In a judicial foreclosure, you can usually delay the action for a period of time as justice and equity require if you meet specific criteria and if you ask the court for the stay in writing.
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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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.
]]>Filing for Chapter 7 bankruptcy is a big decision, but the process is predictable. If you would like to learn what to expect or how to file for Chapter 7 bankruptcy, this article is the right place to start.
We've simplified the steps involved so this broad topic is more manageable. When you’re ready to dive into the details, use the links provided—they’ll take you to resources covering the topic in more depth.
You’re likely familiar with the two chapters available when filing for bankruptcy—Chapters 7 and 13. But not everyone knows when it’s better to file Chapter 7 or 13.
Filing a Chapter 7 bankruptcy is more popular because it erases qualifying debts in about four months. Also, filers like it because there’s no requirement to repay creditors.
By contrast, Chapter 13 bankruptcies are more involved. Chapter 13 filers pay all disposable income to creditors for three to five years, making Chapter 13 expensive and difficult to complete. Unsurprisingly, most filers would prefer not to file for Chapter 13 bankruptcy when possible.
So why would someone choose Chapter 13? People with significant incomes often don’t qualify for Chapter 7 and are limited to using Chapter 13 for debt relief. But other reasons exist, too. For instance, Chapter 13 can help you keep a house, car, or other property you’d lose in Chapter 7.
Not all debts go away in Chapter 7. However, that’s why you’re considering filing for Chapter 7, so naturally, you need to know what you can eliminate or “discharge” in Chapter 7.
The funny thing about bankruptcy law is that it doesn’t include a list of debts you can erase. Instead, it lists the debts you can’t get rid of, or “nondischargeable" debts.” The most common are child and spousal support obligations, student loan balances, and recently incurred tax debt.
You’ll want to look at the detailed list in our bankruptcy discharge article. If you find all your debt will remain when Chapter 7 ends, you probably won’t benefit from Chapter 7. However, chances are you can discharge many debts in Chapter 7 bankruptcy, including the following:
Example. Lily’s debts include medical bills, unpaid rent from her prior residence, and a past-due cellphone bill. She also maxed out her credit card a month before bankruptcy when she bought an expensive handbag. She can discharge all debt in Chapter 7, except for the handbag cost, if the creditor objects. Learn why you should avoid charging luxury purchases before bankruptcy.
Example. Reynaldo owed creditors $150,000 that he hoped to erase in Chapter 7—$100,000 to his ex-spouse, $25,000 in recent income taxes, and $25,000 in credit card debt. Reynaldo learned he could discharge the credit card debt in Chapter 7 but not the tax and marital property equalization balances. By contrast, in Chapter 13, Reynaldo would fully pay the $25,000 tax debt through the Chapter 13 plan. He could also erase most of the credit card and marital property equalization balances because both are dischargeable in Chapter 13.
The Chapter 13 result is possible because the ex-spouse was owed compensation for property division, which is dischargeable in Chapter 13 but not Chapter 7. Support obligations aren’t dischargeable in Chapter 7 or 13.
You’ll review your state’s exemption laws to determine whether you can keep all or most of your property in bankruptcy. When an exemption doesn’t cover a valuable item, the Chapter 7 trustee will sell it and distribute the proceeds to creditors.
Each state has a unique set of bankruptcy exemptions. When a state lets a filer use the federal bankruptcy exemptions or the state set, you choose the exemption set that would work best for you. Although state exemptions vary widely, you can expect to keep the following:
Example. Lynn planned to file for Chapter 7 and erase $50,000 in medical and credit card bills, but she learned she might lose property. Because she lived in a modest rental home with typical furnishings that wouldn’t bring much at a yard sale, she worried only about losing her impressive collection of signed pickleball rackets. Lynn’s concern was valid because collections are rarely protected. Lynn will want to check for a wildcard exemption available for use on any property. Otherwise, the trustee might let her buy the rackets at a discount.
Learn more about how bankruptcy exemptions work.
Chapter 7 is the bankruptcy chapter intended to help lower-income filers who can’t afford to repay some of their debts. You must take the Chapter 7 means test to determine if you qualify, However, you'll be exempt from the means test if most of your debt is from a business venture or you're a qualifying military member.
If you're not exempt, here’s what you’ll do:
You'll qualify if your gross income meets or is less than the median figure. If you don’t pass, you’ll have a second chance to deduct allowed expenses from your income and demonstrate you can’t afford to pay your creditors.
However, if the calculations show you have enough income to repay a meaningful amount to creditors, you won’t be eligible. Instead, you’ll need to look to Chapter 13 for debt relief.
Example. Michael’s gross income calculation exceeded the allowed amount to qualify for Chapter 7. However, he passed the second portion of the means test easily after deducting his hefty mortgage and car payments, child support arrearages, and past-due tax debt.
Other qualification requirements also exist. For instance, you might need to delay filing for bankruptcy to comply with the multiple bankruptcy filing waiting period rules.
Individuals filing for Chapter 7 bankruptcy must complete a course before filing or, in highly unusual cases, shortly after. You can take the class online or by phone up to 180 days before filing for bankruptcy. Here’s where you’ll learn more about the prebankruptcy credit counseling requirement.
You'll tell the court about your property, debts, income, expenses, and more on Chapter 7 bankruptcy forms. When finished, you’ll have disclosed everything about your present and past financial situation, including whether you want to keep your car, house, and other secured property or return it to the lender. You’ll also disclose property transactions that occurred up to ten years before your case.
Your case starts after filing the completed bankruptcy forms (the “petition”). Because a bankruptcy filing can be up to 60 pages long, you can use the emergency filing procedure requiring fewer forms if you’re short on time. You’ll file the remaining forms within 14 days. Otherwise, the bankruptcy court will dismiss your case.
You’ll also pay a filing fee. If you can’t pay it, you can ask the court to split it into four payments or waive it. Your household income must be 150% of the federal poverty guidelines or less, and you can’t have sufficient income to pay in installment payments. Learn more about bankruptcy filing fees and costs.
You’ll prove the accuracy of your bankruptcy petition information by providing the Chapter 7 trustee appointed to your case with financial documents. You can find out why the trustee will want bank statements, paycheck stubs, profit and loss statements, tax returns, and more by reading about the financial paperwork needed for proof in bankruptcy.
The trustee will check identification at the 341 meeting of creditors in Chapter 7 bankruptcy—although your attorney might do so if it’s a virtual meeting—and ask questions about your financial affairs. Creditors can come to the meeting, but they rarely do.
Motions aren't needed in most cases. However, if you dispute a creditor's claim or want to eliminate liens in Chapter 7, you'll address these matters before the court closes your case. If you forget to handle a lien—which happens—the court will likely let you reopen the case later.
Before receiving your discharge order wiping out your debt, you must finish the second “debtor education” course. If you don’t submit your certificate on time, the court will dismiss your case without issuing a discharge. Fixing this problem can be expensive because you’ll likely have to file a motion and pay another bankruptcy filing fee. Learn more about credit and debt counseling in bankruptcy.
Expect to feel a weight lift from your shoulders after completing the steps involved with filing for Chapter 7 bankruptcy because the order discharging qualifying debts wipes them out in Chapter 7 bankruptcy. Creditors won’t be able to bother you any longer.
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.
]]>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.
]]>For instance, almost all individuals filing for consumer bankruptcy must have income low enough to pass the "means test." Also, individuals can’t eliminate debt if they filed a previous bankruptcy within a certain period, and incorporated entities can’t ever discharge debt (but the trustee still sells property in these cases).
Another potential issue you should be aware of? The court will dismiss your case if you use bankruptcy to cheat creditors. Keep reading to learn about these issues and more.
Individuals and businesses can almost always use Chapter 7 to sell property for the benefit of creditors. But that’s not what most people are after. Most people want to know whether they qualify for a Chapter 7 discharge, which is the court order that wipes out credit card balances, medical bills, personal loans, and more.
Here are the short answers.
Below we cover the primary requirements individuals must meet before erasing debt in Chapter 7.
Individuals whose income exceeds Chapter 7 limits won’t qualify for a discharge. They’d need to pay into a three- to five-year Chapter 13 repayment plan for debt relief. Here's how to determine whether you'll be limited to Chapter 13 for debt relief.
The means test calculates whether you have enough income to pay creditors through a Chapter 13 plan.
The first step measures your income against the median income in your state. After averaging your gross income over the six months before filing, you’ll divide the total by six and multiply by twelve.
If your income is less than or equal to the median, the law presumes you’re eligible for a Chapter 7 discharge. If your income exceeds the median, you’ll be eligible if you pass the second part of the means test.
You'll find the state median figures on the U.S. Trustee Program website.
Just because you passed the means test doesn't mean you've overcome all financial hurdles. The means test isn’t the only paperwork the trustee will review to determine Chapter 7 eligibility.
Because the means test looks backward, the trustee will examine bankruptcy schedules disclosing your current income and monthly budget. If the schedules show you can afford to repay a portion of your debts, the trustee will ask the court to convert your matter to Chapter 13.
Example. Shana worked as a barista for five of six months before filing for Chapter 7. She easily passed the means test with an average monthly income of $2,000. However, she landed her dream job a month before filing and received a substantial income boost. Her bankruptcy schedules showed a current monthly income of $4,000 and expenses of $1,950 (she hadn’t had time to upgrade her apartment). The trustee filed a motion asking to convert the case from Chapter 7 to Chapter 13 because of Shana’s ability to repay creditors.
You might not qualify for a discharge if one of the following situations applies.
You can’t get another Chapter 7 discharge if you obtained a Chapter 7 discharge within the last eight years. You must wait six years if you previously filed for Chapter 7 and want to file for Chapter 13.
It’s important to note that you can still file for Chapter 7 or 13 even if you aren’t entitled to a discharge. For instance, it's common to use Chapter 13 to force creditors into a lengthy payment plan. This can be an invaluable way to prevent wage garnishment, bank levies, and property seizure when you're lacking other options.
Also, keep in mind that this assumes you received a discharge in the previous case. The court might have dismissed your case before granting a discharge. If so, and no wrongdoing was involved—perhaps you forgot to file paperwork or couldn’t attend the creditors meeting—you’ll likely be entitled to a discharge if you file again.
Example. Lucy owed $50,000 in tax arrearages that she couldn’t discharge in the Chapter 7 case she filed last year. She also incurred $1,000 in new credit card debt. Because she was at risk of a wage garnishment or, worse yet, losing her home, she filed for Chapter 13 even though sufficient time hadn’t passed to allow her to receive a debt discharge. Lucy was content paying the arrearages and credit card debt through Chapter 13 without fear of collection activity.
Learn more about multiple bankruptcy filings and when you qualify for a second bankruptcy discharge.
You can’t file for Chapter 7 bankruptcy if you or the court dismissed a previous Chapter 7 or Chapter 13 case within the past 180 days because of one of the following reasons:
Learn why you’ll lose the automatic stay after repeat bankruptcy filings.
A bankruptcy court will dismiss a case if it thinks you tried to cheat your creditors or that you’ve concealed assets so you can keep them for yourself rather than have them sold to pay your debt. When this happens, you might be precluded from refiling in the future.
Some activities are red flags to the court and trustee and you can expect the trustee to scrutinize closely:
Also, you must sign your bankruptcy papers under "penalty of perjury" and declare that everything in them is true. If you deliberately fail to disclose property, omit material information about your financial affairs, or use a false Social Security number to impersonate another person and the court discovers your action, the court might dismiss your case or refer your matter for fraud prosecution.
For more information, see What Is Bankruptcy Fraud?
Businesses can file for bankruptcy, but it doesn't always make sense. Chapter 7 bankruptcy won’t wipe out the debt of a corporation or LLC. Instead, the trustee will liquidate the company assets and distribute the funds to creditors.
But a closed business doesn't truly need a discharge. In most cases, the owner wants to discharge personal guarantees the owner signed agreeing to pay the business debt personally. Here's how this would play out in a typical bankruptcy case.
Example. Henry’s Doughnut Emporium failed to flourish after customers realized the eye-catching pastries tasted like cardboard. Even though the business is an LLC, Henry agreed to be personally responsible for the business’s debt. A business bankruptcy lawyer explained that if the LLC files for Chapter 7, the trustee will sell the doughnut-making equipment and use the money to pay creditors. However, bankruptcy won’t erase the business debt, and Henry will remain responsible for the balance. Henry leaves the attorney’s office with a difficult decision to make.
Put Doughnut Emporium in Chapter 7. This option would make sense if it would reduce the business debt to what Henry could afford. However, Henry will want to consider whether he could sell the equipment for more than the trustee would receive at a fire sale.
File Chapter 7 personally. If Henry meets Chapter 7 discharge requirements, he could eliminate his personal and business debt responsibilities in a single Chapter 7 filing. However, this strategy would be viable only if any property lost to the trustee was worth less than the debt discharged.
Put Doughnut Emporium in Chapter 7 and file individually. This highly transparent approach would be unnecessary unless Henry were concerned a creditor might claim he was hiding business assets.
Learn about when you're responsible for business debts and Chapter 7 bankruptcy for LLCs and corporations.
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.
]]>We also explain why you must wait before wiping out debts in another Chapter 7 or Chapter 13 and warn you about problems you could face when filing for bankruptcy too often. If you want to find your answer fast, the "How Often You Can File for Bankruptcy" chart will help determine the waiting period.
You can file for bankruptcy as many times as you like. Bankruptcy laws don't limit people to a particular number of bankruptcies and don't set a minimum period you must wait before filing again.
However, there's a catch.
If you file too soon after wiping out debt in your old case, you won't be eligible for another "debt discharge" in your new case. The waiting period must expire before you'll qualify for more debt forgiveness.
Although it can make sense to file for bankruptcy without receiving a discharge, such situations are rare. Learn about timing your bankruptcy filing to avoid wasting time and money.
Here's how long you'll wait before qualifying for another bankruptcy discharge. Use your previous bankruptcy filing date as the starting point, not the discharge date.
Plan to File Chapter 7 |
Plan to File Chapter 13 |
|
Previously Filed Chapter 7 |
Eight years |
Four years |
Previously Filed Chapter 13 |
Six years or less |
Two years |
These are the same timeframes in the chart above, but here, you'll find examples to help you calculate when you'll qualify for another discharge.
You'll use these if the bankruptcy chapter you intend to file differs from the previous one. Again, the waiting periods mirror those in the chart, but we explain an exception that applies if you initially filed for Chapter 13.
Chapter 13 exception. People who previously filed a Chapter 13 case and fully paid "unsecured creditors" or, in other words, paid everything other than what was owed on houses, cars, and other collateralized property won't wait as long before filing for Chapter 7. The same is true for Chapter 13 filers who paid at least 70% of unsecured claims, proposed a plan in good faith, and made their best effort to pay creditors. Talk with a local bankruptcy attorney for more information.
Learn who can't file bankruptcy Chapter 7 and how to file bankruptcy Chapter 13 instead.
Sometimes, you don't need a discharge because filing for bankruptcy solves another problem. For instance, businesses (except sole proprietors) are never entitled to a Chapter 7 discharge, yet closing companies sometimes file for Chapter 7.
Here's why.
It's tempting for a company's interest holders to hide assets instead of using them to pay creditors as they should when winding down a business. Because liquidating assets transparently can help minimize wrongdoing accusations from creditors, having a court-appointed trustee sell business assets and distribute funds to creditors can be helpful.
Although it isn't used much, the same approach is available to individual filers, and it's one of the ways to benefit from bankruptcy without receiving a discharge.
More often, individuals not entitled to a discharge turn to Chapter 13 to force a creditor into a repayment plan. For instance, suppose you have a creditor threatening to take your home or file a wage garnishment. If you didn't have the cash to pay the entire debt but could make smaller payments, you'd need time, not a discharge. Filing Chapter 13 would be a viable solution.
A "Chapter 20" bankruptcy is similar and starts when a filer discharges all qualifying debts in Chapter 7. Immediately afterward, the debtor uses a Chapter 13 bankruptcy payment plan to pay nondischargeable debts not erased in Chapter 7.
Keep in mind that some courts don't allow Chapter 20 filings. Also, they can be tricky because your income would need to be low enough to qualify for Chapter 7 yet high enough to afford a Chapter 13 plan. Talk with a local bankruptcy lawyer before attempting to use Chapter 20 as a debt relief strategy.
In most situations, if you didn't receive a bankruptcy discharge the first time, you can file again and receive a discharge. But not always.
Also, you should know that you lose the full benefits of the automatic stay order that stops creditors from collecting when you file multiple bankruptcies quickly. The stay would last 30 days if you filed one previous time during the past year. The court wouldn't issue the stay if you had already filed twice in the past year.
Learn more about repeat filings and the automatic stay.
The term "abusive bankruptcy filing" can refer to a Chapter 7 filing that doesn't meet the means test, the qualification standard determining a filer's right to a debt discharge. But it can also describe a case filed by someone inappropriately using the bankruptcy process, for instance, to evade a creditor or buy time in a foreclosure or lawsuit.
Simply put, the court frowns on debtors who file with no intention of following through with the case. Repeat filers face consequences for these tactics, such as losing the automatic stay discussed or a discharge.
Learn why the court might dismiss your bankruptcy case.
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 filers receive a bankruptcy discharge about four months after filing for Chapter 7 bankruptcy and within weeks of completing a Chapter 13 plan. Once the filer receives a bankruptcy discharge, the filer is no longer responsible for paying the discharged debt. A creditor can’t call, send demand letters, report nonpayment of the obligation to credit reporting agencies, file a lawsuit, or take other actions to collect the discharged debt.
If your bankruptcy chapter proceeds as planned, you’ll receive the discharge after satisfying all requirements, assuming no one successfully objects to your filing. For instance, the bankruptcy court will issue the bankruptcy discharge after you’ve done the following:
The court will notify you by mailing an “order of discharge.” Sometimes, the order is called a “discharge order” or “discharge letter.”
Many people are surprised that the order doesn't list the particular debts discharged in the case. Instead of listing the filer's eliminated debts, the order provides general information about "nondischargeable debt" that doesn’t go away in bankruptcy.
For instance, the bankruptcy discharge will explain that you’ll remain responsible for paying the following:
After the court issues the discharge, creditors holding nondischargeable debts can continue collection efforts. Although the order doesn’t provide the clarity that many debtors desire, it might be helpful to understand that creditors are expected to know whether a particular debt is dischargeable.
Learn which debts you cannot discharge in Chapter 7 and which debts you cannot wipe out in Chapter 13.
Other debts might also be nondischargeable if the creditor filed and won a bankruptcy lawsuit asking that you remain responsible for paying the obligation. Obligations arising from fraud committed by the debtor or debts considered “presumptive fraud” are examples of the type you might have to pay after your bankruptcy case.
Also, a bankruptcy discharge won’t eliminate a lien that a creditor might have on your property. A lien allows the creditor to repossess and sell the collateral to recover at least some of the money you borrowed if the debt remains unpaid, even if the court discharged the debt in your bankruptcy case.
Some liens can be removed, however, even after the closure of the bankruptcy case. Learn more in What Happens to Liens in Chapter 7 Bankruptcy?
While your matter remains open, you’re responsible for cooperating with the trustee, even if you’ve already received your discharge. If you fail to cooperate with the court or the trustee, are not truthful in your paperwork or testimony, fail to turn over assets, or are otherwise undeserving of a discharge, the court can deny your discharge. Learn more about objections to a bankruptcy discharge.
The goal of bankruptcy filers is to get the discharge, and as far as they’re concerned, the case is over once received. But that's not exactly how it works.
In most cases, the bankruptcy court will close the case a few days or weeks after sending the discharge. However, it can take longer because a bankruptcy case must remain open until all outstanding issues are resolved.
In a Chapter 7 case, the bankruptcy trustee responsible for managing your matter could have several outstanding issues. For instance, the trustee must finalize bankruptcy litigation, sell property, and disperse funds to creditors before the bankruptcy court closes the case. In complicated cases, a Chapter 7 case might end two to eight months after you receive the bankruptcy discharge. However, courts frown on trustees keeping Chapter 7 cases open much longer.
In Chapter 13 bankruptcy, you’ll receive the discharge after completing the three- to five-year repayment plan. The court will close the case a few weeks later.
A creditor who wrongfully attempts to collect a discharged debt is subject to paying for any resulting losses. Still, it’s best to avoid the headache of bringing a creditor to task when possible.
If a creditor calls, provide the bankruptcy case number, filing date, and discharge date. The creditor will verify that you discharged the debt in bankruptcy and that it is no longer collectible.
It’s also a good idea to keep your discharge paperwork nearby for other reasons. For instance, a lender might ask for a copy if you apply for credit or a home mortgage.
You’ll find the filing date and case number at the top of almost any document you receive from the court. The discharge date will appear on the left-hand side of the discharge order immediately next to the issuing judge’s name (you’ll find the case number in the top box).
Why does the filing date matter? Qualifying debts that you incur before filing for bankruptcy are eligible for discharge. The discharge order won't include any obligations that arise after filing for bankruptcy.
Why does the discharge date matter? Just because you file for bankruptcy does not mean you’ll receive a discharge, as discussed above. Providing the discharge date will help you resolve a collection issue more expediently because it proves you're no longer responsible for paying qualifying debt.
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.
]]>In this article, you'll learn how Chapter 7 bankruptcy clears debt, which debts Chapter 7 will discharge, why your filing date determines what bankruptcy covers, which debts and liens Chapter 7 bankruptcy won’t clear, and how to stop collection calls after bankruptcy.
Once you understand more about discharging debts in bankruptcy, you'll likely find that using Chapter 7 to eliminate debts you’re struggling to pay is just what you need to get a fresh financial start.
A bankruptcy discharge is an order issued by the bankruptcy court that breaks the contract between the bankruptcy filer and a creditor. Without the contract, the filer isn’t legally required to pay the discharged debt, and the creditor can’t take collection actions.
However, the debt won’t disappear entirely. The bankruptcy filer’s credit report will show the debt “discharged in bankruptcy” for up to ten years, although the notation’s impact on the debtor’s credit score will lessen over time.
Most Chapter 7 filers receive a discharge order about four months after filing the bankruptcy petition.
Chapter 7 filers discharge all of the following debts (a Chapter 13 discharge erases a few more):
You can use our list to get a general feel for whether you’re a potential Chapter 7 candidate, but it’s best to review your particular debts with a bankruptcy lawyer. Why? Because you might have dischargeable debts that don't appear above.
As much as we'd like to, we can't create a list that includes all dischargeable debts because bankruptcy law doesn’t tell us the debts you can discharge. Instead, the law tells us the debts you can’t erase in bankruptcy, which we cover in “Chapter 7 Bankruptcy Doesn’t Clear All Debts” below.
Note about fraud and utility deposits. Any debt-related misconduct or fraud can turn a dischargeable obligation into a nondischargeable debt. Also, a utility provider can’t refuse to provide service because of a bankruptcy filing but can charge a reasonable deposit to ensure future payment.
Find out about utility shut-offs and Chapter 7 bankruptcy.
Your Chapter 7 bankruptcy will discharge debts you had before filing but not after. Not even debts you incurred after filing but before you received your discharge. Here's how it works.
In short, the bankruptcy court discharges debts that existed before the Chapter 7 filing date. You’ll have to pay for anything you get on credit after filing your petition, even bills you incur before receiving a discharge.
Example. Jessica fell behind on her electric bill, listed the balance in her Chapter 7 bankruptcy schedules, and continued to use her electric service. After receiving her Chapter 7 discharge, the energy company deleted the charges predating her bankruptcy filing and billed her for the electricity she used after her bankruptcy filing date.
The discharge order won’t list the debts you wiped out in Chapter 7. Instead, it will list the debts that bankruptcy law says all filers remain responsible for paying. You’ll stay on the hook for the following:
You'll find a more detailed list of nondischargeable debts in What Is a Bankruptcy Discharge? If you’d like more information about classifying debts in bankruptcy, consider reading Types of Creditor Claims in Bankruptcy: Secured, Unsecured & Priority.
Bankruptcy automatically clears you of the responsibility to pay a mortgage, car loan, or secured debt. Bankruptcy doesn’t remove a lien giving the creditor the right to take property if you don’t pay.
For instance, you’ll lose your car if you don’t continue paying your car payment informally or sign a reaffirmation agreement. The lender can use its lien rights to repossess it during the Chapter 7 case after asking the court to lift the “automatic stay” order preventing collection efforts, or wait until the Chapter 7 case ends.
You can stop most creditor calls cold by providing your bankruptcy case number and filing date. Start by finding a filed bankruptcy document or notice. You should have one handy because you get copies of all mailings, even if a bankruptcy lawyer represents you. The filing date will be next to the case number at the top.
Why will this work? The creditor can use the information to verify your bankruptcy, and if the calls don’t stop, the creditor will be subject to sanctions. Find out more about what happens if a creditor tries to collect a debt during your 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.
]]>But it doesn't stop all creditors or eliminate all obligations. You’ll still pay student loans (unless you can prove hardship), arrearages for child support and alimony, and recent tax debts. In this article, you’ll learn what to expect from bankruptcy and how bankruptcy works, including what Chapter 7 and Chapter 13 bankruptcy can do, what happens only in Chapter 13 bankruptcy, and what you can’t do in bankruptcy whatsoever.
Bankruptcy allows people struggling with debt to wipe out certain obligations and get a fresh start. The two primary bankruptcy types filed, Chapter 7 and Chapter 13 bankruptcy, each offer unique benefits and solutions to debt problems. The two bankruptcy types work very differently, and the right chapter for you will depend on your income, property, and goals.
Chapter 7 bankruptcy. This chapter takes an average of three to four months to complete. Chapter 7 is primarily for low-income filers, and because it’s quick, it doesn’t offer a payment plan to help you keep property if you're behind on payments. Learn more about erasing your debt in Chapter 7 bankruptcy and who can't file bankruptcy in Chapter 7.
Chapter 13 bankruptcy. If you have enough income to pay at least something to creditors, you can take advantage of the benefits offered by Chapter 13, primarily the repayment plan. You'll repay some debts through the Chapter 13 plan, but can also use it to catch up on late mortgage, car loan, and other secured payments and keep the property. Find out how to pay off or discharge your debts in Chapter 13 bankruptcy.
Here’s what you can expect in Chapters 7 and 13.
Once you file, the court issues an order called the automatic stay. The stay stops most creditor calls, wage garnishments, and lawsuits, but not all. For instance, creditors can still collect support payments, and criminal cases will continue.
The automatic stay will stop these actions as long as they remain pending. Once complete, bankruptcy won’t help.
Bankruptcy is very good at erasing most nonpriority unsecured debts other than school loans. The debt is unsecured if you didn't promise to return the purchased property if you failed to pay the bill. For instance, you can erase or “discharge” unsecured credit card debt, medical bills, overdue utility payments, personal loans, and gym contracts. If you purchased property, you don’t need to return it.
By contrast, you must return the purchased item if you have a secured credit card. Jewelry, electronics, computers, furniture, and large appliances are often secured debts. Read the receipt or credit contract to determine if you agreed the purchased item would be collateral to guarantee the debt.
Other debts people often agree to secure with collateral include mortgages and car loans. Filers can wipe out mortgages, auto loans, and other secured debts in bankruptcy. Still, you must return the collateral unless you make arrangements to pay what you owe.
When you voluntarily agree to secure debt with property, you give the lender a “lien” on the purchased property. A voluntary lien lets the lender recover the property if you don’t pay, even if you file for bankruptcy. You’ll learn more about this in "What Bankruptcy Can't Do” below.
Learn how other lien types affect property in Chapter 7 bankruptcy.
Chapter 13 offers more benefits than Chapter 7. Here are some things only Chapter 13 can do.
Stop a mortgage foreclosure. Filing for Chapter 13 bankruptcy will stop a foreclosure and force the lender to accept a plan allowing you to make up the missed payments over time. To make this plan work, you must demonstrate that you have enough income to pay overdue amounts and remain current on future payments. Learn more about your home and mortgage in Chapter 13 bankruptcy.
Allow you to keep property not protected by a bankruptcy exemption. No one gives up everything they own in bankruptcy. You can save (exempt) items you'll need to work and live using bankruptcy exemptions. A Chapter 7 debtor gives up nonexempt property—the trustee liquidates unprotected property for creditors—but not a Chapter 13 filer. While it might seem like you’d get to keep more assets, it’s not true. Chapter 13 filers pay the value of nonexempt property to creditors through the repayment plan.
"Cramdown" secured debt when property is worth less than the amount owed. Chapter 13 has a procedure that allows you to reduce an obligation to the replacement value of the property securing it. For example, if you owe $10,000 on a car loan and the car is worth only $6,000, you can propose a plan that pays the creditor $6,000 and discharge the rest of the loan. However, exceptions exist. For instance, you can't cram down a car debt if you purchased the car during the 30 months before bankruptcy. Also, filers can’t use the cramdown provision to reduce a residential home mortgage. Learn more about lowering loans using a “cramdown” in Chapter 13.
Use “lien stripping” to eliminate a junior residential home loan. This benefit isn’t available unless your home is worth significantly less than the total amount you owe. Learn more about lien stripping in Chapter 13 bankruptcy.
Bankruptcy doesn't cure all debt problems. Here's what it can't do for you.
Bankruptcy doesn't prevent a secured creditor from foreclosing or repossessing property you can't afford. A bankruptcy discharge eliminates debts, but it doesn't eliminate liens. A lien allows the lender to take property, sell it at auction, and apply the proceeds to a loan balance. The lien stays on the property until the debt gets paid. If you have a secured debt—a debt where the creditor has a lien on your property—bankruptcy can eliminate your obligation to pay the debt. However, it won't take the lien off the property—the creditor can still recover the collateral. For example, if you file for Chapter 7, you can wipe out a home mortgage. But the lender's lien will remain on the home. If the mortgage remains unpaid, the lender can exercise its lien rights to foreclose on the house once the automatic stay lifts. Learn about judgment liens and other liens in bankruptcy.
Bankruptcy doesn't eliminate child support and alimony obligations. Child support and alimony obligations survive bankruptcy, so you'll continue to owe these debts in full as if you had never filed for bankruptcy. And if you use Chapter 13, you'll have to pay these debts in full through your plan. Learn about nondischargeable obligations.
Bankruptcy doesn't eliminate student loans except in limited circumstances. Student loans can be discharged in bankruptcy only if you show that repaying the loan would cause you "undue hardship," which is a very tough standard to meet. You must prove that you can't afford to pay your loans currently and that there's very little likelihood you can do so in the future. Find out more about the undue hardship standard and student loan debt in bankruptcy.
Bankruptcy doesn't eliminate most tax debts. Eliminating tax debt in bankruptcy isn't easy, but it's sometimes possible for older unpaid tax debts. Learn what’s needed to eliminate tax debts in bankruptcy.
Bankruptcy doesn't eliminate other nondischargeable debts. The following debts aren't dischargeable under either chapter:
If you file for Chapter 7, these debts will remain when your case is over. In Chapter 13, you'll pay these debts in full through your repayment plan.
Debt related to fraud might be eliminated. Bankruptcy won't discharge a fraud-related debt if a creditor files a lawsuit called an adversary proceeding and convinces the judge that the obligation should survive your bankruptcy. Such debts might result from lying on a credit application or passing off borrowed property as your own to use as collateral for a loan. Find out more about bankruptcy fraud.
Did you know Nolo has made the law accessible for over fifty years? It’s true, and we want to ensure you find what you need. Below, you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>If you're one of the millions struggling financially due to inflation, illness, job loss, or another unexpected event, you're not alone, and filing for bankruptcy can help. But first, you need answers to a few essential bankruptcy questions, which we answer below. The good news is that if you find filing for bankruptcy is the answer, you can expect the weight to lift from your shoulders. But the best part? Bankruptcy filers say that getting the bankruptcy discharge, the order that wipes out your debt when filing for bankruptcy, feels even better.
We explain the differences between the three types of bankruptcy, Chapters 7, 13, and 11, and how each bankruptcy type works below.
No one is immune from debt or life’s challenges. The bankruptcy system exists because, sometimes, people need help getting back on their feet. It helps by unwinding the contract between you and your creditor. Without a contract, you have no obligation to pay the debt and get a fresh financial start.
As powerful as bankruptcy is, filing for bankruptcy won't solve every financial problem, so it’s crucial to learn what bankruptcy can and cannot do.
Everyone needs things to maintain a home and employment. You’d hardly get a fresh start if you lost all your belongings when filing for bankruptcy. So don’t worry about losing everything you own.
Each state decides the type of property a filer will need after filing for bankruptcy. Bankruptcy exemptions, the state laws that tell you what you can keep, vary widely. Even so, you’ll likely be able to protect some equity in a home and car, household furnishings, a retirement account, and more.
But you might also learn that some of your assets aren’t covered or are "nonexempt," especially if you own luxury property like artwork, collections, boats, stocks and bonds, and rental property. If you have nonexempt property, check for a “wildcard” exemption you can use to protect the nonexempt property of your choice.
It doesn’t matter which of the three types of bankruptcy you file. The exemptions are the same regardless of whether you file for Chapter 7 or Chapter 13 (the two types most people file), or Chapter 11 (the kind of bankruptcy businesses and individuals who make too much for Chapter 13 bankruptcy file).
However, the type of bankruptcy will determine what will happen to your nonexempt property.
The system ensures that creditors receive the same amount in both bankruptcy chapters.
In most cases, yes. In Chapter 7, you must be able to protect all equity with an exemption to keep the trustee from selling it. You'll also need to be current on the payment if it's financed. Otherwise, the lender could ask the bankruptcy court to allow the repossession or wait until after the Chapter 7 case ends to recover it. Learn more about keeping a car in Chapter 7.
Keeping a car in Chapter 13 or several vehicles is relatively easy. If you can't protect all the equity with an exemption, you can pay creditors for the nonexempt portion through the plan. Also, if you're behind on your car payment when you file, you can catch up on the arrearages in the plan.
If you want to take a peek at what you’d be able to protect, check out bankruptcy exemption laws by state.
You already know that filing for bankruptcy works by wiping out debt, such as credit card balances. And you'll be able to erase overdue utility payments, medical bills, and personal loans. You can even get rid of a mortgage or car payment if you're willing to give up the house or car you put up as collateral to secure the debt.
But did you know you can't discharge all debts? For instance, child support will never go away in bankruptcy, and student loans are difficult to wipe out. You'd have to win a separate lawsuit.
These types of debts are known as "nondischargeable debts." Before deciding to file, be sure that bankruptcy will "discharge" or eliminate enough bills to make it worthwhile.
Not all bankruptcy chapters work the same way, which is good because when your financial situation is unique (as all are), having options helps. Your next step will be to determine which type of bankruptcy will be best for you: liquidation or reorganization bankruptcy.
Chapter 7 bankruptcy is most filers’ first choice. It wipes out qualifying debt without creditor repayment. It's also quick, taking about four months to complete. And if you're an individual, you don't lose everything. You can keep the property you need to work and live.
Chapter 7 doesn't solve all problems and has some downsides. Because it's quick and doesn't involve creditor repayment, Chapter 7 won't help you permanently stop a foreclosure or repossession. You'll want to explore Chapter 13 to save a home from foreclosure or keep your car from being repossessed.
Learn whether you'll lose your home in Chapter 7 bankruptcy.
Also, it's called “liquidation bankruptcy” because the Chapter 7 trustee appointed to handle the case sells the debtor’s property for the benefit of creditors. In an individual bankruptcy, the trustee sells the filer's nonexempt luxury property, so losing things like sporting equipment, gun collections, boats, recreational vehicles, and rental property is common. In a bankruptcy brought by a business, the trustee sells all of the business assets.
Individuals and businesses with extra income to pay debts but insufficient to cover current expenses use "reorganization" bankruptcy chapters. The debtor, creditors, and the court agree on a plan that redistributes the debtor’s income among the creditors. Here’s who typically uses each of these types of bankruptcy:
This type of bankruptcy requires a filer to pay creditors through a three- to five-year repayment plan. While the repayment requirement is often too costly for many, it has benefits.
For instance, if a creditor is playing hardball, a filer can avoid collection efforts and force the creditor into a Chapter 13 payment plan. However, one of the most significant benefits of Chapter 13 is that a debtor can avoid foreclosure and keep a house that would be lost otherwise.
Because debts aren’t treated equally in Chapter 13, a debtor can often channel the monthly payment toward what the debtor wants to accomplish, such as catching up on a house or car payment and paying off nondischargeable tax balances and support obligations over time. Creditors holding debts that filers don’t care much about, credit card, medical, personal loan balances, and the like, are left dividing what remains, which usually isn’t much.
Other benefits exist, too. For instance, a filer can strip off a junior residential mortgage if a home is significantly underwater. It's also possible to reduce the amount owed on personal property or nonresidential real estate if the debtor can pay the reduced amount in full through the plan, in what is known as a “cramdown.”
Overall, drafting a Chapter 13 plan is an involved process, and retaining a bankruptcy lawyer is highly recommended. Other reorganization plans are even more complex. But because they involve extensive negotiations, even more options are available.
You don't need a particular amount of debt to file for bankruptcy, but there are many other eligibility rules. These are the most common.
Debt discharges aren’t unlimited. If you've filed for bankruptcy before, you might not qualify immediately. The waiting period will depend on the chapter you filed previously and the chapter you intend to file now.
For instance, suppose you filed for Chapter 7 two years ago. The waiting period between Chapter 7 and 13 filings is four years. It’s eight years if you want to file another Chapter 7. So you’ll need to wait for another two to six years.
Almost everyone must pass the "means test." There are three ways to meet this requirement.
First is the easy way. Check whether you’re exempt. If you are, you can skip the means test altogether. Filers who have more business debt than personal debt are exempt. So are certain military members and veterans.
Next is the reasonably straightforward method. You’ll compare your gross household income to your state's median income for a family of the same size. Add the gross income you and your family earned over the last six months and multiply by two. Then, compare it to the figures posted on the U.S. Trustee website (select "Means Testing Information" under the "Consumer" tab). You'll pass if your income is less than or the same as the state's median income for your family size.
Finally, the complicated approach. If your gross income is too high, you can take the second portion of the means test. You’ll use the means test forms to deduct allowed expenses (beware, this sounds easier than it is). You'll be eligible for Chapter 7 if you don't have enough income to pay into a Chapter 13 plan.
Fewer people file for Chapter 13 than Chapter 7 primarily because the benefits offered by Chapter 13 bankruptcy come at a hefty price, and many can't afford it. The first set of requirements is relatively easy to meet:
The tricky part is the required payment. While it’s possible to “pay pennies on the dollar,” for most, Chapter 13 bankruptcy gets expensive fast because, in addition to your monthly living expenses, you must make enough to cover the larger of the following over five years:
People who qualify for Chapter 7 bankruptcy but elect to file for Chapter 13 bankruptcy don’t need to follow these rules. They pay according to their budget over three years, but they can extend the period to five years if it’s more manageable. Find out more about calculating a Chapter 13 bankruptcy payment.
Much like Chapter 13 bankruptcy, filers must propose an acceptable plan. But the process is significantly different and even more complicated. Find out more about individual and business Chapter 11 bankruptcies.
Retaining a professional to help you with your case is well worth the cost. Not only will you have peace of mind that you’ve filed a correctly prepared case, but you’ll also receive guidance throughout the process. Most importantly, a bankruptcy lawyer will ensure that you don’t lose important property unexpectedly and don’t find yourself facing bankruptcy fraud charges.
Attorneys’ fees for a Chapter 7 case can range from $1,200 for a simple matter to $3,500 or more for a more complicated case, depending on where you live. Most filers can expect to pay somewhere between $1,500 and $2,000. Remember that a Chapter 7 bankruptcy lawyer will require you to pay the fees in full before filing your matter. Why? Because the bankruptcy case would wipe out any unpaid amount.
By contrast, Chapter 13 lawyers' fees will be significantly more, but unlike Chapter 7, many will accept a downpayment as low as $100. You’ll likely be able to pay the remainder through the repayment plan.
If you have a relatively simple case, filing for Chapter 7 without a lawyer is possible. An example of a simple case would be one in which you can protect all property with exemptions, and your income is low enough to qualify easily.
By contrast, it's far more difficult to represent yourself in Chapter 13. Most people find it challenging to draft a plan the bankruptcy court will confirm without the help of specialized bankruptcy software.
Learn about your options if you can’t afford a bankruptcy lawyer.
While most people hire a bankruptcy lawyer to prepare their bankruptcy paperwork and guide them through the process, it's possible to do your bankruptcy yourself if it's simple enough. You can get a feel for your case's complexity using our bankruptcy quiz. We'll alert you to issues you might want to run by a bankruptcy lawyer.
Your bankruptcy case will begin when you file the bankruptcy paperwork with the bankruptcy court. Go to your state's bankruptcy article for specifics on where and how to file.
The court will issue an automatic stay that will prevent most creditors from continuing to collect from you. Even court cases and trials related to debt collection will have to stop. Keep in mind that bankruptcy won't stop all lawsuits. For instance, you'll still have to make support payments, and criminal actions can go forward, too.
Don't assume that what you say in your paperwork will be accepted at face value. The court will assign a professional called the bankruptcy trustee to check out your filing thoroughly.
When reviewing your paperwork, the trustee will compare the figures in the petition and schedules to your tax returns, bank statements, paycheck stubs, profit and loss statements, and the other financial documents you’ll be required to provide. The trustee will also look for signs of bankruptcy fraud.
If the trustee spots an issue, the trustee might do any number of things. For instance, it isn’t unusual for a trustee to ask for additional documents or photos or inspect an item of property, storage space, or real estate. A trustee will usually attempt to work out a problem informally before or at the 341 meeting of creditors. If you can’t resolve it, the trustee will file a motion or adversary proceeding (although these actions are relatively unusual).
Every filer must attend at least one bankruptcy hearing, the 341 meeting of creditors. It isn't a court appearance, but you must take it seriously. The trustee, not the judge, holds the meeting in a conference room at the courthouse or elsewhere, and about ten filers are assigned to appear during the same hour.
When it starts, the trustee will take attendance and provide initial instructions. Here's what you’ll do next:
A trustee who is satisfied with your responses will conclude the meeting. Otherwise, the trustee will continue the case until another day—something that often happens when one of the following applies:
In most cases, the debtor’s appearance at the creditors' meeting takes less than ten minutes.
At this point, Chapter 7 filers will be in the final stretch, with one more responsibility to complete, filing a financial management course certificate. By contrast, Chapter 13 filers will just be getting started. They’ll need to do the following:
After completing all steps, the debtor will receive a debt discharge wiping out qualifying debt.
To make the most of your discharge and ensure life after bankruptcy goes smoothly, you’ll want to do a bit of planning.
Some areas of your life will be more challenging to negotiate for a year or two after filing for bankruptcy, such as renting or leasing housing, financing a car, and establishing a bank account. So, it’s essential to have these things in place before filing. And don’t plan on making changes soon.
Tip. If you’ll be letting go of a house and you're worried about moving your children's schools, rent something in the area, if possible, before filing.
You can start rebuilding credit soon after completing a bankruptcy. Most filers are surprised by how quickly they receive credit offers. But it makes sense. Creditors know you won’t be able to file again for quite a few years, so if you’re employed, you’ll be a reasonable credit risk. Take the opportunity to find out about credit-building strategies.
Many filers are relieved that they don’t need to push aside a dream of buying a home. You could be eligible two to four years after your bankruptcy case. Find out more about post-bankruptcy homebuying requirements so you can plan accordingly.
After filing for bankruptcy, it’s common to want to secure your future. The first step is following a sound financial plan, of course. But you’ll also want to safeguard yourself against unexpected financial hardships. Putting money aside in a savings account is always a good idea.
But you might want to contribute to a 401k plan or another ERISA-qualified retirement account. Not only would it be exempt if you needed to file for bankruptcy again (it happens), but you could draw on it in an emergency. Obtaining life insurance and making a will are other ways to provide for your family.
Filing for bankruptcy isn't always needed, especially if you're "judgment proof" and don't have any assets that creditors could take. If you're judgment proof and anticipate that your financial situation won't change, a simple bankruptcy alternative would be to avoid creditor calls.
Other options include working out arrangements with creditors. You might find you can negotiate an agreement to pay less than you owe or work with a credit counseling agency to lower monthly payments by reducing the interest rate.
Did you know Nolo has made the law accessible for over fifty years? It’s true, and we want to ensure you find what you need. Below, you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>Also, suppose you ask a friend or relative to be a “cosigner” to help you qualify for a personal loan. If they agree, they will be responsible for the debt if you fail to pay. Although “personal guarantee” isn’t commonly used to describe consumer cosigner transactions, we also explain the responsibilities of cosigners and how to eliminate a cosigner’s responsibility in bankruptcy.
Personal guarantees are standard in business, primarily because opening a business can be risky. New business ventures rarely have much in the way of value or assets. Additionally, many companies fail, leaving creditors with unpaid invoices.
As a result, most creditors won’t agree to extend credit for a product or enter into a property lease with a new, unestablished business without requiring more or if the financed amount is significant. The supplier or landlord will seek to protect the payment of the debt by asking the owner to agree to be personally responsible for paying the debt on behalf of the company, if necessary.
A business owner who consents to the arrangement will sign a personal guarantee contract. Once the personal guarantee is in place, the creditor can seek payment from the business owner’s personal assets if the business fails.
When a company goes under, it’s common for someone who has signed a personal guarantee to wonder if there’s a way to get out of it. However, unless the lender agrees to waive it (which would be unlikely) or some fundamental flaw exists in the agreement, the personal guarantee will remain binding.
In many cases, a business owner can file a consumer bankruptcy to discharge (wipe out) the personal guarantee. For clarity, a “consumer bankruptcy” means the business owner must file bankruptcy personally, not put the business in bankruptcy, to erase the personal guarantee. However, the bankruptcy filing has the added benefit of allowing the business owner to wipe out other qualifying personal debt.
Most bankruptcy filers prefer to file for Chapter 7 bankruptcy because it erases qualifying debt quickly, often within four months. If the proprietor doesn’t qualify for a Chapter 7 discharge, Chapter 13 might be possible. However, this chapter will require the bankruptcy filer to pay creditors for three to five years before the balance of a dischargeable debt will be eliminated or “discharged.”
Example. Suppose you took a business loan to pursue your lifelong dream of opening a cupcake bakery. Because your business was new, the bank asked you to execute a personal guarantee. By signing the guarantee, you agreed to use your personal assets to pay off the loan if the business couldn’t do so. If the cupcake business dried up and the bakery closed, you’d likely be able to wipe out the guarantee by filing an individual Chapter 7 or Chapter 13 bankruptcy.
Again, it's essential to understand that filing a Chapter 7 bankruptcy on behalf of the business will not get rid of a personal guarantee. To wipe out the debt, the signer of the guarantee must file for bankruptcy.
For more information, read Are You Personally Liable for Your Business Debts? Also, learn more about when you’d put a business in bankruptcy instead of filing yourself in Chapter 7 vs. Chapter 13 for Small Business Owners.
It’s also common for individuals not to have sufficient income or a high enough credit score to qualify for large credit purchases. Cosigners are often needed when a borrower doesn’t meet a lender’s requirements when purchasing a car, computer, or other large purchase.
In this situation, the borrower can ask someone to guarantee payment to improve the odds of getting a loan. A guarantor is an individual or company that pays an obligation if the borrower fails to do so. These transactions are typically referred to as “cosigned” loans.
When the borrower misses a payment, the lender has the right to ask the guarantor to take up the payments or to pay off the loan. At that point, the guarantor is subject to the same collection activities under state law: telephone calls, letter demands, lawsuits, and even garnishment and property seizures.
The bank can pursue the borrower and the cosigner until the loan is paid in full (or the borrower and cosigner discharge the debt in bankruptcy). Also, if the guarantor pays the debt, the guarantor can seek reimbursement from the borrower if the borrower hasn’t eliminated the responsibility to pay in bankruptcy.
Just about any willing person can agree to guarantee a loan taken out by someone else. When the borrower is an individual, and the money is for personal or educational purposes, the guarantor is usually a parent, another relative, or a good friend.
In many cases, yes. In fact, it’s a common reason that people file for bankruptcy. But bankruptcy isn’t an option in all cases. For example, a guarantee for an educational loan won’t go away unless you can show undue hardship.
Because business cases can be complicated, the signer of a personal guarantee should seek legal advice from a knowledgeable attorney.
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.
]]>Below we discuss the following benefits provided by this law:
The SCRA applies to all full-time active duty members of the five military branches (Army, Navy, Air Force, Marine Corps and Coast Guard), reservists on federal active duty, members of the National Guard on federal orders for a period of more than 30 days, and commissioned officers of the Public Health Service or the National Oceanic and Atmospheric Administration (NOAA).
Servicemembers are also covered when absent from duty because of sickness, wounds, leave, or another lawful cause. In some situations, dependents of servicemembers are also entitled to protections under the SCRA.
However, the SCRA doesn't apply to Reserve or National Guard members who aren't on active duty, retired military personnel, or National Guard troops called to duty under state orders. But some states provide protections similar to the SCRA for National Guard members and reservists called up to active duty under state orders.
Under the SCRA, many active-duty personnel are entitled to a 6% interest rate cap on debts or financial obligations of any kind (except federal student loans that originated before August 14, 2008) during the period of military service. For mortgage loans, the coverage is the same period, plus one year. Interest over 6% per year is forgiven.
To be eligible for the reduced rate, you must have taken out the loan before you began active duty.
Many active duty servicemembers might also be able to terminate lease obligations and avoid eviction.
Tenants who enter active military service after signing a lease or rental agreement have a right to terminate their rental obligations. Both residential and commercial (business) leases are covered under the SCRA.
You must hand deliver, send via private carrier, mail, or electronically send a written notice of your intent to terminate your tenancy, along with a copy of your orders, to the landlord or manager.
A landlord may not evict a servicemember, or the servicemember's dependents, from a residential home during a period of military service without first getting a court order. Also, the SCRA requires courts to postpone (stay) some residential evictions for nonpayment of rent for up to 90 days or longer.
Which tenants are affected? The SCRA applies if your spouse, children, or other dependents occupy the rental unit during a period of military service. (A dependent is someone you've supported in the past 180 days, paying more than half of that person's living expenses.)
Rental amount. The Act's protections apply when the rent is $9,106.46 (2023) monthly or less. The figure is adjusted yearly to account for inflation or cost of living increases.
The effect on an eviction lawsuit. The SCRA doesn't prevent a landlord from serving a termination notice for the nonpayment of rent. But a landlord who has filed suit must tell the court that the tenant is an active service person—so be sure to notify your landlord when you are activated. The judge will decide whether the service person's status in the military materially affects the ability to pay the rent. If the judge determines that it does, the judge may stay (postpone) the eviction. If the judge decides otherwise, the lawsuit will continue and could result in an eviction.
The SCRA also protects active duty servicemembers from some court judgments and repossessions.
The SCRA allows active service persons to ask for a stay of many kinds of civil actions in which the service person is a defendant. In addition, when calculating the statute of limitations (the time during when a person must bring a lawsuit, or lose the right to do so), the time that the person has been in the military isn't counted.
If you've received notice of a civil proceeding, you can usually delay the action for some time, not less than 90 days, so long as you meet specific criteria and if you request it from the court in writing.
A lender may not foreclose on, seize, or sell the homes of military personnel during active duty or up to one year thereafter unless the foreclosure is pursuant to a court order or a waiver by the servicemember. To be eligible for this protection against foreclosure, you must have taken the mortgage out before you began active duty.
In a judicial foreclosure, you can usually delay the action for a period of time as justice and equity require if you meet specific criteria and if you ask the court for the stay in writing.
A "default judgment" occurs when you're sued and fail to respond to the suit, and the judge rules against you.
Plaintiff must notify the judge that you're on active duty. Under the SCRA, a plaintiff (the person that brings a lawsuit) who seeks a default judgment against an absent active duty servicemember must notify the court that the service person is on active duty. If neither the servicemember nor the servicemember's attorney appears in court, the court may not enter a judgment until after the court appoints an attorney to represent the defendant. If an attorney appointed to represent a servicemember can't locate the servicemember, the actions by the attorney in the case don't waive any defense of the servicemember or otherwise bind the servicemember.
Once a court appoints an attorney to represent the servicemember, that attorney will often seek a stay of proceedings. If requested by the attorney (or upon the court's own motion), a court will grant a stay of proceedings for a minimum of 90 days if there might be a defense and the defense can't be presented without the servicemember’s presence, or after due diligence, the servicemember’s attorney hasn't been able to contact the servicemember or otherwise determine if a meritorious defense exists.
You might be able to reopen the case later. If a court enters a default judgment against a servicemember during the servicemember’s period of military service (or within 60 days after termination of or release from such military service), the court entering the judgment must, upon application by or on behalf of the servicemember, reopen the judgment for the purpose of allowing the servicemember to defend the action if it appears that the servicemember:
The SCRA prohibits repossessions performed without a court order, such as those done by merchants or "repo" specialists, of goods purchased by installment contract, like consumer items or cars, as long as the purchase was made before active duty began.
If you're on active duty, the merchant must get a court order before it can repossess an item. Once in court, an active-duty servicemember may apply for a stay of repossession proceedings. The judge will grant the stay if the service person's ability to pay the debt has been materially affected by entering active service, in the judge's view.
In addition to federal law, many states have their own statutes that provide protections for servicemembers in certain legal situations.
Many protections under the SCRA aren’t automatic, which means a servicemember must request the protection. How you must invoke a protection, how long you get to invoke that protection, and what you must do to demonstrate that you qualify for a particular protection under the SCRA varies.
If you're having financial difficulties and need help invoking your rights under the SCRA, consider talking to a HUD-approved foreclosure counselor (if facing foreclosure), military defense counsel (a military attorney independent from the standard chain of command specially designated to represent servicemembers confidentially), or a civilian attorney with extensive experience in military law.
Because financial difficulties can sometimes impact a military servicemember’s security clearance or result in disciplinary or adverse administrative action, servicemembers should generally avoid initially contacting their base legal office. Military defense counsel or a civilian attorney can provide confidentiality that can be critically important to maintaining a servicemember's career.
Also, if you're facing foreclosure during or after active military duty, consider contacting your mortgage servicer (the company you make your payments to) immediately and ask about foreclosure avoidance options. Most lenders offer various options to borrowers who can't make their mortgage payments, like mortgage modifications, forbearance agreements, and repayment plans.
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!
Our Editor's Picks for You |
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What to Consider Before Filing Bankruptcy |
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Helpful Bankruptcy Sites |
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>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!
Our Editor's Picks for You |
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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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LLC or Corporation |
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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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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.
]]>Read on for more information about whether filing for bankruptcy will affect your security clearance.
Generally, security clearance decisions are made case-by-case and involve specific factors and guidelines to assess your security risk. For example, you can expect the evaluation to consider the following:
Filing for bankruptcy relief will not automatically prohibit you from obtaining a security clearance. In fact, getting rid of debt in a Chapter 7 bankruptcy could increase your chances of approval. Not only will filing show that you are taking a positive step towards resolving your financial problems, but debt-free people have less incentive to accept a bribe or commit some other illegal act, thereby becoming a better candidate for a security clearance.
If you’re unsure which chapter to file, you’ll want to learn about the differences between Chapter 7 and 13 bankruptcy.
Although it can be helpful, filing for bankruptcy isn’t a guaranteed fix. Whether your bankruptcy will affect your security clearance will depend on the circumstances that led you to file.
For instance, if you experienced financial problems and had to file for bankruptcy because of an unexpected event, such as job loss, divorce, or a medical emergency, your bankruptcy would be viewed more favorably than if you had to file because of excessive spending or another type of financial irresponsibility.
When the military evaluates whether you should receive a security clearance, one factor is whether you’re financially responsible. The reasoning behind this consideration is that if you can’t live within your means or satisfy your debts, you might be a security concern due to a lack of self-control, or you might have poor judgment or be predisposed to commit illegal acts to meet your financial obligations, such as accepting bribes.
Here are some examples of financial conditions that could disqualify you from obtaining a security clearance:
Find out the average cost of filing for Chapter 7 bankruptcy.
Whether a bankruptcy filing will jeopardize your security clearance depends on numerous factors and your circumstances. Talk to a knowledgeable bankruptcy attorney or the appropriate legal office or authority in your military branch before filing your case to learn more about whether bankruptcy will affect your security clearance.
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.
]]>For most people considering filing for bankruptcy, Chapter 7 is the preferred choice. Why? Because of all types of bankruptcy, Chapter 7 is the quickest and the cheapest, allowing filers to eliminate debts without repaying anything to creditors.
If this sounds good, you'll want to learn the basics of filing bankruptcy in Chapter 7, including navigating the Chapter 7 process. You’ll learn how to file for bankruptcy, Chapter 7 bankruptcy requirements, how much it costs to file for Chapter 7 bankruptcy, Chapter 7 bankruptcy income limits, when to file for bankruptcy, and more.
Many people can’t get ahead financially because of unpaid credit card balances, medical bills, rent and utility payments, gym memberships and other fees, and payday loans. If this sounds familiar, filing for Chapter 7 bankruptcy could improve your life quickly.
Chapter 7 bankruptcy requirements include filing forms, attending a hearing, and participating in two relatively short courses. After completing these steps, you’ll wipe out the types of debts described above and other bills. And many people keep everything they own.
You can use Chapter 7 bankruptcy to erase or “discharge” debt without paying into a lengthy payment plan. The other bankruptcy option, Chapter 13, lasts three or five years. You must pay all your extra or “discretionary” income to creditors each month, which isn’t easy.
However, the Chapter 13 repayment plan allows filers to catch up on overdue mortgages and auto loans and keep the house or car. Sometimes, you can reduce the amount owed on home and auto loans and other secured debts and pay the balance over time. Those options aren’t available in Chapter 7.
Find out more about the differences between Chapter 7 vs. 13.
The Chapter 7 filing fees cost $338 (as of October 2023), but if you can’t afford it, you can ask the court for four installment payments or to waive the filing fee altogether. Hiring a bankruptcy lawyer to represent you is relatively reasonable compared to the debt savings. You can expect to pay $2,000 for a Chapter 7 case; however, bankruptcy costs vary depending on your location and case difficulty.
From a time perspective, you’ll likely invest ten to twenty hours of your time for the following:
Overall, most Chapter 7 cases take about four months to complete.
Chapter 7 bankruptcy works well for people with little income or valuable property. Higher-income earners and people who want to keep property they’d otherwise lose in Chapter 7 are often better suited for Chapter 13 bankruptcy.
That’s not to say higher-income people won’t qualify for Chapter 7. It happens more often than you might think. But you’ll need several family members or significant allowable expenses to work. Keep reading to learn why (you’ll find the answer in the “means test” sections).
Individuals and businesses can file Chapter 7, but not everyone qualifies for a Chapter 7 debt discharge. If you don’t qualify for a discharge, the Chapter 7 trustee appointed to your case will sell your property and distribute the funds to your creditors. You’ll remain responsible for your debt after the case ends.
Learn more about who might not want to file for Chapter 7 bankruptcy.
Chapter 7 bankruptcy doesn’t have a particular set of income limits that applies to everyone filing for bankruptcy. Instead, you’ll take the means test.
If you pass the Chapter 7 means test, you’ll qualify, although you must also meet other requirements (discussed below). But you might not be required to take the means test if you fall into an exempt category.
The means test determines whether you make enough money to repay your creditors through a Chapter 13 plan. If you don’t, you’ll qualify to discharge debts using Chapter 7.
You’ll follow the means test form instructions to determine your family’s gross income and compare it to your state’s median income for a family of the same size. You’ll automatically pass if it doesn’t exceed the state’s median.
If your gross income is too high, the second part of the means test asks you to subtract allowed expenses from your income. If you don’t have enough to pay a reasonable amount to creditors after completing the calculations, you’ll qualify for Chapter 7.
Learn whether you’re eligible for a discharge and can pass the Chapter 7 means test. You might want to consider Chapter 13 if you don't pass.
Are you a military member? You’ll be exempt if your service falls within the guidelines listed on the means test form. Are you a current or previous business owner? You’ll be exempt if you have more business debts than consumer debts.
You incur business debts as a result of pursuing profit-producing endeavors. Household rent, utility bills, food, and family entertainment expenses would be consumer debts. Learn about small businesses in bankruptcy.
There are many. Because the means test looks at previous earnings, not current earnings, the trustee will check your current wages and expenses. If you have money remaining each month, you might need to consider Chapter 13.
You also won’t qualify for a discharge if you received a previous bankruptcy discharge in the last six to eight years. The waiting period depends on whether you previously filed a Chapter 7 or 13 bankruptcy.
Also, where and when you file will depend on how long you've lived in the state. You’ll need to be in the state for at least 180 days. The wait will be longer if you’d like to use the new state’s exemption laws (more about how exemption laws protect property below).
When you file for Chapter 7 bankruptcy, you temporarily lose property ownership. It becomes part of the “bankruptcy estate” the Chapter 7 trustee handles.
You’ll start by listing all property in your bankruptcy forms. You’ll also identify what you can protect or exempt by listing the state or federal bankruptcy exemption code number.
Filers can keep some equity in most types of essential property, such as the following:
Your state decides which items you can protect or whether you can use the federal exemptions instead. You’d use whichever exemption system allows you to keep the property most important to you.
Remember that bankruptcy exemptions vary by state. Find out more about protecting property with bankruptcy exemptions or talk to your bankruptcy attorney if you need more clarification about what you can keep.
Losing property in Chapter 7 happens regularly enough that you should carefully check exemptions. For instance, most filers won’t be able to keep their boats, RVs, expensive jewelry, antiques, and other luxury items.
If you have nonexempt property you can't protect, you might have to surrender or pay to keep it (most trustees will sell things back to you at a discount). The trustee will sell it at auction, return the exemption amount to you, deduct the sales costs and the trustee’s fee, and disperse the remaining amount to unsecured creditors.
However, if selling the property wouldn’t generate much for creditors, the trustee will "abandon" it. You'd get to keep it, even though it's nonexempt.
Tip. Determining whether Chapter 7 makes sense can be done by subtracting the value of the property you’d lose from the debt you’d erase. If the amount of debt you’d wipe out significantly exceeds the amount of property you’d lose, filing for bankruptcy will likely be a sound financial decision.
Your first step will be checking whether you can protect all of your home or car’s equity with a bankruptcy exemption. If you can’t, you’ll likely lose it in Chapter 7. The Chapter 7 bankruptcy trustee will sell the house or car, return the exemption amount to you, and distribute the remaining sales proceeds to creditors.
Suppose you can protect the equity with a homestead, motor vehicle, or wildcard exemption. If you financed your home or car and are still making payments, you must meet another requirement. You must also be current on the monthly payment.
If you aren’t current, the lender can ask the court to lift the automatic stay and repossess or foreclose the property. If successful, you'd lose it in Chapter 7 bankruptcy. This result occurs because when you purchased the property, you agreed it would be collateral for a loan, making it a secured debt. If you're behind on your payments, the creditor can recover the property, even if you’ve filed for bankruptcy.
Your debt will also be secured if a creditor records a lien against your property, such as a tax or judgment lien. In some cases, such as with a judgment lien, you can eliminate the lien in Chapter 7 bankruptcy. But only sometimes and not always entirely.
Most filers will find they can eliminate credit card balances, medical bills, personal loans, utility payments, past-due rent, and more. It’s even possible to discharge mortgage and car payments. However, you’d need to return the property because they're secured property. As explained above, the lender can recover the property if the debt goes unpaid, even if you file for bankruptcy.
The most common “nondischargeable” debts you’ll remain responsible for paying include child and spousal support, alimony, recently incurred tax debt, and student loans.
The entire Chapter 7 process is essentially a qualification process, and the person to best predict the outcome of your case would be a bankruptcy lawyer experienced with diverse issues.
For instance, suppose your income and debt ratio appear unbalanced (people who inflate income when applying for credit will want to avoid bankruptcy). In that case, you might want to explore other debt repayment options. After assessing your particular finances and financial history, an experienced bankruptcy lawyer will be in the best position to identify potential problems and explain your chances of success.
Learn about the transaction types that could be considered bankruptcy fraud.
You won’t want to use your credit cards for anything other than food, clothing, and other necessary items to prevent allegations of fraudulent credit card use. Learning about luxury purchases, cash advances, and the “presumption of fraud” can help avoid trouble.
You’ll also want to avoid giving away, hiding, or selling property for less than its value. It’s essential to be transparent about your finances when filing for bankruptcy.
These are a few of the many tips for a problem-free bankruptcy. Learn more about what you should avoid before bankruptcy.
Your Chapter 7 bankruptcy will start when you file your Chapter 7 bankruptcy petition, schedules, and other forms with your local bankruptcy court. The bankruptcy forms reveal your complete financial condition and include disclosures about the following:
In addition to filing the bankruptcy forms, you must complete credit counseling with an agency approved by the United States Trustee. You'll find approved agencies for each state on the U.S. Trustee's website. Click "Credit Counseling and Debtor Education."
You'll find step-by-step instructions for completing the bankruptcy forms in How to File for Chapter 7 Bankruptcy, by Attorney Cara O'Neill.
A week or two after filing, you and your creditors will receive a notice with the date and time of the Chapter 7 hearing all filers must attend, the "creditors meeting" or “341 meeting of creditors.” You’ll also learn the name of the Chapter 7 trustee appointed to your case and essential Chapter 7 filing deadlines.
Five days before the meeting, you’ll turn over your “521 documents.” Plan to provide bank statements, paycheck stubs, tax returns, and other financial documents the trustee requires. Filers with a business ownership interest will also turn over profit and loss statements.
Filing for Chapter 7 bankruptcy works well to stop collection efforts. The court issues an "automatic stay" order as soon as you file, prohibiting most creditors from collecting what you owe them.
At least temporarily, creditors cannot legally seize or “garnish” wages, empty or “levy” your bank account, go after your car, house, or other property, or cut off your utility service when you file for bankruptcy. Chapter 7 will even stop some lawsuits.
However, the automatic stay has limits. Find out why filers lose the automatic stay after repeatedly filing Chapter 7 bankruptcy cases.
The Chapter 7 bankruptcy trustee's primary duty is seeing that your creditors are paid as much as possible. Because the trustee receives a percentage of the money distributed to creditors, the more assets the trustee recovers, the more the bankruptcy trustee gets paid.
The trustee will review the property listed in your Chapter 7 bankruptcy paperwork and determine whether a bankruptcy exemption gives you the right to keep it. If not, the trustee will sell it. The trustee will also evaluate property transfers and sales, look for hidden property, and review income sources and claimed expenses.
The trustee can use a “clawback” provision to unwind preferential payments to creditors before the Chapter 7 filing and distribute the funds according to bankruptcy law. In most Chapter 7 bankruptcy cases, the trustee doesn’t unwind any transactions and finds nothing of value to sell. But that's not always the case, and most filers who run into problems aren't truly surprised that the issue emerged.
After swearing you in, the Chapter 7 bankruptcy trustee runs the meeting and will ask questions about your bankruptcy case. In most Chapter 7 bankruptcies, this is the only hearing required. Most creditors' meetings last less than ten minutes.
Learn what happens after the Chapter 7 bankruptcy 341 meeting of creditors.
Assuming you complete everything required of you, you’ll wait about four months to receive your Chapter 7 debt “discharge” which will wipe out everything except the following:
The court will likely close your case a few days later.
The process rarely takes longer than four months unless the court keeps your case open to resolve bankruptcy litigation or when the Chapter 7 trustee needs time to sell nonexempt property. Find out more about when your Chapter 7 bankruptcy will end.
Yes. You can expect your credit score to drop after you file. However, it’s often easier to rebuild credit after bankruptcy. You’ll likely receive offers for credit cards soon after your case ends. With careful use and management, most people can finance a car a year later and buy a home two to four years after bankruptcy.
Other issues to prepare for include opening bank accounts and renting a place to live for a year or more after filing. You’ll want to secure these things before filing for 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.
Updated October 11, 2023
Involuntary bankruptcies don’t occur often, and creditors usually bring them against business organizations rather than individuals. The involuntary bankruptcy process begins when creditors follow the procedure for filing a bankruptcy action on behalf of the person or company owing money. You can start with the basics of business bankruptcies by reading Small Business Bankruptcy.
It shouldn’t be surprising that creditors file involuntary bankruptcies against companies and individuals with assets, carefully investigating the potential bankruptcy target’s finances before initiating an involuntary bankruptcy. The reasoning makes sense.
Creditors want to get paid, and forcing an involuntary bankruptcy on a person or business without sufficient assets to pay all creditors involved would be a poor move, resulting in additional lost revenues. Learn when someone might be personally liable for business debts.
The strategy is different when an individual or business doesn’t own much. When there isn’t enough to go around, a creditor is better off grabbing whatever money and property is available outside of bankruptcy.
In this situation, creditors who act quickly understand that once bankruptcy is initiated, the automatic stay order prohibiting collection activities will stop creditors from collecting the debt independently. The creditors must share whatever gets recovered by the bankruptcy trustee appointed to the case.
However, creditors who recover assets before bankruptcy might have to return the funds after a bankruptcy filing. Learn about the trustee’s “clawback” power in bankruptcy.
A creditor should consider the practical effects of an involuntary bankruptcy when the available assets might not adequately repay the creditor’s debt, the most salient issue being the ability to collect the debt after bankruptcy.
Depending on the debt and chapter type, the bankruptcy will likely cut off the creditor’s future ability to collect. However, some exceptions exist.
Learn when an individual can discharge personal liability for business debt.
An involuntary bankruptcy starts when one or more creditors file a petition with the bankruptcy court. A creditor can file an involuntary bankruptcy case under Chapter 7 or Chapter 11. Cases under Chapter 13 and Chapter 12 cases aren’t permitted.
The bankruptcy petition must indicate which of two circumstances justifies the involuntary bankruptcy:
Once filed, the debtor can respond to the petition. If the debtor fails to do so, the court will allow the matter to move forward, and the debtor will have to participate in the bankruptcy.
If the debtor responds, the court will set a hearing and decide whether the bankruptcy should go forward. A judge who finds in favor of the debtor will dismiss the case. The judge might also require a filing creditor to pay the debtor's costs and fees.
The official individual and non-individual involuntary petition forms are on the U.S. Court’s bankruptcy form page.
Most involuntary bankruptcies are a collaboration between several creditors. If the debtor has more than 12 unsecured creditors, at least three of these creditors must join the petition. The three must collectively have at least $18,600 in unsecured debt outstanding from the debtor (effective from April 1, 2022, through March 31, 2025).
A solitary creditor can only file an involuntary petition if owed at least $18,600 and if the debtor has fewer than 12 unsecured creditors total (effective from April 1, 2022, through March 31, 2025). Also, the creditors' claims for debt cannot be disputed or contingent. The debt amount must be known and not conditioned on some future event, such as a lawsuit judgment.
Involuntary bankruptcies can’t be filed against banks, insurance companies, not-for-profit organizations, credit unions, farmers, or family farmers.
Involuntary bankruptcy cases can be complicated and fraught with litigation. Anyone facing or considering initiating an involuntary bankruptcy should meet with a qualified business bankruptcy 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.
Updated October 10, 2023
]]>Secured debts are created with liens. Liens can be voluntary or involuntary. Home mortgages and car loans are examples of secured debts that you incur voluntarily. Real property tax liens, by contrast, are involuntary liens.
Usually, you voluntarily agree to give a creditor a security interest in your property. For instance, as a condition for making a home loan, a lender typically requires you to sign a mortgage (or, in some states, a deed of trust). A mortgage or deed of trust is an agreement that grants a lender a security interest, or lien, against real property. The lien allows for a foreclosure auction if the homeowner falls behind on the monthly payment.
You can also grant a lender a lien against personal property, which is anything you own or have an interest in that isn't real estate (real property). Personal property includes vehicles, equipment, furniture, tools, inventory, shares of stock, other types of investment interests, and even cash.
Typically, you grant a lien against personal property through a security agreement. Before extending a new car loan, for example, a lender will require you to sign a security agreement granting a lien against the vehicle you are buying. It's the voluntarily lien that allows the lender to repossess your car if you don't pay as agreed.
Involuntary liens are security interests imposed against your property by a state or federal statute or court order. No agreement is involved. Involuntary liens include:
One of the steps that a secured creditor must take to protect its right to collect is to perfect its lien. "Perfection" is a legal term that refers to the action required to give other creditors and interested parties notice of a lien or security interest. The action to perfect a lien depends on the property type and applicable state law. For example:
In most states, the lender perfects its lien by recording (filing) mortgages and deeds of trusts in the county where the property is located.
Lenders usually can perfect liens against cars, motorcycles, and trucks by a filing with the state motor vehicle department and a notation on the certificate of title.
Security interests in most tangible personal property—like equipment, furniture, tools, goods, and materials—are perfected by filing financing statements. A financing statement is a document that identifies the borrower, lender, and collateral for a secured debt.
Unlike security agreements, financing statements don't have to be signed to be effective. A creditor can file a financing statement as long as you have signed the security agreement for the collateral that it is supposed to cover. In most states, financing statements are filed with the secretary of state.
Perfecting a lien is a critical step for any creditor. Sometimes, borrowers grant liens against the same property, like your home, to multiple creditors. Take, for example, a home equity line of credit, which is usually junior to the mortgage you took out to buy your house. A junior lien, like a home equity line of credit, can, in effect, move up in priority if the holder of the first mortgage fails to perfect its interest.
In bankruptcy, the consequences of a lender's failure to perfect a lien can be even more serious. If you file bankruptcy, the court has the power to set aside a lien that has not been properly perfected. A lien that is set aside is treated as if it never existed in the first place—meaning that the lender becomes an unsecured creditor. (To learn what happens to unsecured debt in Chapter 7 and 13 bankruptcy, see What Happens to Liens in a Chapter 7 Bankruptcy and Your Debts in Chapter 13 Bankruptcy.)
One of the big differences between an unsecured debt and a secured debt is how the creditor can enforce its rights if you fail to make payments. For most unsecured debts, creditors must first sue you in court before they can take any of your property. However, A secured creditor can move to enforce rights if you default on your loan obligations and have not filed bankruptcy. Remedies to enforce secured debts include:
Secured creditors may not trespass on private property or breach the peace, but they usually don't have to go to court before repossessing cars or other motor vehicles.
A lender may enforce a home loan by foreclosing its mortgage or deed of trust. In some states, foreclosure doesn't require any court action and may be completed within a matter of a few months. In other states, where court approval is needed, foreclosure typically takes much longer.
A secured creditor has the additional option of filing a court action to obtain a judgment against you. Depending on applicable state law, a creditor may seek a judgment for the entire obligation that you owe or the balance left after deducting the value of any collateral that it recovers.
If you’re struggling financially and want to learn about different ways to manage your debts, like negotiating settlements or filing bankruptcy, consider talking to a debt settlement lawyer or bankruptcy lawyer.
]]>An "unsecured debt" is an obligation or debt that doesn't have specific property, like your house or car, serving as collateral for payment of the debt. If you fail to pay unsecured debt, the creditor can't take any of your property without first suing you and getting a court judgment, subject to a few exceptions.
A "secured debt," on the other hand, has a piece of property serving as collateral for the debt. If you fail to make payments, the creditor can take the property.
Common types of unsecured debts include:
Most debts are unsecured. The primary exceptions are home and auto loans, which are almost always secured.
Advances on lines of credit can be unsecured claims. Some lines of credit are unsecured, backed only by your promise to repay advances taken against them. Obligations on home equity lines of credit, on the other hand, are typically secured claims (secured by your home).
If you fail make payment on an unsecured debt, the creditor can contact you to try to obtain payment, report the delinquent debt to a credit reporting agency, or file a lawsuit against you. Generally, a nongovernmental, unsecured creditor can't seize your assets without a court judgment.
To get a judgment, a creditor must file a complaint in state or federal court and serve you with a copy, which is the start of the lawsuit. You have the right to file an answer to the complaint and contest the lawsuit before a judgment can be entered.
Once a creditor obtains a court judgment against you, it can proceed with collection remedies. Collection remedies and procedures are governed primarily by state law. A judgment creditor may, among other things:
The percentage of your wages that can be garnished varies from state to state. State and federal law also exempt some real and personal property from collection. Creditors can't garnish or collect from assets to the extent exemptions cover them. Exemptions available to you might protect your home equity, household furniture, pension plans, and other items of property from your creditors' collection efforts.
If you default on a federal student loan, the Department of Education can garnish up to 15% of your disposable income without a court judgment. State and federal tax authorities may also undertake collection remedies without going to court.
If you’re struggling financially and want to learn about different ways to manage your debts, like negotiating settlements or filing bankruptcy, consider talking to a debt settlement or bankruptcy lawyer.
]]>Because some dates overlap, you’ll want to consult with your attorney for specifics or read more about how to file for Chapter 13 bankruptcy.
You’ll want to find your financial documents, determine whether you’re eligible for Chapter 13, and complete your official bankruptcy paperwork. You’ll also take a pre-filing credit counseling course during the 180 days before filing your Chapter 13 bankruptcy case.
Find out how to get the bankruptcy petition and other official forms.
Your case will begin when you submit your completed paperwork and filing fee to your local bankruptcy court. If you have counsel, your lawyer will file your case online.
Learn how to benefit from an emergency bankruptcy filing when you don’t have time to complete the entire bankruptcy petition.
The automatic stay takes effect when you file your bankruptcy case. It bars most creditors from taking any actions to collect what you owe, including stopping lenders from foreclosing on your home.
The Chapter 13 trustee is responsible for administering your case. You will receive a Notice of Appointment of Trustee from the court in the mail.
The bankruptcy court will send you and your creditors important information in a Notice of Chapter 13 Case, including the meeting of creditors date, the creditors’ claim deadline, and the confirmation hearing date (we explain more about these dates below).
You’ll begin paying the amount proposed in your Chapter 13 plan about 30 days after filing. The court won’t have approved your plan yet, but making your monthly payment before the confirmation hearing allows you to complete the case within the 36- or 60-month requirement. Find out more about how long your Chapter 13 plan will last.
If the bankruptcy court doesn’t approve or “confirm” your plan, the trustee will return your money, minus administrative costs and certain interest-incurring secured payments like car payments. It’s important to pay these debts on time to prevent a buildup of unpaid fees and interest that could undermine plan completion.
You’ll provide the trustee with bank statements, paycheck stubs, four years of tax returns, and other documents. Other financial information a trustee might require include proof of insurance; mortgage and car loan balances; retirement, stock, and investment statements; and income and expense statements if you own a business. Learn about 521 bankruptcy documents.
You attend the Chapter 13 meeting of creditors, where the trustee and any creditors who show up can ask you about your financial affairs. You must bring any documents the trustee requests and proof that you‘ve filed tax returns for the last four years.
The trustee or a creditor could object to your plan at or after the 341 meeting. In many cases, problems are resolved informally. Otherwise, a modification requires a written objection requesting a court ruling.
Creditors file proof of claim forms stating the amount owed and the debt type, along with a contract or other supporting documents. If a creditor doesn’t file a proof of claim by the deadline, you’ll have 30 days to file it for the creditor.
You or the trustee will file a written objection to a creditor’s claim if you have a reason to object. You’ll want to file it as soon as possible to give the creditor the proper notice.
You or your attorney attend the confirmation hearing. The court reviews your proposed plan and objections raised by creditors or the trustee before deciding whether to “confirm” or approve your repayment plan.
If the court approves your plan, you’ll continue making your proposed payment. However, suppose the trustee or creditor raises a valid objection. In that case, the court might give you time to modify your plan and continue the Chapter 13 confirmation hearing. It’s common to “amend” or change a Chapter 13 plan in response to an objection by the trustee or a creditor.
Depending on your jurisdiction, the trustee will send you periodic statements showing creditor payments. You might be able to access the information on the trustee’s website. Contact the trustee for instructions.
It’s important to keep track of the payments and pay any late fees assessed for a delinquent mortgage or car payment. This situation can occur when you fall behind on a plan payment, preventing the trustee from sending the funds on time. If you don’t pay the fees separately, the outstanding balance will continue to grow, and you’ll owe a significant amount at the end of your case.
The court, trustee, U.S. Trustee, or creditor could request annual tax returns while your Chapter 13 plan is in effect.
You will file a certificate showing you completed a debtor education course before making your last plan payment. Also, you'll likely verify that you’re current on support payments and provide other information.
The court grants your bankruptcy discharge erasing the remaining balances of qualifying debts after you complete your plan and fulfill other requirements. The court might schedule a brief final court appearance called a “discharge hearing.” Otherwise, you’ll receive a discharge notice by mail about a month after completing your plan payments or receiving a hardship discharge.
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.
]]>Learn more about using different types of bankruptcy exemptions.
Exemptions allow you to keep some assets safe in bankruptcy, such as an inexpensive car, professional tools, clothing, and a retirement account. If you can exempt an asset, you don’t have to worry about the bankruptcy trustee appointed to your case taking it and selling it for your creditors' benefit or paying to keep it. (We explain how exemptions work in Chapters 7 and 13 below.)
Many exemptions protect specific property types, such as a motor vehicle or furniture, up to a particular dollar amount. Sometimes an exemption protects the entire value of the asset. Some states have a "wildcard exemption" that can be applied to any property you own.
Exemptions always protect the same amount of property regardless of the chapter filed. However, what happens to "nonexempt" property you can't protect with a bankruptcy exemption will depend on whether you file for Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 bankruptcy is a liquidation bankruptcy where the appointed trustee sells your nonexempt assets to pay your creditors. Exemptions help you protect your assets in Chapter 7 bankruptcy because the bankruptcy trustee can’t sell exempt property.
For example, suppose your state has a $5,000 motor vehicle exemption, and you have one car worth $4,000. In that case, the exemption will cover all of the car's equity, and you can keep it. For more information about keeping a car in Chapter 7 and other property, see Exemptions in Chapter 7 Bankruptcy.
A Chapter 13 bankruptcy allows you to keep all your property while paying some or all of your debt in a three- to five-year Chapter 13 repayment plan. But this benefit comes at a cost. You'll have to pay nonexempt creditors for the property you can't protect with an exemption.
Nonpriority unsecured creditors, such as credit card issuers, must receive at least as much as the value of the property you can't exempt. So in Chapter 13 bankruptcy, being able to exempt all or most of your property helps keep your monthly plan payment low.
Learn more about exemptions in Chapter 13 bankruptcy.
Each state has a set of bankruptcy exemptions, and federal law provides a federal bankruptcy exemption set, too. Some states require you to use the state exemptions, while others allow you to choose the state or the federal bankruptcy exemption set. But you must choose one or the other--you can't mix and match exemptions from two sets.
The state’s exemption laws you’ll qualify to use will depend on where you lived during the last two years, called the "domicile requirements." For more information about the differences between state and federal exemptions and domicile requirements, read Which Exemptions Can You Use In Bankruptcy?
A second set of federal exemptions called "federal nonbankruptcy exemptions" can be used along with your state’s exemptions. For more information, see The Federal Nonbankruptcy Exemptions.
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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]]>On your bankruptcy forms, you explain your financial situation to the court, trustee, and creditors. Your disclosures will include how much you earn, the debts or “claims” you owe, your real estate and personal property, your monthly budget, and recent property transactions.
You’ll disclose each creditor's name, address, and amount owed in your paperwork when listing claims. Learn about completing bankruptcy forms.
Most debts won’t need a contingent, unliquidated, or disputed label because the label is only required if it isn’t clear that you owe the debt. In most cases, there will be no question that you owe the money. When you don’t have an issue to raise to get out of paying the debt, you won’t need to label the claim contingent, unliquidated, or disputed.
For instance, suppose you’re behind on your car loan. In that case, the claim would be for the outstanding balance. The same would apply to other everyday obligations, such as credit card debt.
Learn about other claim labels you’ll need to know in Types of Creditor Claims in Bankruptcy: Secured, Unsecured & Priority.
Sometimes the amount you owe to a creditor isn’t easy to figure out. Each label—contingent, unliquidated, and disputed—identifies a particular issue that needs resolving before paying the claim.
Perhaps the amount you owe could depend on what someone else does or might not be determined. Or, you and the creditor might disagree on how much you owe.
If a problem exists, you’ll indicate it when listing that claim on your bankruptcy papers under the appropriate label of contingent, unliquidated, or disputed claim (the form has checkboxes).
Payment of the claim depends on some event that hasn’t yet occurred and might never occur. For instance, if you cosigned a secured loan (such as a car loan or mortgage), you aren’t responsible for paying it unless the other person on the loan doesn’t pay (defaults). Your liability as cosigner is contingent on the default.
Sometimes you owe money, but you don’t know how much yet. The debt might exist, but the exact amount hasn’t been determined. For instance, say you’ve sued someone for injuries you suffered in an auto accident, but the case isn’t over. Your lawyer has taken the case under a contingency fee agreement—the lawyer will get a third of the recovery if you win and nothing if you lose. The debt to the lawyer is unliquidated. You won’t know how much you’ll owe the lawyer until the case settles or gets resolved at trial.
If you and the creditor don’t agree about the amount you owe, or if you owe anything, you’ll check this box. For instance, suppose the IRS says you owe $10,000 and has put an involuntary tax lien on your property. By contrast, you believe you owe only $500. You’ll list the total amount of the lien, not the amount you think you owe, and indicate that the claim is in dispute (you can explain how much you think you owe in the notes).
It’s common for someone to want to omit a claim from the bankruptcy paperwork for one reason or another. You can’t do it. You must list all claims—the claims you think you owe and those others believe you owe.
It’s in your best interest to do so. If you fail to list a claim, the claim might not be erased or “discharged” in your case, even if it would ordinarily qualify as a dischargeable debt.
If money is available to pay creditors, here’s what will happen next:
Keep in mind, however, that each situation is unique. If you aren’t clear about what will happen to claims in your bankruptcy case, meet with a knowledgeable bankruptcy 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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]]>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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]]>Read on to learn more about which debts get discharged at the end of Chapter 13 bankruptcy.
Not sure which chapter to file? Start by reading What Are the Differences Between Chapter 7 and Chapter 13 Bankruptcy?
You'll find a complete overview of the bankruptcy process in What You Need to Know to File for Bankruptcy in 2022.
Not all debts are treated equally in bankruptcy. Each debt falls into a particular category, which tells you whether the debt must be paid or whether it can be discharged.
A Chapter 13 repayment plan will lay out separate instructions for paying each of these three types of debt. Here are a few of the significant details:
Once you’ve completed your Chapter 13 repayment plan, most remaining nonpriority unsecured debt balances will get discharged. Student loan balances are a notable exception—you’ll remain responsible for those (at least for the present).
Below are some of the most common types of nonpriority unsecured debts. Typically, any balances on these accounts will be discharged at the end of the Chapter 13 plan.
Some debtors who would otherwise be qualified to file a Chapter 7 case, choose to file a Chapter 13 to take advantage of Chapter 13's expanded discharge list. Below are some of the debts that will get discharged in Chapter 13 but not in Chapter 7 bankruptcy.
Through Chapter 13 bankruptcy you can discharge debts arising out of your willful and malicious damage to another person’s property (the damage was intentional, not accidental) but not willful injury to another person.
If you pay your tax obligation using a credit card, that debt is normally considered nondischargeable in a Chapter 7 bankruptcy. However, in Chapter 13 you can discharge debts you incurred to pay nondischargeable tax obligations.
Domestic support obligations such as alimony or child support are always nondischargeable. However, through Chapter 13 bankruptcy, you can discharge your obligation to your spouse or former spouse for other debts assigned to you in divorce or separation proceedings.
Example. Let’s assume in your divorce decree you were assigned and required to pay the entirety of a joint credit card you held with your spouse. If you don’t pay it, the credit card company can go after both you and your former spouse, despite the family court order assigning the debt to you. You are broke and fail to pay the balance. Consider the following results, which vary depending on which type of bankruptcy you file:
When you let go of a home in a Chapter 7 case, you’ll remain responsible for property taxes, utility bills, and homeowners’ dues until the home’s title is no longer in your name (in other words, until the lender sells it in foreclosure). Some bankruptcy courts, but not all, don’t hold you responsible for homeowners’ dues if you surrender your home as a part of a Chapter 13 plan.
You’ll be able to discharge obligations you owe to a city, county, state, or other governmental agency in Chapter 13 bankruptcy, including those arising from fraud. However, you’ll have to pay any restitution or a criminal fine incurred in criminal sentencing.
If the court found that you weren’t entitled to a discharge in a previous bankruptcy case (perhaps you didn’t meet the Chapter 7 means test) or if you waived your discharge, you might be able to get rid of debt in Chapter 13. If a judge declared a particular debt nondischargeable, however, you won’t be able to get rid of it by filing another case.
Typically, bankruptcy doesn’t get rid of a creditor’s security interest (such as a mortgage or car lender’s lien) on your property. However, if certain conditions are satisfied (for instance, the debt isn’t fully secured by the collateral, and the property is worth less than what’s owed) Chapter 13 bankruptcy allows you to strip off a wholly unsecured junior lien or cram down a secured debt (reduce the loan to match the property value). The stripped or reduced portion gets reclassified as an unsecured debt and discharged at the end of the case. (To learn more, see What is Lien Stripping in Chapter 13 Bankruptcy? For more information on cramdowns, go to Cramdowns in Chapter 13 Bankruptcy: The Basics.)
A few other debts you’ll be able to discharge include:
Before you receive a discharge in Chapter 13 bankruptcy, you have to pay back a certain amount of your debts through a repayment plan. But your repayment isn’t dependent on the total amount of debt that you owe. Rather, your repayment plan amount depends on the type of debt you have, the value of your property, your income, and your expenses.
Specifically, you’re required to pay the greater of the following to your unsecured creditors:
The bankruptcy trustee pays creditors depending on the priority of the particular debt. Certain priority debts (such as recent taxes, alimony, and child support) must be paid in full, unlike nonpriority unsecured debts.
And while it’s possible that you might pay less than what you owe (especially if you have a lot of credit card or medical debt), if all of your debt is priority debt, such as recent income tax balances and support obligations, then you’ll repay it all.
After you complete all plan payments, any remaining qualifying balances get wiped out. Creditors can no longer come after you to collect those debts.
To learn more, see Unsecured Debt in Chapter 13: How Much Will You Pay?
]]>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.
]]>But creditors don’t get paid automatically. Before receiving funds, a creditor must submit a “proof of claim” to the court using an official proof of claim form. And not all creditors’ debts receive the same treatment.
A priority claim is a debt entitled to special treatment and will get paid before nonpriority claims. When filling out the proof of claim form, the creditor indicates whether a priority status exists by checking “yes” in box 12.
The bankruptcy trustee—the court-appointed individual responsible for overseeing the case—will review all submitted claims. After resolving objections and confirming the plan in Chapter 13 bankruptcy, the trustee will distribute funds to priority creditors. If money remains, the trustee will pay claims without priority status.
All creditors seeking payment in a Chapter 13 case must file a claim. In a Chapter 7 case, the court will instruct creditors to submit claims if it appears that the case is an “asset case,” meaning that money will be available for distribution. By contrast, creditors won’t submit claims in a “no-asset case.”
Here are examples of common priority claims:
These figures are effective as of April 1, 2022, and remain valid through March 31, 2025.
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.
Updated November 4, 2022
]]>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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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 benefit of this chapter is that you repay some of your debts, but usually not all, through a three- to five-year repayment plan. But before the court "confirms" (approves) your plan, you must fill out the official bankruptcy paperwork and prove that you are:
To file for Chapter 13, you will have to submit proof that you filed your federal and state income tax returns for the four tax years before your bankruptcy filing date. If you need some time to get current on your filings, the court can postpone the proceedings (but you don’t want to count on this). Ultimately, however, if you don't produce your returns or transcripts of the returns for those four years, your Chapter 13 case will be dismissed. Learn about reasons the court might dismiss your case.
To qualify for Chapter 13, you will have to show the bankruptcy court that you will have enough income after subtracting certain allowed expenses and required payments on secured debts (such as a car loan or mortgage) to meet your repayment obligations. Your plan must pay back certain debts in full, or the judge will not confirm it and allow you to proceed.
You can use the income from the following sources to fund a Chapter 13 plan:
If you are married, your income does not necessarily have to be "yours." A non-working spouse can file alone and use money from a working spouse as a source of income. And an unemployed spouse can file jointly with a working spouse.
Learn more about the Chapter 13 bankruptcy repayment plan.
It’s true that many people prefer to file for Chapter 7 bankruptcy because it doesn’t require the filer to pay back creditors. But some debtors simply don’t qualify. Others, however, choose to file for Chapter 13 bankruptcy because it provides options that Chapter 7 doesn’t offer, making a Chapter 13 case the better choice.
Here’s a list of common reasons a debtor might file a Chapter 13 case:
You won’t qualify for Chapter 13 bankruptcy if your secured and unsecured debts exceed certain amounts. The debt figures are $465,275 for unsecured debts and $1,395,875 for secured debts for cases filed between April 1, 2022, and March 31, 2025.
A debt is secured if you stand to lose specific property (the property you pledged as collateral) if you don't make your payments to the creditor. Home loans and car loans are the most common examples of secured debts. But a debt might also be secured if a creditor—such as the IRS—has filed a lien (notice of claim) against your property.
An unsecured debt doesn't give the creditor a right to take a particular piece of property. Most debts are unsecured, including credit card debts, medical and legal bills, back utility bills, and department store charges. (Learn more by reading Types of Creditor Claims in Bankruptcy: Secured, Unsecured & Priority.)
A business can't file for Chapter 13 bankruptcy in the name of that business. Instead, businesses are steered toward Chapter 11 bankruptcy when they need help reorganizing their debts. An exception exists, however: Although a sole proprietor cannot file in the name of the business, both business and personal debts are the individual's responsibility and, therefore, are included in the bankruptcy filing. So Chapter 13 can effectively help reorganize a sole proprietor’s business.
You can, however, file for Chapter 13 bankruptcy as an individual even if you own a business. You’ll include business-related debts for which you are personally liable in your Chapter 13 bankruptcy case. But, the business will remain liable for the debt. (Again, the result is different if you’re a sole proprietor—both the individual and business debt liability will be handled by the bankruptcy.)
Important Note: Stockbrokers and commodity brokers cannot file a Chapter 13 bankruptcy case, even if they want to discharge only personal (nonbusiness) debts.
You’ll disclose all aspects of your financial condition, including your income and expenses, assets, creditors, and previous transactions in the official bankruptcy paperwork. The case will start once you file your forms and other necessary items, such as a filing fee and proof that you completed a credit counseling class. You’ll have fourteen days to submit your Chapter 13 repayment plan unless you receive an extension from the court.
This article provides the reader with a general overview of Chapter 13 bankruptcy. For more information on Chapter 13's eligibility requirements, see Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Attorney Cara O'Neill. Because of the complicated nature of this chapter, you’re strongly encouraged to meet with bankruptcy counsel.
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.
Updated April 25, 2022
]]>Most debtors don’t have any problem sailing through the Chapter 7 process. That said, getting a Chapter 7 discharge isn’t a sure bet. Here are two barriers to debt discharge.
For a few of the 19 categories of debt, the creditor must successfully challenge the discharge of the debt during the bankruptcy case. If a creditor doesn't raise an objection, or if it does and the court disagrees, the debt will be discharged.
In Chapter 7 cases, the debtor doesn’t have an absolute right to a discharge. To receive a discharge, debtors must fulfill the requirements of bankruptcy law. (11 U.S.C. § 727.)
If the debtor fails to follow the rules or doesn’t provide mandatory information, a creditor, the bankruptcy trustee, or the U.S. trustee can object to the entire Chapter 7 discharge. For instance, the court can deny a Chapter 7 discharge if you:
If successful, the debtor will remain responsible for all obligations.
Some types of debts are deemed nondischargeable without the need for a hearing if they fall within one of a list of prescribed categories. Unless the debtor can demonstrate extraordinary circumstances, the following debts are automatically nondischargeable:
While all of these debts are nondischargeable in Chapter 7, some can be eliminated in Chapter 13. Find out which debts are dischargeable in Chapter 13 but not Chapter 7.
Some debts aren’t automatically excepted from discharge. Creditors must ask the court to determine if they are dischargeable or not. If the creditor doesn't raise the dischargeability issue or the creditor raises the issue, but the court doesn't agree, these debts will be discharged.
If you're considering bankruptcy as an option for dealing with debt, you'll want to learn more about how it works, what it can and cannot do, and who is eligible.
Did you know Nolo has been making the law easy for over fifty years? It’s true—and we want to make sure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
Our Editor's Picks for You |
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What to Consider Before Filing Bankruptcy |
What Not to Do Before Bankruptcy |
Helpful Bankruptcy Sites |
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
Updated April 23, 2022
]]>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.
“Charge off” is an accounting term that simply means that the account has been removed from the company’s books because no payments have been made in 120 to 180 days (depending on the type of account.)
Most people come across the term “charge off” after reviewing a credit report. Because a charge off is associated with an unpaid debt, many assume that charged off means that the debt is no longer collectible and that you no longer owe the money. That’s not the case.
A notation of a charge off indicates that the lender is no longer showing the account as a bad debt on the bottom line. That usually doesn’t stop the lender’s collection efforts. The lender can continue trying to collect the debt. Often the lender will transfer or sell the debt to a collection agency. In turn, the collection agency either collects the debt for the lender or, if the collection agency purchased the debt, collects it for its own benefit. Either way, a charge off is merely an accounting term, and you still owe the debt.
The Federal Reserve requires a lender to charge off a credit card debt when it is 180 days late. A car loan or installment loan must be charged off when it is 120 days late.
Learn more about debt buyers and how to negotiate with them.
Once a loan is charged off, don’t count on the loan showing up on the company’s books again. Even if you offer to pay it, chances are it’s been transferred or sold and the original company no longer has an interest in it. If you pay the debt, the company that purchased the account should show that you paid it off, but unfortunately, the original lender can continue reporting the charge off for seven years.
When you file for bankruptcy, you agree to disclose your entire financial situation in exchange for the benefits provided by the chapter that you file. (Find out which bankruptcy will be better for you in What Is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?)
You must list all debts when you fill out your bankruptcy paperwork—including charged off accounts. If you don’t list them, you risk the debts not being discharged (wiped out). All kinds of debt can be charged off, including car loans and other debt secured by collateral, and unsecured debt, like a credit card balance, medical bill, or personal loan. If you file for Chapter 7 bankruptcy, you can expect the court to discharge the charged-off debt within three to four months (the average time it takes for a Chapter 7 case to end). In a Chapter 13 bankruptcy, you’ll pay any discretionary income—the amount remaining after paying allowed monthly expenses—to your unsecured creditors over the course of your Chapter 13 bankruptcy payment plan. All eligible unsecured debts get discharged when you complete your plan.
If the charge off is a secured debt—such as a car loan or mortgage—then you’ve likely already lost the collateral (the house or the car) through repossession (see below) or foreclosure. In that case, you’ll list the account as an unsecured debt in your bankruptcy paperwork.
If a debt has been charged off but you still have the collateral, and you’d like to keep it, you should speak with a bankruptcy attorney as soon as possible.
(Do you want to keep a car in bankruptcy? Find out how in Can You File Bankruptcy on a Car Loan and Keep the Car?)
A repossession occurs when a creditor takes possession of the collateral—usually a car—that you put up when taking out a loan. Here’s how it works.
Before a lender agrees to lend you money for a car purchase, you must agree to guarantee payment of the loan with the vehicle. The contract creates a lien in favor of the lender. The lien allows the lender to take the car, sell it, and apply the sales proceeds to the loan if you default on your payment. If the auction price isn’t enough to pay off the loan, you’ll still owe the remainder called a “deficiency balance.” (The lender releases the lien on the car after you pay the loan balance.)
If you lose the car to repossession, most state laws will give you some time to get the car back. The process is called “reinstating the loan.” Reinstatement requires you to pay any past-due amount, as well as the lender’s costs for the repossession.
Repossessions can occur with property other than cars as well. Furniture, jewelry, and other personal property pledged to secure a loan can be repossessed, as long as the lender follows the state laws.
(To learn more about foreclosure of mortgages on real property, visit What is Foreclosure?)
It’s possible to charge off a loan without having the dealer repossess the car. As stated earlier, car loans are supposed to be charged off if no payment has been made for 120 days. But, unsecured debt, like credit cards or medical accounts, can stay on the books until they’re 180 days old. Usually, a lender will repossess the collateral and sell it, long before 120 days pass. Almost always, the proceeds of the sale won’t be enough to cover what’s owed on the loan, and most lenders will need to charge off the remaining balance.
No law requires the lender to repossess the collateral before charging off the loan. The lender could choose to do it the other way around or could choose not to repossess the car at all. The lender might be forced to forgo repossession if the car can’t be located or if the car’s value is less than it would cost to sell at auction (for instance, if the car was totaled in an accident). The lack of a repossession doesn’t alter the need to charge off the loan or prevent the lender from selling the charged off loan to a debt buyer.
If your car is repossessed before the bankruptcy is filed, you might be able to reinstate the loan and regain possession of the car, but you have to work quickly. You’ll have to file a Chapter 13 bankruptcy case and propose a three to five-year repayment plan.
In Chapter 13 bankruptcy, it’s possible to reinstate a loan by including it in your repayment plan. In fact, this is one of the key benefits of a Chapter 13 bankruptcy case. Not only will it stop a repossession (or a foreclosure) in its tracks, but you can spread out your payment arrearages over the repayment plan rather than paying the entire overdue amount right away. You’ll have to continue paying your monthly payments, too, but by the end of the payment plan, you’ll own the car free and clear. If you don’t want to keep the car, the balance owed will get discharged (wiped out) with other qualifying debt at the end of your plan.
Filing a Chapter 7 case instead will not help you get your car back, because Chapter 7 has no mechanism for getting you caught up or reinstating the loan.
(For more information, read What Bankruptcy Can and Cannot Do.)
If you default on your car loan, you could suffer a charge off, a repossession, or both. It’s hard to know whether the charge off or the repossession looks worse on your credit report. Credit scores are based on all the information in your credit report, good and bad, and the credit reporting agencies and companies that produce credit scores like the FICO score keep their scoring models a secret. Someone having trouble with one account like a car loan often has difficulty keeping other accounts in line. Your credit score can take a hit from late car payments, repossessions, past due credit card payments, judgments, tax liens, and other negative or derogatory entries.
Experience tells us that both a repossession and a charge off of the car loan can cause a significant hit, maybe as much as 100 points. Not only will both a repossession and a charge off have a profound effect on your score in the short run, but they will also continue to influence your credit score and the credit decisions of potential lenders for seven years (although the derogatory information has less effect on your credit score the older it gets.)
Learn more about credit reports and credit scores.
Learn more about how to clean up your credit report and improve your credit score.
]]>Chapter 12 is a better fit for family farmers and fishermen than a typical business Chapter 11 because it uses the more straightforward Chapter 13 process while allowing Chapter 12 filers to have significantly more debt than they could in a Chapter 13 case. Learn about Chapter 13 debt limitations.
Only family farmers and fishermen can file for bankruptcy under Chapter 12. If you plan to file as an individual, either by yourself or with a spouse, here are the requirements you'll need to meet:
Partnerships and corporations can file for bankruptcy under Chapter 12 if a single family owns more than 50% of the stock or equity. (Debt figures exclude home mortgages and are valid for cases filed between April 1, 2022, and March 31, 2025.)
The most important benefit of filing for Chapter 12 is the debt relief allowing family farmers and fisherment to continue farming or fishing operations. Each case proceeds in a predictable fashion. Here's what you can expect.
If you file as an individual—as opposed to filing under a business name—you'll need to attend a credit counseling course before submitting your bankruptcy paperwork to the bankruptcy court. You'll include the completion certificate with the bankruptcy petition.
A Chapter 12 case begins with the case filing. The “automatic stay” order triggered by the bankruptcy case stops most creditors from calling, sending letters, and pursuing debt collection lawsuits. Learn more about the automatic stay and its limitations.
Soon after, the court appoints a bankruptcy trustee to review documents, monitor operations, and conduct a meeting known as the “meeting of creditors,” “creditors meeting,” or “341 meeting.” The trustee also collects plan payments and disperses them to creditors.
Before the meeting, you'll provide bank statements, profit and loss statements, tax returns, and other financial documents required in a bankruptcy case for the trustee to review. At the meeting, the trustee will verify your identity and ask questions about the bankruptcy filing. Creditors can also ask questions.
You'll have 90 days to file your proposed three-year plan to pay creditors, but you can ask the court to extend the time. The court can also give you up to five years to pay if you can show “cause” or good reason. For instance, most courts will approve a five-plan if you need more time to pay child support or alimony arrearages.
Most filers try to submit the proposed plan before the 341 meeting. If you do, you'll have an opportunity to discuss potential problems with the trustee at the meeting of creditors and make needed adjustments. Learn more about the plan in “Elements of The Chapter 12 Repayment Plan” below.
A proposed plan must be approved or “confirmed” by the bankruptcy court at a hearing set within 45 days of the plan’s filing. If the debtor, trustee, and creditors can’t resolve a problem, the judge will consider each side’s argument at the hearing, although most judges rely heavily on the trustee’s recommendations.
The court will continue monitoring the case until you make the required payments. If you file as an individual, you'll also need to complete a debtor education class before the bankruptcy court will close the matter and grant a debt discharge that eliminates debts in accordance with your plan.
The court will dismiss the case without a discharge if the debtor can’t obtain plan confirmation or make the required payments. A debtor also can elect to dismiss a Chapter 12 case or convert it to a Chapter 7 liquidation.
The essential parts of a Chapter 12 repayment plan include the following.
Required plan payments. During the plan period, the debtor must turn over all “disposable income” to the Chapter 12 trustee. “Disposable income” in a Chapter 12 case is the difference between the revenue generated by the debtor’s farm or fishing operations and the amount reasonably needed to cover business expenses and expenses incurred in the maintenance and support of the debtor’s family.
Mortgages and other secured claims. One of the advantages of Chapter 12 is that debtors can “cram down” or reduce secured debt, like farm mortgages and boat loans. Mortgage lenders and other secured creditors must receive the value of the collateral securing the debt. Any balance owed over the collateral’s value becomes an “unsecured debt,” often paid little or nothing in Chapter 12 cases. Secured debt payments can extend beyond the plan's term, and interest can be reduced to the current market rate.
Trustee fee. Trustees receive a percentage of the funds dispersed to creditors.
Discharge of debt. Chapter 12 plans must meet the “best interests of creditors” test. Under the “best interests” test, creditors must receive at least as much under a Chapter 12 plan as they would in Chapter 7 bankruptcy. As long as the plan meets the “best interests” test, unsecured creditors can be paid pennies on the dollar or nothing at all.
Did you know Nolo has been making the law easy for over fifty years? It’s true—and we want to make sure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
Our Editor's Picks for You |
|
More Like This |
Will Business Bankruptcy Help If I Want to Continue My Business? |
Consider Before Filing Bankruptcy |
Chapter 7 for Small Business Owners |
Helpful Bankruptcy Sites |
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
Updated April 21, 2022
]]>If you can’t protect all of your property in your Chapter 7 case, the bankruptcy trustee appointed to administer the matter will sell the nonexempt property for the benefit of creditors. When money is available, it’s considered an asset case. Any debt you fail to list in an asset case won’t be discharged.
If, however, yours is a no-asset Chapter 7 bankruptcy (there’s no money to repay creditors), the debt still might be discharged. It will depend on:
To learn more about debts discharged in Chapter 7 bankruptcy, see Debt Management: The Bankruptcy Discharge.
While you should do your best to include all debts in your bankruptcy, it’s not uncommon for debtors to accidentally omit a creditor. If you do so in a no-asset Chapter 7 case, and the creditor doesn’t suffer as a result (isn’t “prejudiced by the omission”), most courts take a “no harm, no foul” approach and will still consider the debt discharged.
The reasoning behind the “no harm, no foul” approach is that if it was an innocent mistake and the creditor wouldn’t have received anything anyway, discharging the omitted debt wouldn’t change the outcome for that creditor.
When determining whether an unlisted debt should be discharged, courts might consider factors such as:
Keep in mind that not all jurisdictions follow this basic rule. If you can’t remember all of your creditors, consider meeting with a local bankruptcy attorney who can tell you what to expect in your area.
If the omitted creditor alleges that you fraudulently failed to list its debt or that the debt is otherwise nondischargeable (for example, if you initially obtained the debt through fraud), you will likely have to litigate the issue in bankruptcy court if you want the debt discharged.
In that case, you might have to show that you made an innocent mistake, that there was no fraud involved, and that the debt is dischargeable.
Your creditors need to receive notice of your bankruptcy, so the best way to ensure your discharge is to include all your debts when filling out your bankruptcy forms.
Before you file your case, gather all of your bills and get a copy of your credit report. Then verify your obligations. Also, be sure to list debts that won’t appear your credit report, such as a loan from family or friends or an obligation you personally guaranteed.
If you find that you accidentally omitted a creditor and your bankruptcy is not yet closed, you can amend your schedules to list the omitted debt.
]]>So how can you use bankruptcy to get a fresh start? Start by learning:
Your goal? Determining the best bankruptcy chapter for you. Learning how bankruptcy works and understanding the three types of bankruptcy, Chapters 7, 13, and 11, are the first steps to getting the fresh start you need.
You’ll find a basic overview of bankruptcy in the “How Bankruptcy Works” section. Then you'll learn the differences between bankruptcy Chapters 7 and 13, the two bankruptcy chapters most people file.
Being bankrupt is the last thing anyone wants, but it happens. Fortunately, our legal system helps people start over by filing for bankruptcy.
Bankruptcy works by “voiding” or breaking the contracts between you and your bankruptcy creditors, freeing you from the responsibility of paying your bills. It’s how bankruptcy can give you a fresh start.
But bankruptcy works for creditors, too. Keep reading to learn more.
Bankruptcy starts when you file completed bankruptcy forms with the bankruptcy clerk. In your bankruptcy filing, you’ll explain everything about your financial situation, which in turn will reveal why you’re bankrupt.
For instance, some of the things you’ll tell the bankruptcy court will include:
The task of reading your bankruptcy paperwork will fall on the bankruptcy trustee the bankruptcy court appoints to oversee your case. If the bankruptcy trustee finds that you can pay some amount to your bankruptcy creditors, the bankruptcy trustee will follow the bankruptcy law to ensure each bankruptcy creditor gets the amount the creditor is entitled to receive.
How the bankruptcy trustee will pay creditors will depend on which one of three types of bankruptcy you file.
More than three types of bankruptcy exist, but bankrupt individuals and small businesses can file Chapter 7, Chapter 13, and Chapter 11. Here’s a little about each type of bankruptcy.
Keep reading for more information about each type of bankruptcy.
Chapter 7 bankruptcy filings exceed all other types of bankruptcy every year by far, which isn’t surprising because, when possible, most people prefer to file for Chapter 7. Why? Because it doesn’t require creditor payments, and it’s over in about four months.
However, all this stripped-down, bare-bones type of bankruptcy does is help people “discharge” or wipe out qualified debt, such as credit card balances, medical bills, and personal loans. It doesn’t solve any other financial problems.
Chapter 7 bankruptcy works best for people who don’t have much money left after paying monthly expenses and don’t have more property than their state lets them protect or “exempt” with a bankruptcy exemption. Filers lose property they can’t protect with a bankruptcy exemption.
Individuals and businesses can file this type of bankruptcy.
Chapter 13 bankruptcy solves a lot more problems than Chapter 7 bankruptcy. Bankruptcy filers can use the three- to five-year repayment plan to catch up on mortgage payments and keep a house, or bring a car loan current and keep a car.
Also, Chapter 13 bankruptcy filers don’t lose property. Instead, they can pay creditors to keep nonexempt property through the Chapter 13 plan.
This type of bankruptcy works best for bankruptcy filers who make too much to qualify for Chapter 7 bankruptcy or those who want to keep property they’d lose in Chapter 7 bankruptcy. Only individuals and sole proprietors qualify for Chapter 13 bankruptcy. Businesses and companies can’t use this type of bankruptcy.
Very few Chapter 11 bankruptcy cases get filed each year. Why? Because this type of bankruptcy is complicated, expensive, and usually filed by large and small businesses needing financial help from creditors. Individuals who have too much debt for Chapter 13 can also use Chapter 11.
You can learn more about Chapter 11 bankruptcy here.
You will have to pay for “nondischargeable debt” or debt that doesn’t go away in bankruptcy. If you file for Chapter 7 bankruptcy, these debts will remain with you after your Chapter 7 bankruptcy ends. In Chapter 13, you’ll pay most nondischargeable debts in full through your Chapter 13 plan (but not student loans).
These are the most common nondischargeable debts:
Before deciding you're bankrupt, make sure you can erase enough debt to make filing for bankruptcy worthwhile.
Your first step? Check whether your debts qualify for a bankruptcy debt discharge and if you can protect your property in your state using bankruptcy exemptions.
If you can, the next step is determining if you qualify for Chapter 7 bankruptcy by passing the bankruptcy means test. If you pass the Chapter 7 means test, you’ll likely want to file for Chapter 7 bankruptcy, but always be sure to consult with a bankruptcy attorney.
If you don’t qualify for Chapter 7 bankruptcy, or if you have other problems, such as you want to keep a home out of foreclosure or prevent your car from being repossessed, you’ll likely want to consider filing for 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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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>In this article, you’ll learn about:
Once you understand how Chapter 13 generally works, you'll likely want more specific information. You'll find additional resources for you at the end of the article.
People usually choose Chapter 13 bankruptcy because they make too much to pass the Chapter 7 means test, don’t want to lose a house or car after falling behind on the monthly payment, or want to avoid wage garnishments and other collection tactics and repay support arrearages or recent tax debt over five years.
Other benefits that aren’t available in Chapter 7 include eliminating junior mortgages on a residence using “lien stripping” and paying less on a car loan with a “cramdown.”
Here’s a snapshot of what you’ll do in Chapter 13 bankruptcy from start to finish. After reviewing the nine steps, you'll be ready to tackle the more challenging aspects of Chapter 13—eligibility and the specifics of the Chapter 13 plan.
During the 180 days before filing for Chapter 13, complete a credit counseling course from an agency approved by the Department of Justice U.S. Trustee Program. The session helps evaluate whether you have sufficient income to repay your creditors.
Most providers charge between $25 and $35 for the course and provide counseling for free or at reduced rates if you can't afford to pay. However, Chapter 13 filers rarely qualify for the discount.
The filing starts your bankruptcy case. Soon after, the court clerk will send a letter notifying you, the trustee appointed to your case, and your creditors of the automatic stay prohibiting collection activities. The notice will include creditor deadlines and the date and time of the 341 meeting of creditors—the hearing all filers must attend.
Expect to pay a bankruptcy filing fee when filing your bankruptcy paperwork and credit counseling certificate. You can use the Federal Court Finder to find your local bankruptcy court.
At least five days before the hearing, you’ll turn over "521 documents," including tax returns, paycheck stubs, bank statements, and possibly more, to the trustee. The trustee will check your identification and ask questions about your bankruptcy filing at the hearing. Creditors can also attend but rarely do.
Your monthly Chapter 13 payments will begin the month after you file, even though the court won’t have approved or “confirmed” your proposed Chapter 13 plan. The timing helps ensure your Chapter 13 bankruptcy case will end on schedule—usually in five years.
If the bankruptcy court doesn’t confirm your plan, the trustee will refund your payments. However, don’t expect to get car payments back—your car lender will credit your account.
Your creditors and the bankruptcy trustee will have an opportunity to object to your proposed Chapter 13 repayment plan. If it happens, your attorney will likely try to make changes to everyone’s satisfaction.
After considering any argument presented at the plan confirmation hearing, the judge must be able to answer the following questions affirmatively before confirming your plan:
Most judges give filers several opportunities to correct a deficient plan before dismissing a Chapter 13 case.
Before the court orders a debt discharge wiping out the remaining balance of your qualifying debts, you must make all payments, be current on child support and alimony obligations, and complete a second course—the debtor’s education course.
After receiving the bankruptcy discharge, most filers are free of debt except for mortgages and student loans. Learn about debts that survive Chapter 13.
The following steps involve learning whether you're eligible, how much you'll pay, and the challenges you might face during your plan.
Debt limits. You can have only so much debt in Chapter 13 bankruptcy—you’ll find the Chapter 13 bankruptcy debt limitations here. If your total debt burden is too high, you’ll be ineligible, but you can file an individual Chapter 11 bankruptcy instead.
Income requirements. When you file a Chapter 13 bankruptcy, you must prove you can afford to pay your monthly household obligations and the monthly plan payment. The bankruptcy court won’t “confirm” or approve your proposed Chapter 13 plan if you don't have any income or it's too low.
Person status. Only individuals and sole proprietors qualify for a Chapter 13 debt discharge—it isn’t available to small businesses and companies. However, small business owners who file individually will include personally guaranteed business debts in the plan. And from a practical standpoint, a business owner’s improved financial condition can benefit a small business indirectly, so Chapter 13 might be worth pursuing.
This is the big question—can you afford a Chapter 13 payment? Many people can't. Even if you can, your Chapter 13 payment plan will stretch you to your financial limit even if you pay significantly less than what you owe.
Start by learning how long your plan will be, then calculate the total debt you need to repay. However, be warned—the rules are tricky, and you'll end up with a rough estimate at best. You and your attorney will use a software program to get an accurate figure before filing.
Most filers pay into a five-year plan. People who qualify for Chapter 7 will have the option of a three-year plan but often go with the more extended plan—primarily because the lower monthly payment increases the likelihood that the court will confirm or approve it.
Here are the Chapter 13 payment rules. We recommend reviewing the rules and the examples in Filing for Bankruptcy in 2022.
To get a monthly figure, you'll add up what you must pay and divide the total by 36 or 60—the number of months in your repayment plan period.
Your last step? Consider the “best efforts” or "best interests of creditors" test. This rule requires you to pay to keep property you can’t protect with a bankruptcy exemption.
To find this figure, you’ll inventory your property, review your state’s bankruptcy exemptions, and determine how much "nonexempt property" you have (property that isn't protected with a bankruptcy exemption). Compare the total value of your nonexempt property to your disposable income. You’ll pay the larger amount in your plan.
The rule ensures that Chapter 13 creditors receive at least as much or more as they would if the debtor had filed for Chapter 7. Learn more about debts you’ll repay in Chapter 13 bankruptcy and the Chapter 13 repayment plan.
If your income decreases during your repayment period—which happens more frequently than one would think—it won’t necessarily be the end of your Chapter 13 case. Here are the options available when you can’t complete your current Chapter 13 plan.
Modify your payment. The court can reduce the disposable income amount you’re paying toward nonpriority unsecured debts like credit card balances, medical bills, and personal loans. But that’s it unless you’re willing to sell property and pay the proceeds to your creditors to reduce your obligation under the “best efforts” rule.
Ask for a Chapter 13 hardship discharge. If you lose your job because a plant closes in a one-factory town or suffer a debilitating illness, you might qualify for a hardship discharge. The problem here? A hardship discharge often isn’t available until you’re deep into your plan because you must pay the amount required by the best efforts rule.
Consider converting or “switching” to Chapter 7 bankruptcy. The downside? You’ll likely lose any nonexempt property you haven’t yet paid to keep. Again, the best efforts rule is at work. Unsecured creditors must get at least an amount equal to the value of your nonexempt property. Otherwise, the Chapter 7 trustee will sell the nonexempt property and pay unsecured creditors.
Dismiss your Chapter 13 bankruptcy case. You’ll still owe any outstanding debt balances, plus the interest creditors didn’t charge during your Chapter 13 case.
Chapter 13 cases are challenging to navigate. Although it’s possible to file your own Chapter 13 case, it’s rarely successful, and most courts encourage filers to retain a bankruptcy lawyer in Chapter 13.
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.
]]>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!
Our Editor's Picks for You |
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Can I Keep My Car If I File for Chapter 7 Bankruptcy? Your Car in Chapter 7 Bankruptcy Options to Keep Your Car in Chapter 7 Bankruptcy What Happens to a Car Lease in Chapter 7 Bankruptcy? |
Consider Before Filing Bankruptcy |
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Helpful Bankruptcy Sites |
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>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.
When you claim your deductions, you’ll be able to use the actual cost of some expenses. For others, such as the allowance for food, clothing, and housing, you’ll use the national and local standards.
Here’s a list of some of the deductions you’ll be allowed to take:
To determine your disposable income, you’ll complete one of two forms, depending on the chapter you intend to file (each chapter allows for similar deductions).
In a Chapter 7 case, you’ll complete the Chapter 7 Means Test Calculation form. You’ll deduct allowed expenses to find your disposable monthly income. Next, you’ll multiply that amount by 60 months. If the figure exceeds the maximum amount currently allowed (which will be listed on the form), you won’t qualify for a discharge. Additionally, you might not qualify if your disposable income is sufficient to pay 25% or more of your unsecured, nonpriority debt (such as credit card balances, medical bills, and personal loans).
In a Chapter 13 matter, you’ll fill out the Chapter 13 Calculation of Your Disposable Income form. The amount that remains after deducting expenses is your monthly disposable income. You’ll pay that number to your unsecured, nonpriority creditors each month over the course of your three- to five-year repayment plan.
Because each case is different, determining whether you qualify for bankruptcy (as well as completing the appropriate forms) can be challenging. When in doubt, contact a knowledgeable bankruptcy attorney.
]]>Embezzlement is different from fraud or larceny (theft). The embezzler has permission to handle the property in a certain way (but not to take it). Instead, the wrongdoer uses the position of trust granted by the owner to convert the property to the embezzler’s possession and control (to take it).
The act of embezzlement can occur in many familiar circumstances. Below you’ll find a couple of typical examples.
An employee who takes money or property from an employer (or sometimes a customer) and uses it for personal benefit commits embezzlement. Here are a few ways this act can be committed:
Embezzlement can occur whenever someone mishandles property that someone else entrusts with them. For instance, embezzlement can happen as a result of:
As a criminal offense, most embezzlement gets prosecuted under state law; however, the federal government also prosecutes those who embezzle from the federal government (or someone paid by the federal government, like a contractor working on a government building). If convicted, the penalties include incarceration, fines, and victim restitution (money to pay for a loss).
Suffering through a criminal proceeding might not be the end of the embezzler’s worries. A victim (whoever lost the property) can also sue in civil court. A winning plaintiff (called a “judgment creditor”) might be able to use the civil judgment to garnish wages (take money from your paycheck), levy on a bank account (withdraw funds from your account), place a lien on property, or even seize and sell property to satisfy the judgment. It will depend on the avenues (remedies) provided to you under state law.
(Find out more in Bankruptcy and Embezzlement.)
]]>(For more articles on the bankruptcy discharge, see Debt Management: The Bankruptcy Discharge.)
Dischargeable debts are obligations that can be wiped out by your bankruptcy discharge. When you receive your discharge, you are no longer obligated to pay any of these debts and creditors cannot come after you to collect them.
A few examples of dischargeable debt include:
(For more, see Which Debts Are Discharged in Chapter 7 Bankruptcy?)
Timing and Debt Dischargeability
If a bill comes due after you file for bankruptcy, you might find yourself wondering whether the balance will go away. It’s common to be confused about whether ongoing accounts, such as utility bills, get completely wiped out at the end of the case, or whether the bankruptcy discharge is limited to the portion owed before the filing date.
The quick answer? The court looks to the filing date.
Post-petition debts—the new bills that you incur after you file your initial bankruptcy paperwork—don’t qualify for discharge. You’ll remain responsible for paying for them. The only type of debt eligible for discharge is “pre-petition debt,” or, debt that existed before you filed your matter.
Example. Suppose that you file a Chapter 7 case. In your bankruptcy schedules, you list your overdue water, sewer, and garbage bill. The Chapter 7 discharge will wipe out any portion of the utility bill account balance that predated your filing. However, you’ll be required to pay any charges that accrued after your filing date.
The same holds true in a Chapter 13 bankruptcy. All pre-petition debts get included in the Chapter 13 plan (the three- to five-year payment plan that you must complete before receiving a discharge). All of your post-petition debts, such as a monthly cell phone bill or a new gym membership, remain your responsibility to pay.
Be aware, however, that when you’re in a Chapter 13 case, unexpected obligations can come up. Not only is this understood, but the court might be willing to adjust your plan payments to accommodate you. To learn about your options, read Post-Petition Debts in Chapter 13 Bankruptcy.
In most cases, you can eliminate dischargeable debts in bankruptcy without any repayment. However, whether your creditors will receive anything in your bankruptcy will depend on whether you are filing for Chapter 7 or Chapter 13 bankruptcy.
Most Chapter 7 bankruptcies are no asset cases—there’s nothing for the trustee to sell to pay creditors with. As a result, dischargeable debts are typically wiped out without receiving anything in Chapter 7 bankruptcy.
Further, if there are any proceeds to distribute, general unsecured debts (such as credit card obligations) are the last to get paid and receive a pro-rata share of any money left over after all priority debts (such as alimony, child support, and some taxes) get paid.
However, keep in mind that your discharge only eliminates your liability for these debts. It does not affect liens on your property (such as a mortgage or car lien). As a result, if you stop paying your mortgage or car loan, your lender can still foreclose on or repossess your property even if it cannot sue you personally to collect the debt.
In Chapter 13 bankruptcy, most dischargeable debts are considered nonpriority general unsecured claims. Depending on your income, assets, and expenses, they typically receive little or nothing through your Chapter 13 repayment plan. And they are discharged upon completion of your plan payments.
However, if a dischargeable debt is secured (such as your car loan), you have two choices. If you want to keep the car, you must continue making payments on it during your Chapter 13 bankruptcy (if you meet certain conditions, you might be able to reduce your principal balance through a Chapter 13 cramdown). Alternatively, you can surrender the car, and discharge your liability for the car loan.
]]>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:
Learn about bankruptcy fraud and the consequences and penalties associated with bankruptcy fraud.
If you're wondering how a trustee could find out about a fraudulent transfer, it's not as hard as you might think. Sometimes someone you know will inform the trustee outright, or you might reveal it yourself. You must disclose all property transfers (for instance, if you sold or gave away a home, car, or boat) that occurred during the two years before your filing on the Your Statement of Financial Affairs for Individuals Filing for Bankruptcy form. The trustee will review the form entries for signs of a fraudulent transfer (also called a fraudulent conveyance). The trustee reviews other schedules, too.
"Actual fraud" happens when you sell, give away, or otherwise transfer your property to someone else with the specific intent of keeping it out of the hands of your creditors. Doing this shortly before filing for bankruptcy can be considered bankruptcy fraud.
Proving bankruptcy fraud can be difficult, but sometimes it's as plain as day. People try to hide the fact that they don’t intend to pay a creditor when transferring property, so the courts look for “badges of fraud”—facts and circumstances which tend to show that the debtor intended to cheat the creditor.
Here are some common badges of fraud:
Example. Your business, a dress shop, isn’t making much money, and in fact, it’s insolvent—the outstanding loans total more than the value of all the inventory and fixtures. In a last-ditch effort to keep afloat, and without telling the creditors, you sell half of the inventory to another boutique for significantly less than what it’s worth. Instead of using that money to pay your lender as required by the financing agreement, you use it to pay the store’s rent and your car loan.
Fraudulent conveyances can happen in both business and private dealings. For instance, intentionally selling your car without paying the car lender would likely count as a fraudulent conveyance. Also, you’d likely run into the same problem if you transferred shares of stock to your children before filing for Chapter 7 bankruptcy (in most states, stock isn’t exempt property and would be sold for the benefit of creditors).
The second type of fraudulent transfer involves transferring property to someone else for less than it’s worth. Even though this is also considered a fraudulent transfer, it doesn’t necessarily involve an intent to defraud a creditor.
Example: You agree to sell your 15-year-old pickup truck to your cousin. You know its book value is $3,000, but wanting to give the guy a break, you agree to take just $1,000 for it. You file for bankruptcy ten months later.
This type of transfer differs from the first transfer in an important way: There was no intent to defraud creditors out of money they’d be entitled to through the bankruptcy. In fact, such a transfer might occur even before anticipating handling financial problems by filing for bankruptcy. Even so, it’s considered a fraudulent transfer if two conditions are met:
Courts will consider the circumstances surrounding the transfer to determine if you received reasonably equivalent value. Some of the factors include:
In bankruptcy, creditors suffer the consequences of a fraudulent transfer. It's the trustee’s duty to find and liquidate (sell) nonexempt property (property that the filer can’t protect in bankruptcy) and distribute the funds to creditors to pay claims. Because of this responsibility, the trustee has the power to unwind fraudulent transfers and recover either the property or its value. Sometimes the trustee must file a lawsuit (adversary proceeding) against the recipient in the process.
Example: Bart, who is up in years, decides to transfer some real estate to Andrew while he’s still alive rather than will it to Andrew. By doing so, Bart can avoid a probate proceeding after his death and reduce estate taxes to Bart and Andrew. A year after transferring the property, Bart files for Chapter 7 bankruptcy. Because Andrew didn’t pay his father for the real estate, the trustee asks that Andrew turn over the property to the bankruptcy estate so that it can be sold and the proceeds distributed among all the valid claims.
The trustee will review all transfers made within two years before filing for bankruptcy (the period increases to ten years for property transferred to a self-settled trust). A bankruptcy trustee can go back as long as four years if the state has enacted laws, like the Uniform Fraudulent Transfer Act, which allows for a longer lookback period.
Keep in mind that trustees have seen many schemes so no matter how novel a plan might seem to you, it likely isn't. Learn what happens when the trustee suspects fraud.
]]>While the powerful relief afforded by bankruptcy frees you from overwhelming debt, it comes at a cost to your creditors. Bankruptcy law attempts to mitigate this loss by giving your creditors a share of your nonessential assets in exchange for wiping out your debt. You’ll disclose all property you currently own (and asset transfers) and keep the things you can exempt—generally property needed to maintain a job and home.
Here’s what will happen to the rest.
Remember that your creditors are entitled to receive certain property or payments—it’s part of the deal. Hiding assets, knowingly omitting required information on bankruptcy paperwork, or inappropriately using the bankruptcy process to a creditor’s detriment could be considered bankruptcy fraud.
Fraud doesn’t always play out within the bankruptcy itself—it can occur before the bankruptcy filing. This problem often arises when someone tries to erase a prior bad act using bankruptcy. Here are examples of fraudulent behavior that might cause a creditor to ask the court to deny your discharge of a particular debt (you’ll still owe it after the case ends):
Be aware that the bankruptcy trustee will often work closely with a creditor or interested party when that person is making a fraud claim. For instance, if a creditor asks uncomfortable and probing questions 341 meeting, the trustee will likely continue the meeting to allow the creditor more time. Why would the trustee want to get involved? Because dishonest debtors hide assets, and the more assets the trustee finds, the more the bankruptcy trustee gets paid.
Learn more by reading When the Bankruptcy Trustee Suspects Fraud.
Most people who file for bankruptcy are honest and transparently report all assets. Still, it’s not always the case—and succumbing to the temptation to hide property can result in a bankruptcy fraud accusation. Here are examples of actions that, if intentional, would likely be problematic:
You’ll only run into trouble if it’s believed that you knowingly and intentionally committed a fraudulent act. Why? Because bankruptcy fraud doesn’t happen by accident or mistake. For instance, accidentally forgetting to list an asset or incorrectly stating your income or expenses probably wouldn't rise to the level of fraud. However, if you failed to list your vacation home in your bankruptcy paperwork, hoping that the trustee wouldn’t find out about it, it’s likely you’ve knowingly and intentionally done the following: hidden an asset, filed a false form, and committed perjury.
Not all fraud is the same. The severity of the consequences for civil versus criminal fraud differs substantially. Learn more about the differences between these two types of bankruptcy fraud.
Civil cases usually arise when a creditor files a lawsuit (adversary proceeding) alleging wrongdoing involving one particular debt (see “Fraud That Starts Before Bankruptcy” above for a list of examples of common allegations). If the creditor proves its case, the filer will face a variety of consequences. For instance, the court can do one or more of the following:
Learn about presumptive fraud in bankruptcy—a trap that’s not only easy to fall into but easy for a creditor to prove. Also, find out what happens when the bankruptcy trustee suspects fraud.
A significant scheme to deprive multiple creditors would be more likely to rise to the level of criminal bankruptcy fraud. Under federal law, cases of criminal fraud are investigated by the Federal Bureau of Investigation (F.B.I.) and aggressively prosecuted by the U.S. Department of Justice (D.O.J.). Although the bulk of the crimes apply to debtor activities (the person who files the case), creditors, bankruptcy trustees, court personnel, and third parties can also be convicted of bankruptcy crimes.
Also, many types of dishonesty are often involved in criminal bankruptcy fraud, some of which are also crimes. You’ll find most bankruptcy crimes in federal criminal statutes. (18 U.S.C. §§ 152, 157.) Here are some examples.
Along with bankruptcy fraud, federal prosecutors often add counts for other federal crimes. For instance, the D.O.J. might prosecute someone for perjury who fails to list an asset on bankruptcy schedules. Also, prosecutions often include tax fraud, wire fraud, mail fraud, money laundering, bank fraud, identity theft, or conspiracy, each of which brings separate penalties.
The consequences of engaging in criminal bankruptcy fraud can be harsh. Anyone who makes a knowingly false statement in association with a bankruptcy filing can be assessed fines up to $250,000 and receive up to 20 years in prison. If you’re looking for information about penalties associated with bankruptcy fraud—such as jail time, fines, and more—go to Bankruptcy Fraud Consequences and Penalties.
Rest assured that it’s unlikely for a debtor to face fraud allegations without warning. Most filers are fully aware of their past actions and know to expect a possible fraud accusation. If this is a concern, consult with a knowledgeable bankruptcy attorney.
Other individuals considering filing for bankruptcy can take steps to avoid fraud allegations by transparently disclosing financial information. For instance, a debtor should be prepared to list all income, property, creditors (even if the intention is to repay a particular creditor after the bankruptcy), and prior transactions (such as property sales, donations, and gifts). You can learn what you’ll disclose by reviewing the official bankruptcy paperwork.
]]>Although it occurs in only a small percentage of cases, most bankruptcy fraud has some connection with a debtor’s attempt to avoid paying creditors by concealing assets or abusing the system. For instance, bankruptcy fraud can occur as a result of:
Other offenses include the destruction of records, falsifying documents filed in court, using false identity information, bribing court officials, and stealing from the bankruptcy estate.
It isn't just the debtor who can run afoul of the law. Creditors sometimes knowingly file false proof of claims to collect money not owed. Lawyers sometimes attempt to bribe the bankruptcy trustee (the official responsible for overseeing the case) or the bankruptcy judge. And trustees have raided funds they’ve collected on behalf of creditors.
Civil actions are often brought by a single creditor seeking a remedy against a debtor for an isolated action (instead of a broader action filed by the Department of Justice). For instance, a creditor might claim that the debtor lied about income when requesting credit or show that the debtor never intended to repay an obligation.
The level of proof necessary to bring civil sanctions against a debtor or others in the bankruptcy court is much lower than what the DOJ must prove in a criminal case. Therefore, regardless of whether there is a criminal proceeding, the bankruptcy court has at its disposal several options:
Learn more about proving bankruptcy fraud.
A criminal bankruptcy fraud case will tend to involve a more elaborate scheme than what the average person would attempt, with the debtor knowingly executing a plan impacting numerous, if not all, creditors. And it doesn’t happen in a vacuum. The actions leading to prosecution for bankruptcy crimes can violate other federal statutes. For instance, an indictment for bankruptcy fraud often includes counts for perjury, tax fraud, bank fraud, wire mail fraud, identity theft, and conspiracy, bringing a schedule of penalties adding years to sentences imposed for bankruptcy crimes.
The Federal Bureau of Investigation (FBI) investigates bankruptcy crimes. If it appears that a crime has been committed, the case will proceed to the U.S. Department of Justice (DOJ) for prosecution. If convicted, sentencing for a conviction could include any or all of the following:
Example. In a well-known bankruptcy case, Joe and Teresa Giudice (from the Real Housewives of New Jersey) plead guilty to 41 federal counts of criminal behavior, including bankruptcy fraud. At sentencing, Mrs. Giudice received 15 months in prison while her husband received 41 months. Together they were ordered to pay restitution of $414,000. The court allowed them to serve the sentences consecutively (one following the other) so that a parent would remain home to care for their young children during the incarceration period.
Bankruptcy fraud, a federal felony, is serious and carries with it significant penalties that can affect your life for years, well beyond any benefit received from committing the crime.
A federal felony comes with more than a formal sentence—many of your rights will be restricted, sometimes for life. For instance, you might not be able to:
Regardless of immigration status, non-citizens convicted of a felony are subject to deportation. Mr. Guidice, referenced above, is not a citizen of the United States. When he completes his prison term, he could face deportation.
Errors occur in bankruptcy on occasion. If you’re concerned that you’ve made a mistake in your paperwork or bankruptcy case, a bankruptcy attorney can help you make the proper adjustment promptly.
]]>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
]]>Both Chapters 7 and 11 strike a balance between providing debt relief to filers and payment to creditors. However, the type of relief available to individuals and businesses varies significantly, and it isn’t always intuitive. Here are the basics:
You'll find links to more information about small business bankruptcies after the comparison chart at the end of the article.
Only filers who don’t have enough income to pay into a lengthy repayment plan will qualify for Chapter 7. And creditors will receive payment only if the debtor—the person filing the case—owns assets that can be sold by the Chapter 7 trustee—the person responsible for administrating the case. The lack of a repayment plan makes Chapter 7 the fastest bankruptcy chapter to complete.
How long a particular Chapter 7 will take will depend on the property owned by the debtor. For instance, a “no-asset” case in which the filer can protect all property using bankruptcy exemptions is the quickest. With no property to sell and no creditors to pay, this type of case is over in about three to four months.
By contrast, some filers can protect only some assets, and others aren’t entitled to use exemptions at all. These “asset” cases stay open longer, about six months to a year on average, to give the trustee time to liquidate (sell) the property. Cases involving real estate or property ownership litigation often take longer to resolve.
The most attractive benefit of Chapter 7 is that it allows some debtors—but again, not all—the ability to discharge (erase) qualifying debt. The filer will receive the debt discharge after three to four months, even if the case itself remains open while the trustee sells assets for the benefit of creditors.
If you now realize that one of the complicating factors of Chapter 7 is that it doesn’t treat all filers alike, you’re correct. But the rules aren’t random. The filer’s status as an individual, sole proprietor, or another business entity determines the rules you’ll apply in the following categories:
You’ll find specific examples after “How Chapter 11 Bankruptcy Works.”
When learning about the Chapter 7 process, remember that applying the wrong law could result in significant property loss because a debtor doesn’t have the right to dismiss a Chapter 7 case without court approval. Consult with a bankruptcy lawyer experienced in business-related cases to avoid unexpected results.
Not all struggling businesses are destined to close. When an unexpected event reduces the income stream of an otherwise viable company—as experienced by many at the onset of the coronavirus pandemic—Chapter 11 can help. A filer can restructure debt to allow the company to remain open as long as the filer, creditors, and the court agree on the strategy. For instance, a plan of reorganization can include:
Chapter 11 relief is also available to individual wage earners who don’t qualify for Chapter 7 or Chapter 13. Because such filings are rare, this discussion pertains to businesses only.
The U.S. trustee (or bankruptcy administrator in North Carolina and Alabama) keeps track of the overall case progression by monitoring business operations, overseeing investigations, and ensuring the timely submission of filings, operating reports, and fees. But the U.S. trustee isn’t as directly involved as the trustee in Chapter 7 or 13 cases.
The filer or “debtor in possession” is responsible for carrying out everyday business operations. But that’s not all. The debtor in possession also fulfills all noninvestigative bankruptcy requirements, such as completing filings and reports, reviewing and objecting to creditor proof of claims, and hiring court-approved experts. The need to be actively involved is partly why a traditional Chapter 11 is cost-prohibitive for most small companies.
One of the Chapter 11 case hallmarks is the extensive creditor negotiations that occur before and after the case filing. It’s not unusual for the parties to resolve issues without entering into a formal plan. As with any form of bankruptcy, it’s an abuse of process to use Chapter 11 as a delay tactic with no intention of subjecting to the process.
Find out what individuals and small businesses can expect when filing under either Chapter 7 or 11 bankruptcy, or click one of the links below to go straight to the information you're seeking:
These Chapter 7 filers can keep property using bankruptcy exemptions and discharge qualifying debt. It’s best suited for a low- or no-income debtor whose property is fully protected by bankruptcy exemptions and whose debts qualify for discharge. But as long as the debtor would come out ahead financially, meaning that the amount of erased debt would adequately exceed the value of property lost, Chapter 7 would likely make sense.
These filers must qualify by passing the Chapter 7 means test unless the filer’s business debt exceeds the filer’s consumer debt, thereby exempting the filer from the means test requirement. The exemption creates a “loophole” that prevents a high-earning filer with substantial business debt from automatically disqualifying.
However, keep in mind that another test exists. The trustee will compare the current income figures listed on Schedule I: Your Income to the expense totals disclosed on Schedule J: Your Expenses. The bankruptcy judge will likely convert the case to Chapter 13 if, after subtracting the two figures, income remains that the filer could use to pay creditors through a repayment plan. For instance, a filer with a $5,000 monthly income and $3,500 in monthly expenses would have $1,500 available to pay creditors each month. The bankruptcy judge would likely convert the case to Chapter 13.
Individuals can protect or exempt property using bankruptcy exemptions, such as some equity in a home and car, household furnishings, clothing, a retirement account, and some tools needed in a profession or trade. Many states also have wildcard exemptions a filer can use to protect assets of the filer’s choice.
Sole proprietors can also keep any property covered by bankruptcy exemptions. If exemptions protect vital business assets—such as needed equipment and product—a sole proprietor might even be able to keep the business open. By contrast, a service-oriented sole proprietorship will almost always survive Chapter 7 because a trustee can’t sell the owner’s future services.
When an individual files for Chapter 7 bankruptcy, qualifying personal and business debts are wiped out with the debt discharge, and personal guarantees are included. The same applies to sole proprietors. Credit card balances, utility and medical bills, lease balances, and personal loans are debts commonly discharged in Chapter 7.
If a filer would lose important property in Chapter 7, negotiating debt directly with creditors and selling assets might be the better option. Also, Chapter 13 has mechanisms not available in Chapter 7 that will allow filers to do the following:
Find out when Chapter 13 works better than Chapter 7.
Chapter 7 provides limited benefits to these entities. It works best when the business has substantial assets to sell, and the partners or stakeholders want to relinquish the work of selling it to someone else. Essentially, the filing allows the closing company to hire the Chapter 7 trustee to take the rowing oar in the wind-down process and to assume liquidation and asset distribution-related tasks. Because all property gets sold, filing for Chapter 7 will effectively close the company.
Stakeholders interested in filing for Chapter 7 should consider that the trustee’s interests are aligned more closely with creditors than the debtor, making them natural partners. The more assets the trustee uncovers, the bigger the trustee’s payday, giving the trustee ample incentive to investigate the company’s affairs and potentially mishandled or hidden assets.
Although the transparent nature of bankruptcy can be beneficial, the other option—closing the business outside of bankruptcy—is often more economical and offers less stakeholder scrutiny. Business bankruptcy attorneys decide on closure strategy on a case-by-case basis.
Here are some procedural details that apply when these debtors file for Chapter 7.
Most filers must take and pass the Chapter 7 means test to qualify for Chapter 7. However, an exception exists when business debt exceeds consumer debt. Because businesses don’t have consumer debt, filing businesses are exempt from the need to qualify for Chapter 7.
When a business files for Chapter 7, the trustee sells all of the business property at fire-sale prices. The trustee then deducts sales costs and an additional percentage as payment for the trustee’s efforts before distributing the remainder to creditors.
This practice can be problematic for stakeholders personally liable for business debt, leaving higher balances than might be possible otherwise. Stakeholders can often limit exposure by negotiating down debt, selling the property for top dollar, and distributing funds outside of bankruptcy. This approach tends to pay more toward creditor payments, leaving less for stakeholders to pay with personal assets.
The partnership, LLC, or corporation won’t receive a debt discharge. Stakeholders remain responsible for any personal guarantees for business debt and other nondischargeable obligations, such as trust fund tax debt.
Partnerships rarely file for Chapter 7 because general partners are personally liable for business debt. If a partnership without adequate assets to repay creditors filed for Chapter 7, the trustee could pursue the partners for payment personally and individually—possibly even forcing them into bankruptcy.
Red flags for any business filers include rumblings from disgruntled creditors, business partners, or even ex-spouses. Not only are these individuals the most likely to ask uncomfortable, if not downright dramatic questions at the 341 meeting of creditors—the one hearing all Chapter 7 filers must attend—but things could, and often do, escalate from there. In a nutshell, the trustee gains from the information provided by disgruntled creditors. It can help uncover assets.
Also, a bankruptcy filing increases the chances of a creditor lawsuit. Once a business files a case in bankruptcy court, creditors start looking for ways to get paid. The most basic is by filing a proof of claim. However, if selling the business assets won’t pay much toward claims, creditors might initiate litigation asserting that the stakeholders mishandled assets and attempt to go after their personal assets. Even when meritless, defending a lawsuit is costly.
Large businesses with debt exceeding Chapter 11, Subchapter V (Chapter 11, Sub V) small business limits must use the traditional Chapter 11 procedure. Because of the large number of creditors involved and the votes required to approve a plan, Chapter 11 is the most cumbersome and expensive form of bankruptcy, making it unavailable to most small businesses.
It works well if the functioning business has a sufficient income stream to support a reorganization plan (although, in some instances, the company can take out a loan for operating capital). Here are some of the procedural requirements that set it apart from Chapter 11, Subchapter V (discussed further below).
Creditors have significant involvement in a Chapter 11 case. The U.S. trustee appoints a creditors’ committee made up of the seven largest unsecured creditors with the following responsibilities:
The committee is comprised of unsecured creditors because an unsecured debt—an obligation not backed by collateral—carries with it the least amount of protection in bankruptcy. Hence, it’s most at risk of being discharged in a bankruptcy case. By contrast, secured creditors have significant protection—they’re entitled to the property collateralizing the claim if the debt isn’t paid, even in a bankruptcy case.
The debtor in possession must fully disclose background information so that a creditor can make an informed decision about the feasibility of the proposed plan. The disclosure statement describes how the plan would pay each class of creditors, along with other information, such as:
Creditors use the company snapshot provided to raise plan objections disguised as disclosure statement objections. Because creditors can also object to the proposed plan, the process gives creditors two “objection” bites at the apple, creating two litigation rounds.
Once the disclosure statement is approved, the court will set dates for plan objections and creditor voting. The debtor must wait to begin soliciting creditor votes until then unless negotiations predated the bankruptcy filing.
Once the requisite amount of creditor votes is received and the plan is confirmed, the property in the bankruptcy estate vests in the debtor per the plan.
Also, after creditor consensus is received and the plan is confirmed, the debtor receives a debt discharge erasing debts identified in the plan. The discharge occurs at the time of confirmation, not after the debtor makes required payments, because the confirmed plan becomes a new binding contract between the debtor and creditors.
Chapter 11, Subchapter V, requires far less creditor involvement in a process that can more closely resemble Chapter 13 than Chapter 11.
A business must be functioning and have an income stream sufficient to support a reorganization plan. Also, the company's debts must be $3,024,725 or less if filed between April 1, 2022, and March 31, 2025.
Because it can be difficult for a small business to remain profitable and propose a feasible plan, the U.S. trustee provides more oversight throughout the process. For instance, the debtor in possession must submit to an initial interview with the U.S. trustee—something not a part of a traditional Chapter 11—and provide extensive financial information earlier in the process.
Some of the requirements that typically generate litigation in a traditional Chapter 11 aren’t required in Chapter 11, Subchapter V, such as:
As long as the plan pays creditors according to bankruptcy rules and is objectively fair, the bankruptcy judge can confirm (approve) it over creditor objections.
A debtor must make all plan payments before receiving the debt discharge if the judge confirms the plan without creditor consent.
If a business debtor’s filing involves one piece of commercial real estate or residential property with four or more residential units, it’s considered a single asset real estate filing. Special rules that help protect a secured creditor from loss apply in these cases.
In a single asset real estate filing, a creditor with a secured interest in the property can bring a motion asking the court to lift the automatic stay so that the creditor can move forward with foreclosure or other collection actions. If the debtor in possession can’t file a feasible reorganization plan or pay interest payments to the creditor, the creditor will win the motion.
Because these cases also often involve cash collateral—a contractual agreement to turn over property rents, accounts receivables, and other cash equivalents to the creditor—these cases often end quickly. Without the use of cash collateral, many single asset real estate debtors can't pay the necessary interest payment.
These benefits and procedures apply in both Chapter 7 and 11 cases.
An "automatic stay" order immediately stops most creditors from pursuing collection efforts, including wage garnishments, levies, and many lawsuits. Filing for bankruptcy won’t stop all legal actions, however. Criminal cases, some family law matters, and government civil enforcement proceedings will continue.
The automatic stay will go into effect if it’s the filer’s first bankruptcy. The rules discourage people from misusing the system by limiting the stay to a month or preventing it from going into effect when someone has filed and dismissed cases recently, usually within the last 180 days.
Anyone can file for Chapter 7 or 11, including individuals, married couples, and business entities. But not every chapter is a good match for every filer—some chapters come with significant pitfalls. Also, filers who have received a debt discharge in the past must wait until the required time elapses before qualifying for a second bankruptcy discharge.
Filers must complete a credit counseling course within 180 days before filing and include it with the petition and other official bankruptcy forms. Businesses must be represented by counsel and possess proper filing authority. A filing fee or waiver is also required (more below).
All filers attend at least one hearing called the 341 meeting of creditors. Before the meeting, filers submit verification documentation supporting the petition's financial disclosures, including tax returns, profit and loss statements, bank statements, and more. At the meeting, the trustee conducting the meeting places filers under oath, verifies identity, and asks standard questions, along with questions raised by the petition. Creditors can appear and ask questions, as well.
The costs associated with bankruptcy can add up quickly. Here’s what you can expect to pay.
Whenever a business is involved in bankruptcy, it’s best to seek professional advice. For instance, many business people find it more beneficial to file individual bankruptcy after a business closure. An attorney experienced with business bankruptcy cases will evaluate all of the options available and determine how to protect your assets while meeting your goals.
This table highlights some primary differences between Chapters 7 and 11, and Chapter 11, Subchapter V.
Chapter 7 |
Chapter 11 |
Chapter 11, Sub V |
|
Type of Bankruptcy |
Liquidation |
Reorganization |
Reorganization |
Who Can File? |
Individuals, married couples, and business entities |
Individuals, married couples, and business entities |
Individuals, married couples, and business entities |
Debt Restrictions |
No debt limitation. |
No debt limitation. |
$3,024,725 for cases filed between April 1, 2022, and March 31, 2025. |
Income Qualification Restrictions |
Income must be low enough to pass the Chapter 7 Means Test unless business debt exceeds consumer debt or another exemption applies. |
Business or personal income must be sufficient to fund the Chapter 11 plan. |
Business or personal income must be sufficient to fund the Chapter 11 plan. |
Other Eligibility Restrictions |
Must take a credit counseling course during the180 days before filing. Counsel must represent a business entity and file proof of filing authority. |
Must take a credit counseling course during the 180 days before filing. Counsel must represent a business entity and file proof of filing authority. |
Must take a credit counseling course during the 180 days before filing. Counsel must represent a business entity and file proof of filing authority. |
Filing Fees |
$338 payable in four installments with court permission (Dec 2020). Fee waiver available. |
$1,738 (effective Dec 2020) |
$1,738 (effective Dec 2020) |
What Happens to Property in Bankruptcy? |
Trustee can sell all nonexempt property to pay creditors. |
The debtor remains in control of the property, including the business, throughout the case as a "debtor in possession." A trustee isn't appointed. |
The debtor remains in control of the property, including the business, throughout the case as a "debtor in possession." A trustee isn't appointed. |
What Happens to Debt in Bankruptcy and How Long Does it Take to Receive a Discharge? |
Three to four months for individuals and sole proprietors to receive a debt discharge erasing qualifying obligations—other businesses ineligible. |
Businesses receive a debt discharge upon plan consensus and confirmation. |
Discharge received after completion of plan payments when the bankruptcy judge confirms the plan without creditor consensus. |
Benefits |
Individuals and sole proprietors can quickly discharge qualifying debt, including personal guarantees and other business-related obligations. Sole proprietors will include personal and business assets and debts in the case. Businesses can shift the wind-down obligation to sell the business's property to the trustee. |
Debtors maintain control over the business and property while restructuring debt, often allowing a struggling business to remain open. Provides a way to catch up on missed payments to avoid foreclosure or repossession. |
Debtors maintain control over the business and property while restructuring debt, often allowing a struggling business to remain open. Provides a way to catch up on missed payments to avoid foreclosure or repossession. Doesn’t require a creditors’ committee, disclosure statement, or creditor consensus, making it more cost-effective for small businesses. |
Drawbacks |
The trustee can sell nonexempt property. Doesn't provide a way to catch up on missed payments to avoid foreclosure or repossession. The personal assets of partnership partners can be at risk. Filing for bankruptcy opens the door for creditor litigation. |
Prohibitively expensive for most small businesses. Filing for bankruptcy opens the door for creditor litigation, although the risk is lessened by the ability to negotiate with creditors. |
Filing for bankruptcy opens the door for creditor litigation, although the risk is lessened by the ability to negotiate with creditors. |
Did you know Nolo has been making the law easy for over fifty years? It’s true—and we want to make sure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
Our Editor's Picks for You |
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More Like This |
Will Business Bankruptcy Help If I Want to Continue My Business? |
What to Consider Before Filing Bankruptcy |
Chapter 7 for Small Business Owners |
Helpful Bankruptcy Sites |
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
Updated April 14, 2022
]]>The shortened process known as an emergency or skeleton filing allows you to start a bankruptcy case by submitting an incomplete, bare-bones filing. And the best part? It can be filed online in a matter of minutes.
A specific emergency isn’t required for a skeleton filing. Anyone who needs to file quickly to prevent an unwanted event from happening can use the process. For instance, bankruptcy can stop a:
After filing, the automatic stay goes into place and stops these types of issues immediately. Keep in mind that the relief might be temporary, and that not all bankruptcy chapters will solve every problem.
Understanding the differences between Chapter 7 and Chapter 13 bankruptcy will help you determine which chapter will best meet your needs.
The average bankruptcy packet ranges from 40 to 50 pages in length. The beauty of a skeleton filing is that you don’t have to complete all of the required paperwork.
Here’s what you should be prepared to file and pay:
A business will use the non-individual forms. You can find the official bankruptcy forms on the U.S. Courts website.
The skeleton process buys you time—but that’s it. You must submit the remaining forms within 14 days. The court will likely notify you about the deadline in writing.
A completed packet will contain information about every aspect of the debtor’s financial situation, including the following:
It’s important to keep in mind that if you don’t meet the filing deadline, the court will dismiss the case, and possibly issue sanctions if the court suspects an abuse of the bankruptcy process.
You can learn more by reading Emergency Bankruptcy Filing.
]]>Although this seems simple, you can hold property in different ways, including:
In this article, you’ll find the definition of the most common types of property ownership, a well as other terms you’ll need to know if you’re considering bankruptcy.
When you’re filling out your bankruptcy forms, you’ll need to describe all real estate that you own on Schedule A/B: Property of the official bankruptcy forms. You’ll be asked to include:
It’s the last point that stumps many people. Even though you don’t have to fill in the ownership interest portion, it’s always good to be complete.
Here are some common ways to own real estate.
Most people will use one of the terms mentioned above to describe their real estate ownership interest. But, other situations can exist. Here are some terms that you’re not likely to need, but, depending on your circumstances, you just might.
You’ll find more useful bankruptcy terms in When Is a Bankruptcy Claim Contingent, Unliquidated, or Disputed?
]]>Before you file for bankruptcy, it’s important to be certain that it’s the right choice because a bankruptcy filing can have a severe and lasting impact on your credit, assets, and income. The first course—the pre-filing credit counseling class—helps you make sure that bankruptcy is right for you. In the course, you’ll review your finances and explore alternative repayment options. If, after completing the course, moving forward with bankruptcy still makes sense, you’ll file a course completion certificate to prove you satisfied the education requirement along with your petition and schedules (the official paperwork that initiates the case). You can take the course online or over the phone and most people complete it in an hour or two.
You’ll take the post-filing debtor education course (or “second” class) after you file your bankruptcy. The second course will provide you with financial management tools that you’ll be able to rely on after your bankruptcy is over.
In a Chapter 7 bankruptcy, you must file your completion certificate with the court no later than 60 days after the date first set for the 341 meeting of creditors (the hearing that all bankruptcy filers must attend). The court will remind you by sending a notice entitled “Notice of Requirement to File a Certification of Completion of Course in Personal Financial Management.” Chapter 11, 12, and 13 filers can submit the completion certificate anytime before making the final payment under the repayment plan.
It’s best to get the coursework done promptly because not only is it easy to forget to do, failing to file the certificate will cost you. The court will dismiss your case without discharging (wiping out) your qualifying debt, and you’ll have to repay the filing fee to reopen it. Worse yet, in many courts, you won’t be able to file the certificate until you file a motion asking the court to accept the late-filed certificate and the judge grants your request (and you might have to file an additional motion asking for your discharge).
All individuals who file a Chapter 7, 11, 12, or 13 bankruptcy must complete a credit counseling class and a debtor education training course before receiving debt relief—even if the individual’s debts are primarily business debts.
This rule includes a husband and wife filing jointly (together). Each must satisfy the requirement. By contrast, business entities, such as a partnership, limited liability company, or corporation, are exempt.
You might be exempt from the requirement if you must file an emergency case, or you’re in a military zone. However, be aware that such exemptions are rare.
To find a course that meets the requirements of the courts in your bankruptcy jurisdiction, visit the U.S. Trustee’s website and select from a list of authorized providers.
]]>The court will grant your request for a hardship discharge if you can prove three conditions:
If you don’t qualify for a hardship discharge, it’s likely because you need to pay money to your unsecured creditors. If that’s the case, you can convert from a Chapter 13 to a Chapter 7 bankruptcy. The Chapter 7 trustee will sell your nonexempt property (assets you can’t protect with a bankruptcy exemption) and distribute the funds to your creditors.
If the court grants your motion for a hardship discharge, only unsecured nonpriority debts get discharged. The following debts typically aren’t wiped out in a hardship discharge:
Some debts will be wiped out in a hardship discharge unless the creditor objects to the debt by filing and winning a lawsuit called an adversary proceeding. These debts include:
If you have a debt that falls into one of these categories, your best strategy is to do nothing and hope the creditor does the same. If the creditor files the lawsuit, you’ll need to respond if you want the debt to remain dischargeable.
]]>Read on to learn some reasons a creditor or trustee might request a denial of discharge, what the legal consequences are if the judge finds for the complaining party, and more.
A bankruptcy discharge cancels your obligation to pay back qualifying debts after your bankruptcy case ends. Creditors cannot legally collect a discharged debt from you. (Find out about the debts you’ll remain responsible for in Nondischargeable Debts.)
If you’d like to dispute the debtor’s right to a discharge, you’ll need to file either an adversary proceeding (a type of lawsuit) or a motion, depending on the type of debt involved.
You must file the objection within 60 days of the date of the 341 meeting of creditors (with some exceptions—consult with a bankruptcy lawyer). The deadline date will appear on the Notice of Chapter 7 Bankruptcy Case mailed out by the court.
A creditor will usually object to the discharge of its particular debt when fraud or an intentional wrongful act occurs before the bankruptcy case. For instance, examples of nondischargeable debts, if proven, could include:
A creditor or the trustee can also object to the discharge of all debts involved in the case. This type of objection is common when the fraud is committed in connection with the bankruptcy, rather than before the filing. Examples include:
The penalty for losing any fraud-related objection can be very severe. You could face dismissal of your bankruptcy case, repaying some or all of your debts, and possibly even criminal prosecution.
Fraud isn’t always involved in an objection, however. Sometimes it isn’t clear whether a debt fits within a nondischargeable category. In that case, a creditor might ask the court to weigh in on the dischargeability status of a particular debt. For instance:
(Learn more in What Types of Bankruptcy Cases Must Be Filed as an Adversary Proceeding?)
The case starts with the filing of a written complaint (the document that initiates a lawsuit) that explains the specific reasons the party believes the debt isn’t dischargeable.
Several parties could file an adversary proceeding, including:
The parties will engage in discovery (a process that requires an exchange of evidence), and the judge will schedule a trial. If, after the trial, the judge finds for you, the debt will be discharged, and you won’t have to repay it. If the judge finds for the person who filed the suit, your debt won’t be discharged. You’ll be required to repay the debt. Of course, like any lawsuit, you can settle the adversary proceeding before trial.
]]>(For more information on how a bankruptcy discharge affects particular types of debt, see Debt Management: The Bankruptcy Discharge.)
In general, only an interested party—someone who has a stake in the outcome—can ask the bankruptcy court to revoke your discharge. In most cases, the revocation request will come from:
The grounds an interested party can use to request a revocation will depend on whether you filed for Chapter 7 or Chapter 13 bankruptcy.
If you filed for Chapter 7 bankruptcy, the bankruptcy trustee, United States trustee, or your creditors could ask the court to revoke your discharge if you:
In Chapter 13 bankruptcy, an interested party can request the court to revoke your discharge if you:
(For more information, read When the Bankruptcy Trustee Suspects Fraud.)
In Chapter 7 bankruptcy, an interested party must request a revocation based on fraud within one year after the court grants the discharge, or, if the debtor failed to report assets that were property of the estate or disobeyed court orders, within one year of the closing of the case, whichever is later. (Although a discharge is usually received early in the case, the matter might remain open for a considerable time to allow for the selling of assets.)
In Chapter 13 bankruptcy, an interested party must request a discharge revocation within one year after the court grants the discharge.
If the court revokes your bankruptcy discharge, you’ll remain liable for any previously discharged debts. Also, if you committed fraud or otherwise abused the bankruptcy system, you might have to pay fines, forfeit assets, or face criminal prosecution.
]]>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.
]]>The official bankruptcy forms can be completed and downloaded for free from the forms page of the U.S. Courts website.
As with most forms, the filer will start by giving the bankruptcy court basic information about the debtor. For instance, a petition for an individual filing a voluntary case—the most common type—will disclose:
An individual debtor or an official representative of a non-individual filer must sign the petition under penalty of perjury, acknowledging the consequences of lying to the court, concealing property, or committing bankruptcy fraud. The penalty for perjury can be up to a fine of $250,000, or imprisonment for up to 20 years, or both.
You’ll need to file many other forms in the bankruptcy case. Although most are filed with the petition, you can file them up to 14 days afterward. They detail the debtor’s income, assets, debts, expenses, and other aspects of the debtor's financial circumstances.
For more information, read How to Fill Out Bankruptcy Forms.
]]>On occasion, the bankruptcy trustee assigned to manage the case will suspect a bankruptcy crime because of inconsistencies in the official paperwork the debtor must complete and file with the court. Or, the trustee might question the debtor’s testimony at the hearing all filers must attend, the 341 meeting of creditors.
But that isn’t the only way. Other sources of information include:
Also, an official bankruptcy audit conducted by the U.S. Trustee’s Office can uncover evidence of wrongdoing. Such audits occur one of two ways: the case is selected for review on a random basis, or it gets flagged because it doesn’t fit within expected parameters (perhaps the debtor claimed unusually large monthly expenses).
Proving fraud can be difficult. For almost all bankruptcy crimes, the government has to resolve two questions:
Establishing that a defendant took a particular action, such as hiding property—or failed to do something, such as reporting all property owned—is easier than proving that the debtor intended to cheat his creditors. But the government must do just that—prove the wrongful act wasn’t the result of an innocent mistake.
Example. The trustee conducts an asset search and discovers that Barry, the Chapter 7 debtor, sold a piece of real estate worth $10,000 to his brother just three months before he filed Chapter 7 bankruptcy. His brother paid only $1,000 for the property. When Barry filed his Chapter 7 case, he didn’t disclose this transfer in his paperwork or at his meeting of creditors. The fact that Barry made the transfer but failed to disclose it is easy to establish with land records and the bankruptcy schedules. But the prosecutor will also have to prove that Barry’s failure to disclose the transfer wasn’t just an oversight and that the transfer itself was designed to hide the land from the court and ultimately the creditors.
Keep in mind, however, that the bankruptcy court has been witness to many different types of schemes, and is quick to see through claims of innocence.
Proving intent is rarely straightforward. Unless the perpetrator admits the crime, prosecutors have to rely on circumstantial evidence that, when seen as a whole, shows that the defendant intended to deceive, delay, or hinder creditors. This type of circumstantial evidence is known as “badges” of fraud:
In the example above, a prosecutor would likely argue that Barry must have been trying to hide the real estate from his creditors because he:
If you believe you might be involved in a fraud case in bankruptcy, you should seek counsel from a knowledgeable bankruptcy or defense attorney.
]]>You’ll find most bankruptcy crimes in the federal statutes. (18 U.S.C § 152 and 18 U.S.C. § 157.) Keep in mind that differing factors, including the nature of the crime, determine when the limitation period begins.
The statute of limitations for a crime is the law that tells you how much time the government has to bring criminal charges. Once the limitation period has run, the government can no longer prosecute the crime.
Sometimes determining when the limitation period begins and ends is tricky. Crimes fall into three general types:
Other factors can affect the statute of limitations. For more information, read Calculating the Statute of Limitations. Also, consider consulting with a knowledgeable bankruptcy attorney about the specifics of your case.
The law determining the applicable statute of limitations depends on the type of offense.
Example. Daria’s business was floundering, and she was considering bankruptcy. On January 1, 2013, Daria transferred a piece of real property worth $10,000 to her brother for $10. On February 3, 2014, Daria filed a Chapter 7 case, but she didn’t disclose the transfer or the cash. Not suspecting that anything was amiss, the court granted Daria’s discharge on May 15, 2014. Six months later her former business partner contacted the trustee to ask about the proceeds of the sale of the partnership assets. At a special examination on December 1, 2014, Daria denied everything under oath.
Daria has potentially committed several crimes. The limitation periods will expire as follows:
Other limitations periods exist for other possible crimes. You should contact a knowledgeable bankruptcy attorney for information about your particular case.
(For more information on this topic, read Bankruptcy Fraud Consequences.)
]]>Before the bankruptcy trustee—the official responsible for overseeing the case—can pay a creditor in bankruptcy, the creditor must prove several things:
Many debts, like loans and credit cards, are based on contracts between the parties. The contract explains the duties, liabilities, and terms, such as payment amount and interest rate. A balance usually isn’t difficult to figure out at any given time. It’s a relatively simple calculation of principal amount borrowed, plus fees and interest, minus payments. However, sometimes something must occur before the creditor will know how much is owed.
Example. Suppose you’re involved in an automobile accident and the other driver’s insurance company sues you. The monetary cost to the injured person (damages) can’t be determined because the other party’s medical treatment is ongoing. Those costs won’t get finalized until the treatment ends. You also won’t know the total cost that your attorney will charge for defending you. Both the insurance claim and your attorney’s claim are unliquidated. The amounts will be liquidated (known) after the case settles or goes to trial and the court enters a judgment.
Unliquidated Claims in a Chapter 7 Bankruptcy Case
When the trustee finds money to pay claims, the unsecured creditors will usually only receive a pro rata share (a percentage of the funds available). The trustee can’t calculate the pro rata share if unliquidated claims exist. The trustee must know each creditor’s claim amount. Therefore, a Chapter 7 bankruptcy case can’t end before the claims get liquidated.
The same holds true for claims the trustee might have against other parties. Trustees often enter into litigation to recover money owed to the debtor (the bankruptcy filer) by people not involved in the bankruptcy. The trustee’s claims must be liquidated so that the trustee knows how much money will be available to distribute to creditors.
(For more information, see When Is a Bankruptcy Claim Contingent, Unliquidated, or Disputed?)
]]>Not everyone qualifies for a Chapter 7 bankruptcy, although many prefer to file this chapter, if possible. In a Chapter 7 case, the debtor’s household income cannot exceed the state’s median income for a family of the same size. However, a filer with a higher than average income can still qualify by taking and passing the “means test” on the official Chapter 7 Means Test Calculation form.
The Chapter 7 means test allows the filer to reduce income by subtracting out necessary expenses. For instance, the debtor can deduct amounts paid for the following:
For other expenses, such as housing, utilities, food, and clothing, the debtor must use set amounts determined by national and local standards. The rule prevents a debtor from qualifying by deducting higher-than-average expenses. Otherwise, the bankruptcy system might unfairly reward those who chose to live lavish but unsupportable lifestyles.
Once complete, the means test reveals the debtor’s disposable income. If the total disposable income exceeds the threshold amounts established by federal law (the current figures will appear on the form), the debtor fails the test. For bankruptcy relief, the debtor will have to file a Chapter 13 bankruptcy.
A debtor who fails the means test but files a Chapter 7 case anyway must mark a box that states that the presumption of abuse arises. The statement indicates that, due to the outcome of the means test, it’s presumed that the debtor is abusing the process (trying to get away with something) by filing a Chapter 7 case instead of paying creditors in a Chapter 13 matter.
]]>Not all creditors have the right to levy a bank account. For instance, a credit card company cannot take your money without doing more (unless your bank issued the credit card—then you might be subject to a setoff). Specifically, the creditor must sue the debtor in court and win a money judgment.
Once the creditor wins a money judgment, the creditor becomes a “judgment creditor.” A judgment creditor can use collection techniques to take funds when the debtor won’t pay voluntarily. For instance, in addition to levying on a bank account, a judgment creditor can:
You should also be aware that certain creditors—such as the Internal Revenue Service—can levy a bank account without first going to court.
If you learn that your bank account has dropped due to a levy, and you need the funds for basic living expenses, you might be able to recover the money by petitioning the court—but you must act quickly. You’ll likely have a matter of days to do so. For assistance, try contacting your local sheriff’s office or the self-help office at your local courthouse.
]]>
The lien doesn’t allow the bank to sell the home at a foreclosure sale immediately after a default, however. Instead, a home lender must follow federal and state foreclosure laws.
Federal law (as of January 2017) prohibits a bank from initiating foreclosure proceedings before a homeowner’s mortgage payment is 120 days past due. The purpose of the federal waiting period is to help the homeowner stay in the home. The extra time gives the owner a chance to find a way to bring the loan current or to apply for a loss mitigation program.
After the 120-day waiting period elapses, the lender can start foreclosing by following the law of the state where the house is located. The bank will use either a judicial or nonjudicial foreclosure procedure, depending on the particular state’s process.
A judicial procedure starts when the lender files a lawsuit in court. If the bank wins, the court will order the home sold at a foreclosure sale.
If the bank uses a nonjudicial procedure, it will follow steps outlined in state law. In most cases, the lender must notify the borrower of the default, give the borrower a short amount of time to bring the account current, and notify the borrower (and possibly the public) of the foreclosure sale date. After completing the steps, the bank can proceed with the foreclosure sale without court approval.
(If you’d like to learn about foreclosure law in your state, read State Foreclosure Laws.)
]]>
In general, exempt property will include the things that an individual will need to maintain a job and household. Here are a few examples of commonly-included assets.
Not all states offer all of these protections. However, most provide additional exemptions, too. The type, amount, and conditions associated with each exemption varies by state.
(To find out what you’ll be able to keep, go to Nolo’s Bankruptcy Exemptions by State topic page.)
Some states give residents an additional choice. Specifically, they allow residents to choose between the state exemption list and the federal bankruptcy exemptions. The list that will be best for you will depend on the type of property that you own.
Although you can’t mix and match the two lists (you must choose one or the other), if you use your state bankruptcy exemptions, you’ll be able to use the federal nonbankruptcy exemptions, as well.
(You can find out more by reading the articles on the Bankruptcy Exemptions topic page.)
]]>
The following assets will be part of your bankruptcy estate:
(If you’d like more details about specific property types within each category, you can find it by reading Property in Your Bankruptcy Estate.)
However, filing for bankruptcy doesn’t mean that you’ll lose all of your property. You’ll be able to protect (exempt) the assets that you’ll need to maintain a job and household. But it's not up to you to choose the property that you’ll keep—it’s up to your state.
To determine the type and amount of property that you’ll be allowed to exempt (and take out of the bankruptcy estate), you’ll look to your state’s exemption rules. They’ll set forth what you’ll be entitled to keep. (For more information, go to Nolo’s Bankruptcy Exemptions by State topic page.)
What will happen to assets that you can’t exempt (nonexempt property) will depend on the bankruptcy chapter that you file. If you’re interested in learning more about nonexempt property, you can find out by reading What Is Nonexempt Property in Bankruptcy?
]]>
Here’s how the process works.
When bankruptcy funds are available for distribution, the court will send out a notice instructing creditors to submit “proof of claim” forms by a particular deadline date. On the claim form, the creditor must describe the debt and tell the court whether the claim is a secured or unsecured claim, among other things. The responses help the bankruptcy trustee—the court-appointed individual responsible for monitoring the case—disperse the funds appropriately.
Whether a creditor’s claim is secured or unsecured will usually depend on the debt contract entered into between the creditor and the bankruptcy filer. If the borrower agreed to guarantee or “secure” payment of the debt by putting up collateral—valuable property that the creditor can sell if the borrower fails to pay as agreed under the contract—then the debt will be a secured debt. The security creates an ownership interest in the property called a “lien” and a creditor with a lien right will have a “secured claim” in bankruptcy. If the lender doesn’t have a lien, the debt will be an unsecured debt, and the creditor’s bankruptcy claim will be an unsecured claim.
(To learn more about bankruptcy claims, read Types of Creditor Claims in Bankruptcy: Secured, Unsecured & Priority.)
Additionally, the creditor must further categorize unsecured claims on the proof of claim form as either a priority unsecured claim (which entitles the creditor to be paid ahead of other claimants) or as a nonpriority unsecured claim (the claim category that the trustee will pay last). (Find out more in What Is a Nonpriority Unsecured Claim in Bankruptcy?) [LINK]
You’ll report both your priority and nonpriority unsecured debts on official form E/F: Creditors Who Have Unsecured Claims when you prepare your bankruptcy paperwork. (Read Completing Bankruptcy's Schedule E/F: Creditors Who Have Unsecured Claims for additional information.)
]]>How can I tell if I have nonexempt property? Nonexempt property won’t appear in the exemption list. What will happen to your nonexempt property will depend on the type of bankruptcy chapter that you file.
What happens to nonexempt property in a Chapter 7 bankruptcy? When you file this bankruptcy chapter, the bankruptcy trustee—the court-appointed official responsible for managing your case—will sell your nonexempt property for the benefit of your creditors. The trustee will use the sales proceeds to pay your bills in the order required by bankruptcy law. Priority debt, such as domestic support obligations (child or spousal support) or tax debt, will get paid first. If you don’t have priority debt, or if funds remain after paying it in full, the trustee will pay your nonpriority unsecured debts, such as credit card balances, personal loans, and utility bills.
What happens to nonexempt property in a Chapter 13 bankruptcy? The trustee won’t sell your nonexempt property. Instead, you’ll pay an amount equal to the value of the nonexempt property to your unsecured creditors (creditors whose debt isn’t guaranteed by collateral). For instance, suppose that you aren’t able to exempt a boat worth $15,000 or a timeshare valued at $7,500. You’ll need to pay your unsecured creditors at least $22,500 over the course of your three- to five-year plan.
(For more information about nonexempt property, visit Nolo’s Bankruptcy Exemptions topic page.)
]]>(Learn more about the 341 meeting of creditors by visiting our creditor meeting topic page.)
Before the meeting, you’re required to send the trustee certain documents called “521 documents.” These items will help the trustee review your bankruptcy filing. Here’s a list of what you’ll need to forward to the trustee:
It’s common for the trustee to ask for additional documents and you’re obligated to comply with reasonable requests. (If the trustee asks for documents that you’re not comfortable providing, you should seek out the advice of an attorney.)
Here are examples of other documents you’ll want to be prepared to provide:
Most trustees prefer that you send the documents in a particular manner, so you’ll want to contact the trustee to find out where (and how) to forward the documents. Some trustees prefer the traditional mail route. However, most will allow you to scan and email them. Others will provide a link to a secure service that you’ll use to upload the required information from your computer.
For security purposes, it’s important to cover up any Social Security and bank account numbers, as well as the names of minor children.
]]>Here’s how the claim process works in bankruptcy.
When money is available to pay toward debt, the court will send out a notice giving creditors a deadline—called a “claims bar” date—by which they must submit a “proof of claim” form. The information the claim holder will provide will include:
A lender must check the “secured claim” box if the borrower agreed to guarantee the debt with property, called “collateral.” In other words, the borrower put up an asset that the creditor could sell if the borrower defaulted on (broke the terms of) the contract.
Two common types of secured debt are mortgages and car loans. The lender retains an ownership interest (called a “lien”) in the house or car (collateral) until the borrower pays off the loan. If the borrower fails to stay current, a lender can either foreclose on the home or repossess the vehicle.
By contrast, a creditor with an unsecured debt would not have the right to take property if the borrower failed to live up to the payment terms. Examples of unsecured debt include credit card balances, medical bills, and personal loans, such as payday loans.
Most creditors submit the forms promptly because failing to file a timely claim will result in a forfeiture of the creditor’s right to receive a portion of the available funds.
(Learn more by reading Types of Creditor Claims in Bankruptcy: Secured, Unsecured & Priority.)
]]>The Servicemembers’ Civil Relief Act (SCRA) provides active-duty military members with many legal protections in civil actions initiated against them. The SCRA gives courts the right to stay or postpone bankruptcy and non-bankruptcy proceedings against military personnel on active duty. Further, the protections afforded by the SCRA are separate from and in addition to the automatic stay provided by bankruptcy.
The SCRA offers other protections you can read about in Legal Protections for America's Military: The Servicemembers' Civil Relief Act.
To qualify for Chapter 7 bankruptcy, debtors must typically pass the Chapter 7 means test. The means test determines whether filers have enough disposable income to repay debts. If they don't, they qualify to receive a Chapter 7 debt discharge. Filers who can afford to pay some or all of their debt must use Chapter 13 or Chapter 11 if the filer exceeds Chapter 13 debt limit guidelines.
However, some military members aren’t required to take the means test. You can find the exclusion criteria on the Chapter 7 bankruptcy means test form or keep reading.
Suppose you’re a veteran with a disability who incurred most debt while on active duty or performing a homeland defense activity. In that case, you wouldn’t need to complete the means test to qualify for Chapter 7 bankruptcy.
To be considered a disabled veteran for means test purposes, you need to have a disability rated at 30% or more or be discharged from active duty because of a disability suffered or aggravated in the line of duty.
Other servicemembers aren’t required to take the means test, as well. Members of the National Guard or a reserve unit of the Armed Forces who were called to active duty or performed a homeland defense activity for at least 90 days after September 11, 2001, are excluded from Chapter 7 means testing requirements while on active duty and for 540 days afterward.
Important note. This exclusion is usually temporary. You’ll be subject to the means test requirement 14 days after your 540-day exclusion period ends.
A bankruptcy filing doesn’t automatically revoke your security clearance. Whether it is affected by bankruptcy will depend on a variety of things, including why you filed, your job performance, and other related factors.
By contrast, having large amounts of outstanding debt will almost certainly jeopardize your security clearance. In that instance, filing for bankruptcy might help if viewed as a positive step toward financial responsibility.
Learn whether you should file for bankruptcy now or wait.
Determinations regarding security clearances are usually made on a case-by-case basis. Before filing, check that your bankruptcy won’t adversely affect your security clearance with your superior or consult a bankruptcy lawyer. Learn more about special financial protections for the military.
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.
]]>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).
(Learn more about the bankruptcy discharge.)
The SSA is tasked with processing a large number of payments ranging from disability to retirement benefits. Due to the complexity of Social Security laws and the large volume of payments issued, overpayments and mistakes are common. Most overpayments occur because people lose their eligibility for disability or other benefits (typically when they get well enough to return to work) but still continue to receive checks from the SSA.
In most cases, people are not actually aware that they are being overpaid. Most people promptly notify the SSA when they return to work or experience a change that may affect their Social Security benefits. However, if payments continue, they erroneously believe that they still qualify to receive those benefits. As a result, most people are shocked and unprepared when they receive a letter from the SSA demanding repayment of the overpaid amount (which can be substantial).
(For more articles on Social Security and Social Security Disability, visit our Social Security Center.)
Just because you owe a debt to the federal government does not mean that you can’t discharge it in bankruptcy. Certain debts owed to the government, such as recent unpaid taxes or criminal fines, are nondischargeable in bankruptcy. But a Social Security overpayment is not one of them.
In bankruptcy, Social Security overpayments are treated as unsecured debts similar to credit card debt and medical bills. So if you are unable to pay back your Social Security overpayment, filing for bankruptcy relief can allow you to discharge your obligation to the SSA. However, keep in mind that the SSA has the right to object to your discharge if it believes you were committing fraud by accepting the additional payments.
Debts acquired by false pretenses or other fraudulent means can’t be discharged in bankruptcy. If a creditor believes that you committed fraud (such as providing false information on a credit application) when you obtained the debt, it can file a complaint (called an adversary proceeding) in your bankruptcy to have the debt declared nondischargeable. (Learn more about bankruptcy adversary proceedings based on fraud.)
Just like your other creditors, the SSA has a right to object to your discharge. But fraud is typically very difficult to prove in bankruptcy. So the chances that the SSA will object to your discharge are slim. However, if the SSA believes you accepted payments knowing that you were not entitled to them, it may have more incentive to file an objection to your discharge.
If you received a large Social Security overpayment and are not able to pay it back, consider talking to a knowledgeable bankruptcy attorney in your area to discuss all of your options.
]]>However, some remaining nonpriority, unsecured debts are not discharged when your Chapter 13 plan is complete. Read on to learn the details.
Certain types of debts survive Chapter 13 bankruptcy, regardless of your income or circumstances.
In both Chapter 7 and Chapter 13 bankruptcies, child support and alimony you owe directly to an ex-spouse or child are nondischargeable. Your Chapter 13 repayment plan must provide for 100% repayment of these debts. Although you don’t have to completely pay back support you owe to a governmental child support collection agency during the life of your plan, any amount that is left over after you complete your plan is not dischargeable.
Debts you owe on fines or restitution orders contained in the sentence for conviction of any crime (yes, even traffic tickets) may not be discharged in Chapter 13.
If you have been fined by a government agency for some reason, or subjected to a penalty or a forfeiture of property, this debt will not be discharged. However, if the government agency assesses the fine because you were overpaid benefits due to your failure to report income or for some other faulty behavior, only the fine itself is not dischargeable. The amount you were overpaid is dischargeable like any other unsecured debt. However, if the agency files an action in court alleging that you obtained the overpayment through fraud, the court can rule that the overpayment is not dischargeable.
Recent income tax debts—those that first became due within the three-year period prior to your filing date—are priority debts and have to be paid in full in any Chapter 13 plan. If your Chapter 13 ends prematurely for any reason, the tax debts you have not yet repaid will remain; you will either have to pay them outside of bankruptcy or convert your Chapter 13 to a Chapter 7 bankruptcy. (For more details, see Tax Debts in Chapter 13.)
If you operate a vehicle while illegally intoxicated by alcohol or drugs, and you kill or injure someone, any debt arising out of the injury is not dischargeable. But what if you are sued and the judge or jury finds you liable but doesn’t specifically find that you were intoxicated? This may not help you: The judgment against you won’t be discharged if the bankruptcy court (or a state court in a judgment collection action) determines that you were, in fact, intoxicated.
Note that this rule applies only to personal injuries: Debts for property damage resulting from your intoxicated driving are dischargeable.
If a creditor obtains a judgment against you in civil court for personal injury or death caused by your willful or malicious act, the judgment will be nondischargeable.
Unlike the “willful and malicious” category of debts that may be nondischargeable in Chapter 7, a creditor in a Chapter 13 case need not go to court to prove that the debt should not be wiped out. Instead, these debts are automatically nondischargeable. Note that the act which gives rise to the debt need only be willful or malicious to be nondischargeable in Chapter 13, which greatly expands the types of debt that will survive discharge. For instance, a judgment for injury caused by your reckless driving would most likely survive Chapter 13 bankruptcy on the ground of “maliciousness,” whereas it might be discharged in Chapter 7 because reckless driving, through malicious, is seldom considered willful.
Finally, unlike Chapter 7, which includes damage to property, this exception to a Chapter 13 discharge applies only to debts arising from personal injury or death.
Bankruptcy requires you to list all your creditors on your bankruptcy papers and provide their most current addresses. That way, the court can mail out notice of your bankruptcy with the best chance of reaching them. If you do your part and the official notice fails to reach the creditor for some reason beyond your control—for example, because the post office errs, or the creditor moves without leaving a forwarding address—the debt will still be discharged (as long as it is otherwise dischargeable). Also, if the creditor knew or should have known of your bankruptcy through other means, such as a letter or phone call from you, the debt will be discharged.
Suppose, however, that you forget to list a creditor on your bankruptcy papers or carelessly misstate a creditor’s identity or address. In that situation, the court won’t notify the creditor and the debt almost always will survive your bankruptcy (unless the creditor wouldn’t have received any payments under your plan, a very rare occurrence). The general rule is that debts not listed in a Chapter 13 case survive the bankruptcy. This means, of course, that you should be extra careful to list all of your creditors in a Chapter 13 case. Also, if a creditor fails to file a proof of claim, you would be well advised to file one for it, especially if the claim is for a secured debt.
As in Chapter 7, a student loan cannot be discharged in Chapter 13 unless you show the bankruptcy court that paying the loan back would be a substantial hardship. In certain situations, you might be able to discharge the interest on student loans (but not the principal).
Debts based on fraud, theft, or breach of fiduciary duty are not dischargeable in Chapter 13. Bankruptcy courts in Chapter 13 cases use the same procedure for determining the dischargeability of these debts as they use in Chapter 7 cases -- that is, the debt will be discharged if the creditor fails to come forward and establish fraud in the bankruptcy court.
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