Bankruptcy in America: The Big Picture

Although you may not care much about the larger bankruptcy picture, understanding it will help you keep your situation in perspective. Knowing that you're not alone should also reassure you if you are feeling isolated or even like a failure.

Why People File for Bankruptcy

Studies show that the most common reasons for filing for bankruptcy are:

• job loss, followed by an inability to find work that pays nearly as well
• medical expenses that aren't reimbursed by insurance or government programs
• divorce or legal separation, and
• small business failures.

Of course, none of these events would necessarily require bankruptcy if the people who experience them had adequate savings to weather the storm. But, for a number of reasons, most of us lack such savings. In fact, many of us are up to our eyeballs in debt, making ends meet from paycheck to paycheck. And when a recession hits, or jobs leave the country en masse and the pink slips start flowing, many otherwise stalwart citizens find themselves turning to bankruptcy for relief. Let's take a closer look at how we got so financially overextended.

Why You Shouldn't Feel Guilty About Filing for Bankruptcy

The American economy is based on consumer spending. Roughly two-thirds of the gross national product comes from consumers like us spending our hard-earned dollars on goods and services we deem essential to our lives. If you ever had any doubt about how important consumer spending is to our economy, remember that President George W. Bush wasted no time after the events of September 11, 2001, in urging Americans to spend more. And many other government leaders told us that spending was our patriotic duty. As Americans, we learn almost from birth that it's a good thing to buy all sorts of goods and services. A highly paid army of persuaders surrounds us with thousands of seductive messages each day that all say, "buy, buy, buy."

These sophisticated advertising techniques (which often cross the line into manipulation) convince us to buy. And for those of us who can't afford to pay as we go, credit card companies are relentless in offering credit to even the most deeply indebted of us. In fact, billions of credit card solicitations are mailed to U.S. residents each year -- roughly ten solicitations for every man, woman, and child. And, perhaps surprisingly, the largest growth sectors for credit cards are college students and people with bad credit ratings. The college students are targeted because they are customers of the future -- and because their parents can be expected to bail them out if they get carried away with their new purchasing power. And people with bad credit are solicited in large numbers because creditors have discovered that they will pay huge interest rates for debts run up on their cards, which leads to equally huge profits.

Readily available credit makes it easy to live beyond our means and difficult to resist the siren songs of the advertisers. If, because of illness, loss of work, or just plain bad planning, we can't pay for the goods or services we need, feelings of fear and guilt are often our first responses. But, as we've also seen, the American economy depends on our spending -- the more, the better. In short, much of American economic life is built on a contradiction.

In this age of billion-dollar bailouts for poorly managed financial institutions, should you really feel guilt ridden about the debts you've run up? That's something only you can decide, but remember that large creditors expect defaults and bankruptcies and treat them as a cost of doing business. The reason banks issue so many credit cards is that it is a very profitable business, even though some credit card debt is wiped out in bankruptcies and never repaid.

Bankruptcy is a truly worthy part of our legal system, based as it is on forgiveness rather than retribution. Certainly, it helps keep families together, frees up income and resources for children, reduces suicide rates, and keeps the ranks of the homeless from growing even larger. And, perhaps paradoxically, every successful bankruptcy returns a newly empowered person to the ranks of the "patriotic" consumer. If you suddenly find yourself without a job; socked with huge, unexpected medical bills you can't pay; or simply snowed under by an impossible debt burden, bankruptcy provides a chance for a fresh start and a renewed, positive outlook on life.

What About the Downside?

Bankruptcy can also have its disadvantages -- economically, emotionally, and in terms of your future credit rating. The bankruptcy process can get intrusive. As part of your public filing, you are required to disclose your financial activities during the previous year or two, as well as your debts and current property holdings.

Bankruptcy also carries a certain stigma. (Otherwise, why would we spend so much time talking you out of feeling bad about it?) Some people would rather struggle under a mountain of debt than accept the label of "bankrupt."

If you have a bankruptcy on your record, you will need to convince those who have business dealings with you that you made every effort to meet your financial obligations before resorting to bankruptcy. Whether you are renting or buying a home, buying or leasing a car, or seeking financing for a business, your bankruptcy will be counted against you, at least for several years (and it will stay on your credit report for ten years). And while you will be able to get credit cards after bankruptcy, you will have to pay the highest interest rate, at least for a while.

While these facts may seem like downsides, they collectively have an upside. For several years, you will find it very easy to be debt-free -- you will have to pay as you go because it will be tough to get credit. Filing for bankruptcy can be a harsh wakeup call, one that will give you a new perspective on the credit system. A bankruptcy temporarily removes you from the credit hamster wheel and gives you some time and space to learn to live credit free (or, at least, to fashion a saner relationship to the credit industry).

An Overview of Chapter 7 Bankruptcy

This book explains how to file for Chapter 7 bankruptcy. Its name comes from the chapter of the federal statutes that contains the bankruptcy law (Chapter 7 of Title 11 of the United States Code). Chapter 7 bankruptcy is sometimes called "liquidation" bankruptcy -- it cancels most of your debts, but you have to let the bankruptcy trustee liquidate (sell) your nonexempt property for the benefit of your creditors. (People who file for bankruptcy are allowed to keep certain necessities of life, known as "exempt" property, as explained further in "What Is Exempt Property?" below.) By comparison, Chapter 13 bankruptcy is called a "reorganization" bankruptcy because it allows you to keep all of your property if you are willing to restructure your debt and pay some or all of it off over time.

Here is a brief overview of the Chapter 7 bankruptcy process, from start to finish.

What Bankruptcy Costs

The whole Chapter 7 bankruptcy process takes about three to six months, costs $299 in filing fees (unless you get a waiver), and usually requires only one brief meeting, out of court, with the bankruptcy trustee -- the official appointed by the bankruptcy judge to process your bankruptcy on behalf of the court. If you use a lawyer, you can expect to pay an additional $1,000 or more in legal fees. Of course, you can save most of this money by representing yourself with the help of this book (and, perhaps, typing services from a bankruptcy petition preparer, and/or legal advice from a limited practice lawyer). See Ch. 10 for information on finding lawyers and petition preparers.

Mandatory Credit Counseling

Before you can file for bankruptcy, you must consult a nonprofit credit counseling agency. The purpose of this consultation is to see whether there is a feasible way to handle your debt load outside of bankruptcy, without adding to what you owe.

To qualify for bankruptcy relief, you must show that you received credit counseling from an agency approved by the U.S. trustee's office within the 180 day period before you filed. The courts are split as to whether you can get credit counseling on the same day you file your bankruptcy papers. One court said same-day counseling is fine, as long as it takes place before you file ( In re Dixon, 339 B.R. 475 (E.D. Ark. 2006)); another said that you have to complete counseling no later than the day before you file ( In re Cole, 347 B.R. 70 (E.D. Tenn. 2006)). To be safe, you should complete your credit counseling the day before or earlier.

Once you complete the counseling, the agency will give you a certificate showing that you participated. It will also give you a copy of any repayment plan you worked out with the agency.

There are a few exceptions to this counseling requirement. You don't have to participate if you are in the military on active duty, you are incapacitated, or you are prevented from participating because of a disability. You also don't have to get counseling if there is no agency available to you. For example, one court excused a debtor's failure to get counseling because no agency could provide counseling in the debtor's Creole language, and the debtor could not afford to hire an interpreter. ( In re Petit-Louis, 344 B.R. 696 (S.D. Fla. 2006)).

The purpose of credit counseling is to give you an idea of whether you really need to file for bankruptcy or whether an informal repayment plan would get you back on your economic feet. Counseling is required even if it's pretty obvious that a repayment plan isn't feasible (that is, your debts are too high and your income is too low) or you are facing debts that you find unfair and don't want to pay. (Credit card balances inflated by high interest rates and penalties are particularly unpopular with many filers, as are emergency room bills and deficiency judgments based on auctions of repossessed cars.)

The law requires only that you participate -- not that you go along with whatever the agency proposes. Even if a repayment plan is feasible, you aren't required to agree to it. However, if the agency does come up with a plan, you must file it along with the other required bankruptcy paperwork. See Ch. 6 for more information on the credit counseling requirement, including how to get the certificate of completion that you'll have to file with your other bankruptcy papers.

Filing Your Papers

To begin a Chapter 7 bankruptcy case, you must complete a packet of forms and file them with the bankruptcy court in your area. Many filers are shocked to see the long list of documents that might be required in a Chapter 7 case, particularly after Congress added even more paperwork requirements in the new bankruptcy law. But don't be alarmed: Many of these forms require very little time and effort to fill in, and most filers won't have to complete them all. Just take things one step at a time, following the detailed instructions in Ch. 6, and you'll do just fine.

Once you file the papers described below, the court will send a notice of your bankruptcy filing to all of the creditors listed in your bankruptcy documents. You will get a copy as well. This notice (called a "341 notice" because it is required by section 341 of the bankruptcy code) sets a date for the meeting of creditors (see "The Meeting of Creditors," below), provides the trustee's name, address, and telephone number, and gives creditors the deadlines for filing objections to your bankruptcy or to the discharge of particular debts.

The Voluntary Petition

You begin a Chapter 7 case by filing a "Voluntary Petition": the official court form that requests a bankruptcy discharge of your debts. This form asks for some basic information, including your name, address, and the last four digits of your Social Security number; information about your creditors, debts, and property; and whether you have lived, maintained a residence or business, or had assets in the district where you are filing for most of the 180-day period before you file (this gives you the right to file in that district). You'll find line-by-line instructions for completing the Voluntary Petition in Ch. 6.

Additional Documents

You will have to submit quite a few more documents, either when you file the petition or (with a few exceptions) within 15 days after you file. These additional documents include lists of your creditors, assets, debts, income, and financial transactions prior to filing; copies of your most recent federal tax return; wage stubs for the previous 60 days; a list of property you are claiming as exempt (that is, property that you are entitled to keep even though you are filing for bankruptcy); information on what you plan to do with property that serves as collateral for a loan (such as a car or home); proof that you have completed your prefiling credit counseling; and, later in your bankruptcy case, proof that you have completed budget counseling.

Perhaps the most important form -- made necessary by the new bankruptcy law -- requires you to compute your average gross income during the six months prior to your bankruptcy filing date and compare that to the median income for your state. If your income is more than the median, the same form takes you through a series of questions (called the "means test") designed to determine whether you could file a Chapter 13 bankruptcy and pay some of your unsecured debts over time. The outcome of this test will largely determine whether you can file for Chapter 7 bankruptcy. (See "Who Can File for Chapter 7?" below, and Ch. 6, for detailed information about these calculations.)

After you file, you may want to amend some or all of your forms to correct mistakes you discover or to reflect agreements you reach with the trustee. Amending these forms is fairly simple -- we explain how to do it in Ch. 7.

The Automatic Stay

Often, people filing for bankruptcy have faced weeks, months, or even years of harassment by creditors demanding payment and threatening lawsuits and collection actions. Bankruptcy puts a stop to all this. By filing your bankruptcy petition, you instantly create a federal court order (called an "Order for Relief" and colloquially known as the "automatic stay") that requires your creditors to stop all collection efforts. So, at least temporarily, most creditors cannot call you, write dunning letters, legally grab (garnish) your wages, empty your bank account, go after your car, house, or other property, or cut off your utility service or welfare benefits. As explained in Ch. 2, the automatic stay is not absolute: Some creditors are not affected by the automatic stay, and others can get the stay lifted to collect their particular debt, as long as they get the judge's permission first.

Renters beware. The automatic stay's magic does not extend to certain eviction actions. And even if the automatic stay does kick in to temporarily halt your eviction when you file for bankruptcy, the bankruptcy court will almost always lift the stay and let the eviction proceed, upon the landlord's request. See Ch. 2 for more information on the automatic stay and eviction proceedings.

Court Control Over Your Financial Affairs

By filing for bankruptcy, you are technically placing the property you own and the debts you owe in the hands of the bankruptcy trustee (see "the trustee," below). You can't sell or give away any of the property that you own when you file, or pay any of your prefiling debts, without the trustee's consent. However, with a few exceptions, you can do what you wish with property you acquire and income you earn after you file for bankruptcy. You are also allowed to borrow money after you file.

The Trustee

The bankruptcy court exercises control over your property and debts by appointing an official called a "trustee" to manage your case. Your trustee's name and contact information will be in the official notice of filing you receive in the mail several days after you file your petition. The trustee (or the trustee's staff) will examine your papers to make sure they are complete and to look for property to sell for the benefit of your creditors. The trustee's primary duty is to see that your creditors are paid as much as possible. The trustee is mostly interested in what you own and what property you claim as exempt, but will also look at your financial transactions during the previous year (in some cases these can be undone to free up assets that can be distributed to your creditors). The more assets the trustee recovers for creditors, the more the trustee is paid.

Some courts appoint full-time trustees (called "standing" trustees) to handle all cases filed in that courthouse. Other courts appoint trustees on a rotating basis from a panel of bankruptcy lawyers (called "panel" trustees). Either way, the trustees have the same responsibilities. However, full-time trustees usually do a better job of scrutinizing bankruptcy papers for possible mistakes, whether intentional or accidental.

The Meeting of Creditors

As explained above, you will receive a notice of the date of the creditors' meeting shortly after you file your bankruptcy papers. This meeting is typically held somewhere in the courthouse or federal building (but almost never in a courtroom). The trustee runs the meeting and, after swearing you in, may ask you questions about your bankruptcy and the documents you filed. For instance, the trustee might ask how you arrived at the value you assigned to an item of property listed in your papers, whether you have given anything away in the last year, and whether the information you put in your papers is 100% accurate. All together, this questioning rarely takes more than a few minutes. Creditors rarely attend this meeting -- but if they do, they will also have a chance to question you under oath, usually about where collateral is located or about information you gave them to obtain a loan. In most bankruptcy cases, this will be the only personal appearance you have to make. We discuss the creditors' meeting in more detail, and provide information on other situations when you might have to appear in court, in Ch. 7.

What Happens to Your Property

In your bankruptcy papers, you'll be asked which items of your property you claim as exempt. Each state allows debtors to keep certain types of property, or a certain amount of equity in that property. The exemptions available to you depend on where you have lived prior to filing for bankruptcy. (For more information, see "What Is Exempt Property?" above, and Ch. 3.)

If, after the creditors' meeting, the trustee determines that you have some nonexempt property, you may be required to either surrender that property or provide the trustee with its equivalent value in cash. The trustee is highly unlikely to search your home or seize your property, but will order you to turn over property listed in your schedules or identified during your creditors' meeting or in other proceedings. If you don't turn over the property, the bankruptcy judge can order you to do it (and hold you in contempt if you don't). Plus, the court can dismiss your bankruptcy petition if you fail to cooperate with the trustee.

If the property isn't worth very much or would be cumbersome for the trustee to sell, the trustee may "abandon" it -- which means that you get to keep it, even though it's nonexempt. As it turns out, all of the property that most Chapter 7 debtors own is either exempt or essentially worthless for purposes of raising money for the creditors. As a result, few debtors end up having to surrender any of their property -- unless the property is collateral for a secured debt. (See "Secured Debts," below, and Ch. 5 for a detailed discussion of secured debts.)

Secured Debts

If you've pledged property as collateral for a loan, the loan is called a secured debt. The most common examples of collateral are houses and motor vehicles. If you are behind on your payments, the creditor can ask to have the automatic stay lifted so it can repossess the property or foreclose on the mortgage. However, if you are current on your payments, you can keep the property and continue making payments as before -- unless you have built up enough equity in the property to make it worthwhile for the trustee to sell it for the benefit of your unsecured creditors. (See Ch. 5 for more information on secured debts.)

If a creditor has recorded a lien against your property without your consent (for example, because the creditor obtained a money judgment against you in court), that debt is also secured. However, in some cases and with certain types of property, you may be able to wipe out the debt and keep the property free of the lien. This is called "lien avoidance," and it is also covered in Ch. 5.

Contracts and Leases

If you're a party to a contract or lease that's still in effect, the trustee may take your place as a party to the contract -- known as "assuming" the contract -- and enforce it for the benefit of your unsecured creditors. Alternatively, the trustee can decide not to step in as a party to the contract -- called "rejecting" the contract -- in which case, your obligations under the contract are discharged as an unsecured debt. For example, suppose you have a five-year lease on some commercial property when you file for bankruptcy. If you've got a good lease (perhaps at a below-market rate, with a few years left on it, for property in an up-and-coming part of town), the trustee may decide to assign the lease to a third party in exchange for money to pay your unsecured creditors. In this situation, the trustee will assume the lease and assign it to the highest bidder, even if the lease forbids assignments: The trustee's rights trump any transfer restrictions in the lease. However, if the trustee doesn't think selling the lease is worth the trouble (as is almost always the case), the trustee will take no action, which is the same thing as rejecting the lease. Of course, you and the landlord can renew the lease at any time.

Under the new bankruptcy law, you can assume leases on personal property (such as a car or business equipment) rather than having the trustee assume them. However, you will be allowed to do this only if you are able to cure any defaults on the lease, as required by the creditor. (Ch. 6 provides instructions for completing Schedule G, a required bankruptcy form in which you list all current contracts and leases, and the statement of intention, another required form in which you tell your creditors and the trustee whether you would like to assume any leases.)

Personal Financial Management Counseling

The new bankruptcy law requires all debtors to attend a two-hour course on managing finances in order to receive a bankruptcy discharge. You must take this course from an agency approved by the U.S. Trustee Program. (For a list of approved agencies, go to the U.S. trustee's website, www.usdoj.gov/ust, and click "Credit Counseling & Debtor Education.") You will be charged fees on a sliding scale, but you can't be denied services because of your inability to pay.

The Bankruptcy Discharge

At the end of the bankruptcy process, all of your debts are discharged except:

• debts that automatically survive bankruptcy, unless the bankruptcy court rules otherwise (child support, most tax debts, and student loans are examples), and
• debts that the court has declared nondischargeable as a result of an action brought by the creditor, as might be the case for debts incurred by fraudulent or willful and malicious acts on your part.

Ch. 9 explains which debts are -- and are not -- discharged at the end of your bankruptcy case. See also "Who Can File for Chapter 7?" below, which explains the circumstances in which your entire discharge -- not just the discharge of a specific debt -- may be denied.

After Bankruptcy

Once you receive your bankruptcy discharge, you are free to resume your economic life without reporting your activities to the bankruptcy court -- unless you receive (or become eligible to receive) an inheritance, insurance proceeds, or proceeds from a divorce settlement within 180 days after your filing date. In that case, you have a duty to report those assets to the trustee. If you don't, and they are discovered, the trustee (and the court, if necessary) can order you to turn over the assets and your discharge can be revoked.

After bankruptcy, you cannot be discriminated against by public or private employers solely because of the bankruptcy, although this ban on discrimination has exceptions (discussed in Ch. 8). You can start rebuilding your credit almost immediately, but it will take several years to get decent interest rates on a credit card, mortgage, or car note. You can't file for a subsequent Chapter 7 bankruptcy until eight years have passed since your last filing date. You can file for Chapter 13 bankruptcy any time, but you can't get a Chapter 13 discharge until four years have passed since you filed for Chapter 7.

Who Can File for Chapter 7?

Filing for Chapter 7 bankruptcy is one way to solve debt problems -- but it isn't available to everyone. Here are some situations in which you may not be able to use Chapter 7.

You Can Afford a Chapter 13 Repayment Plan

Under the old bankruptcy rules, most filers were free to choose the type of bankruptcy that seemed best for them -- and most chose Chapter 7 rather than Chapter 13. The new bankruptcy law takes this choice away from some filers with higher incomes. One goal of the new law is to force people who have the economic ability to pay back some of their debts over time to file under Chapter 13, rather than allowing them to liquidate their debts outright in Chapter 7. If the U.S. Trustee decides, based on the information about your income, debts, and expenses you provide in your required paperwork, that you could afford a Chapter 13 plan under the new rules, it will file a motion to have your case dismissed -- and that motion will probably be granted by the court unless you convert to a Chapter 13 bankruptcy.

To figure out whether you will be allowed to use Chapter 7, you must first:

• determine your "current monthly income," and
• compare your current monthly income to the median family income in your state.

If your current monthly income is no higher than the state's median income, your Chapter 7 bankruptcy won't be presumed to be "an abuse" of the bankruptcy process. However, if it later turns out that your actual income (as shown in Schedule I of your bankruptcy papers, explained in Ch. 6) is significantly higher than your expenses (as listed in Schedule J, also explained in Ch. 6), you might still be forced into Chapter 13. (see In re Pak, 343 B.R. 239 (N.D. Cal. 2006), and In re Paret, 347 B.R. 12 (D. Del. 2006).) If your income exceeds the state median income, you will have to do some calculations (called the means test) to determine whether you can afford to pay off at least some of your unsecured debts in a Chapter 13 plan. (If you have to take the means test, you can find step-by-step instructions in Ch. 6.)

Determine Your Current Monthly Income

The new bankruptcy law defines current monthly income as your average monthly income over the six months preceding the month in which you filed for bankruptcy. You must include almost all types of income, whether or not they are taxable -- this means, for example, that if you are including wages in your income, you must use your gross earnings, not the net income you actually take home after taxes are withheld and other deductions are made. For filers who lost a job or other income during the six-month period before filing for bankruptcy, this current income figure may be significantly more than what they are actually earning each month by the time they file for bankruptcy.

Example: John and Marcia are married and have two young children. They fell quickly into debt after John was forced out of his job because of a work-related injury on April 1, 2007. Three months later, on July 1, 2007, John and Marcia decide to file for bankruptcy.

To compute their current monthly income, Marcia adds up the family's income for the period from January 1, 2007, through June 30, 2007 (the six-month period before their filing date). This includes John's gross salary for the first three months (he made $8,000 a month as a software engineer), plus $1,800 in workers' compensation benefits for each of the last three months. Marcia made $1,000 during each of the first three months, and had no income for the last three months. The total family income for the six-month period is $32,400. The family's current monthly income is $32,400 divided by six, or $5,400, even though the amount they actually took in during each of the three months before filing was only $1,800.

Use the Current Monthly Income Worksheet, below (and in Appendix 2), to calculate your current monthly income by:

• adding up all of the income you received during the six-month period before the month in which you filed for bankruptcy, and
• dividing by six to come up with a monthly average.

You should include all of the following types of income on the form:

• wages, salary, tips, bonuses, overtime, and commissions
• gross income from operating a business, profession, or farm
• interest, dividends, and royalties
• rents and other income from real property
• pension and retirement income
• regular contributions someone else makes to you or your dependents' household expenses, including child or spousal support
• regular contributions of your spouse, if he or she isn't filing for bankruptcy with you
• unemployment compensation
• workers' compensation insurance
• state disability insurance, and
• annuity payments.

[Current Monthly Income Worksheet] omitted for online sample chapter.

Compare Your Income to Your State's Family Median Income

The census bureau publishes annual family median income figures for all 50 states. To compare your current monthly income to the family median income for your state, you'll need to multiply your current monthly income by 12 (or divide the annual family median income figure by 12). Let's do it the first way. In John and Marcia's case, the family's current monthly income ($5,400) multiplied by 12 would be $64,800.

Once you've got your current monthly income and your family median income for the same time period (one month or one year), compare them to see whether your current monthly income is more or less than the median. You can find the most recent family median income figures in the Median Family income chart in Appendix 2. You can also find up-to-date figures at the website of the U.S. trustee at www.usdoj.gov/ust/eo/bapcpa/meanstesting.htm or the United States Census Bureau, www.census.gov (click "State Median Income" from the home page).

You can see from the chart in Appendix 2 that John and Marcia's current monthly income would be more than the family median income in most states.

What to Do Next

If, like most bankruptcy filers, your current monthly income is equal to or below the state's median, then you may be allowed to file for Chapter 7 bankruptcy; continue reading this chapter. As you will discover, however, your actual monthly income and actual expenses, as calculated on Schedules I and J -- see Ch. 6 -- may also affect your eligibility to use Chapter 7. And, because of how the means test works, your actual income and expenses may be quite different than what the means test shows, primarily because the means test uses your average income over the six months before you file and a set of IRS-approved expense amounts that might not be the same as what you actually spend each month.

If your income exceeds the state median income, you'll need to take the means test to figure out whether a court would presume your Chapter 7 bankruptcy case to be abusive. (If this happens, you would have to persuade the court that it's appropriate for you to file for Chapter 7, under the circumstances -- see "Special Problems" in Ch. 7.) You can find the means test form and step-by-step instructions for completing it in Ch. 6.

If you are required to take the means test and you pass it -- which means you don't have enough disposable income to fund a Chapter 13 repayment plan -- you've passed the first Chapter 7 eligibility hurdle: Keep on reading this chapter. Remember, you'll also have to show that your actual income and expenses don't allow you to afford a Chapter 13 plan. So, even if you qualify for Chapter 7 based on the means test, you may face another hurdle down the road.

If you can't pass the means test, you might consider filing for Chapter 13 bankruptcy, with the help of Nolo's Chapter 13 Bankruptcy, by Stephen Elias and Robin Leonard. You should also look at options outside of the bankruptcy system, in "Alternatives to Chapter 7 Bankruptcy," below.

You Previously Received a Bankruptcy Discharge

You cannot file for Chapter 7 bankruptcy if you obtained a discharge of your debts under Chapter 7 in a case begun within the past eight years, or under Chapter 13 in a case begun within the previous six years. (11 U.S.C. § 727.) However, if you obtained a Chapter 13 discharge in good faith after paying at least 70% of your unsecured debts, the six-year bar does not apply.

The eight- and six-year periods run from the date you filed for the earlier bankruptcy, not the date you received your discharge.

Example: Brenda files a Chapter 7 bankruptcy case on January 31, 2007. She receives a discharge on April 20, 2007. Brenda files another Chapter 7 bankruptcy on February 1, 2015. The second bankruptcy is allowed because eight years have passed since the date the earlier bankruptcy was filed (even though fewer than eight years have passed since Brenda received a discharge in the earlier case).

A Previous Bankruptcy Was Dismissed Within the Previous 180 Days

You cannot file for Chapter 7 bankruptcy if your previous Chapter 7 or Chapter 13 case was dismissed within the past 180 days because:

• you violated a court order, or
• you requested the dismissal after a creditor asked for relief from the automatic stay. (11 U.S.C. § 109(g).)

You Haven't Met the Credit Counseling Requirements

To file for Chapter 7 bankruptcy, you have to satisfy all the requirements for credit counseling. This means that you must obtain the counseling within 180 days before you file and file a certificate of completion no later than 15 days after you file, unless you fit within one of the exceptions to the counseling requirement (discussed in "Mandatory Credit Counseling," above) or you didn't obtain counseling for some other reason that is acceptable to the bankruptcy court. (See Ch. 6 for more on these requirements.)

You Defrauded Your Creditors

Bankruptcy is geared toward the honest debtor who got in too deep and needs a fresh start. A bankruptcy court will not help someone who has played fast and loose with creditors or the court. This type of behavior can lead to a denial of your bankruptcy discharge and even to criminal charges if you lie under oath.

Certain activities are red flags to the courts and trustees. If you have engaged in any of them within the past several years, do not file for bankruptcy until you consult with a bankruptcy lawyer. These no-nos are:

• unloading assets to your friends or relatives
• incurring debts for luxury items when you were clearly broke, and
• concealing property or money from your spouse during a divorce proceeding.

Example: Joan wants to file for bankruptcy but is worried that she'll lose her house. Before filing, Joan puts the house in her mother's name on the understanding that her mother will deed it back to her after the bankruptcy is completed. Before filing, Joan learns that this is a definite no-no and can land her in serious trouble. She retransfers the house back into her own name and files a Chapter 7 bankruptcy. The trustee learns of the transactions and successfully opposes Joan's discharge on the ground that she acted fraudulently. The fact that she undid the fraud before filing won't necessarily help her.

Your Filing Constitutes "Abuse"

The court can dismiss your case if it finds that your filing is abusive -- that is, that your actions demonstrate that you aren't entitled to the remedy offered by Chapter 7. As explained above, if you fail the means test, the court can presume that your bankruptcy filing is abusive and prevent you from using Chapter 7. However, even if you pass the means test, the court might find abuse. For example, if your actual income (as calculated in Schedule I of your bankruptcy paperwork) significantly exceeds your actual expenses (as calculated in Schedule J of your papers), the court might find that you should be limited to Chapter 13, even if you pass the means test.

Even if you clearly can't afford a Chapter 13 repayment plan, the court can still dismiss your Chapter 7 case if it finds, considering all of the circumstances, that your filing is abusive. Here are some examples:

• The court can refuse to grant a Chapter 7 discharge if the debtor fails to explain how he or she got so deeply in debt ( In re Tanglis, 344 B.R. 563 (N.D. Ill. 2006).)
• If the debtor fails to explain what happened to money received from a personal injury settlement or home refinancing, the court can refuse to grant a Chapter 7 discharge. (See In re Bozeman, Bankruptcy No. 99-35862, Adversary No. 013252 (M.D. Ala. 2006), in which the court found that saying "we did stuff" was not a sufficient explanation of where the money went.)
• Voluntary unemployment can be considered abusive, because the debtor could pay back some or all of the debts if employed. ( In re Richie, 353 B.R. 569 (E.D. Wash. 2006)).
• A debtor who couldn't account for how cash advances were spent during the previous year may be denied a Chapter 7 discharge on grounds of abuse. ( In re Yanni, Bankruptcy No. 0510393ElF, Adversary No. 05-428ElF (E.D. Penn. 2006).)

You Are Attempting to Defraud the Bankruptcy Court

Misleading the court is a terrible idea. If you lie, cheat, or attempt to hide assets, your current debt crisis may no longer be your biggest legal problem. you must sign your bankruptcy papers under "penalty of perjury," swearing that everything in them is true. If you get caught deliberately failing to disclose property, omitting material information you are asked to provide about your financial affairs during previous years, or using a false Social Security number (to hide your identity as a prior filer), you will not get any bankruptcy relief, and you may be prosecuted for perjury or fraud on the court. People go to prison for that.

The "Open Letter to Debtors and Their Counsel," set out below, reflects a view held by more and more bankruptcy courts. Just remember, you're signing papers under penalty of perjury, and the courts expect you to be careful and accurate. The more accurate you are with the information in your papers, the less likely you are to run into any trouble.

Does Chapter 7 Bankruptcy Make Economic Sense?

If you are inclined to file for Chapter 7 bankruptcy, take a moment to decide whether it makes economic sense. If filing for Chapter 7 won't help you out of your current debt problems, will force you to give up property you want to keep, or is unnecessary because of your financial situation, for example, then Chapter 7 might not be the best option.

If you are married, consider the debts and property of both spouses as you read this section. In Ch. 6, you will have an opportunity to decide whether you are better off filing jointly or filing alone.

Are You Judgment Proof?

Most unsecured creditors are required to obtain a court judgment before they can start collection procedures such as a wage garnishment or seizure and sale of personal property. Taxes, child support, and student loans are exceptions to this general rule. If your debts are mainly of the type that require a judgment, the next question is whether you have any income or property that is subject to seizure by your creditors if they obtain a judgment. For instance, if all of your income comes from Social Security (which can't be taken by creditors), and all of your property is exempt (see Ch. 3), there is nothing your creditors can do with their judgment. That makes you judgment proof. While you may still wish to file for bankruptcy to get a fresh start, nothing bad will happen to you if you don't file, no matter how much you owe. For more on what it means to be judgment proof, see "Alternatives to Chapter 7 Bankruptcy," below.

Even though you may be judgment proof, you may want to file for bankruptcy to stop harassment by your creditors. In most cases, you can stop creditors from making telephone calls to your home or work by simply telling them to stop. You can also send them a letter like the one shown below, which almost always does the trick.

If a creditor continues to harass you after you have given written notice, you can sue the creditor under the Fair Debt Collection Practices Act (15 U.S.C. §§ 1692–1692o) for any damage you suffer (such as medical conditions caused by the harassment) and statutory damages of up to $1,000. You can also collect attorneys' fees, so you should be able to find an attorney who will represent you without requiring you to pay a retainer up front. Your state may have similar legal protections against creditor harassment -- and additional remedies for violations of the law. For more information on illegal debt collection practices, see Solve Your Money Troubles, by Robin Leonard and John Lamb (Nolo).

[Sample Letter Telling Collection Agency to Stop Contacting You] omitted for online sample chapter.

Will Bankruptcy Discharge Enough of Your Debts?

Certain categories of debts may survive Chapter 7 bankruptcy, depending on the circumstances. These are commonly referred to as nondischargeable debts -- and it may not make much sense to file for Chapter 7 bankruptcy if your primary goal is to get rid of them.

There are three categories of nondischargeable debts:

• debts that always survive bankruptcy
• debts that survive bankruptcy unless the bankruptcy court rules that a particular exception applies, and
• debts that survive bankruptcy only if the bankruptcy court says that they should.

If most of your debts are the kind that automatically survive bankruptcy or that survive unless a particular exception applies, hold off on filing your Chapter 7 bankruptcy until you have at least read Ch. 9 and learned what is likely to happen to these debts in your case. In particular, you should be concerned about:

• back child support and alimony
• debts other than support that arise from a marital settlement agreement or divorce decree
• student loans
• government fines, penalties, or court-ordered restitution
• tax arrearages (including debts incurred to pay a tax arrearage -- for example, if you used a credit card to pay back taxes), and
• court judgments for injuries or death resulting from your drunk-driving convictions.

The following types of debts can survive bankruptcy, but only if the creditor mounts a successful challenge to them in the bankruptcy court:

• debt incurred on the basis of fraud, such as lying on a credit application or writing a bad check
• debt for luxury items that you recently bought on credit with no intention of paying for them
• debt from willful and malicious injury to another person or another's property, including assault, battery, false imprisonment, libel, and slander, and
• debt from larceny (theft), breach of trust, or embezzlement.

Chapter 13 might be a better choice. In some situations, Chapter 13 offers relief that is not available in Chapter 7. For example, if you are facing foreclosure on your home because of mortgage defaults, or if you have debts that you can discharge in Chapter 13 but not in Chapter 7, you might want to consider using Chapter 13. See "Pay Over Time With Chapter 13 Bankruptcy," below, for more information.

Will a Cosigner Be Stuck With Your Debts?

If someone else cosigned a loan or otherwise took on a joint obligation with you, that person can be held wholly responsible for the debt if you don't pay it. If you receive a Chapter 7 bankruptcy discharge, you may no longer be liable for the debt -- but your cosigner will still be on the hook. Especially if your cosigner is a friend or relative, you might not want to stick him or her with your debt burden.

If you have a cosigner whom you want to protect, you'll need to use one of the alternatives to Chapter 7 bankruptcy that are outlined below. By arranging to pay the debt over time, you can keep creditors from going after your cosigner for payment. And, if you decide to file for Chapter 13, you can include the debt in your repayment plan to keep creditors off your cosigner's back.

How Much Property Will You Have to Give Up?

Chapter 7 bankruptcy essentially offers this deal: If you are willing to give up your nonexempt property (or exempt property of equivalent value) to be sold for the benefit of your creditors, the court will erase some or all of your debt. If you can keep most of the things you care about, Chapter 7 bankruptcy can be a very effective remedy for your debt problems. But if Chapter 7 bankruptcy would force you to part with treasured property, you may need to look for another solution.

The laws that control what property you can keep in a Chapter 7 bankruptcy are called exemptions. Each state's legislature produces a set of exemptions for use by people who are sued in that state. These same exemptions are available to people who file for bankruptcy in that state and meet the residency requirements described below. In 15 states (and the District of Columbia), debtors who meet the residency requirements can choose between their state's exemptions or another set of exemptions created by Congress (known as federal bankruptcy exemptions). States that currently allow debtors this choice are Arkansas, Connecticut, Hawaii, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.

As it does in so many things, California has adopted its own unique exemption system. Rather than using the federal exemptions, California offers two sets of state exemptions for those who meet the residency requirements described below. As in the 15 states that have the federal bankruptcy exemptions, people filing for bankruptcy in California (who meet the residency requirements) must choose one or the other set of California's state exemptions.

Property that is not exempt can be taken from you and sold by the trustee to pay your unsecured creditors. You can avoid this result by finding some cash to pay the trustee what the property is worth, or convincing the trustee to accept some exempt property of roughly equal value as a substitute. Also, if nonexempt property lacks sufficient value to produce money at a public sale, the trustee may decide to let you keep it. For instance, few trustees bother to take well-used furniture or secondhand electronic gadgets or appliances. These items generally aren't worth what it would cost to sell them.

As you've no doubt figured out, the key to getting the most out of the bankruptcy process is to use exemptions to keep as much of your property as possible, while erasing as many debts as you can. To make full and proper use of your exemptions, you'll want to:

• learn which exemptions are available to you
• become familiar with the exemptions you can use, and
• use the available exemptions in the way that lets you keep more of your treasured property.

Ch. 3 gives step-by-step instructions for figuring out whether your personal property is exempt under the state laws available for use in your bankruptcy, and Ch. 4 covers exemptions for your home. Here, we provide a brief overview of exemptions.

Domicile Requirements for Using Exemptions

When it passed the new bankruptcy law, Congress wanted to discourage people from moving to a new state to take advantage of its more generous exemptions for homes and other valuable property. To achieve this goal, the new bankruptcy law imposes:

• a two-year domicile requirement to claim a state's exemptions for personal and real property, and
• a $136,875 limit on the homestead exemption you can claim if you didn't acquire your home at least 40 months before filing for bankruptcy (if your state's homestead exemption is less than $136,875 -- as many are -- then this rule won't affect you).

If you have not been domiciled in your current state for at least two years before filing, you must use the exemptions of the state where you were living for the better part of the 180-day period ending two years before your filing date. In other words, if you file for bankruptcy on January 1, 2008, and you have not lived in your current state for two years, you will have to use the exemptions available in the state where you lived for most of the period between July 5, 2005 and December 31, 2005. These somewhat bewildering rules are explained in detail in Ch. 3; the 40-month rule for claiming the homestead exemption is covered in Ch. 4.

Property That Is Typically Exempt

Certain kinds of property are exempt in almost every state, including:

• equity in your home, to a certain value (commonly called the homestead exemption)
• equity in a motor vehicle, to a certain value (usually between $1,000 and $5,000)
• reasonably necessary clothing (no mink coats)
• reasonably needed household furnishings and goods (the second TV may have to go if it has any value)
• household appliances
• jewelry, to a certain value
• personal effects
• life insurance (cash or loan value, or proceeds), to a certain value
• retirement funds necessary for current support
• tools of your trade or profession, to a certain value
• a portion of unpaid but earned wages, and
• public benefits (welfare, social security, unemployment compensation) accumulated in a bank account.

Some states also provide a "wildcard" exemption -- an exemption for a set dollar amount that you can apply to any property that would otherwise not be exempt. (See Ch. 3 for more on wildcard exemptions.) Also, if you are using the federal exemptions or the California "System 2" exemptions and you don't need to protect equity in a home, you can use some or all of the homestead exemption as a wildcard.

Property That Is Typically Nonexempt

In most states, you will have to give up or pay the trustee for the following types of property (in legal terms, these items are "nonexempt"):

• expensive musical instruments (unless you're a professional musician)
• cameras, camcorders, and personal digital assistants
• stamp, coin, and other collections
• valuable family heirlooms
• cash, bank accounts, stocks, stock options, bonds, royalties, and other investments
• business assets
• real estate you're not living in
• boats, planes, and off-road vehicles
• a second car or truck, and
• a second or vacation home.

For those with nonexempt property. If it appears that you have a lot of nonexempt property, read Ch. 3 before deciding whether to file for bankruptcy. That chapter helps you determine exactly how much of your property is not exempt and suggests ways to:

• buy it from the trustee (if you really want to hold on to it)
• use exempt property to barter with the trustee, or
• retain the value of your nonexempt property by selling some of it and buying exempt property with the proceeds before you file.

Example 1: Several years ago, John and Louise inherited a genuine Chinese jade vase, their most prized possession. it's worth $10,000. They don't want to give it up but are in desperate financial shape, with debts of more than $60,000.

If they file for Chapter 7 bankruptcy, their debts will be discharged, but they will probably lose the vase, assuming it's not exempt in their state and there's no wildcard exemption available that will cover its value. In Chapter 13 bankruptcy, however, they could keep the vase and pay their debts out of their income over the next three to five years, provided their payments to their unsecured creditors over the life of the plan total at least $10,000 (the value of their nonexempt vase). After several anguished days, John and Louise decide to file for Chapter 7 bankruptcy and give up the vase.

John and Louise might be tempted to hide the vase and hope the trustee doesn't discover it. That would be a crime (perjury), for which they could be fined or jailed. It's also an abuse of the bankruptcy process that could get their petition dismissed and prevent them from filing again for six months and discharging the debts they listed in their schedules. A much safer alternative (but still risky in some states) would be to sell the vase before they file and use the proceeds to buy exempt property. (See Ch. 3 for information on when you can do this.) or, John and Louise might offer the trustee exempt property in place of the vase.

Example 2: Over the years, Mari has carefully constructed an expensive computer system that she uses primarily for hobbies but also as a work tool for her marginal desktop publishing business. The computer system does not qualify for a specific exemption in her state. Over a substantial period of time, Mari has also amassed a debt of $100,000, consisting primarily of bank credit cards, debts, medical bills, and department store charges.

If Mari files for Chapter 7 bankruptcy, she can discharge all of her debts, because they are unsecured and she did not incur them fraudulently. However, unless a wildcard exemption protects the computer system's value, Mari must either surrender most of the computer equipment so it can be sold for the benefit of her creditors (though she may be able to keep the pieces essential to her desktop publishing business) or find a way to replace them with exempt property of equivalent value. Mari decides that canceling her debts is far more important to her than hanging on to the entire system, and proceeds to file for Chapter 7 bankruptcy.

Alternatives to Chapter 7 Bankruptcy

In many situations, filing for Chapter 7 bankruptcy is the best remedy for debt problems. In others, however, another course of action makes more sense. This section outlines your main alternatives.

Do Nothing

Surprisingly, the best approach for some people who are deeply in debt is to take no action at all. If you're living simply (that is, with little income and property) and look forward to a similar life in the future, you may be what is known as "judgment proof." This means that anyone who sues you and obtains a court judgment won't be able to collect -- simply because you don't have anything they can legally take. (As a famous song of the 1970s said, "Freedom's just another word for nothing left to lose.") Except in highly unusual situations (for example, if you are a tax protester or willfully refuse to pay child support), you can't be thrown in jail for failing to pay your debts.

Normally, creditors cannot take your property or income without first suing you and obtaining a court judgment (except for taxing authorities and student loan collectors). However, even if the creditor is armed with a court judgment, the law prevents creditors (except the IRS, of course) from taking property that is exempt under your state's general exemption laws, including food, clothing, personal effects, and furnishings. (See "How Much Property Will You Have to Give Up?" above.) And creditors won't go after your nonexempt property unless it is worth enough to cover the creditor's costs of seizure and sale.

Before taking property, creditors usually try to go after your wages and other income. But a creditor can take only 25% of your net wages to satisfy a court judgment, unless it is for child support or alimony. Often, you can keep more than 75% of your wages if you can demonstrate that you need the extra amount to support yourself and your family. Income from a pension or another retirement benefit is usually treated like wages. Creditors cannot touch public benefits such as welfare, unemployment insurance, disability insurance, SSI, or Social Security.

To sum up, if you don't have a steady job or other source of income that a creditor can snatch, or you can live on 75% of your wages (or perhaps a little more), you needn't fear a lawsuit. Similarly, if most of your property is exempt, there is little the creditor can seize to repay the debt. In these situations, most creditors don't bother trying to collect the debt at all.

Now that you have the good news, here's some bad: Judgments usually last for five to ten years, and they can be renewed for longer periods. In this age of computers, credit reporting bureaus, and massive databases that track our every activity, you may have to live with your decision to do nothing for a long, long time. And, in many cases, interest on your debt will continue to accrue, which means the $10,000 you owe today could become a $100,000 debt in the future.

Even if you are judgment proof, you may be better off dealing with your debt situation now, either through bankruptcy or through one of the other alternatives discussed below. For example, if you don't file for bankruptcy and later receive a windfall -- lottery winnings or an unexpected inheritance -- you may lose the windfall to your creditors. Windfalls you receive after you file for Chapter 7 bankruptcy, on the other hand, are yours to keep.

Negotiate With Your Creditors

If you have some income, or you have assets you're willing to sell, you may be a lot better off negotiating with your creditors than filing for bankruptcy. Through negotiation, you may be able to come up with a new payment plan that allows you to get back on your feet. Or you may be able to settle your debt for less than you owe.

Negotiating with creditors. How to negotiate with your creditors is covered in detail in Solve Your Money Troubles, by Robin Leonard (Nolo). That book explains how to deal with creditors when you owe money on a variety of debts, including credit cards, mortgage loans, car loans, child support, and alimony.

Get Outside Help to Design a Repayment Plan

Many people have trouble negotiating with creditors, either because they don't have the skills and negotiating experience to do a good job or because they find the whole process exceedingly unpleasant. Indeed, because the ability to negotiate is an art, many people benefit from outside help.

If you don't want to negotiate with your creditors, you can turn to a lawyer or to a credit counseling agency. These agencies come in two basic varieties: nonprofit and for profit. They all work on the same basic principle: A repayment plan is negotiated with all of your unsecured creditors. you make one monthly payment to the agency, which distributes the payment to your creditors as provided in the plan. As long as you make the payments, the creditors will not take any action against you. And if you succeed in completing the plan, one or more of your creditors may be willing to offer you new credit on reasonable terms.

The nonprofit agencies tend to be funded primarily by the major creditors (in the form of a commission for each repayment plan they negotiate) and by moderate fees charged the user (roughly $20-$25 per plan negotiated). The for-profit agencies are funded by the same sources but tend to charge much higher fees.

The big downside to entering into one of the repayment plans is that if you fail to make a payment, the creditors may pull the plug on the deal and come after you, regardless of how faithful you've been in the past. When that happens, you may find that you would have been better off filing for bankruptcy in the first place. For more on the pros and cons of repayment plans, see Solve Your Money Troubles, by Robin Leonard (Nolo).

Pay Over Time With Chapter 13 Bankruptcy

Chapter 13 bankruptcy lets you enter into a court-approved plan to deal with your debts over three to five years. Some debts must be paid in full (back taxes are the most common examples), while others may be paid only in part. The basic idea is that you must devote all of your disposable income to whatever plan is approved by the bankruptcy court. With a few exceptions, Chapter 13 doesn't require you to give up any property -- for that reason, it's the bankruptcy of choice for folks who have significant amounts of nonexempt property or property that has a sentimental value.

If you do file for Chapter 13 bankruptcy, the minimum amount you will have to pay to your unsecured creditors is roughly equal to the value of your nonexempt property. But you may have to pay more: The new bankruptcy law provides guidelines for calculating exactly how much you must pay into your plan, based on the size of your income:

• If your current monthly income (as defined by the bankruptcy law -- see "Who Can File for Chapter 7 Bankruptcy?" above) is more than the median family income for your state, you must pay all of your "disposable income" into your plan for five years. To calculate your disposable income, you must use expenses dictated by the IRS, which could be significantly less than your actual expenses. This means that you may be obligated to pay more money into your plan than you actually have left over each month, after paying your bills and living expenses.
• If your current monthly income is less than the state median, you can propose a three-year repayment plan. you can also calculate your disposable income using your actual expenses, rather than the IRS standards.

To file for Chapter 13 bankruptcy, you fill out the same forms as in a Chapter 7 bankruptcy and file them with the bankruptcy court along with a filing fee of $274. In addition, you must file your most recent tax return and show that you are current on your taxes for the last four years. You must also file a plan to repay your debts under the new bankruptcy law's guidelines and serve a copy of the plan on each of your creditors. With the possible exception of current payments on your mortgage and car note, you make payments under the plan directly to the bankruptcy trustee, who in turn distributes the money to your creditors. When you complete your plan, any remaining unpaid balances on unsecured, dischargeable debts are wiped out.

Chapter 13 requires you to pay off your debts over time, but few filers pay back 100% of what they owe. The typical Chapter 13 plan pays 100% of child support (unless the support has been assigned to a government agency, in which case the plan might pay a lesser percentage), back taxes, and other debts classified as "priority" debts, and some lesser percentage of other unsecured debts, depending on the debtor's income and the value of the debtor's nonexempt property.

Like Chapter 7 bankruptcy, Chapter 13 bankruptcy doesn't wipe out all types of debts. Domestic support obligations, criminal penalties, certain tax debts, debts arising from injuries caused by your intoxicated driving, certain debts or creditors you don't list on your bankruptcy papers, and debts arising from your fraudulent conduct all may survive your bankruptcy filing, whether you file under Chapter 7 or Chapter 13. And, as in Chapter 7, student loan debts will be discharged only if you can show that repaying the loan would cause a substantial hardship. (For more on each of these types of debts, see Ch. 9.) Debts arising from a civil judgment against you for maliciously or willfully injuring or killing someone will also survive a Chapter 13 bankruptcy.

In addition to these debts, there are certain debts that are discharged only in Chapter 13 -- that is, these debts will survive Chapter 7 bankruptcy, but will be wiped out at the end of your repayment plan if you file under Chapter 13. These debts include:

• marital debts (other than for support) created in a divorce or settlement agreement
• debts incurred to pay a nondischargeable tax debt
• court fees
• condominium, cooperative, and homeowners' association fees
• debts for loans from a retirement plan, and
• debts that couldn't be discharged in a previous bankruptcy.

You can file for Chapter 13 bankruptcy at any time, even if you got a Chapter 7 bankruptcy discharge the day before. However, you can't get your Chapter 13 discharge until four years have passed since you filed a previous Chapter 7 case.

If you start, but are not able to finish, a Chapter 13 repayment plan -- for example, you lose your job six months into the plan and can't make the payments -- the trustee may modify your plan. The trustee may give you a grace period (if the problem seems temporary), reduce your total monthly payments, or extend the repayment period. As long as it looks like you're acting in good faith, the trustee will try to accommodate and help you across rocky periods. If it's clear you won't be able to complete the plan because of circumstances beyond your control, the court might let you discharge your debts on the basis of hardship. Examples of hardship would be a sudden plant closing in a one-factory town, or a debilitating illness.

If the bankruptcy court won't let you modify your plan or give you a hardship discharge, you still have two options:

• You can convert your case to a Chapter 7 bankruptcy (unless you received a Chapter 7 discharge in a case filed within the previous eight years).
• You can ask the bankruptcy court to dismiss your Chapter 13 petition, which would leave you in the same position you were in before you filed, except you'll owe less because of the payments you made on your debts. If your Chapter 13 bankruptcy is dismissed, your creditors may add any interest that was abated during your Chapter 13 case to the total amount you owe.

You may qualify for Chapter 13 even if you don't have sufficient disposable income to complete your plan. The new bankruptcy law assumes that your monthly income during your plan will be the same as your average income during the six months before you filed for bankruptcy. If you lost a job or otherwise experienced a drop in income during those six months, your actual income could be quite a bit less than the law assumes it will be. In addition, certain higher-income filers will have to calculate their expenses using IRS standards, which are often less than their actual living expenses. All this means that you may not be able, as a practical matter, to make the payments required by a Chapter 13 plan, even if you qualify to file under the figures used in the new law.

Resources for Chapter 13 bankruptcy. For general information on Chapter 13 bankruptcy, get a copy of The New Bankruptcy: Is It Right for You?, by Stephen Elias (Nolo). If you are interested in filing for Chapter 13 bankruptcy, see Chapter 13 Bankruptcy: Repay Your Debts, by Stephen Elias and Robin Leonard (Nolo), which provides all the forms and instructions necessary to complete your own Chapter 13 bankruptcy.

Family Farmers Should Consider Chapter 12 Bankruptcy

Chapter 12 bankruptcy, which is very similar to Chapter 13, is specially designed for family farmers and provides a way to keep the farm while paying off debts over time. If you are a farmer, we recommend you speak with a bankruptcy attorney about Chapter 12 bankruptcy before choosing to file a Chapter 7 bankruptcy.

Corporations and Partnerships Should Consider Chapter 11 Bankruptcy

Chapter 11 bankruptcy is usually reserved for corporations and partnerships. Individuals occasionally file for Chapter 11 bankruptcy, however, if their debts exceed either of Chapter 13 bankruptcy's debt limits and they think they'll have enough steady income to pay off a portion of their debts over a several year period. this book doesn't cover Chapter 11 bankruptcies -- few bankruptcy attorneys recommend them for individuals.

Introduction

In the chapters that follow, we explain how to complete the required bankruptcy paperwork, what happens to your debts and property when you file for bankruptcy, how to get help with your bankruptcy, and how to pick up the financial pieces once your bankruptcy is final, among other things. But before you get to these important topics, you need to figure out whether you can -- and should -- file for Chapter 7 bankruptcy in the first place. This chapter will give you an overview of the bankruptcy process and help you decide whether Chapter 7 bankruptcy is right for you.