Chapter 7

Individual and Business Liquidation

What Is Bankruptcy?

Basic information on Chapter 7 and Chapter 13 bankruptcy.

Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts or repay them under the protection of the bankruptcy court. Bankruptcies can generally be described as "liquidations" or "reorganizations."

Chapter 7 bankruptcy is the liquidation variety -- property is sold (liquidated) to pay off as much of your debt as possible, while leaving you with enough property to make a fresh start. Chapter 13 is the most common type of "reorganization" bankruptcy for consumers -- you repay your debts over three to five years.

Both kinds of bankruptcy have numerous rules -- and exceptions to those rules -- about what kinds of debts are covered, who can file, and what property you can and cannot keep.

Liquidation (Chapter 7)

Liquidation bankruptcy is called Chapter 7, and it can be filed by individuals (a "consumer" Chapter 7 bankruptcy) or businesses (a "business" Chapter 7 bankruptcy). A Chapter 7 bankruptcy typically lasts three to six months.

In a liquidation bankruptcy, some of your property may be sold to pay down your debt. In return, most or all of your unsecured debts (that is, debts for which collateral has not been pledged) will be erased. You get to keep any property that is classified as "exempt" under the state or federal laws available to you (such as your clothes, car, and household furnishings). If you don't own much, chances are that all of your property is exempt and you have what is known as a "no asset" case.

If you owe money on a secured debt (for example, a car loan, where the car is pledged as a guarantee of payment), you have a choice of allowing the creditor to repossess the property; continuing your payments on the property under the contract (if the lender agrees); or paying the creditor a lump sum amount equal to the current replacement value of the property. Some types of secured debts can be eliminated in Chapter 7 bankruptcy.

Not everyone can file for Chapter 7 bankruptcy. For example, if your disposable income is sufficient, after subtracting certain allowed expenses and monthly payments for certain debts (including child support and debts that secure property), to fund a Chapter 13 repayment plan, you won't be allowed to use Chapter 7. For more on this and other requirements, see Who Can File for Chapter 7 Bankruptcy? For more information on Chapter 7 bankruptcy generally, see An Overview of Chapter 7 Bankruptcy.

Bankruptcy doesn't work on some kinds of debts. Though bankruptcy can eliminate many kinds of debts, such as credit card debt, medical bills, and unsecured loans, there are many types of debts, including child support and spousal support obligations and most tax debts, that cannot be wiped out in bankruptcy. For more information, see What Bankruptcy Can and Cannot Do.

Reorganization (Chapter 13)

Chapter 13 bankruptcy is also known as "wage earner" bankruptcy because, in order to file for Chapter 13, you must have a reliable source of income that you can use to repay some portion of your debt. And to qualify for Chapter 13, your secured debts must be less than $922,975 and your unsecured debts less than $307,675.

When you file for Chapter 13 bankruptcy you propose a repayment plan that details how you are going to pay back your debts over the next three to five years. The minimum amount you'll have to repay depends on how much you earn, how much you owe, and how much your unsecured creditors would have received if you'd filed for Chapter 7.

If you have secured debts, Chapter 13 gives you an option to make up missed payments to avoid repossession or foreclosure. You can include these past due amounts in your repayment plan and make them up over time.

An Overview of Chapter 7 Bankruptcy

Chapter 7 bankruptcy is sometimes called "liquidation" bankruptcy -- it cancels your debts, but you might have to let the bankruptcy court liquidate (sell) some of your property for the benefit of your creditors.

Chapter 7 bankruptcy refers to the chapter of the federal statutes (the Bankruptcy Code) that contains the bankruptcy law.

Bankruptcy Costs in Time and Money

The whole Chapter 7 bankruptcy process takes about four to six months, costs $274 in filing and administrative fees, and commonly requires only one trip to the courthouse.

Who Can File

Chapter 7 can be a powerful remedy for debt problems, but it isn't available to everyone. For example, you won't be able to use Chapter 7 if you already received a bankruptcy discharge in the last six to eight years (depending which type of bankruptcy you filed) or if, based on your income, expenses, and debt burden, you could feasibly complete a Chapter 13 repayment plan. (For more information on these eligibility requirements, see Who Can File for Chapter 7 Bankruptcy?.)

Bankruptcy Forms

To file for bankruptcy, you fill out a two-page petition and a number of other forms. Then you file the petition and forms with the bankruptcy court in your area. Basically, the forms ask you to describe:

· your property

· your current income and its sources

· your current monthly living expenses

· your debts

· property you claim the law allows you to keep through the bankruptcy process (called "exempt property") -- most states let you keep some equity in your home, clothing, household furnishings, Social Security payments you haven't spent, and other necessities such as a car and the tools of your trade.

· property you owned and money you spent during the previous two years, and

· property you sold or gave away during the previous two years.

You must also file a certificate showing that you have completed credit counseling with an agency approved by the United States Trustee. (For a list of approved agencies in each state, go to the Trustee's website, http://www.usdoj.gov/ust, and click "Credit Counseling and Debtor Education.")

If you're facing an emergency, like a foreclosure or repossession in the next few days, you can file just the two-page petition, but you must file the rest of the forms within 15 days.

Bankruptcy's Magic Wand -- The Automatic Stay

Filing for bankruptcy puts into effect an "Order for Relief" -- known informally as the "automatic stay." The automatic stay immediately stops most creditors from trying to collect what you owe them. So, at least temporarily, creditors cannot legally grab ("garnish") your wages, empty your bank account, go after your car, house, or other property, or cut off your utility service or welfare benefits. For more information, see How Bankruptcy Stops Your Creditors: The Automatic Stay.

Bankruptcy Court's Control Over Your Financial Affairs

By filing for bankruptcy, you are technically placing the property you own and the debts you owe in the hands of the bankruptcy court. You can't sell or give away any of the property you own when you file, or pay off your pre-filing debts, without the court's consent. However, with a few exceptions, you can do what you wish with property you acquire and income you earn after you file for bankruptcy.

The Bankruptcy Trustee

The court exercises its control through a court-appointed person called a "bankruptcy trustee." The trustee's primary duty is to see that your creditors are paid as much as possible on what you owe them. And the more assets the trustee recovers for creditors, the more the trustee is paid.

The trustee (or the trustee's staff) will examine your papers to make sure they are complete and to look for nonexempt property to sell for the benefit of creditors. The trustee will also look at your financial transactions during the previous year to see if any can be undone to free up assets to distribute to your creditors. In most Chapter 7 cases, the trustee finds nothing of value to sell.

The Creditors Meeting

A week or two after you file, you (and all the creditors you list in your bankruptcy papers) will receive a notice that a "creditors meeting" has been scheduled. The trustee runs the meeting and, after swearing you in, may ask you questions about your bankruptcy and the papers you filed. The trustee will ask you whether the information in your papers is 100% true. Creditors rarely attend this meeting, but if they do, they may question you under oath about where collateral is located or about information you gave them to obtain the loan.

This meeting, which takes place somewhere in the courthouse, rarely lasts more than a minute or two. In the vast majority of Chapter 7 bankruptcies, this is the debtor's only visit to the courthouse.

What Happens to Your Property

If, after the creditors meeting, the trustee determines that you have some nonexempt property, you may be required to either surrender that property or provide the trustee with its equivalent value in cash. If the property isn't worth very much or would be cumbersome for the trustee to sell, the trustee may "abandon" the property -- which means that you get to keep it, even though it is nonexempt.

What Is Exempt Property?

Each state has laws that determine which items of property are exempt in bankruptcy, and in what amounts. These items cannot be seized by creditors or by the bankruptcy trustee.

Many states exempt health aids, "personal effects" (things such as electric shavers, hair dryers, and toothbrushes), ordinary household furniture and clothing without regard to their value.

Other kinds of property are exempt up to a limit. For example, in many states, furniture or a car is exempt to several thousands of dollars. This exemption limit means that any equity in the property above the limit isn't exempt. (Equity is the market value minus how much you still owe.)

Typically, the following items are exempt:

· part of the equity in motor vehicles (the amount varies from state to state)

· reasonably necessary clothing (no fur coats)

· reasonably necessary household goods and furnishings

· household appliances

· jewelry, to a few hundred dollars

· personal effects

· life insurance (cash or loan value or proceeds), (the amount varies from state to state)

· part of the equity in a residence (the amount varies from state to state)

· pensions

· public benefits

· tools of a trade or profession, to a certain value, and

· unpaid but earned wages.

As it turns out, any property owned by most Chapter 7 debtors is either exempt or is essentially worthless for purposes of raising money for the creditors. As a result, few debtors end up having to surrender any property, unless it is collateral for a secured debt.

How Your Secured Debts Are Treated

If you've pledged property as collateral for a loan, the loan is called a secured debt. The most common examples of collateral are houses and automobiles. If you're behind on your payments, the creditor can ask to have the automatic stay lifted in order to repossess or foreclose on the property. However, if you are current on your payments, you can keep the property and keep making payments as before -- unless you have enough equity in the property to justify its sale by the trustee.

If a creditor has recorded a lien against your property without your consent (for example, because the creditor obtained a court judgment against you), that debt is also secured. You may be able to wipe out the lien in bankruptcy.

The Bankruptcy Discharge

At the end of the bankruptcy process, all of your debts are wiped out (discharged) by the court, except:

· debts that automatically survive bankruptcy, unless the court rules otherwise (for example, child support, most tax debts, and student loans), and

· debts that the court has declared nondischargeable because the creditor objected (for example, debts incurred by your fraud or malicious acts).

After Bankruptcy

Once you receive your bankruptcy discharge, you no longer legally owe your creditors for any discharged debts. You can resume your economic life without court supervision, except you must tell the court if you receive (or become eligible to receive) an inheritance, insurance proceeds, or proceeds from a divorce settlement within 180 days of the date you originally filed your papers.

You can start rebuilding your credit, but it will take several years before you can get decent interest rates on a credit card, mortgage, or car loan. You can't file for Chapter 7 bankruptcy again for another eight years from the date of your filing.

Who Can File for Chapter 7 Bankruptcy?

Learn about eligibility rules for Chapter 7 -- including the new "means test."

Filing for Chapter 7 bankruptcy can be a powerful tool for dealing with overwhelming debt. But it isn't available to everyone. Here are some situations in which you will not be allowed to file for Chapter 7.

You Have Enough Income to Repay Your Debts

Under the old bankruptcy rules, the bankruptcy judge had the power to dismiss a Chapter 7 case if he or she thought the debtor had sufficient disposable income to fund a Chapter 13 repayment plan. There were no hard and fast rules dictating when a judge should dismiss a case on these grounds -- it depended on the facts of the case and the attitude of the judge.

Now that the new bankruptcy law has gone into effect, however, there are clear criteria that dictate who will be allowed to stay in Chapter 7 bankruptcy -- and who will be forced to use Chapter 13 bankruptcy if they want to file. Disabled veterans whose debts were incurred during active duty and people whose debts come primarily from the operation of a business get a fast pass to Chapter 7. All others must meet the requirements set out below.

How High is Your Income?

Under the new rules, the first step in figuring out whether you can file for Chapter 7 is to measure your "current monthly income" against the median income for a family of your size in your state. Your "current monthly income" is your average income over the last six months before you file. If your income is less than or equal to the median, you can file for Chapter 7.

If your income is more than the median, however, you must pass "the means test" -- another requirement of the new law -- in order to file for Chapter 7.

Do You Have Enough Disposable Income to Repay Some Debts?

The purpose of the means test is to figure out whether you have enough disposable income, after subtracting certain allowed expenses and required debt payments, to repay at least a portion of your unsecured debts over a five-year repayment period.

To find out how a free online calculator can help you figure out whether you pass the means test, see The Means Test: Is Your Income Low Enough for Chapter 7 Bankruptcy?

For much more information on these new requirements, including detailed worksheets that will help you figure out whether you can use Chapter 7, see How to File for Chapter 7 Bankruptcy, by Attorneys Stephen Elias, Albin Renauer, and Robin Leonard (Nolo).

You Previously Received a Bankruptcy Discharge

You cannot file for Chapter 7 bankruptcy if you obtained a discharge of your debts in a Chapter 7 case within the last eight years, or a Chapter 13 case within the last six years.

A Previous Bankruptcy Was Dismissed Within the Previous 180 Days

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

· you violated a court order

· the court ruled that your filing was fraudulent or constituted an abuse of the bankruptcy system, or

· you requested the dismissal after a creditor asked for relief from the automatic stay.

You Defrauded Your Creditors

A bankruptcy court may dismiss your case if it thinks you have tried to cheat your creditors or concealed assets so you can keep them for yourself.

Certain activities are red flags to the courts and trustees. If you have engaged in any of them during the past year, your bankruptcy case may be dismissed. These no-nos include:

· unloading assets to your friends or relatives to hide them from creditors or from the bankruptcy court

· running up debts for luxury items when you were clearly broke and had no way to pay them off

· concealing property or money from your spouse during a divorce proceeding, or

· lying about your income or debts on a credit application.

In addition, you must sign your bankruptcy papers under "penalty of perjury" swearing 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 hide your identity as a prior filer), and the court discovers your action, your case will be dismissed and you may be prosecuted for fraud. (For more information, see Tell the Whole Truth When You File for Bankruptcy.)

The Means Test: Is Your Income Low Enough for Chapter 7 Bankruptcy?

An online calculator tells you if you can file for Chapter 7 bankruptcy.

When the new bankruptcy law passed in 2005, it included a new "means test" -- a formula designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy. (These filers may use Chapter 13 bankruptcy to repay a portion of their debts, but may not use Chapter 7 to wipe out their debts altogether.)

Because of this new requirement, some people mistakenly believe that they must be completely penniless in order to use Chapter 7. Not true. You can earn significant monthly income and still qualify for Chapter 7 bankruptcy, even under the new law. In fact, most people who would have qualified for bankruptcy under the old law still qualify under the new law. This article shows you simple ways to determine whether you could pass the means test -- and, therefore, use Chapter 7 -- if you were to file for bankruptcy.

How Does the Means Test Work?

The means test was designed to limit the use of Chapter 7 bankruptcy to those who truly can't pay their debts. It does this by deducting specific monthly expenses from your "current monthly income" (your average income over the six calendar months before you file for bankruptcy) to arrive at your monthly "disposable income." The higher your disposable income, the more likely you won't be allowed to use Chapter 7.

To take the means test, you must first determine whether your income is more or less than the median income in your state. If you earn more than the median, you must figure out whether you would have enough left over, after subtracting certain expenses, to repay some of your debt.

Is Your Income More Than the Median?

The first step is simple: If your current monthly income is less than the median income for a household of your size in for your state, you pass. Period. You're done. You do not need to complete the rest of the means test. You can file for Chapter 7.

Do You Have Enough Disposable Income to Repay Some Debts?

For those whose household income exceeds the state median, the means test computations get significantly more complex. You must determine whether you have enough income left over (called "disposable income"), after paying your "allowed" monthly expenses,to pay off at least a portion of your unsecured debts (such as credit card bills). If your disposable income adds up to more than a certain amount, you fail the means test and cannot file for Chapter 7.

Median income levels vary by state and household size, and each county and metropolitan region has different allowed amounts for categories of expenses: basic necessities, housing, and transportation. But don't worry: You can get through the math with the help of an online calculator (see below).

Use an Online Calculator

If you're looking for an easy way to determine your status under the means test, use the online means test calculator at www.legalconsumer.com. This calculator is free, anonymous, and does not require registration. Created by Nolo author Albin Renauer, the calculator is an ideal companion to Nolo's book How to File for Chapter 7 Bankruptcy. Once you enter your zip code, the calculator uses the applicable income and expense standards for your state, county, and region to determine your eligibility.

You'll have to supply a good amount of financial information, but the calculator will save you the trouble of looking up income and expense figures for your area and doing the math. And, if you decide to file for bankruptcy, you can use these figures on your official paperwork (the calculator closely follows the format of the means test form, Official Form 22A,that you must complete when you file for bankruptcy).

If You Pass the Means Test

Of course, just because you qualify under the means test does not necessarily mean you should file for Chapter 7 bankruptcy -- merely that you can. Any decision to file for Chapter 7 bankruptcy should be made only after considering alternatives and other factors discussed with your attorney.

If You Don't Pass the Means Test

If you don't pass the means test, you are limited to using Chapter 13 bankruptcy, which requires you to make monthly payments over a five-year period according to a strict budget monitored by the court. Most people who file for bankruptcy prefer Chapter 7, which requires no repayment. However, Chapter 13 is still the best way to handle specific types of problems, like curing a default on a mortgage. (See Reasons to Use Chapter 13 Instead of Chapter 7.)

Chapter 7 FAQ

Are student loans dischargeable in bankruptcy?
Will bankruptcy set off the IRS's audit radar?
Can my bankrupt ex-husband get out of paying child support?
Can we get a home loan if my husband has a past bankruptcy?

I've got $60,000 left in student loans, and I've been repaying them for ten years already. If I file for bankruptcy, will this debt be wiped out?

The rules for discharging student loans in bankruptcy have gotten tougher over the years. Currently, student loans are dischargeable only if you can prove to the court that repaying them would cause you undue hardship, which is a pretty tough standard to meet. And to make this showing, you'll have to file a separate action in your bankruptcy case.

A bankruptcy court will discharge a student loan for undue hardship only if it believes you'll never be able to pay the loan back. For example, if you have a permanent disability and no future ability to work, and you have made reasonable efforts to pay off as much of the loan as you can by using the various non-bankruptcy options available, the court might find that paying back the loan is more than should be asked of you.

If you file for Chapter 13 bankruptcy, you can include your student loans in the repayment plan, and try to make a dent in them over the life of your plan. However, you will still owe whatever student loan debt remains when you complete your plan, unless you can convince the court that it would be an undue burden. Be warned, however, that bankruptcy courts are typically very reluctant to discharge student loans.

I am preparing to file for Chapter 7 bankruptcy and have been advised that the IRS will look at this as a HUGE red flag. Apart from not understanding why, I am more curious as to what to expect. Do you have ideas on this?

We are not aware of any policies -- written or unwritten -- targeting bankrupts for audits or other IRS problems. With more than 1.5 million people filing for bankruptcy in each of the first five years of the new millennium, the IRS would quickly run out of person power if it targeted or specially screened the tax returns of former bankrupts. The agency is already hard-pressed hectoring souls for nonpayment and other such deadly sins. You probably don't have much to worry about from its quarters.

A bankruptcy court just notified me that my ex-husband is filing for Chapter 7. I am one of his creditors, because: a) he owes back child support, including for medical bills; and b) he's not paying current child support. Will he be able to wiggle out of these debts?

Bankruptcy can wipe out many types of debt, but child support is not one of them. Certain debts (referred to legally as "priority debts") are considered so important that they survive bankruptcy -- and child support is first on the priority debt list. This means that your ex will still owe you this money, despite filing for bankruptcy.

My husband and I are trying to prequalify for a home loan. He was married once before and filed for bankruptcy; this was over eight years ago, but it still shows up. We have also paid off a lot of old debt, but it still appears on our credit report as not paid. What can we do to set the record straight?

It's time that you and your mate took active steps to clean up your credit file and get the correct status showing that the bills are paid off. If you haven't already done so, complete the "request for reinvestigation" form which is included with your credit report, or write a letter to the credit bureau, listing all of the incorrect and old information and requesting that the bureau remove or reinvestigate the disputed information.

If the bureau doesn't respond within 30 days, send a follow-up letter requesting that they remove the disputed information. If the bureau claims the information is accurate, contact the creditors directly. If the creditor agrees that the bills are paid off, get it in writing. Then, send this letter to the credit bureau. Or, provide the name and phone number of the creditor to the bureau so it can call and verify the information. If the creditor will not assist you, call the credit bureau customer service number and ask for help. Once your file is current, try again to prequalify for a mortgage.

Because you're dealing with a number of complications, it would probably be best for you to work with a mortgage broker. You should be able to find a mortgage for which you can qualify, but don't bank on finding the best terms -- that is, you'll probably need to put 20% to 25% down, pay high points, pay higher than average interest, or even get a cosigner.

Chapter 7: How it Works

Following is an overview of the early course of a typical Chapter 7 bankruptcy case.

The Chapter 7 Petition and Filing Requirements

A chapter 7 case begins with the debtor filing a petition with the bankruptcy court (the court serving the area where the individual lives, or where the business debtor is organized or has its principal place of business or principal assets). In addition to the petition, in a chapter 7 bankruptcy case the debtor must also file with the court:

1. Schedules of assets and liabilities;

2. A schedule of current income and expenditures;

3. A statement of financial affairs; and

4. A schedule of executory contracts and unexpired leases.

Debtors must also provide the assigned case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began).

1. Individual debtors with primarily consumer debts have additional document filing requirements. They must file:

2. A certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling;

3. Evidence of payment from employers, if any, received 60 days before filing;

4. A statement of monthly net income and any anticipated increase in income or expenses after filing; and

5. A record of any interest the debtor has in federal or state qualified education or tuition accounts.

A husband and wife may file a joint petition or individual petitions. Even if filing jointly, a husband and wife are subject to all the document filing requirements of individual debtors. (The Official Forms may be purchased at legal stationery stores or downloaded from the internet at http://www.uscourts.gov/bkforms/index.html.)

Fees and Payment Options

As of October 17, 2005, the courts must charge a $220 case filing fee, a $39 miscellaneous administrative fee, and a $15 trustee surcharge. Normally, the fees must be paid to the clerk of the court upon filing. With the court's permission, however, individual debtors may pay in installments. The number of installments is limited to four, and the debtor must make the final installment no later than 120 days after filing the petition. For cause shown, the court may extend the time of any installment, provided that the last installment is paid not later than 180 days after filing the petition. Id. The debtor may also pay the $39 administrative fee and the $15 trustee surcharge in installments. If a joint petition is filed, only one filing fee, one administrative fee, and one trustee surcharge are charged. Debtors should be aware that failure to pay these fees may result in dismissal of the case.

If the debtor's income is less than 150% of the poverty level (as defined in the Bankruptcy Code), and the debtor is unable to pay the chapter 7 fees even in installments, the court may waive the requirement that the fees be paid.

Required Information

In order to complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules, the debtor must provide the following information:

1. A list of all creditors and the amount and nature of their claims;

2. The source, amount, and frequency of the debtor's income;

3. A list of all of the debtor's property; and

4. A detailed list of the debtor's monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.

Married individuals must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files, the income and expenses of the non-filing spouse is required so that the court, the trustee and creditors can evaluate the household's financial position.

The "Automatic Stay"

Filing a petition under chapter 7 "automatically stays" (stops) most collection actions against the debtor or the debtor's property. But filing the petition does not stay certain types of actions listed under the Bankruptcy Code, and the stay may be effective only for a short time in some situations. The stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.

Meeting of Creditors

Usually between 20 and 40 days after the petition is filed, the case trustee will hold a meeting of creditors. During this meeting, the trustee puts the debtor under oath, and both the trustee and creditors may ask questions. The debtor must attend the meeting and answer questions regarding the debtor's financial affairs and property. If a husband and wife have filed a joint petition, they both must attend the creditors' meeting and answer questions. Within 10 days of the creditors' meeting, the U.S. trustee will report to the court whether the case should be presumed to be an abuse under the "means test" (which determines eligibility for filing bankruptcy under chapter 7)

It is important for the debtor to cooperate with the trustee and to provide any financial records or documents that the trustee requests. The Bankruptcy Code requires the trustee to ask the debtor questions at the meeting of creditors to ensure that the debtor is aware of the potential consequences of seeking a discharge in bankruptcy such as the effect on credit history, the ability to file a petition under a different chapter, the effect of receiving a discharge, and the effect of reaffirming a debt. Some trustees provide written information on these topics at or before the meeting to ensure that the debtor is aware of this information.

In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the meeting of creditors.

Conversion from Chapter 7

In order to accord the debtor complete relief, the Bankruptcy Code allows the debtor to convert a chapter 7 case to case under chapter 11, 12 or 13 as long as the debtor is eligible to be a debtor under the new chapter. However, a condition of the debtor's voluntary conversion is that the case has not previously been converted to chapter 7 from another chapter. Thus, the debtor will not be permitted to convert the case repeatedly from one chapter to another.

Chapter 7 Bankruptcy Checklist

A summary of what's involved in a typical Chapter 7 bankruptcy.

1. Analyze your debt. Some debts, such as child support obligations, are not dischargeable in Chapter 7 bankruptcy. And if you pledged collateral for a debt, the creditor can take the property if the debt isn't paid.

2. Determine your property exemptions. Every state has exemption laws, which dictate what types of property (or, in some cases, how much equity in particular types of property) you are entitled to keep if you file for Chapter 7 bankruptcy.

3. Make sure you are eligible. If your average income during the six months before you file is more than the median income for a family of your size in your state, you may not be allowed to use Chapter 7, depending on your income and debts. For more information, see Who Can File for

Chapter 7 Bankruptcy?

4. Redeem or reaffirm secured debts. If you pledged property as collateral for a loan, you'll need to pay something to the creditor if you want the right to keep the property. When you file for bankruptcy, you'll be asked to decide whether you want to "redeem" the property (pay the creditor the current replacement value of the property), "reaffirm" the debt (agree on new contract terms with the creditor), or "surrender" the property (let the creditor take it -- if the property is worthless, the creditor may not bother). Depending on where you live, there may be other options as well.

5. Fill out the bankruptcy forms. You complete a few dozen pages of forms, in which you tell the court about all of your property, debts, income, and expenses. You'll list the names of all your creditors, note which debts are disputed, decide what property you are claiming as exempt, and decide what you want to do about each of your secured debts.

6. File the forms. Filing your petition (the main bankruptcy form) officially starts your case. Most people file all the forms at once, but if you're in an emergency, you can file just a two-page form, and then file the complete set of the forms within 15 days.

7. Go to a meeting. In most cases, you'll need to go to court only once, for a short meeting with the trustee (and perhaps a creditor or two) to review your case and answer any questions about the information in your forms.

8. File objections or motions if needed. If you dispute a creditor's claim against you or you want to eliminate certain liens, you'll need to address these matters before your bankruptcy case is closed.

9. Wind up your secured debts. When you filed your bankruptcy forms, you completed a form in which you stated how you intended to handle your secured debts. Before your case is closed, you'll need to act on these matters.

10. Get your discharge. Congratulations! This is what it's all about. At the end of a successful bankruptcy, the court will issue an order saying that your dischargeable debts are officially discharged. Once a debt is discharged, you no longer have a legal obligation to pay it and the creditor has no legal right to demand it.

Chapter 7: Means Test, Credit Counseling, and Debtor Education Information

Below you will find in-depth information from the U.S. government on "means test" eligibility, credit counseling, and debtor education requirements for Chapter 7 bankruptcy filers. These requirements came about as a result of changes in bankruptcy laws that took effect in October of 2005. This page will be updated as new information on bankruptcy filing requirements and procedures becomes available.

The "Means Test" and Eligibility for Chapter 7

Under the new bankruptcy law that went into effect in October of 2005, bankruptcy applicants who wish to file under Chapter 7 must meet certain eligibility requirements based on a "means test." Under the "means test," if your current monthly income is less than the median income in your state, you can file for bankruptcy under Chapter 7. The link below from the U.S. Trustee Program (a branch of the U.S. Department of Justice that is responsible for overseeing bankruptcy cases) provides more information on the "means test" -- including links to income figures and other information you will need in order to determine eligibility for Chapter 7.

· "Means Test" Information and Requirements (U.S. Trustee Program)

Credit Counseling and Debtor Education

As part of the new bankruptcy laws, people wishing to file for bankruptcy (under Chapter 7 or Chapter 13) must now complete a credit counseling program before they will be allowed to file a bankruptcy petition. In addition, bankruptcy filers must obtain debt management counseling before being allowed to complete the bankruptcy process. In order to comply with these credit counseling and post-discharge debtor education requirements, filers must work with agencies that have been approved by the U.S. Trustee Program (a branch of the U.S. Department of Justice that is responsible for overseeing bankruptcy cases). Below are links to information on credit counseling and debtor education, and two lists of agencies that have been approved by the U.S. Trustee Program -- the first a list of agencies that provide pre-filing credit counseling to those wishing to file for bankruptcy, and the second a list of agencies that offer post-discharge debtor education to people who are completing the bankruptcy process. The third link below includes tips on choosing a credit counselor, from the Federal Trade Commission (FTC).

Chapter 7: Debt Discharge

A discharge releases individual debtors from personal liability for most debts and prevents the creditors owed those debts from taking any collection actions against the debtor. Because a chapter 7 discharge is subject to many exceptions, though, debtors should consult competent legal counsel before filing to discuss the scope of the discharge. Generally (and excluding cases that are dismissed or converted) individual debtors receive a discharge in more than 99 percent of chapter 7 cases. In most cases, unless a party in interest files a complaint objecting to the discharge or a motion to extend the time to object, the bankruptcy court will issue a discharge order relatively early in the case -- generally, 60 to 90 days after the date first set for the meeting of creditors.

Grounds for Denial of a Debt Discharge

The grounds for denying an individual debtor a discharge in a chapter 7 case are narrow and are construed against the moving party. Among other reasons, the court may deny the debtor a discharge if it finds that the debtor:

· Failed to keep or produce adequate books or financial records;

· Failed to explain satisfactorily any loss of assets;

· Committed a bankruptcy crime such as perjury;

· Failed to obey a lawful order of the bankruptcy court;

· Fraudulently transferred, concealed, or destroyed property that would have become property of the estate; or

· Failed to complete an approved instructional course concerning financial management.

Debt "Reaffirmation"

Secured creditors may retain some rights to seize property securing an underlying debt even after a discharge is granted. Depending on individual circumstances, if a debtor wishes to keep certain secured property (such as an automobile), he or she may decide to "reaffirm" the debt. A reaffirmation is an agreement between the debtor and the creditor that the debtor will remain liable and will pay all or a portion of the money owed, even though the debt would otherwise be discharged in the bankruptcy. In return, the creditor promises that it will not repossess or take back the automobile or other property so long as the debtor continues to pay the debt.

If the debtor decides to reaffirm a debt, he or she must do so before the discharge is entered. The debtor must sign a written reaffirmation agreement and file it with the court. The Bankruptcy Code requires that reaffirmation agreements contain an extensive set of disclosures. Among other things, the disclosures must advise the debtor of the amount of the debt being reaffirmed (and how it is calculated), and that reaffirmation means that the debtor's personal liability for that debt will not be discharged in the bankruptcy. The disclosures also require the debtor to sign and file a statement of his or her current income and expenses which shows that the balance of income paying expenses is sufficient to pay the reaffirmed debt. If the balance is not enough to pay the debt to be reaffirmed, there is a presumption of undue hardship, and the court may decide not to approve the reaffirmation agreement. Unless the debtor is represented by an attorney, the bankruptcy judge must approve the reaffirmation agreement.

If the debtor was represented by an attorney in connection with the reaffirmation agreement, the attorney must certify in writing that he or she advised the debtor of the legal effect and consequences of the agreement, including a default under the agreement. The attorney must also certify that the debtor was fully informed and voluntarily made the agreement and that reaffirmation of the debt will not create an undue hardship for the debtor or the debtor's dependants. The Bankruptcy Code requires a reaffirmation hearing if the debtor has not been represented by an attorney during the negotiating of the agreement, or if the court disapproves the reaffirmation agreement. The debtor may repay any debt voluntarily, however, whether or not a reaffirmation agreement exists.

Debts That Cannot Be Discharged

An individual receives a discharge for most of his or her debts in a chapter 7 bankruptcy case. A creditor may no longer initiate or continue any legal or other action against the debtor to collect a discharged debt. But not all of an individual's debts are discharged in chapter 7. Debts not discharged include

· Debts for alimony and child support,

· Certain taxes,

· Debts for certain educational benefit overpayments or loans made or guaranteed by a governmental unit,

· Debts for willful and malicious injury by the debtor to another entity or to the property of another entity,

· Debts for death or personal injury caused by the debtor's operation of a motor vehicle while the debtor was intoxicated from alcohol or other substances, and

· Debts for certain criminal restitution orders.

The debtor will continue to be liable for these types of debts to the extent that they are not paid in the chapter 7 case. Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for willful and malicious injury by the debtor to another entity or to the property of another entity will be discharged unless a creditor timely files and prevails in an action to have such debts declared nondischargeable.

Revocation of Debt Discharge

The court may revoke a chapter 7 discharge on the request of the trustee, a creditor, or the U.S. trustee if the discharge was obtained through fraud by the debtor, if the debtor acquired property that is property of the estate and knowingly and fraudulently failed to report the acquisition of such property or to surrender the property to the trustee, or if the debtor (without a satisfactory explanation) makes a material misstatement or fails to provide documents or other information in connection with an audit of the debtor's case.

Debts that Remain After a Chapter 7 Discharge

If you file for bankruptcy under Chapter 7, you should be aware that not all debts are eliminated (or "discharged") once the bankruptcy process is complete. Generally speaking, in a Chapter 7 proceeding, the following debts are not discharged:

· Debts or creditors not listed on the schedules filed at the outset of the case.

· Most student loans, unless repayment would cause the debtor and his or her dependents undue hardship (more on student loans below).

· Recent federal, state, and local taxes.

· Child support and spousal maintenance (alimony).

· Government-imposed restitution, fines, and penalties.

· Court fees.

· Debts resulting from driving while intoxicated.

· Debts not dischargeable in a previous bankruptcy because of the debtor's fraud.

Student Loans

As noted in the above list, educational loans are generally not discharged by a Chapter 7 bankruptcy. They may be dischargeable, however, if the court finds that paying off the loan will impose an "undue hardship" on the debtor and his or her dependents.

In order to qualify for a hardship discharge of a student loan, the debtor must demonstrate that he or she cannot make payments at the time the bankruptcy is filed, and will not be able to make payments in the future. The debtor must apply for the hardship discharge before discharge of the debtor's other debts is granted. Application for a hardship discharge is not included in the standard bankruptcy fees, and must be paid for after the case is filed.

The Bankruptcy Code does not specifically define the requirements for granting a hardship discharge of a student loan. Courts have applied different standards, but they often apply a three-part test to determine eligibility:

1. Income -- if the debtor is forced to pay off the student loan, the debtor will not be able to maintain a minimum standard of living for himself or herself and his or her dependents;

2. Duration -- the financial circumstances that satisfy the income test in (1) will continue for a significant portion of the repayment period; and

3. Good Faith -- the debtor must have made a good-faith effort to repay the loan prior to the bankruptcy.

Additional Non-Dischargeable Debts

In addition, the following debts are not discharged if the creditor objects during the case and proves that the debt fits one of these categories:

· Debts from fraud, including certain debts for luxury goods or services incurred within ninety days before filing and certain cash advances taken within seventy days after filing.

· Debts from willful and malicious acts.

· Debts from embezzlement, larceny, or breach of fiduciary duty.

· Debts from a divorce settlement agreement or court decree, if the debtor has the ability to pay and the detriment to the recipient would be greater than the benefit to the debtor.

Exempt vs. Non-exempt Property Under Chapter 7

In a Chapter 7 liquidation case, the debtor has to turn certain property over to the bankruptcy trustee, so that the property can be sold and the proceeds used to pay off debts. Debtors, whether they are businesses or individuals, are often justifiably concerned about what property they will be allowed to keep and what they must give up. Below are examples of property that a Chapter 7 debtor will usually have to give up ("non-exempt" property), and property that the debtor may usually keep ("exempt" property).

Non-exempt Property

Items that the debtor usually has to give up include:

· Expensive musical instruments, unless the debtor is a professional musician.

· Collections of stamps, coins, and other valuable items.

· Family heirlooms.

· Cash, bank accounts, stocks, bonds, and other investments.

· A second car or truck.

· A second or vacation home.

Exempt Property

Exempt property (items that a debtor may usually keep) can include:

· Motor vehicles, up to a certain value.

· Reasonably necessary clothing.

· Reasonably necessary household goods and furnishings.

· Household appliances.

· Jewelry, up to a certain value.

· Pensions.

· A portion of equity in the debtor's home.

· Tools of the debtor's trade or profession, up to a certain value.

· A portion of unpaid but earned wages.

· Public benefits, including public assistance (welfare), social security, and unemployment compensation, accumulated in a bank account.

· Damages awarded for personal injury.

If you have questions about what property you will be allowed to retain if you file bankruptcy under Chapter 7 of the Bankruptcy Code, you may want to speak with an experienced bankruptcy attorney.

Chapter 7: The Case Trustee, Claims, and the Bankruptcy Estate

The Case Trustee

When a chapter 7 petition is filed, the U.S. trustee (or the bankruptcy court in Alabama and North Carolina) appoints an impartial case trustee to administer the case and liquidate the debtor's nonexempt assets. If all the debtor's assets are exempt or subject to valid liens, the trustee will normally file a "no asset" report with the court, and there will be no distribution to unsecured creditors. Most chapter 7 cases involving individual debtors are no asset cases.

Filing of Claims

If the case appears to be an "asset" case at the outset, unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors. A governmental unit, however, has 180 days from the date the case is filed to file a claim. In the typical no asset chapter 7 case, there is no need for creditors to file proofs of claim because there will be no distribution. If the trustee later recovers assets for distribution to unsecured creditors, the Bankruptcy Court will provide notice to creditors and will allow additional time to file proofs of claim. Although a secured creditor does not need to file a proof of claim in a chapter 7 case to preserve its security interest or lien, there may be other reasons to file a claim.

The Bankruptcy Estate

Commencement of a bankruptcy case creates an "estate." The estate technically becomes the temporary legal owner of all the debtor's property. It consists of all legal or equitable interests of the debtor in property as of the commencement of the case, including property owned or held by another person if the debtor has an interest in the property. Generally speaking, the debtor's creditors are paid from nonexempt property of the estate.

The Case Trustee's Role

The primary role of a chapter 7 trustee in an asset case is to liquidate the debtor's nonexempt assets in a manner that maximizes the return to the debtor's unsecured creditors. The trustee accomplishes this by selling the debtor's property if it is free and clear of liens (as long as the property is not exempt) or if it is worth more than any security interest or lien attached to the property and any exemption that the debtor holds in the property. The trustee may also attempt to recover money or property under the trustee's "avoiding powers." The trustee's avoiding powers include the power to: set aside preferential transfers made to creditors within 90 days before the petition; undo security interests and other prepetition transfers of property that were not properly perfected under nonbankruptcy law at the time of the petition; and pursue nonbankruptcy claims such as fraudulent conveyance and bulk transfer remedies available under state law. In addition, if the debtor is a business, the bankruptcy court may authorize the trustee to operate the business for a limited period of time, if such operation will benefit creditors and enhance the liquidation of the estate.

Distribution of Estate Property

The Bankruptcy Code governs the distribution of the property of the estate. Under the Code, there are six classes of claims; and each class must be paid in full before the next lower class is paid anything. The debtor is only paid if all other classes of claims have been paid in full. Accordingly, the debtor is not particularly interested in the trustee's disposition of the estate assets, except with respect to the payment of those debts which for some reason are not dischargeable in the bankruptcy case. The individual debtor's primary concerns in a chapter 7 case are to retain exempt property and to receive a discharge that covers as many debts as possible.

When Chapter 7 Isn't the Right Choice

If you can't wipe out enough debt, or if you have to sacrifice too much property, Chapter 7 may not be worthwhile.

If you are inclined to file for Chapter 7 bankruptcy, take a moment to decide whether it makes economic sense. You need to consider three questions:

· Are you judgment proof -- that is, are creditors legally barred from taking your property or income even if you don't file for bankruptcy?

· Will bankruptcy discharge enough of your debts to make it worth your while?

· Will you have to give up property you really want to keep?

Are You Judgment Proof?

Most unsecured creditors are required to obtain a court judgment before they can start collection procedures, such as a wage garnishment or seizure of personal property. (Collections for taxes, child support, and student loans are exceptions to this general rule.)

If your debts are mainly of the type that require a judgment, the next question is whether you have any income or property that your creditors can seize if they go to the trouble of obtaining a judgment. For instance, if all of your income comes from Social Security (which can't be taken by creditors), and all of your property is exempt, there is nothing your creditors can take from you to satisfy their judgment. That makes you "judgment proof."

While you may still wish to file for bankruptcy to get a fresh start, nothing bad will happen to you if you don't file, no matter how much you owe.

Will Bankruptcy Discharge Enough of Your Debts?

Certain categories of debts cannot be discharged in Chapter 7 bankruptcy. It doesn't make much sense to file for Chapter 7 bankruptcy if your primary goal is to get rid of these nondischargeable debts. The main nondischargeable debts are:

· back child support and alimony obligations

· student loans, unless repayment would cause you undue hardship

· income taxes less than three years past due

· recent debts for luxuries (more than $550 to any one creditor incurred within 90 days before you file for bankruptcy, and cash advances of more than $825 within 70 days before you file), and

· court judgments for injuries or death to someone arising from your intoxicated driving.

The bankruptcy judge may rule some types of debts nondischargeable if the creditor objects to a discharge in the bankruptcy court. These debts include:

· debts incurred on the basis of fraud, such as lying on a credit application or writing a bad check

· debts from willful or malicious injury to another or another's property

· debts from larceny (theft), breach of trust, or embezzlement, or

· debts arising out of a marital settlement agreement or divorce decree that aren't otherwise automatically nondischargeable as support or alimony.

If the bulk of your indebtedness is from debts that creditors may request be discharged, it may still make sense to file for bankruptcy and hope your creditors don't object.

Codebtors will still be on the hook. If you want to discharge debts for which you have a codebtor (such as someone who cosigned a loan for you, or a business partner who is equally liable for the debt), bankruptcy won't wipe out the debt. If the debt is of a type that can be discharged in bankruptcy, you will no longer be legally responsible for paying it, but your codebtor will.

How Much Property Will You Have to Give Up?

Whether or not you decide to file for bankruptcy may depend on what property of yours will be taken to pay your creditors ("nonexempt" property) and what property you get to keep ("exempt" property).

Certain kinds of property are exempt in almost every state, while others are almost never exempt. The following are items you can typically keep (exempt property):

· motor vehicles, up to a certain value

· reasonably necessary clothing (no mink coats)

· reasonably needed household furnishings and goods (the second TV may have to go)

· household appliances

· jewelry, up to a certain value

· personal effects

· life insurance (cash or loan value, or the proceeds of life insurance), up to a certain value

· pensions

· part of the equity in your home

· tools of your trade or profession, up to a certain value

· a portion of unpaid but earned wages, and

· public benefits (welfare, Social Security, unemployment compensation) accumulated in a bank account.

Items you must typically give up (nonexempt property) include:

· expensive musical instruments (unless you're a professional musician)

· stamp, coin, and other collections

· family heirlooms

· cash, bank accounts, stocks, bonds, and other investments

· a second car or truck, and

· a second or vacation home.

Is Bankruptcy More Than You Need?

You may be considering bankruptcy just to stop harassment by your creditors. However, in most cases, you can stop creditors from making telephone calls to your home or work by simply telling them to stop.

What to Do

If you determine that you are judgment proof, that you'll be stuck with significant debt following bankruptcy, or that you may have to give up too much property, Chapter 7 bankruptcy may not make sense for you.

Alternatives to Filing for Chapter 7

Debtors should be aware that there are several alternatives to chapter 7 Bankruptcy relief. For example, debtors who are engaged in business (including corporations, partnerships, and sole proprietorships) may prefer to remain in business and avoid liquidation. Such debtors should consider filing a petition under chapter 11 of the Bankruptcy Code. Under chapter 11, the debtor may seek an adjustment of debts, either by reducing the debt or by extending the time for repayment, or may seek a more comprehensive reorganization. Sole proprietorships may also be eligible for relief under chapter 13 of the Bankruptcy Code.

In addition, individual debtors who have regular income may seek an adjustment of debts under chapter 13 of the Bankruptcy Code. A particular advantage of chapter 13 is that it provides individual debtors with an opportunity to save their homes from foreclosure by allowing them to "catch up" past due payments through a payment plan. Moreover, the court may dismiss a chapter 7 case filed by an individual whose debts are primarily consumer rather than business debts if the court finds that the granting of relief would be an abuse of chapter 7.

If the debtor's "current monthly income" is more than the state median, the Bankruptcy Code requires application of a "means test" to determine whether the chapter 7 filing is presumptively abusive. Abuse is presumed if the debtor's aggregate current monthly income over 5 years, net of certain statutorily allowed expenses, is more than (i) $10,000, or (ii) 25% of the debtor's nonpriority unsecured debt, as long as that amount is at least $6,000. The debtor may rebut a presumption of abuse only by a showing of special circumstances that justify additional expenses or adjustments of current monthly income. Unless the debtor overcomes the presumption of abuse, the case will generally be converted to chapter 13 (with the debtor's consent) or will be dismissed.

Debtors should also be aware that out-of-court agreements with creditors or debt counseling services may provide an alternative to a bankruptcy filing.

When Chapter 7 Bankruptcy Is Better than Chapter 13

Most people choose Chapter 7, if they have a choice. Here are some reasons why.

Most people who file for bankruptcy choose Chapter 7 bankruptcy because it's fast, effective, easy to file, and doesn't require payments over time.

Advantages of Chapter 7 Bankruptcy

A typical Chapter 7 bankruptcy case is opened and closed within three to six months, and the person filing emerges debt-free except for a mortgage, car payments, and certain types of debts that survive bankruptcy, such as student loans, recent taxes, and unpaid child support.

Although you can lose property in Chapter 7 bankruptcy, most filers don't. Bankruptcy lets you keep most necessities -- if you have little to begin with, chances are good you'll be able to keep all or most of your property (unless you pledged the item as collateral for a loan).

However, not everyone is eligible to use Chapter 7 bankruptcy. If your income is sufficient to fund a Chapter 13 repayment plan, after subtracting what you'll spend on certain allowed expenses and monthly payments for child support, tax debts, secured debts (such as a mortgage or car loan), and a few other types of debts, you won't be allowed to file for Chapter 7 bankruptcy.

Drawbacks of Chapter 13 Bankruptcy

Probably the main reason most people prefer Chapter 7 bankruptcy is that it doesn't require you to repay any portion of your debts, as Chapter 13 bankruptcy does. And if you use Chapter 13 bankruptcy, you must complete the entire three- to five-year repayment plan in order to have your remaining debts discharged (unless the court lets you off the hook early, for hardship reasons). The majority of those who file for Chapter 13 bankruptcy don't complete their plans, so filers run a very real risk that their debts won't ultimately be discharged.

Despite this major potential drawback, there are some good reasons why people who are eligible for both types of bankruptcy choose to use Chapter 13.

An Overview of Chapter 13 Bankruptcy

The basic steps involved in a typical Chapter 13 case.

Chapter 13 bankruptcy, sometimes called the wage earner's plan, or reorganization bankruptcy, is quite different from Chapter 7 bankruptcy (which wipes out most of your debts). In a Chapter 13 bankruptcy, you use your income to pay some or all of what you owe to your creditors over time -- anywhere from three to five years, depending on the size of your debts and income.

Chapter 13 bankruptcy isn't for everyone. Because Chapter 13 requires you to use your income to repay some or all of your debt, you'll have to prove to the court that you can afford to meet all of your payment obligations. If your income is irregular or too low, the court might not allow you to file for Chapter 13.

If your total debt burden is too high, you are also ineligible. Your secured debts cannot exceed $922,975, and your unsecured debts cannot be more than $307,675. A "secured debt" is one that gives a creditor the right to take a specific item of property (such as your house or car) if you don't pay the debt. An "unsecured debt" (such as a credit card or medical bill) doesn't give the creditor this right.

The Chapter 13 Process

Before you can file for bankruptcy, you must receive credit counseling from an agency approved by the United States Trustee's office. (For a list of approved agencies, go to the Trustee's website at http://www.usdoj.gov/ust/, and click "Credit Counseling and Debtor Education.") These agencies are allowed to charge a fee for their services, but they must provide counseling free or at reduced rates if you cannot afford to pay.

Once you've completed your counseling, the credit counseling agency will give you a certificate showing that you met the requirement. To begin your bankruptcy case, you must file this certificate with the bankruptcy court, along with a packet of forms listing what you own, earn, owe, and spend. You'll also need to submit your federal tax return for the previous year and proof that you filed federal and state tax returns for the previous four years. In addition, you must file a Chapter 13 repayment plan showing how you will pay off your debt. And you'll have to pay the filing fee, which is currently $274.

The Chapter 13 Repayment Plan

This form is the most important paper in your entire Chapter 13 bankruptcy case. It describes in detail how (and how much) you will repay each of your debts. There is no official form for the plan, but many courts have designed their own forms.

Making Payments on the Repayment Plan

You must begin making payments under your Chapter 13 repayment plan within 30 days after you file it with the bankruptcy court. Usually, you make payments directly to the bankruptcy trustee (the person appointed by the court to oversee your case). Once your repayment plan is confirmed, the trustee will distribute the money to your creditors.

If you have a regular job with regular income, the bankruptcy court may order that your monthly payments be automatically deducted from your wages and sent directly to the bankruptcy court.

How Much You Must Pay

Your Chapter 13 plan must pay certain debts in full. These debts, which include child support and alimony, wages you owe to employees, and certain tax obligations, are called "priority debts," because they're considered sufficiently important to jump to the head of the bankruptcy repayment line.

In addition, your plan must include your regular payments on secured debts, such as a car loan or mortgage, as well as repayment of any arrearages on the debts (the amount by which you've fallen behind in your payments).

The plan must show that any disposable income you have left after making these required payments will go towards repaying your unsecured debts, such as credit card or medical bills. You don't have to repay these debts in full (or at all, in some cases). You just have to show that you are putting any remaining income towards their repayment.

How Long Your Plan Will Last

The length of your repayment plan depends on how much you earn and how much you owe. If your average monthly income over the six months prior to the date you filed for bankruptcy is higher than the median income for your state, you'll have to propose a five-year plan. If your income is lower than the median, you may propose a three-year plan. (To get the median income figures for your state, go to the United States Trustee's website, http://www.usdoj.gov/ust/ , and click "Means Testing Information.")

No matter how much you earn, your plan will end if you repay all of your debts in full, even if you have not yet reached the three- or five-year mark.

If You Can't Make Plan Payments

If for some reason you cannot finish a Chapter 13 repayment plan -- for example, you lose your job six months into the plan and can't keep up the payments -- the bankruptcy trustee may modify your plan. The trustee may:

· give you a grace period, if the problem looks temporary

· reduce your total monthly payments, or

· extend the repayment period.

If it's clear that there's no way you'll be able to complete the plan because of circumstances beyond your control, the court might let you discharge your debts on the basis of hardship. Examples of hardship would be a sudden plant closing in a one-factory town or a debilitating illness.

If the bankruptcy court won't let you modify your plan or give you a hardship discharge, you can:

· convert to a Chapter 7 bankruptcy, unless you received a Chapter 7 bankruptcy discharge within the last eight years or a Chapter 13 bankruptcy discharge within the last six years, or

· ask the bankruptcy court to dismiss your Chapter 13 bankruptcy case. You would still owe your debts. However, any payments you made during your plan would be deducted from those debts. On the flip side, your creditors will be able to add on interest they did not charge while your Chapter 13 case was pending.

How a Chapter 13 Case Ends

Once you complete your repayment plan, all remaining debts that are eligible for discharge will be wiped out. Before you can receive a discharge, you must show the court that you are current on your child support and/or alimony obligations, and that you have completed a budget counseling course with an agency approved by the United States Trustee. (This requirement is separate from the mandatory credit counseling you must undergo before filing for bankruptcy -- you can find a list of approved agencies at the Trustee's website, http://www.usdoj.gov/ust/, and click "Credit Counseling and Debtor Education.")

Other Types of Reorganization Bankruptcy

In addition to Chapter 13, there are two other types of reorganization bankruptcy you may have heard of: Chapter 11 and Chapter 12.

Chapter 11 bankruptcy is the type of bankruptcy used by financially struggling businesses -- such as Macy's -- to reorganize their affairs. It is also available to individuals, but because Chapter 11 bankruptcy is expensive and time-consuming, it is typically used only by those who have debts that exceed the Chapter 13 bankruptcy limits or who own substantial nonexempt assets (such as several pieces of real estate). To learn more about this kind of bankruptcy, see A Feast for Lawyers, by Sol Stein (M. Evans & Co., Inc.).

Chapter 12 bankruptcy is almost identical to Chapter 13 bankruptcy. But to be eligible for Chapter 12 bankruptcy, at least 80% of your debts must arise from the operation of a family farm. Chapter 12 has higher debt ceilings to accommodate the large debts that may come with operating a farm, and it offers the debtor more power to eliminate certain types of liens. Only a few hundred people file for Chapter 12 each year, while hundreds of thousands file for Chapter 13. You need a lawyer to file for Chapter 12.

Do you have questions or do you want to make an appointment in this area?

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