What are the main differences between a Chapter 7 and a Chapter 13 bankruptcy?
A Chapter 7 bankruptcy is also known as a “straight” or “liquidation” bankruptcy. In a Chapter 7 bankruptcy, your non-exempt assets are liquidated and the proceeds are paid to your creditors. Many Chapter 7 bankruptcies are “no asset” bankruptcies, which means that the debtor has no assets to liquidate. Once the discharge order is entered, the debtor is relieved of any debts incurred before filing for bankruptcy.
A Chapter 13 bankruptcy is also known as a “Wage-Earner’s Payment Plan Bankruptcy.” In a Chapter 13 bankruptcy, you repay a portion (or all) of your debts over a 3 or 5-year period, depending upon your gross and disposable income. The amount repaid depends on your assets and/or your disposable monthly income. This type of bankruptcy, also known as a “house saver bankruptcy”, is often used by individuals seeking to save their homes from foreclosure. If you are behind on your mortgage payments and want to catch up, Chapter 13 bankruptcy may be the perfect way to do so.
Am I eligible to file for bankruptcy?
In order to file a Chapter 7 bankruptcy, you must meet certain requirements. In particular, if you have been granted a Chapter 7 discharge in the last 8 years or a Chapter 13 discharge in the last 6 years, you cannot file another Chapter 7 bankruptcy. You must also pass the means test, which compares your household income to the median income for a household in your area.
In order to file a Chapter 13 bankruptcy, you must have less than $383,175 in unsecured debt (like credit cards) and less than $1,149,525 in secured debts (like mortgages). You must have disposable income left over each month after your expenses are paid. If you don’t, you cannot file a feasible Chapter 13 repayment plan, and therefore cannot file a Chapter 13 bankruptcy. If you were granted a Chapter 7 discharge within 4 years of filing your Chapter 13, you cannot file. Also, if you were granted a Chapter 13 discharge within 2 years of filing your second Chapter 13, you cannot file. Only individuals may use Chapter 13 bankruptcy. If you are a company, you do not qualify for Chapter 13 and you must use either Chapter 7 (to liquidate company assets) or Chapter 11 (to reorganize company finances).
Do individuals qualify for Chapter 11 bankruptcy?
Sometimes, individuals make too much money to qualify for Chapter 7 and have too much secured or unsecured debt to qualify for Chapter 13. If that is the case, then an individual must do Chapter 11 bankruptcy.
What is the automatic stay?
When any bankruptcy is filed, the automatic stay goes in to effect. The automatic stay prohibits all creditors from continuing their collection efforts on a consumer (lawsuits, collection calls, etc.) Creditors are prohibited from contacting the consumer in any way, shape, or form. The automatic stay remains in effect until the bankruptcy case is over, or until a creditor successfully requests that the stay be lifted.
My income exceeds the median income for my county. Can I file a Chapter 7 bankruptcy?
It is a major misconception that a consumer is ineligible for a Chapter 7 if the consumer’s income exceeds the median income. If the income exceeds the applicable median income, then the consumer must pass the means test. The means test is a test designed to determine whether an individual is living beyond his means. IRS standards for the applicable household size are used as deductions from the person’s income. The income used in the Means Test is the average 6-month salary (referred to as the Current Monthly Income) of the consumer.
Deductions for necessary expenses are deducted from the Current Monthly Income. Secured debts are also used as necessary expenses. Therefore, the mortgage the consumer is contractually obligated to pay is deducted from Current Monthly Income. If after all the deductions, there is a significant surplus (usually around $200 or more), then the presumption of abuse arises. At this point the U.S. Trustee may file a motion to dismiss the case or the consumer must convert to a Chapter 13.
Can I keep my house if I file a Chapter 7 bankruptcy?
Yes, you can keep your house if you file bankruptcy as long as you are current on the payments and you do not have too much equity. If you have equity in your home, you may need to consider Chapter 13 bankruptcy.
Can I keep my car if I file a Chapter 7 bankruptcy?
Yes, as long as you are current on your payments and there is little to no equity. Some lenders will require that you reaffirm the debt in order to keep the car. Reaffirming the debt is entering into a new contract with the lender stating that you are still liable for the debt even though you filed bankruptcy. Vehicle creditors tend to be aggressive when it comes to reaffirmation agreements. Some will repossess if you do not reaffirm, even though you are current on your payments.
What are my exemptions?
In Virginia, and or the clear majority of debtors, property is never liquidated. Most bankruptcy estates are called “no asset estates”. The reason for this is simple: There are state laws that provide exemptions that protect your assets so that they cannot be taken and sold or liquidated. There are many exemptions that protect all sorts of property, including, but not limited to, your retirement, most wages and social security benefits, and personal injury proceeds. If you have personal or real property that exceeds the value of these exemptions, you may face the risk of liquidation. The two main exemptions, in Virginia, are “The Poor Debtor’s Exemption” (Va. Code 34-26) and the Homestead Exemption (Va. Code 34-4).
To use the Homestead Exemption, a Homestead Deed must be filed in the county or independent city where the debtor resides. The cost to record a Homestead Deed is $21.00. The Homestead Deed must be recorded within five (5) days from a Meeting of Creditors. The exemption amount is $5,000 per debtor, plus $500 per dependent for any property not protected by any other exemption (exemption doubles to $10,000 at age 65). Commonly protected assets, with this exemption, are tax refunds, bank accounts, and whole life insurance policies. This exemption is the only way to protect the value of your home. If there is equity in your home you may risk losing your home unless you pay the equitable value of your home over time in chapter 13 bankruptcy.
The Poor Debtor’s Exemption is used to protect most personal property. You must be a householder to exempt any personal property. Each householder is entitled to use the full exemption amount (double the amounts for married couples) to protect a family Bible, wedding and engagement rings, family portraits and heirlooms up to $5,000, a burial plot, clothing up to $1,000, household furnishings up to $5,000, one firearm up to $3,000, pets (not used for commercial purposes), medically prescribed health aids, tools of the trade (primary job) up to $10,000, and a motor vehicle up to $6,000.
There is also an exemption to protect retirement benefits where any qualified retirement plan (401(k), IRA, etc.) subject to the Employee Retirement Income Security Act (ERISA), is fully protected.
Can I discharge student loan debt?
Yes, but it is extremely difficult to do so. In order to discharge your student loans, you would have to show that paying them back would impose an “undue hardship” on you and your dependents. The burden is very difficult to meet. You would have to prove that you will not be able to maintain a minimal standard of living if you pay them. You would also have to prove that your circumstances will not be changing any time in the foreseeable future.
Does my husband/wife have to file with me?
It depends on who is liable for the debt. For example, if husband and wife are both on the note for a home loan, then they both would have to file in order to avoid future deficiency liability.
Can I max out my credit cards before filing bankruptcy?
Credit card purchases made 90 days prior to filing may constitute fraud. This a fact-sensitive issue. A creditor may object, claiming that you never had the intent to pay it back. In practice, creditors rarely object unless there was a significant increase in the use of the credit card prior to filing. Avoid any luxury purchases if you are contemplating bankruptcy. Generally, you should keep credit card use to a minimum prior to filing.
How long will it take for my credit score to recover?
It depends. Many people who file for bankruptcy re-establish their credit within two years of filing. Lending guidelines actually allow you to buy a home, as long as you can afford to do so. You must be proactive in re-establishing your credit (make timely payments on your vehicles, new credit cards, mortgage payments, etc.). You will receive many credit card offers within weeks of filing bankruptcy. Creditors see someone who just filed a bankruptcy as a great credit risk. As counter-intuitive as it may sound, it actually makes sense. A fresh filer does not have any debts and cannot file a Chapter 7 bankruptcy for another 8 years. Therefore, the creditor is, in a sense, insured that the person will pay their debts.
Will I get fired for filing bankruptcy?
No. Any employer who fires an employee for filing bankruptcy is in violation of federal law. Bankruptcy is a federal right and employers cannot discriminate against an employee based on a bankruptcy filing.
What is a secured debt? What is an unsecured debt?
Secured debts are debts that are tied to an asset. When a borrower defaults on a secured debt, the lender may repossess the asset to secure payment of the amount owed. The most common secured debts are mortgages and auto loans.
An unsecured debt is not tied to a consumer’s assets. When a borrower defaults on an unsecured debt, the creditor will generally sue the borrower to recover the money owed. If the creditor obtains a judgment, this judgment can be enforced by filing a lien against the borrower’s property or by garnishing the borrower’s wages, among other remedies. The most common unsecured debts are medical bills and credit cards.
Which debts can I discharge?
Almost all of your debts can be discharged in a bankruptcy. Some debts cannot be discharged. You cannot discharge criminal fines, fees, or court-ordered judgments. You also, cannot discharge civil judgments resulting from personal injury or death caused by your negligence. Most student loans cannot be discharged. You cannot discharge taxes that are less than three years old. If you incurred a debt because of committing fraud, you cannot discharge that debt. Alimony and child support payments cannot be discharged.
Can I “strip off” my second mortgage in Chapter 7?
If you file for Chapter 7 bankruptcy, you cannot get rid of second mortgages, home equity lines of credit (HELOCs), or home equity loans. To do this, you must do Chapter 13 and you must complete the entire bankruptcy. If you fail to complete your bankruptcy, or you convert your case to Chapter 7, you will not strip your second mortgage.