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A Chapter 7 is a type of bankruptcy where a bankruptcy court trustee takes non-exempt assets and liquidates them in order to pay for legitimate creditor’s claims that have been presented to a bankruptcy court. Complicated bankruptcy laws governing a bankruptcy court procedures raise many questions to potential filing debtors. Here are some Chapter 7 questions asked by various first time filers and their potential answers:
Should you close a business and liquidate assets before filing?
Any individual, married couple, partnership, or corporation can file a Chapter 7 if they qualify to file. If you close a business and liquidate your assets before you file bankruptcy, the income from the liquidation might place you into an income bracket changing the type of bankruptcy you are qualified to file or, depending on what you do with the money from the sell of business assets, may be seen by a bankruptcy court as preferential treatment or even fraud.
If you are going to file bankruptcy under a Chapter 7, it may be much better to allow a bankruptcy court to liquidate the business assets to pay off your creditors.
Should you move jointly owned property to your spouses name before filing a Chapter 7?
The answer to this question is simply NO. Bankruptcy law prevents any debtor from trying to hide your assets even if it is giving the asset to your spouse. If you file as an individual, your spouse will not be responsible for paying any of your debts, and what is in your name, even if owned jointly, is considered to by one of your assets. Trying to change ownership of an asset right before filing a bankruptcy might be construed as fraud by a bankruptcy court.
If you are going to file a Chapter 7 as a business owner, will obtaining employment wages affect the bankruptcy?
Potentially, the answer could be yes. The new wages could impact your Means Test and put you into a Chapter 13. Usually, a bankruptcy court looks at your last 6 months prior to the filing date to determine eligibility for a Chapter 7, but at the creditor’s meeting if a trustee asks you if anything has changed concerning your income, you would have to reply with the truth.
Normally, the trustee is required to provide you with a list of presumed abuses 10 days before the creditor’s meeting, but when you file, you are required to provide the court with any anticipated increase in income or expenses after filing. If that income increase happens, you might be required to share that information with the trustee. Whether or not he files a petition for dismissal forcing you to a Chapter 13 is up to the individual trustee. If he or she does file a petition, a bankruptcy court judge would have to decide whether or not to dismiss the case.
Should you stop paying credit cards prior to filing a Chapter 7?
The most logical answer to this question is yes, but timing is very important. Why pay unsecured debt when they are going to be discharged? In addition, paying the debts at a certain time could be viewed by the trustee as preferential treatment and most likely might be recovered by the trustee. In this case, your bankruptcy lawyer will know the best time to stop paying credit card debt.
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The Wage Earner’s Plan and Its Advantages
A Chapter 13 bankruptcy, a type of wage earner’s plan, allows any employed individual or self employed person operating an unincorporated business the opportunity to seek bankruptcy relief as long as the individual’s unsecured debts are less than $307,675 and secured debts are less than $922,975.
Under a Chapter 13, a debtor must propose an individual debt adjustment plan to repay all or a portion of the debts with whatever disposable monthly income is available to the filer. Unless a court approves a different timetable “for cause,” the plan devised must be for a period of 3 years if monthly income is less than the applicable state median, and for five years if monthly income is above the applicable state median. During this time, the law prevents creditors from starting or continuing collection activities.
A Chapter 13 offers certain advantages that are not offered in a liquidation. You can save your home from foreclosure; reschedule secured debts; provide protection for co-debtors; consolidate your loans under one plan; keep non-exempt property; extend certain tax obligations, student loans, or other such qualifying debts; and to qualify for bankruptcy relief.
Beginning the Bankruptcy Process
A Chapter 13 begins when you file a petition with a bankruptcy court in the area in which you live. Unless a court orders otherwise, you must provide the court with schedules of your assets and liabilities, current income and expenditures, contracts and leases, and a statement of financial affairs. These forms are a part of the petition process and must be accurate. Upon completion, the papers must be filed with the bankruptcy court clerk’s office along with payment of filing and administrative fees.
A creditor’s meeting must be held within 60 days of the date you filed. You will be required to attend the meeting where all the creditors and trustee will be given an opportunity to ask you questions concerning your financial affairs. Creditors are not required to attend.
Chapter 13 Plan and Confirmation Hearing
From the date of an approved filing you will have 15 days in order to file your individual debt adjustment repayment plan to the court. The court will have to approve your plan before it will be administered by the trustee.
Your plan must provide for fixed payments on a regular basis, usually biweekly or monthly. If the plan is approved, you will make the payments directly to the trustee or make arrangements to have them directly withdrawn from your bank account for the duration of the plan.
The bankruptcy court judge will hold a confirmation hearing on your proposed plan no later than 45 days after the creditor’s meeting. The judge will decide whether or not the plan is feasible and meets the standards for confirmation as stated in the Bankruptcy Code.
Implementation of the Plan
After the plan is approved by the judge, the trustee will then start implementing the plan by paying the funds to creditors according to the terms of the plan. Depending on your disposable monthly income, the creditors may receive all or only a portion of what the creditors claim. What debts the creditors do not get paid for during the plan may be discharged at the end of the bankruptcy process.
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There are six basic types of bankruptcies you can choose from to file, but you can only file one at a time. Each type of bankruptcy has legal statutes determining whether you qualify for filing that basic type. Each type gets is name from the “Chapter” in the bankruptcy laws in which they have been described. The six basic types of bankruptcy are:
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Chapter 7. This basic type bankruptcy is best known as liquidation of your assets. Once you petition the court to file, a bankruptcy court will orderly liquidate, or sell, your non-exempt assets and place the cash proceeds into the bankruptcy estate. The cash proceeds will then be used to pay off the unsecured creditors in priority order determined by federal law, up until the estate is out of cash. Debtors will get to keep exempt assets as determined by either state or federal bankruptcy laws. What unsecured debts have not been paid will be discharged along with non-reaffirmed secured assets.
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Chapter 13. This basic type of bankruptcy is commonly called the Wager Earner’s Plan. You must have regular income in order to qualify for a Chapter 13. Here, you will be required to make a plan to pay back your unsecured debts with disposable monthly income over a 3 or 5 year payout plan. The length of the plan is determined by certain guidelines involving median income for your area. You will also be required to pay Secured debts during the payment period and be up to date on your payments before there can be a discharge. Exemptions and priority both play a role in a Chapter 13.
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Chapter 12. This basic type of bankruptcy is often called the Farmer’s or Fisherman’s Bankruptcy because it is designed to provide relief for farmers and fishermen with a regular income. A Chapter 12 is very similar to a Chapter 13. The filer has to provide the bankruptcy court with a plan for 3 years unless the court extends the time up to 5 years. Secured and unsecured debts are handled in the same manner as a Chapter 13. Exemptions and priority both play roles in a Chapter 12. A Chapter 12 allows the fisherman or farmer to continue to work their business while the bankruptcy plays out.
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Chapter 11. This basic type bankruptcy is called reorganization. Primarily for businesses, the business is required to complete a court ordered plan to pay back a certain amount of their debt while the business is still in operation. The plan can be devised to pay back a portion of its debt, discharge others, or pay the debt in full. The debtor can terminate burdensome contracts and leases, recover assets, and rescale its operations in order to return to profitability. Filers of this Chapter normally go through a period of consolidation and emerge with a reduced debt load and reorganized business.
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Chapter 9. This basic type bankruptcy is primarily for adjusting the debts of Municipalities under a reorganization plan similar to a Chapter 11.
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Chapter 15. This basic type bankruptcy is called Ancillary and Other Cross-Border Cases and provides a mechanism for dealing with cross-border insolvency. A Chapter 15 deals with a debtor whose debts or property are subject to laws in the United States and one or more foreign countries.
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A Former Student’s Personal Story
A former student at the Art Institutes, a school listed under the Education Management Corporation which is currently being sued by the Federal Government for fraud, recently posted a personal bankruptcy story on a website about how a scam of a private student loan bankrupt her.
The former student wrote, “I am currently $80,000 in debt and still have no diploma. I was misled when enrolling at the school about graduation, employment rates, credit transferability and quality of the school itself. I am now stuck with debt that there is no way I will be able to pay off. I am a single mom, a full time student at a different college now, and I feel victimized.”
How Our Bankruptcy System Contributes to the Scam of Our Students
From the thousands of testimonies you can read on the internet, this former student’s story is just one amongst many stories stories about how a private student loan scam is now common, and the students are the victims. The United States Bankruptcy System and laws contribute to this scam that victimizes our college students.
In 2005, Congress passed new bankruptcy laws under the Bankruptcy Abuse Prevention and Consumer Protection Act that added private student loans to discharge exemption status in bankruptcy cases. That means anyone who gets a private student loan can no longer have the loan discharged during any bankruptcy proceeding. In addition, the new laws provide a risk free loan for the lender.
These new risk free loans along with the protection of a bankruptcy discharge exemption encouraged the private student loan sector to expand. With expansion of the new easy loans, problems of scams and corruption rose just as fast. In 2007, New York State Attorney General, Andrew Cuomo, made an investigation into anti-competitive relationships between colleges and private student loan lenders. Many universities were expected of steering student borrowers to their preferred lenders. The students incurred higher interest rates and the university financial staffs who steered the students were allegedly offered monetary kickbacks from the lenders. These accusations are still under investigation.
Former Law Changes Also Contribute to the Problem
In 1978, the Supreme Court made a ruling that would change the face of how banks reasonably dealt with credit card interest. Since then, this move has affected the foundation of how banks charge interest in general. Basically, the ruling undermined existing state usury laws, especially concerning loans in default. Banks now feel the freedom to be more bold in what they charge lenders in interest after default on a loan, penalties and fees. The laws in this area have become circumvented with other existing laws so the average person cannot understand which is which.
What Might be Done About the Problem
Probably the only thing you can do about this particular problem is to elect someone who will change bankruptcy laws. The New York Times recently published an article endorsing the return of bankruptcy protection for private student loans. The elimination of the exemption to discharge is one way of forcing the scam artists to the table.
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As a society, we cannot function without laws to provide a level playing field for all of us so we may avoid scam. If you have been victimized by scam and are now bankrupt, find a bankruptcy attorney today.
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The new year always brings self evaluation to us all. You can spend hours developing resolutions about how you will make a new beginning, what choices you will make, and whether these decisions are right for you. Filing for bankruptcy protection is a lot like developing new year’s resolutions. Filing bankruptcy is a choice, a right, and a new beginning.
Filing Bankruptcy is a Legitimate Choice
No one but you can make the choice whether or not to file bankruptcy. If you decide you think you should file for bankruptcy protection, you might want to keep in mind you must be resolved to complete the process, and you must resolve that filing bankruptcy is a legitimate process before you can have a fair chance at a new beginning. Therefore, your first choice is to determine whether or not filing bankruptcy is a legitimate process for your financial circumstances.
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You can resolve not to file, but the choice of not filing usually gets your further into debt. Not filing can invoke debt collection actions like lawsuits, garnishments, repossessions, foreclosures, and the like. Generally, you do not necessarily have to be completely bankrupt to file, but it is the preferred financial circumstance unless you are fixing to lose your assets through some legal means.
In the cases you are not completely bankrupt, you can select to resolve your financial debt through debt settlement, debt management or consolidation. These tactics normally do not work if you are completely bankrupt. If you do not have current sustainable income plus cash reserves that will pay all your living expenses, pay interest on outstanding loans, and reduce some of your principal on those loans while paying on them for five years, then you are most likely completely bankrupt.
On the other hand, you can resolve to make the legitimate choice of filing for bankruptcy protection. The moment you file a bankruptcy, the automatic stay of the bankruptcy court is executed and prevents certain lawsuits, repossessions, garnishments, foreclosures, debt collections, and the like from further taking place. The automatic stay protects your assets until the bankruptcy court can fairly distribute them.
Filing Bankruptcy Protection is Your Right
Bankruptcy laws have their basis in Constitutional law. Therefore, bankruptcy laws are primarily federal in nature, superseding state bankruptcy laws which are made to supplement the federal law.
Congress was given the power to legislate federal bankruptcy laws, and the laws have evolved through the years to protect both debtor and creditor when financial transactions have gone awry. Filing bankruptcy allows the honest debtor a chance to work their way out of a bad financial situation, or in some cases, to have a financial new beginning.
Filing Bankruptcy Can Provide You with a New Beginning
Congress has historically favored the idea that, economically, it makes good sense for debtors to be productive citizens in lieu of being imprisoned. Congress has historically passed bankruptcy laws that would give a debtor the chance to financially start over with enough assets to make a clean new start. That should mean a new beginning for any debtor filing bankruptcy.
If you resolve to exercise your Constitutional right to make the choice of filing for bankruptcy protection in order to make a financial new beginning, you will most likely need the help of a bankruptcy lawyer.
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The Inheritance
A debtor recently blogging on a bankruptcy website shared with a group that his Grandmother had recently died and left him one fourth of her estate as an inheritance. The asset value was small and her house was the only large item left in the estate. The house had a reverse mortgage securing the house. The debtor, considering filing for bankruptcy, wanted to know whether to wait on his Grandmother’s estate to be settled or to go ahead and file. He had learned he had a $12,000 exemption if he filed for bankruptcy protection.
For those of you facing bankruptcy and have an inheritance of a house that has a secured reverse mortgage, you really need to understand what a reverse mortgage is before you file.
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The Reverse Mortgage
A reverse mortgage is a loan made to a homeowner or homeowners who are over 62 years of age that qualify. They are made against the equity owned in the home and work in a reverse direction than a normal mortgage loan. Instead of reducing the debt by making payments, the recipient of a reverse mortgage gets paid a lump sum based upon the youngest homeowner’s age and never makes any more payments.
The homeowners receive the lump sum tax free and can do what they will with the funds. The mortgage loan continues to increase with interest until the last homeowner dies or sells the property.
When the last homeowner dies, the heirs to the estate have one year in which to sell the house or give it back to the mortgage company. Since the reverse mortgage loan is backed by the US Government and since the US Government’s interest in the house is backed by insurance the homeowner pays, there is really not much risk involved in making these types of loans for any of the entities involved.
The heirs who received the inheritance are not responsible for the loan or house if there is no equity when they sell it. The heirs get what equity is left in the house upon selling it, but they do not have to even sell it if it is an undervalued house at time of sell. In any regards, the reverse mortgage loan is to be satisfied upon sell or return of the house.
The mortgage company does not lose money because it is guaranteed principal plus interest of its loan by the US Government no matter how much the house sells. The US Government cannot lose money because it is guaranteed a return on its investment by the insurance company. The insurance company will not lose money because its actuaries base the amount of the reverse mortgage on death and housing statistics. Virtually, most always, no one loses.
The reverse mortgage plan is a great plan for seniors who are experiencing a downfall on finances at retirement age. Not having to make a house payment is big for most seniors during this time, and the lump sum of money comes in handy.
Facing Bankruptcy
An heir facing bankruptcy may want to realize that reverse mortgage loans are increasing daily, so in a housing market like ours, the equity is also decreasing daily. Many reverse mortgages today are seeing negative equity due to loss of value in homes. Not to worry. Just sale the house or not, and feel free to file for bankruptcy protection.
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A debtor recently told their personal bankruptcy story on a bankruptcy forum website. They had filed a Chapter 7 bankruptcy and they wanted to reaffirm the loan on their new car, their lawyer inadvertently forgot to file the reaffirmation papers on the loan.
A Reaffirmation on a Loan
A reaffirmation is a new agreement between the debtor and creditor of a secured loan that reaffirms the old agreement to the exclusion of a bankruptcy discharge. That means the debtor is agreeing to the terms of the old agreement and gives up any discharge rights of the bankruptcy. A bankruptcy judge, the lawyer, and the debtor all have to sign off on the new agreement before it can become a document with legal binding authority.
Is it a Good Idea to Refinance?
The debtor providing the personal bankruptcy story said he has continued to make payments on time to his car loan institution, even though they no longer send him any records to that fact. Afraid there will be problems and desiring better credit to buy a newer car in a couple of years, the man asks the forum if anyone thinks it is a good idea to refinance a loan in order to build credit even though he may be paying a higher interest rate.
After you have filed a bankruptcy, is it a good idea to refinance a loan in order to build credit?
In the opinion of this writer, it is probably not a good idea to refinance a loan in order to build credit if you can avoid it at all. Similar occurrences happen all the time after a Chapter 7 bankruptcy has been discharged.
To refinance the loan will only provide a new credit risk for you, something you have just remedied in filing the Chapter 7. Why risk a new loan so quick after bankruptcy and with a higher interest rate to boot?
It is never a good idea to buy credit. You build credit free by being a good credit risk and paying your bills on time. This takes time and requires discipline, something the debtor in the story was obviously missing from the first. Does the debtor really think by jumping into a high leveraged note the action will automatically create a new disciplined approach at handling a budget? It seems to me that is what got him in this condition in the first place.
Reaffirmation May Not be a Good Alternative Either
Frankly, it is probably not even a good idea to reaffirm a loan after you have filed for bankruptcy protection. You are giving up part of your protection when you do. The principal on the loan has already been discharged, and you are not obligated to pay the loan. Most loan companies are not interested in repossessing an asset unless the debtor has completely defaulted on the loan.
The End Result
Although the debtor has made timely payments from the beginning and is not legally bound to honor the debt, to avoid repossession of the asset, he must come to a new understanding with the loan company. Since there was no reaffirmation agreement, the debtor is in the better position to renegotiate and command for accountability.
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The Problem with Collection Agency Calls After Filing
When you go bankrupt, one of the most aggravating problems must be the multiple telephone calls you get from relentless collection agencies wanting to collect money you owe them or their client. By federal bankruptcy laws, a collection agency cannot continue to call you once you file for bankruptcy protection. The bankruptcy court automatic stay goes into effect immediately upon filing, and it is against federal law for a creditor of their representative to knowingly contact you. So, what should you say and do when answering collection agency calls after filing bankruptcy?
Federal Law Protects Filing Debtors from Collection Agency Calls
There are two federal laws that can come into play when a collection agency calls after filing bankruptcy. They are the Fair Debt Collection Practices Act (FDCPA) and federal bankruptcy laws which are titled under Title 11 of the United States Bankruptcy Code.
Whether or not you have filed for bankruptcy, a collection agency has to follow the FDCPA guidelines in making calls to debtors. The federal law does not tolerate harassment activity by any collection agency. Violators of this law, whether the debtor has filed for bankruptcy or not, can be prosecuted.
Likewise, a collection agency who is a violator of the automatic stay can also be brought before a bankruptcy court judge to face stiff penalties and fines for the violation. The stay prevents any creditor or its agencies from contacting a debtor while the debtor is in an active bankruptcy.
Practical Suggestions for Answering Collection Agency Calls After Filing
Practically, here are some suggestions on how you might handle a collection call from a collection agency once you have filed for bankruptcy:
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You are not required to give out personal information. A collection agency is usually wanting to restart the statute of limitations on a debt if they ask for personal information they already have. They also want to verify the debt because most do not have the paper work on the original if they are not the original creditor.
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You might want to simply give them your lawyers telephone number. Most bankruptcy lawyers will instruct you to give the collection agency calling you their telephone number.
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You can tell the calling collection agency you have filed for bankruptcy protection and not to call again. You will need to give them the bankruptcy case number and county it was filed in if you are filing Pro Se or your attorney’s telephone number.
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Even though some collection agency representative may come off as rude, it would be counterproductive to return in like kind. Courtesy is usually the best policy, especially when you have the law on your side. You can inform them they might be in violation of two federal laws and refer them to your lawyer or the bankruptcy court.
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Keep a record of the date, time, and name of each collection agency that calls you and as much detail about the call that you can. In case the collection agency does not get the point, you may have to testify to either the bankruptcy court or some other federal court for prosecution purposes.
In most cases, it may be wise to report any violation to your bankruptcy lawyer so he or she can advise you on where to go from there. Otherwise, you can report violations directly to a US Bankruptcy Court for violations of the automatic stay, or the Federal Trade Commission for violations of the FDCPA.
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Inevitably, those of you facing bankruptcy ask questions about what you should do to prepare to file. A Chapter 7 bankruptcy, the simplest form of bankruptcy to file, is normally filed by those who can least afford to file bankruptcy. Here are some suggestions on a Chapter 7 bankruptcy and preparing to file.
Seek Out Basic Knowledge About Bankruptcy Before You File
Most of you will not and probably should not seek out the advice of a bankruptcy lawyer until you really know filing bankruptcy is going to be for you. To determine that, you will need to start gathering as much basic knowledge about bankruptcy as you can before you file.
Bankruptcy forums on the internet are a good way to begin learning about basic bankruptcy facts. Many bankruptcy lawyers and laymen who have experienced bankruptcy get online to help others facing the same situation they once faced.
You can also get a lot of information by researching bankruptcy laws online and by visiting government bankruptcy court sites which will provide you with many of the basics on bankruptcy. You cannot go wrong reading as much as you can about bankruptcy because bankruptcy law can be very complicated. Even a Chapter 7 bankruptcy, the simplest type of bankruptcy, can be very complicated.
Consult with a Bankruptcy Attorney As Soon As Possible
Most bankruptcy lawyers will provide you with a free exploratory consultation to see if their services can help you. Here you will learn some basic information from each attorney that will consult with you. You will also learn their fees for their services and some type of time line for paying them and filing a Chapter 7 bankruptcy.
Stop Paying All of Your Unsecured Debt Except Necessary Debt
When you first decide you need to file, stop paying all your unsecured debt. You can save the money on the unsecured debt you do not pay in order to pay your attorney and filing fees for the Chapter 7 bankruptcy.
Necessary debt can include utility bills, open grocery accounts for food, basic phone service, rent, and any other debt necessary for survival.
Continue to Pay Any Necessary Secured and Exempt Debt
Any necessary secured debt like an auto which gets you back and forth from work and your house mortgage payment, or a debt on an asset you want to keep, needs to be paid on time until you learn how the Chapter 7 bankruptcy will effect those payments.
Also, debts exempt from the effects of bankruptcy like student loans, child and spousal support, tax liens, and the like, need to be continued to be paid.
Delay Filing Until the Last Possible Moment
Even if you have to change your phone number, the more time you have, the more time you can save enough money to afford to file a Chapter 7 bankruptcy. That means you may have to wait the last possible moment before a judgment or some other action forces you to file.
A bankruptcy lawyer can help you best determine how to prepare and when to file a Chapter 7 bankruptcy.
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Definition of Bankruptcy Exemption
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Bankruptcy exemption is where assets you own receive immunity from the bankruptcy process through state or federal law. In any type of bankruptcy filed, an asset exemption can influence the outcome in how creditors are dealt with during the bankruptcy legal proceedings. Any exemption, determined by state or federal law, protects the assets society says is fair for the bankruptcy filer to keep in order to make a fresh financial start.
Relationship of Types of Bankruptcy to Exemption
In a Chapter 7 bankruptcy, an individual type bankruptcy often called liquidation, an exemption protects an asset held by the filer that may be liquidated in order to satisfy unsecured debts held by creditors.
In a Chapter 13, an individual type bankruptcy called a wage earner’s plan, an exemption is used to determine whether or not the plan follows requirements a Chapter 13 plan must provide creditors, equivalent to what creditors would have gotten if the filer had filed a Chapter 7.
In either regards, an exemption can be productively listed in the application schedule provided by the bankruptcy court.
Being Productive with Your Exemption
State and federal exemption laws specifically spell out categories in which assets may be listed for exemption of the bankruptcy process.
Here are some productive thoughts in ways you might list assets in order to maximize your full exemption right when filing:
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Depending on state law, you often have the choice to choose either state or federal law when determining which exemption list you will use. Being productive on choosing here may save you a lot of money in the long run. Know bankruptcy law, what assets owned you want to keep, and whether state or federal law will help you the most when it comes to an exemption.
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Tools of your trade is an exemption category you can be the most productive in building your exemption list. Here is an inconclusive list of assets that may be considered tools of the trade: office supplies; computers; printers; scanners; cameras; carpenter tools; mechanic tools; work shop machinery; musician instruments; office furniture; and a car, truck, or van used for more than just commuting to work.
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The wild card exemption is a place you can be imaginative in listing what asset you want to protect in filing bankruptcy. The federal law for exemptions in this area currently include $1,150 for any property, and you can use any unused portion of homestead up to $10,825.
Here, you can maximize your protection efforts by having a good grasp on the assets you will need going into the future after bankruptcy.
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Personal property is another listing category you should familiarize yourself before filing bankruptcy. Your personal vehicle, household goods, clothing, books, and a large variety of other assets are usually included in this category. Federal law for an exemption currently allows $550 per personal item up to $1125. You might maximize you productivity by carefully listing what is personal, tool of your trade, or a wild card entry.
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A homestead exemption is another category under both state and federal law, and is any real property, including mobile homes, co-ops, and burial plots up to $21,625 as listed under the federal exemption laws. Many filers productively choose to use the federal homestead exemption because of the liberal unused portion of the law. Up to $10,825 may be used for other property.
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