You need a vehicle to get to work, school, and medical appointments, so when considering bankruptcy, it’s crucial to know what happens to your car when you file Chapter 7 or Chapter 13. Fortunately, most people can keep a car in both bankruptcy chapters. In this article, you’ll learn what you must do to keep your vehicle in bankruptcy and what happens if you file bankruptcy with a car loan.
Whether you can keep a car will depend on your vehicle's equity amount, the exemptions available to protect your car’s equity, and whether you choose to file for Chapter 7 or 13. If you have a car payment, whether you’re current or behind on it will also impact your ability to keep your car.
Keep reading. We explain all of these factors in more detail, and provide examples, below.
Yes, bankruptcy works by erasing or “discharging” car loans. However, even though bankruptcy will clear a car loan, you won’t get a free car in bankruptcy. Although many people are under the mistaken belief that filing bankruptcy allows you to wipe out an auto loan and keep the vehicle free and clear of any payments, it isn’t true.
What you must do to keep a car in bankruptcy depends on whether you file for Chapter 7 or 13. In Chapter 7, you can keep the vehicle if you meet the following conditions:
Here’s what you must show to keep a car in Chapter 13:
Filers who meet these requirements don’t need to worry about losing a car in bankruptcy. Keep reading to learn how to comply with the rules and the consequences if you can’t.
In Chapter 7 bankruptcy, you have two people to please before you can keep your car: the Chapter 7 bankruptcy trustee assigned to your case and the car lender. You'll need to do different things to satisfy each of them.
The bankruptcy trustee won’t take your car if you can protect all vehicle equity with a bankruptcy exemption. So, your first step would be determining whether you can protect your car’s equity with a motor vehicle exemption. Check for a wildcard exemption if the motor vehicle exemption isn’t enough to cover your equity. Many states let bankruptcy filers use both.
If you can protect all of the equity, you can keep the car in Chapter 7 bankruptcy, at least as far as the Chapter 7 bankruptcy trustee is concerned.
Example. Henry’s car had $5,000 in equity when he filed for Chapter 7 bankruptcy. His state offers a $7,500 motor vehicle exemption, which more than covers his car equity. Because Henry can protect all vehicle equity, he isn’t at risk of losing his car to the trustee.
To steer clear of your car lender in Chapter 7 bankruptcy, you must be current on your car loan when you file and remain current after your Chapter 7 case ends. Otherwise, the lender will be able to repossess the vehicle.
Example. Henry was five months behind on his car payment when he filed for Chapter 7 bankruptcy. So, even though he could protect the vehicle equity with a bankruptcy exemption, he still lost the car. Shortly after filing for bankruptcy, the lender filed a motion asking the court to lift the automatic stay and let the lender repossess the car. Because Henry was significantly behind on the payments—the vehicle’s equity didn’t cover the overdue amount—the bankruptcy judge granted the motion, and Henry lost the car.
Additional options for keeping a car in Chapter 7 bankruptcy exist when you have a car loan. For instance, you can "redeem" the vehicle, which involves paying the lender its actual value. Learn about all of your car options in Chapter 7 Bankruptcy.
So why must you continue making your car payments to keep your car when filing for bankruptcy? The answer is that while bankruptcy erases car loans, it doesn’t eliminate car liens.
Your car loan is the contract holding you responsible for paying for the car. The lien is the recorded document that allows the lender to reclaim the vehicle if you don't pay according to the contract terms.
Bankruptcy works by breaking the contract requiring you to repay the lender for the car loan. You can file for bankruptcy, return the car to the lender, and not pay anything further on the car loan.
However, there's a catch if you want to keep a car with a car loan. Filing for bankruptcy doesn’t eliminate the lien that gives the bank the right to take back your vehicle if you don't pay as agreed. The bank can use the lien to repossess the car once the bankruptcy case is over, or sooner with the court’s permission, even though you erased the debt. So if you want to keep the car, you must pay for it.
Example. Conroy asked his bankruptcy lawyer why he’d lose a car if he filed for Chapter 7 bankruptcy when behind on car payments but not any of the things he purchased on a major credit card. His lawyer explained that Conroy agreed to give the car lender a lien against the car, and it’s the lien that allows a car lender to recover the purchased property. He further explained that typically, major credit cards are “unsecured” and aren’t guaranteed with a lien.
The lawyer also made sure Conroy understood that the vehicle lender could take the car after gaining permission to proceed during Chapter 7 from the bankruptcy judge or wait to repossess it after the Chapter 7 case ends.
Sometimes, the best option is to return a vehicle with a car loan to the lender. Then you’ll be entirely out from under the car loan. Many bankruptcy filers will return a fianced car to the lender when they:
If you’re in this situation, you’ll check the box stating that you plan to “surrender the property” when filling out the Statement of Intention for Individuals Filing Under Chapter 7 form. You can also surrender a car with a car loan in Chapter 13 bankruptcy.
If you’re behind on your payments, consider filing for Chapter 13 bankruptcy. You can pay off the vehicle balance over three to five years in a Chapter 13 repayment plan and keep the car.
But suppose you don’t make the payments or catch up on any loan arrearages. In that case, the lender can repossess your car in Chapter 13 bankruptcy. Learn more about your car 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.
]]>Although your employer might learn about your bankruptcy case, rest assured that your bankruptcy won't affect your current employment in most situations. However, it might prevent you from getting a job in private industry later.
No employer can fire you solely because you filed for bankruptcy, and an employer can’t use a bankruptcy filing as a reason to change other terms or conditions of your employment.
Specifically, your employer can’t do the following:
If your employer fires you soon after learning of your bankruptcy and no other justifications exist, you might have a case against the employer for illegal discrimination. But bankruptcy won’t shield you from other employment misconduct, so if you’ve been tardy, dishonest, or incompetent at your job, the fact that you filed for bankruptcy won’t affect your termination.
Yes, all bankruptcy filings are public records, except for sensitive information, such as account numbers, Social Security numbers, and minor children’s full names and birthdates.
But looking up a bankruptcy case on the court's Pacer system isn't a simple process. Unless your boss knows you filed, your employer will unlikely check your bankruptcy filing status.
No, bankruptcy trustees don’t routinely talk with a filer's employer, and the court doesn’t send out a notice of the bankruptcy case to employers. However, employers can find out about bankruptcy filing in other ways. Keep reading to learn how.
Again, employers rarely find out about a bankruptcy filing. But it can happen, and here’s how.
Many jobs require a security clearance. Suppose you’re a member of the armed forces or an employee of the CIA, FBI, another government agency, or a private company that contracts with the government. In that case, you might have a security clearance.
Do you risk losing your security clearance if you file for bankruptcy?
Probably not, and your bankruptcy might prove beneficial. According to credit counselors for the military and the CIA, people with a lot of debt can be targets of blackmail. By filing for bankruptcy, you substantially lower that risk, so filing works more in your favor more often than not.
No federal, state, or local government agency can consider your bankruptcy when deciding whether to hire you. Private employers, however, aren’t constrained by a similar rule, and some people find that having a bankruptcy filing in their past haunts them.
A bankruptcy filing causes problems mainly for those applying for jobs dealing with money, such as bookkeeping, accounting, and payroll. So, how does an employer find out you filed? Many private employers conduct credit checks on job applicants, so employers learn about bankruptcies from credit reports.
While an employer needs your permission to run a credit check, employers can refuse to hire you if you don’t consent. If your employer asks for this authorization, consider speaking candidly about what the employer will find. Being honest and upfront might outweigh any adverse discoveries.
Although bankruptcy shouldn't affect your job in most situations, as discussed above, bankruptcy will impact your credit. Most filer's credit scores drop immediately after bankruptcy. Still, they usually improve with careful credit use within a couple of years. You can learn more about strategies for credit recovery after bankruptcy in Bankruptcy and Your Credit FAQ.
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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]]>For instance, if you can’t protect all home equity with a bankruptcy exemption, the Chapter 7 bankruptcy trustee appointed to your case will sell it for the benefit of creditors. Also, your lender can recover your house if your mortgage isn't current during and after your Chapter 7 case. If you can’t meet both requirements because you’re behind on your payment or in foreclosure, or you can’t exempt all home equity, you’ll have a better chance of keeping your house using Chapter 13 bankruptcy.
If you file for Chapter 7 bankruptcy, the trustee and your lender will each determine whether they can take your home. Below, we explain what to do to keep your house safe in Chapter 7.
The trustee is responsible for selling assets for the benefit of creditors. To give the trustee time to evaluate your property, all of your assets become part of a bankruptcy estate when you file for bankruptcy. You lose ownership temporarily and the trustee manages your property in your place.
You can "exempt" or remove property from the estate if it’s allowed by your state's bankruptcy exemptions. The exemptions list the property bankruptcy filers can keep. If you can’t exempt the property, the trustee will sell it for the benefit of creditors.
You can determine whether you can keep your home safe from the trustee if you know how much home equity you have and your state’s “homestead exemption” amount.
Start by valuing your home. Calculate the home equity by subtracting any outstanding mortgage balance and liens from the home value. The equity is the amount you’d have in your pocket after selling the house and paying all mortgages, home equity lines of credit (HELOCs), and liens.
If you don’t have any equity, you’re in good shape. Trustees don’t sell houses without equity. Otherwise, you’ll need to be able to protect your equity with a bankruptcy exemption to avoid losing the home in Chapter 7 bankruptcy.
Learn more about filing for bankruptcy if you have equity in your home.
State exemption statutes list the property its residents can protect in bankruptcy. Some states allow residents to choose between the state exemption list or the federal bankruptcy exemption scheme.
Either way, almost all states permit residents to protect some home equity with a homestead exemption. You might be able to exempt even more with a wildcard exemption. If your exemptions adequately cover your equity, the trustee won’t sell your home in Chapter 7.
However, the trustee will sell the house if your exemptions protect only a portion of your equity. The sales proceeds will be used to pay mortgages, HELOCs, and liens. You'll receive the exemption amount. Creditors will receive whatever remains after deducting sales costs.
Although you can't figure costs into your equity determination, the trustee will consider costs before selling the home. If there isn’t enough to make a meaningful payment to creditors after paying mortgages and liens, returning the homestead exemption to you, and deducting sales costs and the trustee’s fee, the trustee will abandon the property, and you’ll get to keep it.
You don't get to wipe out or "discharge" your mortgage and keep your home. Your lender is entitled to mortgage payments or the return of the home. Here's what you must do to satisfy your lender.
You'll meet this requirement if your mortgage is current and will remain current after bankruptcy. If not, you’ll likely lose the house.
When you file for Chapter 7, the automatic stay stops collection actions, including foreclosures. But if you’re behind on the mortgage payment, the best you can hope for is to delay the process for a few months.
What will happen if you file? The lender can ask the court to lift the automatic stay to allow foreclosure proceedings to continue. The court will likely grant the request if the trustee doesn’t plan to sell the home. Alternatively, the lender can wait until the bankruptcy ends, proceed with foreclosure, and sell the house at auction.
Why Chapter 7 won’t cure a default. Chapter 7 bankruptcy doesn’t allow you to catch up on the overdue payments over time. Also, Chapter 7 doesn't erase the lien that permits the lender to obtain the home if you don't pay. The lender can foreclose after the automatic stay lifts, and you’ll lose the house.
Being able to pay the mortgage after Chapter 7 is critical because losing the house after your case might put you in a worse financial position. Why? Depending on the laws of your state, you might be stuck paying a deficiency balance if the lender couldn’t sell the home for the amount you owe. (A deficiency balance is the amount remaining after a home is sold at auction, and the proceeds are applied to the loan balance.)
Worse yet? You’d have to wait eight years to file a second Chapter 7 bankruptcy, leaving the lender plenty of time to collect a deficiency balance using collection methods such as garnishing your wages or levying on a bank account.
Chapter 13's repayment plan allows you to catch up on mortgage arrearages over time and prevent a home loss. You can also use the Chapter 13 plan to pay your creditors the value of the nonexempt equity you can’t protect with a homestead exemption.
Find out more about keeping a home by filing for 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 a creditor gets a judgment against you and the debt is dischargeable in a Chapter 7 bankruptcy, filing for bankruptcy will wipe out a creditor's ability to collect. However, a creditor with a judgment can place a lien on your property.
Because liens don't go away in bankruptcy automatically, it's possible to wipe out a lawsuit judgment in bankruptcy and remain obligated to pay the lien. When you don't have a strong defense, you can often avoid this problem by filing for bankruptcy before a lawsuit judgment is entered against you.
A lawsuit judgment enhances a creditor’s ability to collect a debt, but you can’t always eliminate that power in bankruptcy. That’s not to say bankruptcy can’t get rid of a lawsuit judgment against you, but eliminating the lawsuit judgment itself isn't always enough to avoid responsibility for paying a debt.
This article takes you step-by-step through this challenging area, covering key areas you'll need to understand, including the following:
Not many. Most bills, like credit card balances, medical bills, rental contracts, and personal loans, aren't “secured” by collateral, such as a home or vehicle the creditor can take if you don’t pay your bill. Also, the law doesn’t allow most unsecured creditors to place a lien on your property when you don't pay what you owe (although some have this right, the IRS being a well-known exception).
Without a money judgment, collateral, or a lien on your property, your credit card company, the local gym owner, or another unsecured creditor can’t do much if you stop paying your debt. They can ask you to pay it, but that’s about it.
Yes. An unsecured creditor who wants to use more aggressive means to force you to pay can get the right to take your property without your consent. But these creditors must sue you in court first.
In court, the creditor must prove the balance owed to the court's satisfaction. If successful, the court will award the creditor a money judgment. The money judgment protects you by ensuring the creditor uses the tactics explained in the next section to collect what's owed, not more.
Once the creditor has a money judgment, the power shifts. The money judgment gives the creditor tools that can strip you of assets. Specifically, a creditor with a money judgment in hand can do the following:
A money judgment also allows the creditor to attach a "lien" to your property. A lien gives a creditor an ownership interest in the property until you pay the debt (more below).
In some states, a judgment automatically gives a creditor a lien right to all your property. Other states require the creditor to file the money judgment with the recorder's office, state secretary, or a similar office first.
With the lien in place, the creditor can do one of two things:
Creditors usually place a lien on a home or other real property because it's often the person's most valuable asset. But selling real estate can be expensive and complicated, so many creditors wait for the debtor to sell it. The debtor must pay off the lien before transferring the title to the new buyer.
If you'd like more details, read How Creditors Enforce Judgments.
Assume the trial is over, the creditor won, and the judge awarded the creditor a money judgment. If the money judgment is for a debt you can discharge, like a credit card balance, and didn't involve fraud, and the judgment creditor hasn’t placed a lien on your property, Chapter 7 bankruptcy will provide a quick and easy solution, allowing you to wipe your hands of the entire matter and pay nothing.
You might benefit from bankruptcy if the judgment creditor already placed a lien on your property, but you’ll have extra work ahead. If the judgment involves fraud, bankruptcy could help if luck is on your side. If the judgment involves a nondischargeable debt, there's likely no reason to file unless you'd benefit by erasing other debt or paying the judgment over time in Chapter 13 bankruptcy.
Keep reading to learn more about each potential outcome.
The simplest way to start your analysis is by determining whether bankruptcy will wipe out the debt. If the underlying debt is nondischargeable, like those below, you won’t be able to erase it in bankruptcy:
If you have one of these debts and need time to repay it, consider filing for Chapter 13. You can force the creditor into a five-year repayment plan while simultaneously handling other financial issues. Another benefit? The creditor won't be able to garnish your wages, levy your bank account, or seize property while you pay into your Chapter 13 plan.
Learn more about debts a bankruptcy discharge won’t eliminate.
Don't assume you're off the hook if the judgment doesn't fall into a nondischargeable category. Other debts can also be declared nondischargeable by a bankruptcy judge if a creditor asks. The most common debts that can be made nondischargeable include the following:
Are you confused about why these debts differ from the debts discussed above? If so, you're not alone. Here's the critical difference.
If the debt falls under one of these categories and the creditor doesn't object, you can discharge the lawsuit judgment. Therefore, if the judgment creditor does nothing, your responsibility to pay will be erased with other qualifying debts.
However, if the creditor objects by asking the bankruptcy court to declare the money judgment debt nondischargeable, the bankruptcy court will likely rely on the underlying judgment and declare the debt nondischargeable.
Tip. Consider filing for bankruptcy soon after being served with a lawsuit containing fraud allegations. You could come out ahead. If your quick action deprives the creditor of a money judgment, the creditor will be forced to prove the fraud allegations at a bankruptcy trial rather than simply asking the bankruptcy judge to declare the debt nondischargeable based on the fraud judgment from the previous court. This is where luck enters the picture. Sometimes creditors assume the matter will be erased in bankruptcy and do nothing, or don't think they'll be able to collect if you're bankrupt and don't want to exert the time and money necessary to pursue a lawsuit.
Liens can be problematic because, in many cases, they survive bankruptcy. Obtaining a bankruptcy discharge won't matter much if the creditor's lien is still attached to your assets, such as your house.
Here’s the typical scenario.
You allow a credit card lawsuit to go to judgment without appearing in court because you didn’t have a viable defense. The court issues a money judgment against you for a dischargeable credit card debt, and you file for bankruptcy soon after. However, the creditor used the money judgment to file a lien against your house before you could file for bankruptcy.
You knew that your bankruptcy filing wiped out the money judgment and eliminated the creditor’s ability to garnish your wages or take money out of your bank account. However, you didn’t realize the bankruptcy did not affect the lien until years later, when you sold the house. You had to pay the lien in full before transferring ownership to the new buyer.
As the example demonstrates, if the lien remains, the creditor will retain a right to sell the property after the bankruptcy case's conclusion or wait until you sell it to take its share, even if you wiped out the money judgment in bankruptcy. If you don't understand this, many years later, you could discover you still owe a creditor for a debt you thought was erased in bankruptcy.
The good news is that you might be able to remove the lien in bankruptcy. The bad news is even if you can remove the lien, it will only be to the extent that you could have “exempted” or protected the property in bankruptcy.
You can eliminate some or all of a judgment lien in bankruptcy through “lien avoidance.” Here’s what you’ll need to prove:
To avoid a judgment lien, you must follow bankruptcy procedures, and it's best to act quickly. However, if you forget to handle the lien, most courts will allow you to file a motion to avoid a lien after your bankruptcy case closes.
You must have the right to keep or "exempt" the property in bankruptcy. If the judgment lien gets in the way of this right, the court will likely agree to avoid it so that you maintain clear property ownership.
If you aren't entitled to exempt the asset, or if the lien is another type, such as a voluntary lien given when purchasing a house or car, the lien will remain in place.
Example 1. Henry can exempt $5,000 in equity in a car. His vehicle is worth $4,000, allowing him to protect it in a Chapter 7 bankruptcy. However, in his state, a creditor with a judgment automatically gets a lien against all of the debtor's personal property, including a car (and Henry has a money judgment against him). His attorney files a motion asking the court to avoid the lien. Because Henry can entirely exempt the vehicle, the court agrees.
Example 2. Tiffany's credit card company obtained a judgment for $25,000 and filed it with the Stoney County recorder's office, giving the credit card company a lien on all of Tiffany's real estate in the county. An exemption doesn't cover Tiffany's cabin. Even though she can wipe out the credit card debt in a Chapter 7 bankruptcy because the property is nonexempt (and located in the county), the court won't remove the lien. After the bankruptcy, the credit card company can sell the cabin (or wait for Tiffany to do so) and recover the lien amount.
For more details, see What Happens to Liens in Chapter 7 Bankruptcy?
You'll want to claim your property's exempt status in your bankruptcy paperwork and file a timely motion with the court. Remember that if you have more equity than what you can exempt, your creditor will likely argue that the lien is valid only up to the exemption amount. Whether you file for Chapter 7 or Chapter 13 will determine how problematic this issue could be for you.
For instance, the trustee might still sell the property in Chapter 7 bankruptcy and return the exempt portion to you. In Chapter 13, you'd likely be better off. You could keep the property by paying an amount equal to the nonexempt part through the Chapter 13 repayment plan.
For more information, read Getting Rid of Judgment Liens in Bankruptcy.
Lien removal is a tricky area of bankruptcy law, and complexities exist beyond this article's scope. To protect valuable property to the best of your ability, you should meet with a bankruptcy lawyer for a thorough case assessment.
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.
]]>Most people want to file Chapter 7 because it wipes out most unsecured debt, such as credit card accounts, utility balances, and medical bills, without requiring monthly payments to creditors for three to five years. However, not everyone qualifies for a Chapter 7 discharge, the order that wipes out qualifying debt.
To determine whether you qualify, you must pass the two-step means test. The means test measures your ability to pay some amount toward your debt through a Chapter 13 plan. Although it would be challenging to pass the first part while making considerable money, it can happen if you have a large family. Otherwise, you'll have a better chance of passing the second part of the means test.
The reason you’ll likely fail the first part of the Chapter 7 means test if you make a lot of money is because it compares your family's gross income to your state’s median income for the same household size. If you have a small to moderate family size, you're not going to get a break.
However, if you fail the first part, you’ll deduct expenses in the second part, and if your expenses are high enough, you’ll pass. But you shouldn't assume you’ll pass the second part with flying colors if you struggle to pay your monthly expenses. Bankruptcy law doesn’t support lavish lifestyles, so many monthly expenses are limited to reflect regional and national averages.
Typically, people with high incomes who qualify for Chapter 7 bankruptcy have significant balances of “priority” debt, which, in many cases, isn’t dischargeable in bankruptcy. The most common are tax debts and domestic support arrearages. Other obligations that help high earners pass the means test include mortgages, car loans, and late payments of the same. Tuition, mandatory payroll deductions like union dues, and court-ordered payments can also help.
Also, if you owe more business obligations than consumer debts, perhaps because of a failing business, you’ll be exempt from taking the means test. And in some jurisdictions, taxes and student loans are considered business debt. Learn about the differences between business and consumer debts.
Below are select income and expense issues that might help you qualify for Chapter 7 bankruptcy.
The first part of the means determines whether your family income is less than the median family income of your state. If it is, you automatically qualify and don’t have to complete the second portion.
You can find the most recent figures on the U.S. Trustee’s website by selecting “Mean Testing Information” on the left. You’ll notice that the limits increase depending on your family members, making passing easier if you support a significant number of people. The amounts also differ dramatically by state, as illustrated in the following examples:
Example 1. Derik has a household of four people, including himself, a spouse, and two children. They live together in New Jersey. In 2023, Derik could have a household income of up to $155,510 and qualify for Chapter 7 bankruptcy without taking the second part of the means test.
Example 2. Kirsten lives in Alabama and also has four people in her household. In 2023, Kirsten’s gross family income could be as high as $94,659 for qualification purposes.
Find out more about comparing your income to the state median.
Even if your family income exceeds your state’s median income, you have another chance to meet qualification requirements. You can subtract some actual and predetermined expenses from your income.
If the amount remaining or your “disposable income” is insufficient to fund a Chapter 13 repayment plan, you’ll qualify for Chapter 7 bankruptcy. Although the figures change periodically, as of October 13, 2023, the monthly disposable income times 60 could not exceed $15,150.
Deductible expenses include the following:
You’ll want to prove you can prove all claimed expenses. Be sure you have receipts before claiming expenses to help you pass the means test.
If you don’t pass the means test, you might qualify to reorganize your debt under Chapter 13 bankruptcy (or Chapter 11 bankruptcy if your expenses exceed the allowed amounts). In Chapter 13, you’ll pay into a three- to five-year repayment plan. After completion, the bankruptcy court will discharge most remaining unsecured debt balances.
There’s no limit to the amount you earn in Chapter 13 bankruptcy. However, it’s relatively common not to make enough to pay all required expenses.
For instance, you must repay all recent back taxes, domestic support obligations, and any arrearages on your home and car loan if you want to keep the property. These amounts are in addition to your monthly expenses and house and car payments.
Find out whether you’re eligible for Chapter 13 bankruptcy.
Each bankruptcy chapter offers different benefits that help solve distinct financial problems. So, you’ll want to consider more than the money you make when deciding which bankruptcy chapter will work for you.
For instance, here are a few examples of issues that might make filing for Chapter 13 bankruptcy a better option than a Chapter 7 case:
Keep in mind that each person’s case is unique. An easy way to determine the most advantageous approach is to meet with a knowledgeable bankruptcy attorney.
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.
Updated October 13, 2023
]]>Yes. However, you must be able to protect your ownership interest using a bankruptcy exemption. Bankruptcy exemptions are laws outlining property a debtor can protect in bankruptcy.
If you can’t exempt your business interest, you’ll likely lose it in Chapter 7, the liquidation chapter. In Chapter 13, the bankruptcy type that reorganizes your finances, you must pay for any portion you can’t exempt over five years.
If you're familiar with how bankruptcy works and you know how your business is organized, skip to the “What Happens to Businesses in a Personal Bankruptcy" Chart. You’ll find concise answers about filing for bankruptcy when owning a business. Otherwise, consider referring to the helpful background articles above before continuing.
Before determining whether you can protect your business interest with a bankruptcy exemption, you must know how your company is organized. Is your company a sole proprietorship, partnership, LLC, or corporation?
Is the Business a Sole Proprietorship? If you haven't drafted any ownership agreements, you probably own your business as a sole proprietor. In a sole proprietorship, the company is an extension of you. For instance, it might be described as Dale Franklin doing business as (d/b/a) Frank's Fine Furniture. You own the assets of the company, such as the vehicles, lawn and gardening equipment, customer lists, and the company's debts are your debts.
Is the Business a Partnership? If you own your business with others, but it isn't incorporated, you likely own it as a partnership. When filing for bankruptcy, you'll list your personal and partnership assets as business assets. As a caveat, filing bankruptcy when you own a partnership can affect all partners' business and personal assets, even if they aren't bankrupt.
Is the Business an LLC or a Corporation? If your company is incorporated, you own interest in it, not the company itself. You might own 100% of the stock or share ownership with other stockholders. Even if you own 100%, the company owns its assets and is liable for its debts (however, when you’re the only owner, the corporate distinction isn’t meaningful in bankruptcy).
If you own the entire company, you’ll need to protect the company’s value or assets, whichever would be worth more (see why the corporation distinction doesn’t mean much?). If you share ownership with others, you’ll exempt the value of your ownership percentage or corporate stock.
Once you know what you must exempt, you'll be ready to determine whether the bankruptcy exemptions available in your state are adequate. Some states offer exemptions for business interests, but none exempt corporate stock. Other options include wildcard exemptions and “tools of the trade” exemptions.
Typically, a wildcard exemption will cover any property you choose. However, not all states offer them, and some have property restrictions. A tools of the trade exemption protects things needed in your trade or profession.
Below is a chart you can rely on for quick answers about what will happen to your business interest if you file a personal bankruptcy in Chapters 7 or 13. The analysis assumes you plan to file an individual Chapter 7 bankruptcy or Chapter 13 bankruptcy in your name, not putting the company itself in bankruptcy.
Find out more information small business owners should know about Chapters 7 and 13.
Chapter 7 |
Chapter 13 |
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Sole Proprietor |
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Partnership |
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You’ll lose it in Chapter 7. However, because the Chapter 13 trustee doesn’t sell property, you’d have to pay its value through the Chapter 13 plan. Otherwise, you wouldn’t qualify for Chapter 13. Learn whether you’re eligible for Chapter 13 bankruptcy.
Sometimes, an asset isn't exempt, but selling it wouldn't recoup enough to be worthwhile. For instance, small family businesses dependent on a particular person’s skill aren’t easily sold, and the trustee might abandon the enterprise. In Chapter 13, the debtor would argue that these factors significantly decrease the business’s value.
Also, a Chapter 7 trustee can’t sell a service-only sole proprietorship, such as a single-person accounting firm, a business consulting or interior designer service, or a window painter’s business. Instead, the trustee would liquidate equipment, products, materials, and other valuable business assets. In Chapter 13, the debtor would pay the value of the business assets through the plan.
Similarly, the trustee can’t sell the business assets owned by an LLC or corporation (unless you’re the sole member or shareholder, as discussed above). Instead, the Chapter 7 trustee would sell your stock or ownership percentage, or you’d pay its value in Chapter 13.
Example 1. You own an unincorporated business called Frank's' Fine Furniture. You're a carpenter who builds custom furniture. You own your tools, a small woodshop, a pickup truck, and the materials needed to craft your custom pieces. Your tools are exempt, but the rest of the business assets are not. Because it's a sole proprietorship, the trustee can't sell your interest in the company but can liquidate the nonexempt assets. You’d pay that value in Chapter 13.
Example 2. Frank's Fine Furniture is incorporated. You own 100% of the stock and estimate the company has assets worth about $20,000. But, without you designing and building the furniture, Frank's Fine Furniture has no additional value. The trustee can sell the stock; however, the value of the business won't include your expertise and will likely be worth $20,000. In Chapter 13, you’d pay $20,000 through the five-year repayment plan.
Example 3. Frank's Fine Furniture is incorporated. You own 100% of the stock. The company has 25 employees, hard assets, like machinery, real property, and vehicles, worth $10,000,000, and annual revenues of $3,000,000. You no longer design or craft the furniture yourself. The trustee will sell your interest in the company (the stock) at total value because it no longer depends on your talents, good name, or assets, whichever would recoup more. By contrast, if you owned 50% of the stock, the trustee would be limited to selling 50% of company stock. You’d pay the equivalent amount in Chapter 13.
Learn how bankruptcy trustees get paid. It will provide insight into the overall process.
Filing for bankruptcy is more complicated when you own a business. You need to understand what will happen to your company, and you'll likely have to provide financial information for you and the company. To ensure you're doing what's best, consider hiring a bankruptcy attorney experienced in handling business-related cases who can help you evaluate what you stand to lose and discuss any alternatives available.
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.
]]>When a marriage ends, the spouses often enter into a contract that divides the couple’s assets, assigns responsibility for debts, and sometimes provides that one spouse will make payments for the support of the other spouse. The contract is called a marital settlement, a divorce agreement, a property settlement, or something similar.
Most agreements spell out the responsibilities and rights of each spouse. For instance, the agreement could require one spouse to do the following:
It’s common for bankruptcy to follow a divorce. How the bankruptcy will affect an agreement will depend on its contents. Learn why it's often better to file for bankruptcy before divorcing in Divorce & Bankruptcy: Which Comes First?
Domestic support obligations aren’t dischargeable in bankruptcy. The bankruptcy code defines a domestic support obligation (DSO) as a debt that is:
This broad definition includes agreement clauses providing future support, such as child or spousal support. These obligations won’t be discharged in a bankruptcy case. Learn more about nondischargeable debt in bankruptcy.
By contrast, bankruptcy law doesn’t protect property division agreements. But knowing whether an agreement provision provides ongoing support or a division of assets isn’t always easy. In fact, bankruptcy litigation can arise to determine whether a particular obligation will be forgiven in bankruptcy. The filer will have to file for Chapter 13 bankruptcy, however (more on why below).
So, what would be considered a property division provision? When a married couple divorces, they divide the property they own together. For instance, suppose one party keeps the couple’s timeshare. To do so, the spouse keeping the asset agrees to reimburse the other spouse over time.
For instance, suppose it is apparent in the agreement that the payment is to pay for the timeshare and not for support. In that case, the debt might be dischargeable in bankruptcy. (More examples are below.)
You’ll likely have to file for Chapter 13 bankruptcy if you’d like to wipe out a property settlement obligation. Here’s why.
Remember that many people negotiate agreements to substitute a split of property instead of a monthly alimony payment. For example, the couple could decide that one party will take ownership of the family home rather than regular support payments. Bankruptcy courts can scrutinize property settlement agreements to discern the parties' intent regardless of the language used.
Working through the dischargeability of a property settlement agreement is one of the trickier issues in bankruptcy, and it is advised that you seek the advice of a bankruptcy litigation lawyer.
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.
]]>Many people believe that once a loan appears as “charged off” on a credit report, they’re no longer responsible for the debt. Unfortunately, this isn’t the case.
When you stop paying on your car loan, the lender might take the “bad” loan off the books by transferring or selling your loan. Lenders often do this to improve the appearance of their financials. However, despite the transfer, you remain responsible for paying the balance to the creditor or debt collector who currently owns the debt.
You’ll list all charged-off loans in your bankruptcy paperwork to obtain a discharge of the debt, as you would all debts. The charged-off loan will be wiped out with other qualifying debts at the end of your bankruptcy case.
Be sure to include addresses for the lender, debt collector, collection agency, and debt buyer who attempted to collect the car loan. Your bankruptcy lawyer will likely list the charged-off loan under the original lender’s name and add any debt collectors who might have contacted you (the petition includes a place to add other creditors you’d like to notify about the debt).
This procedure ensures the annoying collection calls and letters stop because all involved will have received a bankruptcy filing notice. Learn more about the documents needed to prepare a bankruptcy petition.
You’ll likely list the charged-off car loan as an unsecured debt because the lender probably already repossessed the car. However, if you still possess it (which would be unlikely), you’ll list it as a secured debt. Plan to return the car unless you can work something out with the lender.
Most current car loans are secured debts. A borrower agrees to secure a loan by pledging property that the lender can take back if the borrower fails to pay according to the contract terms. Doing so gives the lender a lien that allows the lender to repossess the vehicle, if necessary.
Once the lender repossesses the car, the lender has the collateral, making the lien no longer effective and the loan unsecured for bankruptcy purposes. Most charged-off car loans will be unsecured.
The loan balance is a secured debt if you have a charged-off vehicle loan and still possess the car. However, this would be highly unusual because most lenders repossess cars long before charging off the loan.
If you find yourself in this situation, you'd list the vehicle with secured debts when filling out your bankruptcy forms. Additionally, you’d complete a second form telling the lender and court whether you’d like to keep the car or return it to the lender.
You’ll find more information in “More About Unsecured and Secured Car Loans In Bankruptcy,” below.
Yes. A deficiency balance is the difference between what you owe and the proceeds from the vehicle auction. A lender has the right to collect a deficiency balance after repossession in most states, but bankruptcy wipes out deficiency balances. You’ll list the deficiency balance as an unsecured debt because you'd no longer be in possession of the car.
Below, you’ll find information about how secured and unsecured debts are handled in Chapters 7 and 13.
In Chapter 7 bankruptcy, almost all unsecured debts get discharged (student loans are a notable exception). You’ll no longer owe a charged-off vehicle loan after your bankruptcy.
In Chapter 13 bankruptcy, unsecured debts usually receive a portion of the balance paid out over the life of the plan. At the end of the case, you’ll receive a discharge of any remaining amount owed.
You have a secured loan if you’re making car payments when you file for Chapter 7 and still possess the vehicle. The bankruptcy court will discharge the car loan at the end of the case. But that doesn’t mean you’ll lose it automatically.
Filers who satisfy the requirements to keep the car in Chapter 7 either “reaffirm” the car loan (agree to keep making payments in a new contract) or “redeem” the vehicle (pay the car's value in a lump sum). Some lenders let you keep the car as long as you stay current on the payment, but you won't have a contract so the payments won't be reported to credit bureaus and the lender can recover it at will.
Redemption works well if the vehicle is worth less than you owe and is in decent condition. If you redeem the car, you will own it free and clear after your bankruptcy case unless you use a redemption lender to finance it.
If you can’t keep the car or don’t want to, you can “surrender” it and return it to the lender. Find out more about how Chapter 7 can help with repossession.
In Chapter 13, you can pay the loan back over the life of the plan and keep the car, even if the debt was charged off. Chapter 13 can also help you get a repossessed car back from the lender.
You’ll likely have to pay the total amount owed on the car if you bought it shortly before your bankruptcy filing date. Otherwise, you might be able to cram down the loan and pay the car’s value.
You can also surrender a car in Chapter 13. In that case, the lender will sell the vehicle and apply the proceeds to the loan. The trustee will pay any leftover balance with other nonpriority unsecured claims. This group splits your discretionary income and wouldn’t increase your monthly payment.
Learn more about Chapter 13 bankruptcy and repossession.
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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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 money will lose protected status if you can’t prove your bank account balance is entirely Social Security funds. You can avoid unnecessary problems in bankruptcy by maintaining Social Security benefits in a separate account.
While your state usually decides what you can and cannot keep in bankruptcy, federal law says all your Social Security funds are exempt property. No matter your state, you’re entitled to keep your Social Security money.
However, you must prove the funds you claim are exempt Social Security funds are indeed exempt, and it isn’t always easy to do. Understanding the bankruptcy process will help emphasize why you must handle Social Security funds properly before filing for bankruptcy.
When filing for bankruptcy, you must list everything you own in your bankruptcy petition without exception. It doesn’t matter whether money is sitting in an account or stashed under your mattress. You must disclose it.
Most people realize they must list big-ticket items, like residential homes, rentals, vacation property, cars, and furniture. But you might be surprised to learn you must include small things, such as the following:
You can't forget or hide property in bankruptcy. Everything you own must be disclosed, and it becomes part of your bankruptcy case.
Although you must disclose all property, you don’t lose everything. Each state has exemption laws outlining how much property you can keep when filing for bankruptcy. If an exemption law allows you to keep a particular item, you declare it exempt in your bankruptcy petition by listing the exemption statute’s code number.
Fortunately, most filers can keep necessary household items and a modest car. But there’s no guarantee that everything will remain yours. The Chapter 7 bankruptcy trustee will verify whether you can keep the property and seize nonexempt property for the benefit of your creditors.
When you declare that certain funds are exempt from bankruptcy in your bankruptcy petition, you must prove your right to retain the money. Simply claiming a portion of your bank account balance is exempt Social Security benefits doesn’t mean the bankruptcy trustee will believe you, especially if you’ve mixed or “commingled” them with other funds in the same account. Commingling makes it difficult to prove which funds are exempt.
Keeping your Social Security benefits in a separate account exclusively for those funds is a good practice to prevent commingling issues. It allows you to trace the source of the funds to your Social Security check or an automatic deposit from the Social Security Administration.
It’s a good idea even if you aren't contemplating bankruptcy. It will help protect your Social Security money from creditors' efforts to collect judgments.
If you’ve already commingled your funds, there are a few ways to handle the situation. Here are some strategies you may want to consider:
Most people who receive Social Security funds will likely file for Chapter 7 bankruptcy. If you are, this article’s discussion will apply. But that’s not always the case. For information about what to expect, read Can I Keep My Social Security Income During My Chapter 13 Bankruptcy?
Not only is Social Security income protected from creditors in bankruptcy, but it’s also protected from creditors outside of bankruptcy. So, it’s unusual for someone receiving Social Security income to need to file. It is likely unnecessary if you have little valuable property not covered by exemptions (bankruptcy exemptions apply outside of bankruptcy in almost every state).
Learn whether you're "judgment proof" and can avoid filing for bankruptcy.
Before proceeding with Chapter 7 or Chapter 13, talk with a bankruptcy lawyer about your options. Be sure to ask whether a bankruptcy filing is necessary or if it would be adequate to secure your funds in a separate account and turn off the phone ringer instead.
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.
]]>In this article, you'll find answers to common Chapter 13 mortgage questions, including:
We also provide an overview of the Chapter 13 process and its impact on your home in Chapter 13 bankruptcy.
Table of Contents:
Actually, no, you don’t. If you can’t afford the payment or don’t want the home anymore, you can give the home back to the lender. Surrendering it will relieve you of your responsibility to make the monthly payment.
If you let the home go, the mortgage debt will get lumped with other low-priority obligations that must share your “disposable income,” the amount remaining after you pay monthly expenses and other required debts. These creditors often receive pennies on the dollar.
When you complete the Chapter 13 plan, the balance will be “discharged” or erased with other qualifying balances. However, if you want to keep your home in Chapter 13, you’ll have to pay what you owe.
You’ll need to do three things to keep your financed house in Chapter 13:
Anytime you stop paying mortgage payments, the lender can foreclose on the home.
Many people wonder why they can “discharge” or wipe out most credit card debts in bankruptcy without losing the things they charged, yet they’d lose their house or car if they didn’t continue making payments. The answer is “collateral.”
Lenders don’t like to lose money. So when you take out a loan for an expensive purchase, you must agree that the home, car, or other item will serve as collateral to guarantee the loan.
The lender gets an ownership interest or “lien” that remains on the property, creating a “secured debt” until you pay for it. A mortgage lien allows the lender to sell your house at a foreclosure sale if you stop paying your mortgage.
Filing for bankruptcy doesn’t remove mortgage liens. In most cases, if you don’t pay, you’ll lose the home. We explain a minor exception known as lien stripping below that rarely applies when home values are rising.
A home lender will foreclose if your house payment is past due and your Chapter 13 plan doesn’t provide for the arrearages. You can also expect foreclosure if you stop paying your house payment during bankruptcy, fail to carry homeowner’s insurance, or breach another mortgage provision.
But the lender must first get permission from the court. We explain the process below in the “How a Lender Lifts the Automatic Stay to Foreclose in Chapter 13” section.
You can’t miss any. A Chapter 13 plan is a contractual agreement to pay creditors a particular amount during a specific time and often includes time-sensitive interest payments.
You’ll start making your proposed Chapter 13 payment about 30 days after filing and before the bankruptcy court “confirms” or approves your plan. When necessary, payment amounts are adjusted after confirmation to allow you to complete the plan within three or five years.
If you were to miss payments, you wouldn’t be able to complete your plan on schedule or as approved. So if you stop paying without making arrangements with the Chapter 13 trustee—the official appointed to oversee your case—the trustee will ask the court to dismiss your bankruptcy matter.
As long as you caught up the next month, missing one payment probably wouldn’t derail your Chapter 13 plan. However, you’d need to pay any late fees and penalties not included in your plan payment. Otherwise, you could have a significant problem on your hands.
Here’s why.
Suppose you pay your house payment through your Chapter 13 plan, You miss a plan payment because of unexpected expenses, but the trustee agrees you can catch up the following month.
The trustee doesn’t cover your payment for you, so your house payment will go unpaid for a month. The lender will assess late fees and penalties, which can be hefty.
If you don’t pay the trustee enough extra to cover late fees the following month, your account will show an outstanding balance, and your lender will assess new late fees each month, even though the trustee continues to send the monthly payment.
If you continue falling further behind each month, you could owe a sizeable payment to your lender at the end of the plan period, which, if large enough, could put you in a position of foreclosure again.
Most lawyers add an extra amount to the plan payment to cover these types of problems, but it isn’t always enough. The best practice is to avoid missing payments when at all possible.
Learn about other options available when you can't make your Chapter 13 plan payment.
If you owe more than what your home is worth and you have multiple mortgages on the property, Chapter 13 offers a solution. You can remove or strip off a junior mortgage in Chapter 13 if the junior mortgage is “wholly unsecured.”
Example. Suppose you have a $250,000 first mortgage, a $100,000 second mortgage, and a $75,000 third mortgage on a home worth $300,000. You could use the sales proceeds to pay the first mortgage if you sold the house. You’d also have $50,000 to pay toward the second mortgage. But nothing would be left for the third mortgage, leaving the third mortgage wholly unsecured. You could discharge the third mortgage in Chapter 13.
Stripping liens in Chapter 13 isn’t automatic or straightforward. A local bankruptcy lawyer can explain the process, including how to prove your home’s value.
Once you file a Chapter 13 bankruptcy case, the court puts an order called the automatic stay in place. The stay prohibits creditors from engaging in most collection activities.
The bankruptcy stay can help with foreclosure by preventing your lender from foreclosing on your house without obtaining court permission.
A lender who wants to move forward with foreclosure starts the process by filing a motion for relief from the automatic stay with the court. If the lender wins the motion, it will be able to begin—or resume—the process of obtaining the home, selling it at auction, and applying the proceeds to the mortgage loan.
After the lender files the motion for relief, you’ll have an opportunity to respond. If you don’t “oppose” or fight the motion, the court will usually grant the request and lift the stay for the mortgage lender only. It will remain in effect for your other creditors, but your lender will be free to initiate or continue foreclosure proceedings.
If you oppose the lender’s motion for relief, the judge will set a hearing and listen to each side’s argument before granting or denying the lender’s motion.
If you convince the judge that you can catch up on the missed payments, the judge will usually give you time to make the payments. However, the court will likely lift the stay without further hearing if you fail to.
Learn more about what happens when a creditor tries to “lift” or remove the automatic stay.
It’s likely, yes. But most lenders have a waiting period that must pass first, although some shorten it significantly if you can show that the bankruptcy filing was due to circumstances beyond your control.
You’ll also need to satisfy income and credit score requirements. Learn more about buying a house after Chapter 13 bankruptcy.
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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]]>You'll also learn why the most effective way to erase your responsibility to pay business debts is to file for Chapter 7 bankruptcy yourself. But keep in mind you could lose property in Chapter 7, making it essential to meet with a knowledgeable local bankruptcy lawyer.
In most cases, no, because unless the business is a sole proprietorship, a business can’t discharge debts in Chapter 7. The business will remain responsible for the obligation.
Learn about small businesses and bankruptcy.
Yes, many debts that might drive a business owner to consider filing for bankruptcy can be erased if the business owner files an individual Chapter 7 case. Because of this, it's common for business owners to wait until after the business closes to file a personal Chapter 7 than put the business itself in Chapter 7.
This approach is more beneficial because the owner can wipe out personal guarantees for business debt and the filer's personal debt. Also, a filer doesn't have to take the Chapter 7 means test to qualify for Chapter 7 if the filer's business debt is more than the filer's personal debt.
Find out more about what happens when you're personally responsible for business debts.
You can erase any business debt you're responsible for paying if the debt generally qualifies for a Chapter 7 discharge. For instance, The following is a list of debts anyone can wipe out in Chapter 7 bankruptcy:
It's important to notice you must return collateral to erase a "secured" loan. But in all likelihood, you'd need to do so if the Chapter 7 bankruptcy was part of a company winddown. You'll find more about using Chapter 7 to close a company below.
A creditor with a lien on collateral can take back the property securing the loan if you don't make your payments, even if you file for bankruptcy. Find out more about what happens to liens in Chapter 7 bankruptcy.
Some types of debt aren’t dischargeable in Chapter 7 bankruptcy regardless of whether the obligation is a personal or business debt. Some common types of nondischargeable debt include:
Learn more about using Chapter 7 bankruptcy for business debts in Chapter 7 for Small Business Owners: An Overview.
If the Chapter 7 trustee sells your property, it's likely the proceeds will be used to pay toward your nondischargeable debt, lowering the amount you'll owe after bankruptcy. The trustee must pay priority debts first, and most priority debts are nondischargeable, although student loans are a notable exception.
You can use Chapter 7 bankruptcy to wind down a business transparently, but better options usually exist. Not only does Chapter 7 bankruptcy hold special problems for partnerships, such as opening up the partners' personal assets to creditors, but filing Chapter 7 for a corporation or LLC might not be a good idea, either.
Not only does the business not receive a debt discharge, but the bankruptcy opens up a forum for creditors to easily address other potential grievances and attempt to make officers and others personally liable for business obligations.
Before moving forward with a business Chapter 7, consider retaining a bankruptcy attorney or business lawyer. A lawyer is in the best position to advise you about your options when dissolving the business.
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.
]]>When someone files a bankruptcy case, a court order called the automatic stay immediately goes into effect. The stay stops a creditor’s attempt to collect a debt from the debtor.
For instance, a creditor must stop calling the debtor, as well as sending bills. The stay’s power includes stopping many types of lawsuits cold.
But the automatic stay has limitations. It only ends litigation involving debts that can be forgiven (discharged) in the bankruptcy case. Other types of court proceedings can continue to move forward.
You won’t be able to file or continue with a lawsuit if the damage occurred before the bankruptcy filing and relates to one of the debts below:
Learn more in Will a Pending Lawsuit Go Away If I File for Bankruptcy?
The automatic stay doesn’t prevent you from filing or continuing with all court proceedings. For instance, some court cases:
Below you’ll find examples of obligations that fall into each category.
Actions not related to the debtor’s debts or property:
Lawsuits involving debt that won’t be discharged in the bankruptcy:
Debt that arises after the bankruptcy filing:
A bankruptcy will only involve debt that existed before the bankruptcy filing date. An incident that arises afterward won’t be included in the bankruptcy.
You can file a lawsuit in both of these cases because the incident occurred after the debtor filed the bankruptcy case.
If the lawsuit was already pending when the debtor filed the bankruptcy case—and it involves an issue other than a debt that will be discharged—the parties can choose how to proceed. They can:
If the debtor filed for bankruptcy before the filing of a lawsuit, the parties can:
Learn more by reading about the types of bankruptcy cases you must file as an adversary proceeding.
Before deciding to sue someone who has filed for bankruptcy, consider consulting with a bankruptcy attorney specializing in litigation. After reviewing your case, a bankruptcy lawyer will explain the likelihood of prevailing and help you develop an effective litigation strategy if you decide to go forward.
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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]]>If you file for Chapter 13 bankruptcy, the answer is yes. In Chapter 13 bankruptcy, you repay all or a portion of your debts through a repayment plan over three to five years. In exchange, you can keep your property, including your car and home, assuming you keep up with payments on any loans secured by the property, such as your mortgage or car payment, and catch up on payments you fell behind on before filing for bankruptcy.
Your plan will also have to ensure that your creditors will get as much in Chapter 13 bankruptcy as they would have received in Chapter 7 bankruptcy. For instance, if you own $10,000 worth of “nonexempt” real estate you can’t protect with a bankruptcy exemption, your plan will have to pay your unsecured creditors at least $10,000 (minus costs of sale and the trustee's commission).
In Chapter 7 bankruptcy, you ask the bankruptcy court to “discharge” or erase most of the debts you owe. In exchange for this discharge of qualifying debts, the bankruptcy trustee managing your case can take any property you own that isn’t exempt, sell it, and distribute the proceeds to your creditors.
What property is exempt from collection depends primarily on state law. Typically, exemptions protect some equity in your home and car, retirement funds, public benefits, and most household goods, furniture, necessary clothing, appliances, and books.
Filing for Chapter 13 bankruptcy can be an excellent way to save your home from foreclosure. Chapter 13 bankruptcy lets you pay off late, unpaid mortgage "arrearages" over the length of a repayment plan, which will be three or five years.
For this option to work, you'll need enough income to pay your current mortgage, any mortgage arrearages, and other required payments. Learn more about saving your home in Chapter 13 bankruptcy.
In Chapter 7 bankruptcy, if you have a lot of equity in the home and can’t protect it with a bankruptcy exemption, the bankruptcy trustee will sell your house to repay unsecured creditors.
Even if you can protect all of your equity, if you’re behind on your payments, you’ll likely lose your home because Chapter 7 doesn't provide a way to catch up. The lender can either get permission from the bankruptcy judge to go ahead with a foreclosure or continue foreclosing after your Chapter 7 case ends. Learn what happens to your home in Chapter 7 bankruptcy.
If your only Chapter 7 bankruptcy goal is saving your home, there’s a good chance you’ll be better off filing for Chapter 13 or considering other alternatives first. You might be able to deal with arrearages by negotiating with your lender outside of bankruptcy or modifying your loan terms. Read more about ways to save your home and how to avoid foreclosure.
If you think you'll incur significant debts soon, such as medical bills or unpaid lease payments, waiting to file for Chapter 7 bankruptcy might make sense. Although bankruptcy will discharge many current debts, debts incurred after filing for bankruptcy won't go away.
Also, you won’t be able to file another Chapter 7 bankruptcy for eight years, so you'll be on the hook for those debts for a long time. Learn when it makes sense to delay your bankruptcy filing and whether you should file bankruptcy now or wait.
Yes, bankruptcy’s automatic stay stops your creditors by requiring most creditors and debt collectors to stop all collection efforts against you until the bankruptcy is over. But if all you want to do is stop debt collectors from contacting you, there is an alternate route.
Under the Fair Debt Collection Practices Act, you can send a letter stating that you want the collection agency to stop communicating with you. All agency employees will be prohibited from contacting you, except to tell you that collection efforts have ended or that the collection agency or original creditor intends to sue you or take advantage of some other legal remedy.
Keep in mind that this remedy only applies to debt collectors. Creditors can continue to contact you (except in some states that extend this remedy to the original creditor and collection agencies). To learn more about dealing with debts and debt collection agencies, see Debt Management.
For clear-cut answers, information, and strategies needed to figure out whether bankruptcy is the right solution for your debt problems, see The New Bankruptcy: Will It Work for You? by Cara O'Neill (Nolo).
It depends on the type of debt you have. Filing for bankruptcy provides an excellent way to eliminate debt such as credit card balances, medical debt, and mortgages and car loans after losing a home to foreclosure or a car to repossession.
In a Chapter 7 bankruptcy, the court discharges qualifying debt at the end of your bankruptcy. In Chapter 13 bankruptcy, you pay some or all debt through your repayment plan.
Keep in mind that if you have debts secured by property, such as your home or car, the cancellation of the debt doesn't mean you get to keep the property. Find out about the differences between Chapters 7 and 13.
Some debt is never “discharged” or canceled in bankruptcy, including child and spousal support arrears, student loans (except in limited circumstances), and tax debts due within the previous three years. Learn more about which debts you can erase and what bankruptcy can and cannot do.
Learn about:
We have other articles to help you learn what happens to cars in bankruptcy. You'll find links to additional resources at the end of the article.
A lender must file a motion asking the court to lift the automatic stay, and the court must grant it before the lender can repossess your vehicle. The court will approve a request if the lender:
If you oppose the motion, the court will set a hearing, and the judge will hear each side’s argument. Ways to oppose the motion include:
If you can’t show that the car will be worth enough to cover the amount you owe at the end of the Chapter 7 bankruptcy case or otherwise fix the default problem, most Chapter 7 bankruptcy judges will grant the motion. Your lender will be able to repossess the car during your Chapter 7 bankruptcy case.
Here are several ways to avoid repossession in Chapter 7 bankruptcy and keep your car.
In Chapter 7 bankruptcy, the most common reason a lender will file a motion to repossess your car is the same outside of bankruptcy: failure to make payments (car insurance could be an issue, but it’s rare).
The best way to avoid a problem and keep your car in Chapter 7 bankruptcy is to be current when you file and to continue making payments after your Chapter 7 case ends. Unlike Chapter 13 bankruptcy, Chapter 7 doesn’t have a mechanism to help filers catch up on car payments.
Learn more about filing for bankruptcy on a car loan and keeping the car and the differences between Chapters 7 and 13.
“Curing the default” or paying what you owe after the lender files the motion to lift the stay might work if the court believes you can keep up the payments, but it doesn’t happen often. Not only is it hard to come up with the money necessary to cure, but most filers would have paid before filing for Chapter 7 bankruptcy if it had been possible.
If you need your car, don’t rely on this method. Your lender might—but probably won’t—be willing to reduce your payments, interest rate, or even principal balance. But that’s not to say it’s not worth a try. However, keep in mind that you’ll sign a reaffirmation agreement and remain personally liable for the car loan despite your bankruptcy discharge.
You also can "redeem" or buy back your car in Chapter 7 bankruptcy for its fair market value. However, not everyone can do this because you must file a motion with the court and pay in full in one payment.
This option might be attractive if your car is worth significantly less than your loan balance. And when you redeem your car by paying the lender its market value, you will own it free and clear after Chapter 7 bankruptcy, so you won't risk losing it through repossession.
Example. If you own a car worth $3,000 but have $7,000 remaining on your car loan, you can pay the lender $3,000 to redeem the vehicle and owe nothing further.
To learn more about car repossession and your options for dealing with your car loan in Chapter 7 bankruptcy, see Chapter 7 Bankruptcy and Your Car.
Satisfying your car lender by staying current is only one part of keeping your car in Chapter 7 bankruptcy. You must also protect the car’s equity with a bankruptcy exemption. Otherwise, you’ll lose the car to the Chapter 7 trustee responsible for your case.
In Chapter 7 bankruptcy, the bankruptcy trustee sells property you can’t protect with a bankruptcy exemption for the benefit of creditors. Most states’ motor vehicle exemptions allow you to protect a particular amount of vehicle equity—the amount remaining after selling the car and paying off the loan. But your state might let you use a wildcard exemption, too. If your equity is less than the exemption amount, you’ll be able to keep it.
Before distributing any funds, the trustee must first pay off the car loan and return any exemption amount to the debtor.
Example 1. Tawny owns a car worth $2,500, and her state’s motor vehicle exemption is $3,500. The trustee won’t sell her car because the bankruptcy exemption protects all Tawny’s equity.
Example 2. Abigail’s car is worth $20,000. She still owes $5,000 on it, leaving her $15,000 in equity. She can claim a bankruptcy exemption of $5,000. The trustee will sell the vehicle, pay off the lender, give Abigail $5,000, deduct sales costs and the trustee’s fee, and distribute the remaining $10,000 to creditors.
Keep in mind that some trustees will allow the debtor to pay for nonexempt equity and keep the car. Usually, the trustee gives the bankruptcy filer a discount because the trustee can avoid sales costs. Learn more about your car in Chapter 7 bankruptcy.
If you have equity you can’t protect or overdue payments, consider filing for Chapter 13 bankruptcy. You can reimburse your creditors for the nonexempt equity and catch up on past-due payments through your three- to five-year repayment plan. Learn more in Your Car in Chapter 13 Bankruptcy: An Overview.
If the bank refuses to repossess the car after you give the lender the proper notice of your wish to surrender the vehicle and make the car available, you’ll likely be able to keep it. If you want to force the lender to take it, you might have to take legal action. In both cases, your bankruptcy lawyer can explain the steps you should take next.
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.
]]>Many people considering Chapter 7 or Chapter 13 bankruptcy are worried about the effect bankruptcy will have on their credit scores (you have more than one). Although creditors don’t like to see a bankruptcy on your credit report, the damage it will do to your credit scores depends, in large part, on how good your credit was before you filed.
If you're delinquent on many accounts and your debt-to-asset ratio is high (meaning you have lots of debts and few assets), your credit is already in the tank. If you file for bankruptcy, your scores will take a dip, but it won’t take a huge plunge. If, on the other hand, your credit is good before you file for bankruptcy, then your scores will take a much bigger hit post-filing.
If you have good credit scores, filing for bankruptcy will definitely damage them. According to FICO (the most widely-used credit scoring company in the U.S.), those with good credit should expect a huge drop in their scores immediately after filing for bankruptcy.
If your credit scores are already low before you file for bankruptcy, then bankruptcy will cause a more modest drop in your scores.
According to FICO (again, the most widely-used credit scoring company in the U.S.), whether you file for Chapter 13 or Chapter 7 bankruptcy makes no difference to your credit scores. But it's possible that a potential creditor viewing your credit report might look upon one type of bankruptcy more favorably than another. For example, some creditors might view someone who files for Chapter 13, in which you repay some or all of your debts over a three- to five-year period, as more responsible, and thus a better credit risk, than someone who files for Chapter 7.
Bankruptcy won’t provide immediate improvement to your credit scores, but it can be the quickest way to better credit for many people. Here’s why: If you're already behind on debt payments or have accounts in collection, bankruptcy can help get you back on your feet sooner than other types of debt management programs. That’s because bankruptcy gets rid of many types of debts and provides you with a fresh financial start. When you reduce your debt load and get your finances under control, you can start making loan and credit payments on time, reduce your debt-to-income ratio, and take other steps to rebuild your credit.
But if you don’t file for bankruptcy and continue to limp along—making late payments, defaulting on debts, and increasing the amount of debt you have compared to your income—you’ll never be able to improve your credit.
Keep in mind, though, you probably have other options for getting a handle on your debt other than bankruptcy. Check out all the alternatives to see what option is best for you. When in doubt, consult with an attorney.
Whether you can get loans or credit immediately after bankruptcy depends on what kind of credit you're seeking.
Credit cards. Many bankruptcy filers are bombarded with credit card offers after the bankruptcy is over. Credit card companies know you can't file again for several years (which means you can’t discharge any credit card debt you run up during that time), so they might be eager for your business. But beware—the credit card offers will likely have very high interest rates, annual fees, and other high charges.
Car loans. Most likely you’ll be able to get a car loan right away. But you’ll be dealing with subprime lenders, which means high interest rates and other unfavorable loan terms. (There are auto loan services for those who have been turned down in the past due to bankruptcy. You can see if you qualify for a car loan after your bankruptcy.)
Mortgages. How long it will take to qualify for a mortgage depends, in large part, on the mortgage lender. You might qualify for an FHA-insured mortgage even before you complete a Chapter 13 plan and two years after a Chapter 7. For conventional loans, if your lender sells its loans to Fannie Mae, for example, you’ll have to wait at least two years from the discharge date after a Chapter 13 bankruptcy (four years from a dismissal date) and four years after a Chapter 7 bankruptcy discharge or dismissal date (unless there are extenuating circumstances, and then the waiting period is two years). If your lender doesn’t sell its loans to Fannie Mae, you might have to wait even longer.
These are minimum wait periods—it might take longer to qualify for a mortgage. Other factors that affect your qualification include your income, your debt load, how large your down payment will be, and more.
If you file for bankruptcy, it will appear on your credit report for up to ten years for Chapter 7 and seven years for Chapter 13.
If you apply for a loan or life insurance policy in an amount greater than $150,000 or apply for a job with an annual income greater than $75,000, credit reporting agencies can report your bankruptcy for longer than ten years. As a practical matter, however, most credit reporting agencies will delete the bankruptcy after ten years.
Even though bankruptcy remains on your credit report for up to ten years, you can start rebuilding your credit right away. Credit scoring companies look at several factors when computing your scores:
You can start to improve your credit after bankruptcy by making all of your payments on time. Keep your debt load low, especially as compared to your available credit. And when you are ready, get a credit card, make small charges, and pay the bill off in full every month.
Financial advisors usually advise against touching your retirement savings if at all possible. Rarely is it a good idea to jeopardize your ability to take care of yourself in retirement for the sake of paying off debts or saving your good credit. And if you do raid your retirement savings to pay off credit card or medical debt, you will have to pay an early withdrawal tax penalty -- which makes this strategy even less desirable.
In some cases, taking a loan from your retirement plan might make sense. But you’ll have to pay it back over a certain period of time. If you have the money to do that, then it may be better to instead make payments on your debts. (To learn more, see Should I borrow from my 401(k) to pay off debt?)
Of course, everyone’s situation is different. If you already have a surplus in your retirement account or you can make up the difference in a short period of time, raiding your account might be worth considering. Always talk to a financial advisor before deciding which strategy is best for your long-term financial goals.
Bankruptcy is often an excellent way to get rid of medical debt and credit card debt. For the most part, both types of debt will be discharged in bankruptcy. (There are a few exceptions in the case of fraud, or if you purchase luxury goods too close to your filing. To learn more, see Recent Luxury Debts in Bankruptcy.)
Like anyone filing for bankruptcy, you’ll first need to figure out what happens to your property and other debts. In Chapter 7 bankruptcy, you may lose some property (although most people don’t.) In Chapter 13, you’ll need enough income to fund a repayment plan for three to five years. (To learn more, visit our Bankruptcy area.)
One drawback to bankruptcy: If you were current on debt payments, your credit will take a hit. This might matter if you plan to make a big purchase in the near future, like buying a home or car. After bankruptcy, you may have to wait to qualify for a loan, and when you do, your interest rate will likely be higher.
However, if you’ve already missed payments on your credit card debts, or have defaulted on other loans, your credit has already taken a hit. Filing for bankruptcy probably won’t have a huge impact on your already damaged credit.
If you have few assets that judgment creditors can get and little income that they can attach, you may want to do nothing. That’s because if your property is protected by exemptions, or you have no property of value, then judgment creditors cannot collect against you. Of course, defaulting on your debts will negatively affect your credit.
Before you use this strategy, make sure you won’t lose income or property you care about. Here are some things that creditors might be able to get:
Judgment creditors can attach your wages through a wage garnishment order. Federal and state law limits how much creditors can take. (To learn what is protected, visit our Wage Garnishment topic area.)
Judgment creditors could try to take the money in your bank accounts. To learn more, see Frozen Bank Accounts.
Usually, your ERISA-qualified retirement plan is protected from the collection by judgment creditors. These types of plans include 401(k) plans, deferred compensation plans, and profit sharing plans. There are a few exceptions.
However, if you have a non-ERISA retirement plan, such as an IRA, in some states it may be at risk. State laws vary as to whether those accounts are protected against judgment creditors or not, and if they are, how much of your account is safe.
If you have income or assets you can use to pay your debts, consider nonbankruptcy options as well. You could:
Currently, the average waiting period is two years. In this article, you’ll learn about common mortgage loans and the respective eligibility requirements for bankruptcy filers.
An FHA loan is a federally-insured loan. It’s attractive to first-time, cash-strapped home buyers because it offers the ability to put down as little as 3.5% of the purchase price.
Additionally, the credit score requirements are more liberal than conventional loans. You’ll likely qualify with a credit score of:
If you’d like better terms, consider taking steps to improve a credit score of less than 640.
In most cases, you’ll need to wait two years from the date of your Chapter 7 bankruptcy discharge before you’ll qualify for this loan. Keep in mind that a discharge date isn’t the same as the filing date. The court sends out the bankruptcy discharge paperwork just before your case closes.
Filing for Chapter 13 bankruptcy is a three- to five-year process—but that doesn’t mean that you can’t buy a house during that time. You can obtain an FHA loan before you complete your plan if you meet the following conditions:
Keep in mind that the court might not be on board if you’d have to reduce the amount paid to your creditors in your plan to qualify for a home loan. And if you have to present the terms of the house purchase in your motion (the legal procedure you’ll use to make your request), you might have a hard time closing the deal. Many sellers would be unwilling to take their house on the market on the chance that you’ll obtain the necessary court approval.
If you’re considering this option, you should consult with a knowledgeable bankruptcy attorney before filing. A lawyer can advise you about the feasibility of a future loan qualification and, if possible, assist you by putting together a repayment plan that will help you reach your goal.
Low- and middle-income borrowers willing to purchase a home in a rural community will benefit from this loan. It offers a low-interest, no down payment option for those who might not otherwise be able to qualify for conventional financing.
Applicants will be eligible for this loan three years after receiving a Chapter 7 discharge. However, if you qualify for the exceptional circumstances exception—for instance, by demonstrating that the bankruptcy was beyond your control and not a result of financial mismanagement—you might be able to qualify as soon as 12 months after the discharge.
A Chapter 13 bankruptcy filer can apply after 12 months of successful plan payments, or sooner on a showing of exceptional circumstances. To find out more, visit the United States Department of Agriculture Rural Development website.
The VA loan program is a benefit given to veterans to help with housing needs. Here are some of the hallmarks of this loan program:
The VA considers your credit re-established after bankruptcy when you’ve had two years of clean credit. Keep in mind, however, that individual lenders participating in the VA program can require a specific credit score.
Also, even though a bankruptcy, foreclosure, or low credit score will not disqualify you automatically, there’s an exception: You’ll have to pay back any money owed if you previously purchased a house with a VA loan and lost it due to foreclosure.
For additional information, you can visit the U.S. Department of Veterans Affairs.
Private loans—such as a conventional loan—aren’t insured by the government. Instead, you’ll protect the lender against loss by paying private mortgage insurance each month. The insurance carrier will pay the lender if you’re unable to make good on your obligation.
Interest rates and credit score requirements tend to be higher than that of an FHA mortgage. One benefit, however, is that you’ll likely be able to stop the insurance payment once the property equity equals 20% of the initial mortgage amount. (The insurance associated with an FHA loan won’t go away for the duration of the loan.)
This loan product can help people with higher debt loads purchase a home.
Not only can you have a higher debt-to-income ratio, but you might also have an easier time qualifying if you’re carrying a large amount of student loan debt. Here are the figures the lender can choose between:
If your fully-amortized payment is less than 1% of the total loan balance formula, you can use the lesser number.
Example. Suppose that you owe $100,000 in student loan debt. Using the 1% of the balance criteria, you’d be attributed a payment of $1,000 per month. However, $100,000 amortized over 30 years at 5% interest is $537 per month—an amount significantly less. You’ll be in a better position to receive a mortgage approval under the second scenario.
Many lenders don’t understand these rules completely. You can try referring them to the guidelines on the Fannie Mae website.
Conventional loans still have the longest post-bankruptcy waiting period, overall, but they’ve eased a bit. Depending on your circumstances, you’ll wait two to four years, as follows:
Circumstances beyond your control often include divorce, illness, and sudden loss of income.
It won’t come as a surprise that you’ll need to meet other criteria, too—although you might not realize that individual lenders could impose tougher guidelines. Even so, with persistence, it's likely that you’ll find a bank who will be willing to work with you.
Additionally, your state could have a first-time homebuyer program to help with your down payment. With the right combination of programs, chances are you’ll be in your new house in no time.
You can find out how to rebuild your credit in Improving Credit After Bankruptcy or Foreclosure.
Updated: November 1, 2018
]]>When you file a bankruptcy case, an injunction (a type of court order) called the automatic stay goes into effect to stop creditors, including the IRS, from starting or continuing collection activity, like sending you letters, garnishing your wages or your bank account, or filing liens against your property.
The stay continues during the bankruptcy case. It can be lifted only by the bankruptcy court after a request by the creditor (and only for a good reason).
Once the bankruptcy case is over, the IRS will be free to resume collection activity unless the tax debt has been wiped out (discharged) or paid in full.
Keep in mind that the automatic stay will go into effect the first time that you file for bankruptcy. However, that’s not always the case for subsequent filings. You could lose the stay if you’ve had repeated bankruptcy filings.
Debtors can discharge some tax debt in bankruptcy, but not all. Taxes must meet the following criteria before being forgiven:
If you meet all of these factors, the chances are that your tax debt will be dischargeable. If not, your tax obligation won't go away in a bankruptcy case.
Income tax debts are treated differently depending on whether you file a Chapter 7 bankruptcy or a Chapter 13 case.
If the IRS has filed a tax lien, your case gets a little more complicated. A tax lien will turn the tax debt into a secured obligation that must be repaid regardless of the chapter you file—even if the tax is old and would have otherwise been dischargeable.
]]>Chapter 7 bankruptcy—also called "straight" or "liquidation" bankruptcy—is designed to give you a fresh start by wiping out many types of debt. In return, the bankruptcy trustee sells (liquidates) your nonexempt property to provide partial repayment to creditors. Many people have very little nonexempt property, so most Chapter 7 bankruptcy filers end up keeping most or all of their property.
A debtor is someone who owes money for an outstanding debt. "Debtor" is also the term used to describe someone who files for bankruptcy relief. A debtor can be an individual or company. By contrast, the "creditor" is the person or business to which the debtor owes money, and a "codebtor" is responsible for a debt along with you. For instance, if your aunt cosigned your loan (signed a contract agreeing to pay for the car if you didn't), your aunt would be the codebtor on the loan. As codebtors, you'd both be responsible for paying off the obligation. Learn more about a consigner's responsibilities in Will Your Cosigner Be Liable for Debt if You File for Bankruptcy?
In Chapter 7, the debtor's household income must be low enough to qualify. Suppose the household income is below the state median income for similar households. In that case, the debtor presumptively qualifies for Chapter 7, although the judge can still require filing under Chapter 13 if the debtor has sufficient income to fund a Chapter 13 plan. If the debtor's income is higher than the median, the rules then look at the debtor's means. If, after considering certain expenses and debt payments, enough income exists to fund a repayment plan, the debtor will qualify. For more details, read The Bankruptcy Means Test: Are You Eligible for Chapter 7 Bankruptcy?
Chapter 7 bankruptcy wipes out most types of unsecured debt. Unsecured debts are debts that aren't guaranteed by collateral property. (A mortgage is a secured debt guaranteed by the home; an auto loan is a secured debt guaranteed by a vehicle.) Unsecured debts wiped out by Chapter 7 bankruptcy include credit card debt, medical bills, and gasoline card debt.
However, you can't wipe out all unsecured debt. For instance, child and spousal support and student loans (except in limited circumstances) are nondischargeable—you'll remain responsible for repaying them after bankruptcy. Some other debts might not be dischargeable if the creditor objects, such as recent debts for luxury goods, debts incurred based on fraud (such as lying on a credit application or writing a bad check), and tax debts first due within the previous three years. Learn more about which obligations remain after Chapter 7 bankruptcy in What Bankruptcy Can and Cannot Do and When Chapter 7 Bankruptcy Isn't the Right Choice.
You will be able to keep your home in Chapter 7 bankruptcy if all of your equity in the house is exempt. What is exempt equity? Although the Chapter 7 bankruptcy trustee can sell some property to pay unsecured debtors, you can keep a certain amount of property, called "exempt property."
Bankruptcy law in all but a handful of states allows homeowners to keep some home equity using a "homestead exemption." The exemption amount varies by state. If all of the equity is exempt, the Chapter 7 bankruptcy trustee can't sell your home as part of the bankruptcy. As long as you keep current on your mortgage, the house remains yours. Learn more in Your Home in Chapter 7 Bankruptcy.
The bankruptcy trustee can sell some of a Chapter 7 debtor's property to repay unsecured creditors, but protections exist. All states allow debtors to keep a certain amount of property known as "exempt" property. Most states exempt property up to a specific value in vehicles, clothing, household furnishings, appliances, pensions, tools necessary in a trade or profession, home equity, and public benefits. The extensive list of exemptions allows many debtors to keep all or most of their property. Learn more When Chapter 7 Bankruptcy Isn't the Right Choice.
To get the facts and find out if bankruptcy could work for you, see The New Bankruptcy: Will It Work for You? by Cara O’Neill (Nolo) or How to File for Chapter 7 Bankruptcy, by Cara O'Neill and Albin Renauer (Nolo).