a good way to protect those assets. However, your spouse's income will be included in the bankruptcy, which might make it harder to qualify for Chapter 7 bankruptcy and might affect how much you must pay to unsecured creditors in Chapter 13 bankruptcy.
(You can learn more by reading Are You Personally Liable for Business Debts?)
Depending on the laws of your state, your spouse might not be liable for the debts that you’ve incurred individually. However, even if your spouse isn’t obligated, a potential judgment creditor might be able to collect from both you and your spouse.
For instance, if the two of you jointly own assets—such as a bank account she deposits income into—then a judgment creditor might be able levy (withdraw funds from) the account. For more information, read Bank Levies on Joint Accounts (Spouse).
Filing for bankruptcy might be a good option for you, assuming you meet the eligibility requirements. Your spouse doesn’t have to file bankruptcy with you, and probably shouldn't, especially if she has little or no debts of her own.
If you want to take care of the debt by filing for bankruptcy, you’ll have to include your wife’s income if you share the same household—even if you file alone. Since your wife’s income is appreciable, it might affect your eligibility to receive a discharge in a Chapter 7 bankruptcy.
But there’s an exception. You don’t need to meet income qualifications if the majority of your debts are business debt. You can learn more by reading about the Chapter 7 means test.
Your wife’s income will also affect the amount you’d pay in a Chapter 13 bankruptcy. You can learn more by reading Your Obligations Under a Chapter 13 Bankruptcy Plan.
Although you must include your nonfiling spouse's income, you might be able to take deductions and pass the means test or lower your disposable income. The marital adjustment deduction allows you to deduct some of your spouse's personal expenses if they’re paid with her own separate income. You can exclude that portion because it isn’t used to support your household.
For more information on how this works, read The Marital Adjustment Deduction on the Means Test.
]]>Both Chapters 7 and 11 strike a balance between providing debt relief to filers and payment to creditors. However, the type of relief available to individuals and businesses varies significantly, and it isn’t always intuitive. Here are the basics:
You'll find links to more information about small business bankruptcies after the comparison chart at the end of the article.
Only filers who don’t have enough income to pay into a lengthy repayment plan will qualify for Chapter 7. And creditors will receive payment only if the debtor—the person filing the case—owns assets that can be sold by the Chapter 7 trustee—the person responsible for administrating the case. The lack of a repayment plan makes Chapter 7 the fastest bankruptcy chapter to complete.
How long a particular Chapter 7 will take will depend on the property owned by the debtor. For instance, a “no-asset” case in which the filer can protect all property using bankruptcy exemptions is the quickest. With no property to sell and no creditors to pay, this type of case is over in about three to four months.
By contrast, some filers can protect only some assets, and others aren’t entitled to use exemptions at all. These “asset” cases stay open longer, about six months to a year on average, to give the trustee time to liquidate (sell) the property. Cases involving real estate or property ownership litigation often take longer to resolve.
The most attractive benefit of Chapter 7 is that it allows some debtors—but again, not all—the ability to discharge (erase) qualifying debt. The filer will receive the debt discharge after three to four months, even if the case itself remains open while the trustee sells assets for the benefit of creditors.
If you now realize that one of the complicating factors of Chapter 7 is that it doesn’t treat all filers alike, you’re correct. But the rules aren’t random. The filer’s status as an individual, sole proprietor, or another business entity determines the rules you’ll apply in the following categories:
You’ll find specific examples after “How Chapter 11 Bankruptcy Works.”
When learning about the Chapter 7 process, remember that applying the wrong law could result in significant property loss because a debtor doesn’t have the right to dismiss a Chapter 7 case without court approval. Consult with a bankruptcy lawyer experienced in business-related cases to avoid unexpected results.
Not all struggling businesses are destined to close. When an unexpected event reduces the income stream of an otherwise viable company—as experienced by many at the onset of the coronavirus pandemic—Chapter 11 can help. A filer can restructure debt to allow the company to remain open as long as the filer, creditors, and the court agree on the strategy. For instance, a plan of reorganization can include:
Chapter 11 relief is also available to individual wage earners who don’t qualify for Chapter 7 or Chapter 13. Because such filings are rare, this discussion pertains to businesses only.
The U.S. trustee (or bankruptcy administrator in North Carolina and Alabama) keeps track of the overall case progression by monitoring business operations, overseeing investigations, and ensuring the timely submission of filings, operating reports, and fees. But the U.S. trustee isn’t as directly involved as the trustee in Chapter 7 or 13 cases.
The filer or “debtor in possession” is responsible for carrying out everyday business operations. But that’s not all. The debtor in possession also fulfills all noninvestigative bankruptcy requirements, such as completing filings and reports, reviewing and objecting to creditor proof of claims, and hiring court-approved experts. The need to be actively involved is partly why a traditional Chapter 11 is cost-prohibitive for most small companies.
One of the Chapter 11 case hallmarks is the extensive creditor negotiations that occur before and after the case filing. It’s not unusual for the parties to resolve issues without entering into a formal plan. As with any form of bankruptcy, it’s an abuse of process to use Chapter 11 as a delay tactic with no intention of subjecting to the process.
Find out what individuals and small businesses can expect when filing under either Chapter 7 or 11 bankruptcy, or click one of the links below to go straight to the information you're seeking:
These Chapter 7 filers can keep property using bankruptcy exemptions and discharge qualifying debt. It’s best suited for a low- or no-income debtor whose property is fully protected by bankruptcy exemptions and whose debts qualify for discharge. But as long as the debtor would come out ahead financially, meaning that the amount of erased debt would adequately exceed the value of property lost, Chapter 7 would likely make sense.
These filers must qualify by passing the Chapter 7 means test unless the filer’s business debt exceeds the filer’s consumer debt, thereby exempting the filer from the means test requirement. The exemption creates a “loophole” that prevents a high-earning filer with substantial business debt from automatically disqualifying.
However, keep in mind that another test exists. The trustee will compare the current income figures listed on Schedule I: Your Income to the expense totals disclosed on Schedule J: Your Expenses. The bankruptcy judge will likely convert the case to Chapter 13 if, after subtracting the two figures, income remains that the filer could use to pay creditors through a repayment plan. For instance, a filer with a $5,000 monthly income and $3,500 in monthly expenses would have $1,500 available to pay creditors each month. The bankruptcy judge would likely convert the case to Chapter 13.
Individuals can protect or exempt property using bankruptcy exemptions, such as some equity in a home and car, household furnishings, clothing, a retirement account, and some tools needed in a profession or trade. Many states also have wildcard exemptions a filer can use to protect assets of the filer’s choice.
Sole proprietors can also keep any property covered by bankruptcy exemptions. If exemptions protect vital business assets—such as needed equipment and product—a sole proprietor might even be able to keep the business open. By contrast, a service-oriented sole proprietorship will almost always survive Chapter 7 because a trustee can’t sell the owner’s future services.
When an individual files for Chapter 7 bankruptcy, qualifying personal and business debts are wiped out with the debt discharge, and personal guarantees are included. The same applies to sole proprietors. Credit card balances, utility and medical bills, lease balances, and personal loans are debts commonly discharged in Chapter 7.
If a filer would lose important property in Chapter 7, negotiating debt directly with creditors and selling assets might be the better option. Also, Chapter 13 has mechanisms not available in Chapter 7 that will allow filers to do the following:
Find out when Chapter 13 works better than Chapter 7.
Chapter 7 provides limited benefits to these entities. It works best when the business has substantial assets to sell, and the partners or stakeholders want to relinquish the work of selling it to someone else. Essentially, the filing allows the closing company to hire the Chapter 7 trustee to take the rowing oar in the wind-down process and to assume liquidation and asset distribution-related tasks. Because all property gets sold, filing for Chapter 7 will effectively close the company.
Stakeholders interested in filing for Chapter 7 should consider that the trustee’s interests are aligned more closely with creditors than the debtor, making them natural partners. The more assets the trustee uncovers, the bigger the trustee’s payday, giving the trustee ample incentive to investigate the company’s affairs and potentially mishandled or hidden assets.
Although the transparent nature of bankruptcy can be beneficial, the other option—closing the business outside of bankruptcy—is often more economical and offers less stakeholder scrutiny. Business bankruptcy attorneys decide on closure strategy on a case-by-case basis.
Here are some procedural details that apply when these debtors file for Chapter 7.
Most filers must take and pass the Chapter 7 means test to qualify for Chapter 7. However, an exception exists when business debt exceeds consumer debt. Because businesses don’t have consumer debt, filing businesses are exempt from the need to qualify for Chapter 7.
When a business files for Chapter 7, the trustee sells all of the business property at fire-sale prices. The trustee then deducts sales costs and an additional percentage as payment for the trustee’s efforts before distributing the remainder to creditors.
This practice can be problematic for stakeholders personally liable for business debt, leaving higher balances than might be possible otherwise. Stakeholders can often limit exposure by negotiating down debt, selling the property for top dollar, and distributing funds outside of bankruptcy. This approach tends to pay more toward creditor payments, leaving less for stakeholders to pay with personal assets.
The partnership, LLC, or corporation won’t receive a debt discharge. Stakeholders remain responsible for any personal guarantees for business debt and other nondischargeable obligations, such as trust fund tax debt.
Partnerships rarely file for Chapter 7 because general partners are personally liable for business debt. If a partnership without adequate assets to repay creditors filed for Chapter 7, the trustee could pursue the partners for payment personally and individually—possibly even forcing them into bankruptcy.
Red flags for any business filers include rumblings from disgruntled creditors, business partners, or even ex-spouses. Not only are these individuals the most likely to ask uncomfortable, if not downright dramatic questions at the 341 meeting of creditors—the one hearing all Chapter 7 filers must attend—but things could, and often do, escalate from there. In a nutshell, the trustee gains from the information provided by disgruntled creditors. It can help uncover assets.
Also, a bankruptcy filing increases the chances of a creditor lawsuit. Once a business files a case in bankruptcy court, creditors start looking for ways to get paid. The most basic is by filing a proof of claim. However, if selling the business assets won’t pay much toward claims, creditors might initiate litigation asserting that the stakeholders mishandled assets and attempt to go after their personal assets. Even when meritless, defending a lawsuit is costly.
Large businesses with debt exceeding Chapter 11, Subchapter V (Chapter 11, Sub V) small business limits must use the traditional Chapter 11 procedure. Because of the large number of creditors involved and the votes required to approve a plan, Chapter 11 is the most cumbersome and expensive form of bankruptcy, making it unavailable to most small businesses.
It works well if the functioning business has a sufficient income stream to support a reorganization plan (although, in some instances, the company can take out a loan for operating capital). Here are some of the procedural requirements that set it apart from Chapter 11, Subchapter V (discussed further below).
Creditors have significant involvement in a Chapter 11 case. The U.S. trustee appoints a creditors’ committee made up of the seven largest unsecured creditors with the following responsibilities:
The committee is comprised of unsecured creditors because an unsecured debt—an obligation not backed by collateral—carries with it the least amount of protection in bankruptcy. Hence, it’s most at risk of being discharged in a bankruptcy case. By contrast, secured creditors have significant protection—they’re entitled to the property collateralizing the claim if the debt isn’t paid, even in a bankruptcy case.
The debtor in possession must fully disclose background information so that a creditor can make an informed decision about the feasibility of the proposed plan. The disclosure statement describes how the plan would pay each class of creditors, along with other information, such as:
Creditors use the company snapshot provided to raise plan objections disguised as disclosure statement objections. Because creditors can also object to the proposed plan, the process gives creditors two “objection” bites at the apple, creating two litigation rounds.
Once the disclosure statement is approved, the court will set dates for plan objections and creditor voting. The debtor must wait to begin soliciting creditor votes until then unless negotiations predated the bankruptcy filing.
Once the requisite amount of creditor votes is received and the plan is confirmed, the property in the bankruptcy estate vests in the debtor per the plan.
Also, after creditor consensus is received and the plan is confirmed, the debtor receives a debt discharge erasing debts identified in the plan. The discharge occurs at the time of confirmation, not after the debtor makes required payments, because the confirmed plan becomes a new binding contract between the debtor and creditors.
Chapter 11, Subchapter V, requires far less creditor involvement in a process that can more closely resemble Chapter 13 than Chapter 11.
A business must be functioning and have an income stream sufficient to support a reorganization plan. Also, the company's debts must be $3,024,725 or less if filed between April 1, 2022, and March 31, 2025.
Because it can be difficult for a small business to remain profitable and propose a feasible plan, the U.S. trustee provides more oversight throughout the process. For instance, the debtor in possession must submit to an initial interview with the U.S. trustee—something not a part of a traditional Chapter 11—and provide extensive financial information earlier in the process.
Some of the requirements that typically generate litigation in a traditional Chapter 11 aren’t required in Chapter 11, Subchapter V, such as:
As long as the plan pays creditors according to bankruptcy rules and is objectively fair, the bankruptcy judge can confirm (approve) it over creditor objections.
A debtor must make all plan payments before receiving the debt discharge if the judge confirms the plan without creditor consent.
If a business debtor’s filing involves one piece of commercial real estate or residential property with four or more residential units, it’s considered a single asset real estate filing. Special rules that help protect a secured creditor from loss apply in these cases.
In a single asset real estate filing, a creditor with a secured interest in the property can bring a motion asking the court to lift the automatic stay so that the creditor can move forward with foreclosure or other collection actions. If the debtor in possession can’t file a feasible reorganization plan or pay interest payments to the creditor, the creditor will win the motion.
Because these cases also often involve cash collateral—a contractual agreement to turn over property rents, accounts receivables, and other cash equivalents to the creditor—these cases often end quickly. Without the use of cash collateral, many single asset real estate debtors can't pay the necessary interest payment.
These benefits and procedures apply in both Chapter 7 and 11 cases.
An "automatic stay" order immediately stops most creditors from pursuing collection efforts, including wage garnishments, levies, and many lawsuits. Filing for bankruptcy won’t stop all legal actions, however. Criminal cases, some family law matters, and government civil enforcement proceedings will continue.
The automatic stay will go into effect if it’s the filer’s first bankruptcy. The rules discourage people from misusing the system by limiting the stay to a month or preventing it from going into effect when someone has filed and dismissed cases recently, usually within the last 180 days.
Anyone can file for Chapter 7 or 11, including individuals, married couples, and business entities. But not every chapter is a good match for every filer—some chapters come with significant pitfalls. Also, filers who have received a debt discharge in the past must wait until the required time elapses before qualifying for a second bankruptcy discharge.
Filers must complete a credit counseling course within 180 days before filing and include it with the petition and other official bankruptcy forms. Businesses must be represented by counsel and possess proper filing authority. A filing fee or waiver is also required (more below).
All filers attend at least one hearing called the 341 meeting of creditors. Before the meeting, filers submit verification documentation supporting the petition's financial disclosures, including tax returns, profit and loss statements, bank statements, and more. At the meeting, the trustee conducting the meeting places filers under oath, verifies identity, and asks standard questions, along with questions raised by the petition. Creditors can appear and ask questions, as well.
The costs associated with bankruptcy can add up quickly. Here’s what you can expect to pay.
Whenever a business is involved in bankruptcy, it’s best to seek professional advice. For instance, many business people find it more beneficial to file individual bankruptcy after a business closure. An attorney experienced with business bankruptcy cases will evaluate all of the options available and determine how to protect your assets while meeting your goals.
This table highlights some primary differences between Chapters 7 and 11, and Chapter 11, Subchapter V.
Chapter 7 |
Chapter 11 |
Chapter 11, Sub V |
|
Type of Bankruptcy |
Liquidation |
Reorganization |
Reorganization |
Who Can File? |
Individuals, married couples, and business entities |
Individuals, married couples, and business entities |
Individuals, married couples, and business entities |
Debt Restrictions |
No debt limitation. |
No debt limitation. |
$3,024,725 for cases filed between April 1, 2022, and March 31, 2025. |
Income Qualification Restrictions |
Income must be low enough to pass the Chapter 7 Means Test unless business debt exceeds consumer debt or another exemption applies. |
Business or personal income must be sufficient to fund the Chapter 11 plan. |
Business or personal income must be sufficient to fund the Chapter 11 plan. |
Other Eligibility Restrictions |
Must take a credit counseling course during the180 days before filing. Counsel must represent a business entity and file proof of filing authority. |
Must take a credit counseling course during the 180 days before filing. Counsel must represent a business entity and file proof of filing authority. |
Must take a credit counseling course during the 180 days before filing. Counsel must represent a business entity and file proof of filing authority. |
Filing Fees |
$338 payable in four installments with court permission (Dec 2020). Fee waiver available. |
$1,738 (effective Dec 2020) |
$1,738 (effective Dec 2020) |
What Happens to Property in Bankruptcy? |
Trustee can sell all nonexempt property to pay creditors. |
The debtor remains in control of the property, including the business, throughout the case as a "debtor in possession." A trustee isn't appointed. |
The debtor remains in control of the property, including the business, throughout the case as a "debtor in possession." A trustee isn't appointed. |
What Happens to Debt in Bankruptcy and How Long Does it Take to Receive a Discharge? |
Three to four months for individuals and sole proprietors to receive a debt discharge erasing qualifying obligations—other businesses ineligible. |
Businesses receive a debt discharge upon plan consensus and confirmation. |
Discharge received after completion of plan payments when the bankruptcy judge confirms the plan without creditor consensus. |
Benefits |
Individuals and sole proprietors can quickly discharge qualifying debt, including personal guarantees and other business-related obligations. Sole proprietors will include personal and business assets and debts in the case. Businesses can shift the wind-down obligation to sell the business's property to the trustee. |
Debtors maintain control over the business and property while restructuring debt, often allowing a struggling business to remain open. Provides a way to catch up on missed payments to avoid foreclosure or repossession. |
Debtors maintain control over the business and property while restructuring debt, often allowing a struggling business to remain open. Provides a way to catch up on missed payments to avoid foreclosure or repossession. Doesn’t require a creditors’ committee, disclosure statement, or creditor consensus, making it more cost-effective for small businesses. |
Drawbacks |
The trustee can sell nonexempt property. Doesn't provide a way to catch up on missed payments to avoid foreclosure or repossession. The personal assets of partnership partners can be at risk. Filing for bankruptcy opens the door for creditor litigation. |
Prohibitively expensive for most small businesses. Filing for bankruptcy opens the door for creditor litigation, although the risk is lessened by the ability to negotiate with creditors. |
Filing for bankruptcy opens the door for creditor litigation, although the risk is lessened by the ability to negotiate with creditors. |
Did you know Nolo has been making the law easy for over fifty years? It’s true—and we want to make sure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
Our Editor's Picks for You |
|
More Like This |
Will Business Bankruptcy Help If I Want to Continue My Business? |
What to Consider Before Filing Bankruptcy |
Chapter 7 for Small Business Owners |
Helpful Bankruptcy Sites |
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
Updated April 14, 2022
]]>For instance, it’s not uncommon for a spouse who comes into a marriage with outstanding bills to file individually and keep the debt-free partner out of bankruptcy court—especially if it’ll allow the non-filing spouse to retain a good credit rating (a bankruptcy filing remains on a credit report up to ten years). In this article, you’ll learn about other factors to consider when determining whether an individual or joint filing makes more sense.
(You’ll find more information in Filing a Joint Bankruptcy Petition.)
Getting rid of debt is one of the foremost concerns when deciding whether to file a joint bankruptcy with your spouse. Through a joint bankruptcy, you can wipe out all of the dischargeable debts you both owe. However, if only one spouse files, the non-filing spouse will still be on the hook for his or her own debts as well as any joint debts (in most states—check with a local attorney). So when you share many of the same obligations, filing a joint bankruptcy is usually the better option.
On the other hand, if you have few or no joint debts and your spouse has a lot of individual debts, the better course might be to let your spouse file alone. You’ll retain the option of filing for bankruptcy later on if necessary.
Special Note for Community Property State Residents: If you live in one of the few community property states, the calculation might be different. In many of these states (it depends on the particular state laws), community debts are discharged even if only one spouse files for bankruptcy, and discharged creditors cannot go after any community property so long as both spouses are alive and still married (known as a "phantom discharge" because the non-filing spouse also receives protection even though he or she did not receive a discharge). Conversely, you might lose more property in these states if you file individually (see below).
(To find out if you live in a community property state, see Separate and Community Property During Marriage: Who Owns What?)
When you file jointly, you’ll include both you and your spouse’s assets and property in the bankruptcy (community and separate property). The decision to file a joint bankruptcy with your spouse will depend largely on whether you have enough exemptions to protect all of your property. If you live in a state that allows married couples filing jointly to double exemptions, you might be able to keep more of your property.
If you file an individual bankruptcy without your spouse, his or her separate property is not part of your bankruptcy. So if your spouse has a significant amount of separate nonexempt property, your best option might be to file without your spouse to protect his or her assets.
Special Note for Community Property State Residents: If you live in a community property state, community property might be up for grabs in the bankruptcy even if only one spouse files for bankruptcy. Find out the law in your state or consult with a local bankruptcy attorney before you file.
(To learn more about bankruptcy exemptions and how they protect your property in bankruptcy, see Bankruptcy Exemptions by State.)
Some states exclude property held as tenancy by the entirety from the bankruptcy estate if only one spouse files. (Tenancy by the entirety is property jointly owned by a married couple as a single marital entity, not as two individuals.) If you live in one of these states and you hold your home or another large piece of property as tenancy by the entirety, you might be able to protect the home or property if only one spouse files for bankruptcy. If you file jointly and the homestead exemption doesn't cover your equity, you might lose your home.
Filing for bankruptcy usually involves paying a filing fee to the court and paying an attorney if you decide to hire one. By filing a joint bankruptcy with your spouse rather than two individual bankruptcies, you’ll be able to save a substantial amount of money. First, the court filing fees are the same for both individual and joint bankruptcies. Second, attorney fees for a joint bankruptcy will usually be a lot cheaper than for two individual bankruptcies. In fact, in many cases, filing a joint bankruptcy will cost the same amount as filing one individual case.
When you file bankruptcy, you must provide significant amounts of financial information to the court and the bankruptcy trustee. You must also go to at least one hearing in front of the trustee, called the 341 meeting of creditors. If you file a joint bankruptcy with your spouse, you’ll go to the hearing together and provide only one set of bankruptcy documents. As a result, filing jointly with your spouse is usually more efficient and convenient than separate filings.
If you file a joint bankruptcy, it will be reflected on both of your credit reports. Even though bankruptcy has a negative effect on your credit initially, most people’s credit scores tend to increase shortly after the bankruptcy. However, if you have good credit and your spouse needs to file bankruptcy primarily for his or her own debts, then it wouldn’t be in your best interest to file jointly and take the hit to your credit.
(To learn more about fixing your credit after a bankruptcy, check out Credit Repair.)
]]>Depending on your answers to these questions, you might find out that Chapter 7 bankruptcy won't help much or, in the alternative, that it is a good choice for you.
(For a discussion of other options, including the possibility of doing nothing, see Alternatives to Bankruptcy.)
A creditor will take the time to determine whether you have assets before taking steps to collect from you. If you don’t have an income stream or property other than basic household items and a modest car—and you the situation isn’t likely to change—you’re judgment proof. A creditor will be unable to collect from you, so it’s unlikely that filing for bankruptcy will be necessary.
The same is true if all of your income comes from Social Security (which can't be taken by creditors), and all of your property is exempt (your state’s exemption laws protect certain property from creditors—more on this below).
If you do have valuable assets, you can expect your creditors to take action. You can count on collections for taxes, child support, and student loans occurring quite quickly because the law allows creditors special collection rights. Other unsecured creditors—such as those with credit card balances, medical debt, utility balances, and the like—must first sue you in court and obtain a court judgment before they can start collection procedures, such as a wage garnishment or seizure of personal property.
If a creditor serves you with a lawsuit, you’ll want to speak with a bankruptcy attorney as soon as possible. Filing a bankruptcy case before the creditor receives a judgment will help avoid liens being placed on your property (liens don’t always go away in bankruptcy, thereby giving the creditor a permanent right to your assets). Even if the creditor already has a judgment against you, however, filing for bankruptcy can often provide needed relief.
(Learn more about how creditors can collect from you.)
Certain categories of debt aren’t dischargeable in Chapter 7 bankruptcy. It doesn't make much sense to file for Chapter 7 bankruptcy if your primary goal is to eliminate these nondischargeable debts. The main nondischargeable debts are:
The bankruptcy judge might find that some types of debts are nondischargeable if the creditor objects to a discharge in the bankruptcy court. These debts include:
If the bulk of your indebtedness is from debts that creditors might object to being discharged, you won’t want to move forward with your case without speaking with a knowledgeable bankruptcy attorney. Being accused of any type of fraud in bankruptcy can come with serious consequences.
To learn more about these debts, see Nondischargeable Debts in Chapter 7 Bankruptcy.
Whether or not you decide to file for Chapter 7 bankruptcy might depend on what property of yours will be taken to pay your creditors ("nonexempt" property) and what property you get to keep ("exempt" property).
Certain kinds of property are exempt in almost every state, while others are almost never exempt. The following are items you can typically keep (exempt property):
Items you must typically give up (nonexempt property) include:
Learn more about bankruptcy exemptions, such as which state and federal exemptions you can use, as well as the exemption amounts in each state.
What Is a Chapter 7 Asset Case?
If money is available to pay debt, the bankruptcy court will instruct creditors to submit documentation (an official proof of claim form) that verifies the amount owed by the filer.
Is the case an asset case? When you file a Chapter 7 case, you must disclose all of the property you own on forms called schedules. You must also identify the things that you can keep (exempt) under your state’s exemption laws. If you can exempt all of your property, nothing will be available for creditors, and the court will label your case a “no asset case.” By contrast, your case will be an asset case if you own more property than you can protect in bankruptcy.
What happens to property in an asset case? You’ll keep your exempt property. The bankruptcy trustee—the official tasked with managing your case—will sell the remaining property, called “nonexempt property,” for the benefit of your creditors. After the deadline to submit a proof of claim form passes, the trustee will distribute the funds according to a priority ranking system. Debts that rank higher in priority get paid in full before lower priority debts. For instance, domestic support obligations and taxes rank higher than credit card balances and student loans.
Filing an asset case can make sense. It’s unusual for an individual to have an asset case because most cash-strapped people sell valuable items to pay for living expenses. By the time they’re ready for bankruptcy, there’s nothing left. A filer might choose to file an asset case if the dischargeable debt (the amount that will go away) is significantly greater than the value of the nonexempt property. The scales might tip even further if the debtor faces a wage garnishment or lawsuit, or if the debtor owes a priority debt that won’t get discharged in bankruptcy. In the latter case, the sales proceeds will get applied to the debt, thereby taking some of the sting out of losing the nonexempt property.
Example. Jon owes $60,000 in credit card debt and $40,000 in unpaid taxes. He also owns a sailboat worth $15,000. Even though he will lose the boat, he decides to file for Chapter 7 bankruptcy. He knows that because his taxes are his highest priority debt, all of the money from the boat sale will go toward paying down his nondischargeable tax debt, while all of the credit card debt will get wiped out. Therefore, even though Jon stands to lose property, he’ll be in a better financial position afterward because instead of being in the red by $85,000 ($100,000 debt - $15,000 boat value = $85,000), he’ll reduce his total debt down to a $25,000 in nondischargeable tax debt.
If someone is also responsible for one of your debts—for instance, a relative cosigned on a car loan or your business partner is equally liable for a debt—that person will still be on the hook if you file for Chapter 7 bankruptcy. The bankruptcy case wipes out the obligation of the filing debtor only. So if the debt is of a type that you can discharge in Chapter 7 bankruptcy, you will no longer be legally responsible for paying it, but the other person obligated to pay the debt will. (Learn more about cosigned debt in Chapter 7 bankruptcy.)
For clear-cut answers, information and strategies you need to figure out whether bankruptcy is the right solution for you, get The New Bankruptcy: Will It Work for You?, by Attorney Cara O’Neill.
]]>You can try asking the lender to take you or your ex off of the account; however, it’s unlikely to work. Most banks won’t remove an individual from a loan voluntarily because it’s in the lender’s best interest to keep as many people—and incomes—tied to the debt as possible.
Another option is to refinance the loan. But many people don’t have sufficient credit to do so. If you’ve run out of ways to untangle yourself from a loan that you’re not benefiting from, filing for bankruptcy might be your answer.
Bankruptcy can be a great tool when a relationship goes south because gets rid of many of the types of debts couples share during a relationship. For example, bankruptcy will wipe out (discharge):
The person who files for bankruptcy and receives a discharge (the order that wipes out debt) will no longer be responsible for paying the debt. So if you want off of the loan, chances are you’ll be able to make that happen by filing for bankruptcy.
If, however, you want to get your ex off of a loan you’d like to keep, you’ll have to convince your ex to file the bankruptcy case (more below in “What This Approach Won’t Do”).
Bankruptcy is an effective way to discharge a loan secured by property, such as a mortgage or auto payment. If you—or your ex—want to know whether your ex will be able to keep the house or car, the answer will depend on whether your ex is legally responsible (an obligor) for paying the loan.
Filing for Chapter 7 bankruptcy will be the most streamlined way to remove your liability from a loan. Qualifying debt gets wiped out in four to six months, and you won’t need to pay your creditors through a repayment plan.
You can achieve the same goal by filing for Chapter 13 bankruptcy, but you’ll have to complete a three- to five-year repayment plan. For more information, read What Is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?
Removing a former relationship partner from a loan that you’re both responsible for can be a bit trickier. Why? Because in most cases, your bankruptcy filing will eliminate your liability only—not the responsibility of your ex. So unless your ex will agree to file for bankruptcy, you’ll likely have to explore other options.
Also, you should be aware that bankruptcy won’t wipe out your responsibility to pay particular debts under a marital separation agreement entered into in family court. However, you can wipe out marital property division payments in a Chapter 13 bankruptcy.
If you want to explore ways that your filing might wipe out an ex’s obligation, or if you’re facing a family law-related problem, you should consult with a local bankruptcy attorney.
]]>When you file for Chapter 7 bankruptcy, the trustee assigned to oversee your case will ask for your most recently filed tax return. That doesn’t necessarily have to be the tax return for the last tax year, but if it isn’t the most recent return, the trustee will ask for an explanation.
The trustee will compare the income you report on your return to the amount listed in your bankruptcy paperwork. If you show that you’re due a refund, the trustee will also want to check that you have the right to protect (exempt) it and that you’ve claimed the proper exemption amount. If not, you’d be required to turn the refund over to the trustee, who would, in turn, distribute it to your creditors.
Many people plan their bankruptcy so that they can use the return for necessary items—such as living expenses—before filing for the case. If you choose this approach, it’s a good idea to keep records of your expenditures.
(If you’d like to learn about discharging tax, read Tax Debts in Chapter 7 Bankruptcy.)
In general, you must be up to date on your tax returns before you file a Chapter 13 case, but the rules allow you a little wiggle room. You have to provide copies of the returns for the previous four tax years to the Chapter 13 trustee before the 341 meeting of creditors (the hearing that all filers must attend).
If you’re not required to file a return, your trustee may ask for a letter, an affidavit, or a certification explaining why. Sometimes local courts will impose additional rules for documents in their districts.
If you owe the IRS a return, but don’t file it on time (before your 341 meeting of creditors), things can happen to derail your case.
Filing your tax return might not be as burdensome once you realize that using Chapter 13 bankruptcy to manage your tax debt can be a smart move. Here’s why:
Bear in mind that any nondischargeable tax that won’t go away in bankruptcy (generally, those incurred during the last three tax years) must be paid in full during the three- to five-year Chapter 13 plan. At its completion, you’ll be caught up on your taxes, along with most or all of your other debts.
]]>This article discusses some of the pros and cons of filing Chapter 7 and Chapter 13 bankruptcy, how Chapter 20 bankruptcy works, and how a Chapter 20 can help in certain situations.
Chapter 7 bankruptcy has its benefits and detriments.
If you qualify to file a Chapter 7 and don’t have non-exempt assets that you want to keep, the benefits are obvious. Under Chapter 7:
However, there are some things Chapter 7 bankruptcy cannot do. Under Chapter 7:
To learn more, see our Chapter 7 Bankruptcy area.
Under a Chapter 13, you benefit because you can:
The detriments of a Chapter 13 are that:
Chapter 20 generally refers to a situation where a Chapter 13 is filed right after your Chapter 7 is completed. Some courts even allow the Chapter 13 to be filed after the Chapter 7 discharge is granted but before the case is closed. When you file a Chapter 13 after a Chapter 7 without waiting four years, you cannot receive a discharge in the Chapter 13 but there are other benefits that might fit your situation.
You need the extra time but have too much debt. If you need the extra time to cure an arrearage on a mortgage or car loan but your overall debt exceeds the debt limits under Chapter 13, filing a Chapter 7 first might help. By filing the Chapter 7, you can reduce your overall debt. Then, with your debt load reduced, you may be able to qualify for Chapter 13. Although you won't be able to get a second discharge in the Chapter 13, the second bankruptcy filing will give you extra time to cure the arrearage on your mortgage or car loan or to pay down debts that were not eligible for discharge under the Chapter 7, such as tax debt.
You need to have more money available to apply to an arrearage or non-dischargeable debt. By filing a Chapter 7 first, you may be able to reduce your unsecured debt so that more of your income is available to pay the arrearage or non-dischargeable debt. This can allow you to:
You want to utilize lien stripping. Some courts allow you to strip off completely unsecured second mortgages through Chapter 13 bankruptcy. The bankruptcy courts are not all in agreement on this so it would be best to check with an experienced bankruptcy lawyer in your area if this is your purpose for following a Chapter 7 with a Chapter 13. (To learn more see, What is Lien Stripping in Chapter 13 Bankruptcy?)
]]>I am filing for bankruptcy without my spouse. She has a good job. Do I have to include her income on my bankruptcy petition?
If the two of you share the same household, then yes. If you maintain separate households, then no.
In both a Chapter 7 and Chapter 13 bankruptcy, you are required to include your spouse's income in your bankruptcy petition. For a Chapter 7, her income must be included when doing the means test. In a Chapter 13, her income must be included on the Form 22C to determine your disposable income for the purpose of calculating your plan payments.
The potential problem with including her income is that it may make you ineligible for a Chapter 7, or may unreasonably inflate your Chapter 13 plan payments, which could really strain your budget if she has her own bills and expenses to pay.
However, you may be able to reduce the amount of her income contribution through the marital adjustment deduction. This means that you can deduct any personal expenses that she pays with her own separate income and exclude that part of her income that is not used to support your household. Some examples of a marital deduction expense includes payments for her own student loans and credit cards, or deductions from her paychecks for her own retirement plans.
For more information on how this works, read The Marital Adjustment Deduction on the Means Test.
]]>If you owe a lot of unsecured debt and don't have any assets or income that a creditor can seize or garnish, you have two good choices: File bankruptcy or do nothing.
If a creditor has obtained or will obtain a judgment against you, but you have no assets, then there is not much that creditors could do to force you to pay. Federal law prohibits a creditor from garnishing your social security earnings -- so that will be safe as well.
Just because a creditor cannot get your social security through garnishment does not mean that creditors will stop calling you or sending you collection notices, though. It might even sue you and force you to appear at court for a collection-related hearing, such as a creditor's exam.
If you understand and are comfortable with this and cannot afford the filing fees and attorney fees involved with a bankruptcy filing, then this strategy may be your best option.
If you can scrape the money together to cover your bankruptcy costs and fees, or are able to find an attorney who can offer you bankruptcy services for free or at a reduced cost, then filing for Chapter 7 bankruptcy may be good idea. If your only income is social security and you don't own any property, then Chapter 7 bankruptcy will be a relatively easy process for you.
In Chapter 7 bankruptcy, you are able to discharge most or all of your debts. In exchange, you must give up certain property to the bankruptcy trustee to repay your creditors. If, however, you don't have any property to give up, then you don't stand to lose anything. Even if you do own some property, you get to keep it if it is exempt. To learn more, see our Bankruptcy Exemptions area.
In addition to providing you relief from annoying and stressful collection actions, getting a Chapter 7 bankruptcy may also improve your credit, as it will eventually clean up any lengthy derogatory credit items on your credit report.
Before making the final decision, you should consult with a local bankruptcy attorney or research more to make sure there aren't less-obvious issues particular to your situation. For more information, visit our Chapter 7 Bankruptcy area.
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