Ch 7, 13

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The process of filing bankruptcy can be very quick, but if there are issues with your petition, creditors file claims or objections, or you have a lot of property, your bankruptcy discharge could take longer. Let’s take a look at a timeline of what happens when you file a bankruptcy petition.

1-6 Months Before Filing Bankruptcy

You will want to discuss your options with a bankruptcy attorney to determine if chapter 7 bankruptcy or chapter 13 bankruptcy is the right choice for your financial situation. Once you determine you are definitely going to file you will need to complete the prebankruptcy credit counseling course online, over the phone or in person. The credit counseling course and attorney will help you protect your personal property and create a budget to get you through the bankruptcy and onto recovery.

Filing the Petition

If you are using an attorney they will most likely electronically file the petition for you. That means once the petition is completed, it will be filed and the automatic stay will go into affect as soon as the court stamps your petition. Total time is 1-3 weeks depending on how often you can meet with your attorney and complete the paperwork. If you are filing by completing the forms yourself, as soon as they are completed you will drop them off at the courthouse with your filing fee and the process will begin immediately.

Meeting of the Creditors

Once your petition is filed the court will schedule your 341 meeting of the creditors in 30-60 days. At the 341 meeting the bankruptcy trustee will review your petition and ask you and/or your attorney any questions they need answered. Your creditors may also appear at this meeting to ask any questions they have about your debts and ability to pay.

Bankruptcy Discharge

After the 341 meeting your creditors have 60 days to file a claim or objection to your debt being included in the bankruptcy discharge. If they file a claim the trustee will review it and it may go onto a hearing to determine if the claim is valid. If there are no claims and the trustee determines your bankruptcy should be discharged your debts will be forgiven.

The average amount of time it takes to file a chapter 7 and get your debts discharged is 3-6 months.

One of the biggest misconceptions in bankruptcy is that idea that the majority of people that file are taking advantage of the system, they really can pay their debts, they just don’t want to. Under pressure from credit card companies the new bankruptcy laws were passed in 2005 creating the bankruptcy means test which compares bankruptcy filers income and expenses to averages in their area. The means test was supposed to weed out those filers that were trying to take advantage of the system, or “abuse” the use of bankruptcy.

Presumption of Abuse

When you complete the chapter 7 bankruptcy means test, the file outcome will be whether the presumption of abuse arises or not. The presumption of abuse is simply a determination of whether you have disposable income left over after taking care of your living expenses. If you have too much income then the presumption of abuse arises and the court may force you into a chapter 13 bankruptcy.

The presumption of abuse doesn’t necessarily mean you are actually trying to abuse the bankruptcy system. The presumption can be triggered even if you can only afford to pay 25% of your debts, which obviously your debtors aren’t going to be very happy with, and is of course one of the reasons you probably needed to file bankruptcy in the first place. Luckily in a ch 13 you don’t have to pay off all of your debts in the payment plan, you can be approved to pay as little as 25% and then have the rest of the debt discharged at the end of the plan.

If you are completing the bankruptcy forms on your own, planning on filing pro se bankruptcy, and find out that the presumption of abuse arises on your means test you may want to speak with a bankruptcy attorney to find out how this will affect your ch 7 filing.

One of the biggest fears people have about filing chapter 7 bankruptcy is that the court will liquidate their assets in order to pay off their creditors. Fortunately this is only partly true, for the most part your personal belongings are exempt from being included in the bankruptcy estate and can not be taken by your creditors. Let’s look at this a little further.

When you complete your bankruptcy forms you must list all of your property on Schedules A and B. Sch A includes your real property such as your home. Sch B includes your personal property such as your clothing, furniture, books, cars, investments, basically anything that is not attached to the earth that you own.

After your have listed your personal belongings, you then complete Schedule C which is a list of your bankruptcy exemptions. These exemptions tell the court that you are choosing to not have this property included in your bankruptcy estate. Each state has their own list of exemptions, and some states allow you to choose from the federal bankruptcy exemptions. Each exemption has an amount defined, if your property is worth more than the exemption amount it could be subject to being liquidated in the bankruptcy. If the property is important you can often pay the unexempted amount in order to keep the property.

The value of your personal property is rarely worth enough for the bankruptcy court to liquidate it. Especially personal belongings such as clothing, kitchen utensils, and furniture. If you have a lot of high worth personal property that you are worried about you discuss this with a bankruptcy attorney and get a free bankruptcy review.

One of the biggest reasons people file bankruptcy is that they are unable to pay their mortgage due to losing a job, medical issues, or other financial problems. If you are facing foreclosure you might be wondering if filing will stop the foreclosure proceedings and save your home.

Chapter 7 bankruptcy is liquidation where your non-exempt assets are sold to pay off your creditors. Any debts that are left are forgiven in the bankruptcy discharge and you get a fresh start. Ch 7 cannot help you makeup back payments on your mortgage however. When you file Ch 7 the automatic stay will go into affect and stop any foreclosure proceedings that are currently underway. This will give you time to negotiate with your mortgage lender to refinance your loan in order to save your home from foreclosure. If your lender is unwilling to negotiate unfortunately, you will lose the home if you cannot make up the overdue payments.

If you do what to save your home you should consider chapter 13 bankruptcy as missed mortgage payments can be included in the repayment plan. If the bankruptcy trustee approves the plan, your home will no longer be in foreclosure and you don’t have to come up with the missed payments all at once, they will be paid off over the next 2-5 years.

Tax season is in full swing, and with that comes the questions from people considering filing bankruptcy: If I file, will the bankruptcy court take my tax refund. Your tax refund could be subject to being used to pay your creditors when you file chapter 7 bankruptcy, so let’s take a closer look at your options.

Your federal or state bankruptcy exemptions could cover any tax refund you are owed. If you use a bankruptcy exemption to cover your tax refund, the bankruptcy trustee will not be able to touch it. There are states that also consider child care and earned income to be public benefits, and so the trustee would not be able to touch that portion of your tax refund.

If you are owed a large tax refund and must file right now, it’s best to speak to a bankruptcy attorney to determine if your refund is at risk. They can help you do some pre-bankruptcy planning to avoid losing your refund or show you some other options.

If you don’t need to file right away you can complete your taxes, get your refund, wait until you have spent it, and then file. You may need to wait 6 months in order for the bankruptcy court to not be able to consider the refund as part of your estate however. Either way, you should get a professional’s opinion to make sure you don’t forfeit thousands of dollars.

The bankruptcy code has set rules to allow you to keep certain personal property in order to continue to earn a living after you file bankruptcy. They do this through the use of bankruptcy exemptions. There are Federal and state exemptions which tell the bankruptcy trustee and court that you can keep this property if it is worth up to a certain amount.

Your car or other personal automobile is included in these exemptions. You will be able to keep your car after you file bankruptcy if you car is worth less than, or equal to the exemption amount. So if you have an old car that is only worth $500 and the car exemption is $2500 you can keep the car. If your car is worth $3000 you will have to cover the $500 that is not exempt in order to keep the car.

If you are leasing a car, or making payments on a car you will have to decide what you want to do on the Statement of Intention when you file chapter 7 bankruptcy, letting the trustee know if you want to hand it in or continue paying by signing a reaffirmation agreement. The bankruptcy trustee will have to approve the reaffirmation in order for you to keep your car, and that is typically done by assessing your ability to pay the debt.

If you have a car that is worth a lot of money, or multiple cars, you will want to consult with a bankruptcy attorney in order to see what will likely happen when you file. A good attorney can help you prepare before filing in order to keep as much property as possible.

When you file a chapter 7 bankruptcy, one of the most important things you will do is complete Schedule C which lists your bankruptcy exemptions. Exemptions allow you to keep certain personal property away from your creditors. There are federal exemptions and state exemptions, some states allow you to choose which list of exemptions you want to use.

In those bankruptcy exemptions there is a Pensions exemption which will include any 401k, IRA, Roth IRA, company pension, public retirement benefits such as SSA, and other retirement benefits. For example, you can see in the California Bankruptcy Exemption list the following exemptions:

Pensions

11 U.S.C. § 522 – Tax exempt retirement accounts. Traditional and Roth IRAs up to $1,095,000 per person.

704.110 – Public retirement benefits.

704.115 – Private retirements benefits, including IRA and Keogh.

Government 21255 – Public employees.

Government 31452 – County employees.

Government 31913 – County peace officers.

Government 32210 – County fire fighters.

So, yes you can keep your 401k when you file bankruptcy. If you have loans against your 401k, or are considering taking a loan against your 401k you should discuss your situation with a bankruptcy attorney because the money you receive from a 401k loan could be considered part of the bankruptcy estate and subject to being used to pay your creditors.

The biggest change for chapter 7 bankruptcy filers after the new bankruptcy laws were passed in 2005, is the addition of the bankruptcy means test. The organizations, mostly credit companies, that wanted the bankruptcy laws changed, believed that a large majority of the consumers that file bankruptcy can actually pay their bills and just choose to file bankruptcy to get out of debt for no good reason. The means test is 8 pages of questions regarding your income and expenses that determine if you in fact have enough money to pay your debts. The means test measures whether or not the “presumption of abuse” arises, basically measuring if you are trying to abuse the bankruptcy system or not. So how does the means test work?

Declaration – The first section of the means test is a declaration for veterans or those who are filing bankruptcy on debts that are mostly non-consumer debts.

Income – The next section of the bankruptcy means test is the calculation of monthly income for your household. If you are not married or legally separated and your spouse has their own household, then you will provide your income information. If you are married and filing jointly with your spouse or filing alone, you will have to provide both your income and your spouses information. All figures must reflect average monthly income received from all sources, derived during the six calendar months prior to filing the bankruptcy case, ending on the last day of the month before the filing.

Application of Exclusion – After determining your household income, the means test will compare your income to other families of your size in your state. If your income is equal to or less than the median income, the presumption of abuse does not arise and you can sign the form. If your income is above the median then you will have to continue with the means test.

Marital Adjustment – Any income that was not received on a regular basis may be able to be subtracted in this section to adjust your monthly income for the means test.

Standard Deductions – This section of the means test will deduct expenses from your income for standard living expenses based on averages outlined by the IRS for your household size. Food, clothing, health care, housing, utilities, and transportation and other expenses are spelled out. Additional expenses can be listed that are unique or extraordinary to your family, and deductions for debt payments.

Determination of Presumption – The final section will take into account how much disposable income you have left after your expenses are taken into account. Less than $6000 and the presumption does not arise, if it’s more than $10,000 the presumption does arise and you may be forced into a chapter 13 bankruptcy. If it’s between $6000-10,000 and you can pay at least 25% of your unsecured debt then the presumption arise again, if you cannot pay at least 25% then the presumption does not arise.

The bankruptcy means test can be confusing, and bankruptcy trustees can derive numbers differently so it may be helpful to speak to a local bankruptcy attorney that knows how the means test is being interpreted in your bankruptcy court.

The question we hear the most from people is “do I qualify for chapter 7 bankruptcy?” While the bankruptcy laws are supposed to be accessible to everyone, they can be confusing, and the new bankruptcy laws have changed how courts determine if someone is eligible to file for ch 7 and ch 13 bankruptcy. So, do you qualify for ch 7 bankruptcy?

Individual – You must be an individual to file ch 7. You can be single or married. You can file with your spouse or without them. If you file without your spouse you will still have to disclose their income in order to determine if you are eligible to file chapter 7.

Income – Under the new bankruptcy laws chapter 7 filers must complete a bankruptcy means test which determines if you have the means, enough disposable income, to pay at least a portion of your debts. If your income is below the state median for your family size, as determined by the bankruptcy guidelines then you are eligible for ch 7.

If your income is above the median you may still qualify for ch 7 by providing additional information on your expenses to determine your disposable income. The IRS has provided standard allowances for things like housing, groceries, and other necessary expenses. You may also be able to include extraordinary expenses you may have due to medical and other conditions that will have to be explained to the bankruptcy court.

If your disposable income is less than $6000 you qualify for ch 7, if it’s more than $10,000 you do not qualify for chapter 7 bankruptcy. If it’s between $6000-10,000 and you can pay at least 25% of your unsecured debt then you do not qualify for ch 7, if you cannot pay at least 25% then you can file chapter 7 bankruptcy. The new means test can be complicated if you make more than the median income, so it’s important to consult a bankruptcy attorney.

Filing a ch 7 bankruptcy doesn’t mean you lose all of your belongings and will be left on the streets. While a chapter 7 bankruptcy does liquidate your assets in order to pay your creditors, the Federal government and states have set up exemptions that allow you to keep a certain portion of your assets so you can continue to live a productive life.

Bankruptcy exemptions are basically laws that say you can keep assets that are worth a set amount of money. Any property that is worth more than the exemption amount can be sold by the bankruptcy trustee in order to pay your creditors. There are Federal bankruptcy exemptions and then there are also state exemptions. Each state can determine if you are allowed to use the Federal exemptions, or if you can only use the exemptions set by the state. Whether you can choose Federal or state, they each provide protection for the same types of property, just in different amounts. It’s important to learn what property is exempt when filing for chapter 7 bankruptcy protection so you can determine what property you will be able to keep.

Homestead Exemption – The homestead exemption is set aside for your home or mobile home. The exemption is used to cover the equity you have in your home if you intend to keep it when filing bankruptcy.

Personal Property Exemption – These bankruptcy exemptions cover things like clothing, furniture, burial plots, vehicles, deposits for rent or utilities, pictures, books, etc. Basically any property you own that is not attached to the Earth.

Wages Exemptions – A portion of any wages that you have earned but haven’t been paid yet can be exempt from bankruptcy proceedings.

Pensions Exemptions – Filing bankruptcy doesn’t mean you will lose all of the savings you have set aside for retirement. Federal and state bankruptcy exemptions are available for retirement accounts including traditional and Roth IRA’s, 401k’s, and pensions.

Public Benefits Exemptions – Exemptions are also available for compensation you are entitled to from crime victim’s funds, unemployment, workers comp, POW benefits and disability payments.

Tools of the Trade Exemptions – Tools, equipment and uniforms you own in order to do your job are exempt from bankruptcy proceedings up to a certain amount.

Insurance Exemptions – Exemptions for life insurance, annuities, disability proceeds and other insurance policies are available.

Alimony and Child Support Exemptions – Any alimony and child support whether already paid or still owed to you is eligible for a bankruptcy exemption.

Misc Exemptions – Some states also provide an exemption amount that is available to cover any property that isn’t covered under another exemption, or that is worth more than other exemptions cover.

Knowing the exemptions available to you is important when considering filing ch 7 bankruptcy in order to wipe out your debt. You should get a free bankruptcy review or speak to a bankruptcy attorney to make sure you won’t lose any important property by filing bankruptcy. Your bankruptcy exemptions are listed on Schedule C of the bankruptcy forms and can seriously impact your life, so educate yourself.