What Happens to My Car During Bankruptcy?
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Written by Canterbury Law Group

Can You Keep Your Car After Filing Bankruptcy?

Whether you can keep your car after filing bankruptcy depends on several factors, particularly the type of bankruptcy you file, the value of your car, and the exemptions available in your state. Here’s a breakdown:

Types of Bankruptcy:

  • Chapter 7 Bankruptcy: This type aims to liquidate non-exempt assets to pay creditors. Whether you keep your car depends on:
    • Car Value vs. Exemption: If your car’s value falls below the motor vehicle exemption allowed in your state, you can likely keep it. This exemption protects a certain value of your car from being sold by the bankruptcy trustee to pay creditors.
    • Car Loan: If you have a car loan, keeping the car requires either:
      • Reaffirmation: You agree to continue making payments under the original loan terms. This can be risky as you lose the protection of bankruptcy if you default on payments later.
      • Redemption: You pay the car’s current value to the lender to keep the car and own it free and clear.
  • Chapter 13 Bankruptcy: This type involves creating a repayment plan to repay creditors over 3-5 years. You generally keep your car as long as you stay current on your car loan payments and other plan payments.

Here are some additional points to consider:

  • Equity: The difference between your car’s value and your loan balance is your equity. If your equity exceeds the exemption, the trustee may sell the car and use the proceeds to pay creditors in a Chapter 7 case.
  • State Exemptions: Each state has different bankruptcy exemptions, so it’s crucial to research the specific exemption amount for your state’s motor vehicles. You can find this information online, through legal resources, or by consulting with a bankruptcy attorney.

What Happens to Your Car in Chapter 7 Bankruptcy?

In Chapter 7 bankruptcy, the fate of your car depends on various factors, including the equity you have in the vehicle, whether you’re behind on payments, and the exemptions available to protect assets in your state. Here’s what typically happens to your car in Chapter 7 bankruptcy:

  1. Equity and Exemptions: If your car has significant equity (the value of the car exceeds any outstanding loans or liens), it may be at risk of being sold by the bankruptcy trustee to repay your creditors. However, many states offer exemptions that allow you to protect a certain amount of equity in your car. If the equity in your car is within the exemption limit, you may be able to keep your car.
  2. Secured Debt: If you have a car loan, it’s considered a secured debt, meaning the loan is secured by the vehicle itself. In Chapter 7 bankruptcy, you have the option to reaffirm the debt, redeem the car by paying its current value in a lump sum, or surrender the car to the lender. Reaffirming the debt means you agree to continue making payments on the car loan and retain ownership of the vehicle.
  3. Vehicle Exemption: In many states, there’s a specific exemption called the motor vehicle exemption, which allows you to exempt a certain amount of equity in your car from being used to repay creditors in bankruptcy. If the equity in your car falls within the exemption limit, you can typically keep your car.
  4. Loan Arrears: If you’re behind on car payments and want to keep the car, you may have the option to catch up on missed payments through a reaffirmation agreement or a repayment plan approved by the court.
  5. Nonexempt Equity: If the equity in your car exceeds the exemption limit and you’re unable to protect it, the bankruptcy trustee may sell the car, use the proceeds to pay off your creditors, and distribute any remaining funds to you.
  6. Leased Cars: If you’re leasing a car and want to keep it, you may have the option to assume the lease and continue making payments. However, you’ll need to continue making payments on time to retain possession of the leased vehicle.

What Happens to Your Car in Chapter 13 Bankruptcy?

In Chapter 13 bankruptcy, the fate of your car can be different compared to Chapter 7 bankruptcy due to the structure of the repayment plan. Here’s what typically happens to your car in Chapter 13 bankruptcy:

  1. Automatic Stay: Like Chapter 7 bankruptcy, filing for Chapter 13 bankruptcy triggers an automatic stay, which temporarily halts creditor collection actions, including repossession of your car.
  2. Repayment Plan: In Chapter 13 bankruptcy, you propose a repayment plan to the court to repay all or a portion of your debts over three to five years. Your car loan is included in this plan.
  3. Cure Arrears: If you’re behind on car payments, your Chapter 13 repayment plan allows you to catch up on missed payments (arrears) over the plan’s duration. This allows you to keep your car while repaying what you owe.
  4. Valuation and Treatment: The value of your car is determined based on its fair market value, not the amount owed on the loan. If the value of your car is less than the amount owed (negative equity), you may have the option to cram down the loan to the car’s fair market value, potentially reducing the principal balance and interest rate.
  5. Interest Rate: In some cases, Chapter 13 bankruptcy allows you to reduce the interest rate on your car loan, making monthly payments more affordable.
  6. Reaffirmation: You may have the option to reaffirm your car loan during Chapter 13 bankruptcy, meaning you agree to continue making payments on the loan and retain ownership of the vehicle. However, reaffirmation is subject to court approval and may not always be necessary or advisable.
  7. Surrender or Redeem: If you’re unable to afford the car payments or no longer want to keep the car, you may have the option to surrender the vehicle to the lender or redeem it by paying its current value in a lump sum.
  8. Completion of Plan: Once you successfully complete your Chapter 13 repayment plan, any remaining balances on your car loan and other unsecured debts may be discharged, allowing you to retain ownership of your car free and clear of debt.

How is Debt Managed in Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, debt is managed differently compared to Chapter 13 bankruptcy. Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy,” involves the sale of nonexempt assets to repay creditors and the discharge of qualifying debts. Here’s how debt is managed in Chapter 7 bankruptcy:

  1. Automatic Stay: Upon filing for Chapter 7 bankruptcy, an automatic stay goes into effect, which temporarily halts creditor collection actions, including foreclosure, repossession, wage garnishment, and debt collection lawsuits.
  2. Liquidation of Assets: In Chapter 7 bankruptcy, a bankruptcy trustee is appointed to oversee the liquidation of nonexempt assets. Nonexempt assets are those not protected by exemptions under federal or state law. The trustee sells these assets and distributes the proceeds to creditors. However, many states have exemptions that allow debtors to protect certain assets from liquidation, such as a primary residence, personal belongings, and retirement accounts.
  3. Debt Discharge: Certain types of debts may be discharged (eliminated) in Chapter 7 bankruptcy, meaning you’re no longer legally obligated to repay them. Qualifying debts typically include unsecured debts such as credit card debt, medical bills, personal loans, and certain types of loans. However, certain debts, such as child support, alimony, most student loans, and certain tax debts, are generally not dischargeable in Chapter 7 bankruptcy.
  4. Exempt Property: In Chapter 7 bankruptcy, debtors are allowed to keep (“exempt”) certain property up to a certain value, as determined by federal or state exemption laws. Exempt property typically includes necessities such as clothing, household furnishings, tools of the trade, and a primary residence up to a specified equity limit.
  5. Means Test: To qualify for Chapter 7 bankruptcy, debtors must pass a means test, which evaluates their income and expenses to determine if they have enough disposable income to repay their debts through a Chapter 13 repayment plan. If a debtor’s income exceeds the median income for their state or if they fail the means test, they may be required to file for Chapter 13 bankruptcy instead.
  6. Debt Counseling: Before receiving a discharge in Chapter 7 bankruptcy, debtors are required to complete credit counseling from a court-approved agency. Additionally, debtors must complete a financial management course after filing for bankruptcy.
  7. Discharge of Debts: Once the bankruptcy process is complete and any required courses are finished, qualifying debts are discharged, providing debtors with a fresh financial start. However, it’s important to note that not all debts may be discharged, and certain obligations, such as child support, alimony, and certain tax debts, may survive bankruptcy.

How is Debt Managed in Chapter 13 Bankruptcy?

In Chapter 13 bankruptcy, debt is managed through a court-approved repayment plan. Unlike Chapter 7 bankruptcy, where certain assets may be sold to pay off creditors, Chapter 13 allows individuals with regular income to reorganize their debts and create a plan to repay all or a portion of their debts over a period of three to five years. Here’s how debt is managed in Chapter 13 bankruptcy:

  1. Filing and Plan Proposal: To initiate Chapter 13 bankruptcy, you must file a petition with the bankruptcy court and propose a repayment plan outlining how you will repay your debts over the plan’s duration. The plan typically prioritizes certain types of debts, such as priority debts (e.g., taxes, domestic support obligations), secured debts (e.g., mortgages, car loans), and unsecured debts (e.g., credit card debt, medical bills).
  2. Automatic Stay: Upon filing for Chapter 13 bankruptcy, an automatic stay goes into effect, which temporarily halts creditor collection actions, including foreclosure, repossession, wage garnishment, and debt collection lawsuits.
  3. Plan Confirmation: After filing the repayment plan, the bankruptcy trustee and creditors have an opportunity to review and object to the plan. If no objections are raised, or if objections are resolved, the bankruptcy court holds a confirmation hearing to approve the plan. Once the court confirms the plan, it becomes binding on both the debtor and creditors.
  4. Payment to Trustee: Under the Chapter 13 repayment plan, you make regular payments to the bankruptcy trustee, who then distributes the funds to creditors according to the terms of the plan. The trustee’s role is to oversee the administration of the bankruptcy estate, ensure compliance with the plan, and facilitate payments to creditors.
  5. Debt Repayment: During the plan’s duration, you make monthly payments to the trustee based on your disposable income and ability to repay debts. The trustee allocates these payments to creditors according to the plan’s terms. Secured debts, such as mortgages and car loans, are typically paid in full or brought current through the plan, while unsecured debts may receive partial repayment based on available funds.
  6. Completion of Plan: Once you successfully complete the Chapter 13 repayment plan, any remaining balances on eligible debts may be discharged, meaning you’re no longer legally obligated to repay them. However, certain debts, such as student loans, domestic support obligations, and certain tax debts, may not be dischargeable in Chapter 13 bankruptcy.

Overall, Chapter 13 bankruptcy provides individuals with a structured framework to repay their debts over time while retaining their assets and avoiding liquidation. It’s essential to work with an experienced bankruptcy attorney to navigate the Chapter 13 process, develop a feasible repayment plan, and achieve your financial goals.

How Does Bankruptcy Affect Credit?

Bankruptcy can have a significant impact on an individual’s credit score and creditworthiness. Here are some ways in which bankruptcy can affect credit:

  1. Credit Score: Filing for bankruptcy typically results in a significant drop in credit score. The extent of the drop depends on various factors, including the individual’s credit history, the type of bankruptcy filed (Chapter 7 or Chapter 13), and the amount of debt discharged.
  2. Credit Report: Bankruptcy remains on a credit report for a certain period, depending on the type of bankruptcy filed. Chapter 7 bankruptcy remains on a credit report for ten years from the filing date, while Chapter 13 bankruptcy remains for seven years from the filing date.
  3. Credit Availability: After filing for bankruptcy, individuals may find it challenging to obtain new lines of credit or loans. Lenders may view them as high-risk borrowers and may offer credit with higher interest rates and less favorable terms.
  4. Credit Card Accounts: Credit card accounts included in a bankruptcy filing are typically closed by the creditor. This can reduce the individual’s available credit and further impact their credit utilization ratio.
  5. Rebuilding Credit: While bankruptcy can have a negative impact on credit, it is not permanent. With responsible financial management and timely payments, individuals can begin rebuilding their credit over time. This may involve obtaining secured credit cards, making on-time payments, keeping credit utilization low, and avoiding new debt.
  6. Credit Counseling Requirement: Before receiving a bankruptcy discharge, individuals are required to complete credit counseling from a court-approved agency. This counseling may provide valuable financial education and help individuals develop strategies for managing credit responsibly in the future.
  7. Employment and Housing: While not directly related to credit, it’s worth noting that some employers and landlords may check credit reports as part of the application process. A bankruptcy filing could potentially impact employment opportunities or housing options, although this varies depending on the employer or landlord’s policies.
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The Consequences Of Filing For Bankruptcy

Can Filing For Bankruptcy Make Your Tax Debt Go Away?

Filing for bankruptcy can offer a fresh start for those burdened by overwhelming debt, but it does come with consequences that can impact your financial and personal life. Here’s an overview of the potential downsides:

Financial Impact:

  • Credit Score Damage: Bankruptcy remains on your credit report for 7 years (Chapter 13) or 10 years (Chapter 7), significantly impacting your credit score during that period. Obtaining loans, credit cards, and other forms of credit might be difficult or come with high interest rates.
  • Asset Liquidation: Chapter 7 bankruptcy may involve selling non-exempt assets to repay creditors, potentially leading to property loss. Chapter 13 allows you to keep your assets but requires a repayment plan, potentially straining your finances.
  • Employment Considerations: While federal law prohibits discrimination based on bankruptcy, some employers might conduct credit checks during hiring, and seeing a bankruptcy filing could create challenges in specific industries.

Personal Impact:

  • Emotional Stress: Navigating the legal process, dealing with financial hardship, and facing social stigma associated with bankruptcy can be emotionally overwhelming.
  • Limited Opportunities: Lower credit scores can restrict access to certain opportunities like renting apartments, obtaining professional licenses, or qualifying for insurance with favorable rates.
  • Relationship Strain: Financial stress and the complexities of bankruptcy can strain relationships with family and friends. Open communication and understanding can help mitigate this impact.

However, it’s important to consider the potential benefits alongside the consequences:

  • Debt Relief: Bankruptcy can provide lasting relief from overwhelming debt, offering a clean slate and peace of mind.
  • Improved Financial Management: The process can incentivize healthy financial habits and budgeting practices to avoid future debt pitfalls.
  • Rebuild Opportunities: While credit repair takes time, responsible financial management after bankruptcy can gradually improve your credit score and access to financial products.

Financial Consequences:

  1. Credit Score Impact:
    • Filing for bankruptcy will likely have a severe negative impact on your credit score. A bankruptcy record can remain on your credit report for several years, making it challenging to obtain credit or loans.
  2. Difficulty Obtaining Credit:
    • After bankruptcy, obtaining new credit, such as credit cards or loans, may be more difficult, and if approved, interest rates may be higher.
  3. Limited Access to Financial Products:
    • Bankruptcy can limit access to certain financial products and services. For example, you may find it challenging to qualify for a mortgage or an auto loan with favorable terms.
  4. Asset Liquidation:
    • In Chapter 7 bankruptcy, some of your assets may be sold to pay off creditors. Certain assets, however, may be exempt from liquidation.
  5. Repayment Plans (Chapter 13):
    • In Chapter 13 bankruptcy, you may be required to follow a court-approved repayment plan to pay off your debts over a specified period, usually three to five years.
  6. Impact on Co-Signers:
    • If someone co-signed a loan with you, they may become responsible for the debt if you file for bankruptcy.

Non-Financial Consequences:

  1. Public Record:
    • Bankruptcy is a public record, and your filing will be accessible to creditors, employers, and the general public.
  2. Employment Impact:
    • While federal law prohibits discrimination based solely on bankruptcy status, some employers may consider it during the hiring process. Positions involving financial responsibilities may be particularly affected.
  3. Housing and Utilities:
    • Some landlords and utility companies may inquire about your bankruptcy history, potentially affecting your ability to secure housing or utility services.
  4. Impact on Personal Relationships:
    • The stress and strain of financial difficulties and bankruptcy can impact personal relationships, including those with family and friends.
  5. Loss of Non-Exempt Property:
    • In Chapter 7 bankruptcy, non-exempt property may be sold to pay off creditors. Exemptions vary by state and protect certain types and amounts of property.

It’s important to note that the specific consequences can vary based on the type of bankruptcy filed (Chapter 7 or Chapter 13), individual circumstances, and applicable state laws. Additionally, while bankruptcy has significant consequences, it also provides individuals and businesses with an opportunity for a fresh financial start.

Remember:

  • The specific consequences of bankruptcy vary depending on your individual circumstances, type of bankruptcy filed, and state laws.
  • Consulting with a qualified bankruptcy attorney is crucial to understand the process, potential ramifications, and explore alternatives best suited to your situation.
  • Bankruptcy should not be considered lightly, but it can be a valuable tool for overcoming financial struggles and achieving long-term financial stability.

 

Filing for bankruptcy can affect certain types of tax debt, but it does not automatically make all tax obligations disappear. The treatment of tax debt in bankruptcy depends on the type of tax, the specific circumstances, and the chapter of bankruptcy you file.

General Rules:

  • Tax debt is treated differently than other debts in bankruptcy. In most cases, it’s considered a “priority debt,” meaning it gets higher priority for repayment compared to other unsecured debts.
  • Discharging (eliminating) your tax debt through bankruptcy is generally difficult. You’ll need to meet specific criteria and exceptions.

Here’s a General Overview:

  1. Chapter 7 Bankruptcy:
    • In a Chapter 7 bankruptcy, your non-exempt assets may be liquidated to pay off creditors, but certain debts, including some tax debts, may be discharged. However, not all tax debts are dischargeable. To be dischargeable in Chapter 7, the tax debt must meet specific criteria, including that it is income tax debt, the tax return was filed on time, and the tax assessment is at least three years old.
  2. Chapter 13 Bankruptcy:
    • Chapter 13 bankruptcy involves a repayment plan over three to five years. While you won’t necessarily eliminate tax debt in a Chapter 13 case, you may be able to include tax debt in your repayment plan, allowing you to pay it back over time. This can provide a structured way to address tax arrears.
  3. Priority Tax Debt:
    • Some tax debts are considered priority debts and may not be dischargeable in bankruptcy. Priority tax debts include recent income tax debts, certain payroll taxes, and taxes associated with fraud. Priority tax debts are generally not dischargeable, but a Chapter 13 plan can help you manage the repayment.
  4. Tax Liens:
    • Bankruptcy may not remove tax liens. While the personal obligation to pay the tax debt may be discharged, a tax lien secured by property may survive bankruptcy. The IRS or state taxing authority may still have a claim on your property, and you may need to address the lien separately.
  5. Professional Advice:
    • It’s crucial to consult with a tax attorney or bankruptcy attorney to assess your specific tax situation. They can provide guidance on the dischargeability of tax debt based on the applicable bankruptcy laws and help you navigate the complexities of the process.

In summary, while bankruptcy can address certain tax debts, not all tax obligations are dischargeable, and the treatment of tax debt in bankruptcy can be complex. Seeking professional advice is essential to understand how bankruptcy may impact your specific tax situation and to explore the available options for managing tax debt.

Important points to remember:

  • Consulting a bankruptcy attorney and a tax professional is crucial before making any decisions. They can assess your specific situation and advise you on the best course of action.
  • Bankruptcy shouldn’t be seen as a way to avoid paying your taxes. It should only be considered as a last resort after exploring other options like payment plans or negotiating with the IRS.
  • Filing for bankruptcy has long-term implications, including a negative impact on your credit score and potential difficulties obtaining credit in the future.

Here are some additional resources that you might find helpful:

bankruptcy, bankruptcy attorneys, Chapter 13, Chapter 13 Bankruptcy, Chapter 7, Chapter 7 Bankruptcy, Scottsdale Attorneys, Scottsdale Legal Help
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Regular Post
Written by Canterbury Law Group

Can Filing For Bankruptcy Make Your Tax Debt Go Away?

Can Filing For Bankruptcy Make Your Tax Debt Go Away?

Filing for bankruptcy can affect certain types of tax debt, but it does not automatically make all tax obligations disappear. The treatment of tax debt in bankruptcy depends on the type of tax, the specific circumstances, and the chapter of bankruptcy you file.

General Rules:

  • Tax debt is treated differently than other debts in bankruptcy. In most cases, it’s considered a “priority debt,” meaning it gets higher priority for repayment compared to other unsecured debts.
  • Discharging (eliminating) your tax debt through bankruptcy is generally difficult. You’ll need to meet specific criteria and exceptions.

Here’s a General Overview:

  1. Chapter 7 Bankruptcy:
    • In a Chapter 7 bankruptcy, your non-exempt assets may be liquidated to pay off creditors, but certain debts, including some tax debts, may be discharged. However, not all tax debts are dischargeable. To be dischargeable in Chapter 7, the tax debt must meet specific criteria, including that it is income tax debt, the tax return was filed on time, and the tax assessment is at least three years old.
  2. Chapter 13 Bankruptcy:
    • Chapter 13 bankruptcy involves a repayment plan over three to five years. While you won’t necessarily eliminate tax debt in a Chapter 13 case, you may be able to include tax debt in your repayment plan, allowing you to pay it back over time. This can provide a structured way to address tax arrears.
  3. Priority Tax Debt:
    • Some tax debts are considered priority debts and may not be dischargeable in bankruptcy. Priority tax debts include recent income tax debts, certain payroll taxes, and taxes associated with fraud. Priority tax debts are generally not dischargeable, but a Chapter 13 plan can help you manage the repayment.
  4. Tax Liens:
    • Bankruptcy may not remove tax liens. While the personal obligation to pay the tax debt may be discharged, a tax lien secured by property may survive bankruptcy. The IRS or state taxing authority may still have a claim on your property, and you may need to address the lien separately.
  5. Professional Advice:
    • It’s crucial to consult with a tax attorney or bankruptcy attorney to assess your specific tax situation. They can provide guidance on the dischargeability of tax debt based on the applicable bankruptcy laws and help you navigate the complexities of the process.

In summary, while bankruptcy can address certain tax debts, not all tax obligations are dischargeable, and the treatment of tax debt in bankruptcy can be complex. Seeking professional advice is essential to understand how bankruptcy may impact your specific tax situation and to explore the available options for managing tax debt.

Important points to remember:

  • Consulting a bankruptcy attorney and a tax professional is crucial before making any decisions. They can assess your specific situation and advise you on the best course of action.
  • Bankruptcy shouldn’t be seen as a way to avoid paying your taxes. It should only be considered as a last resort after exploring other options like payment plans or negotiating with the IRS.
  • Filing for bankruptcy has long-term implications, including a negative impact on your credit score and potential difficulties obtaining credit in the future.

Here are some additional resources that you might find helpful:

bankruptcy, bankruptcy attorneys, Chapter 13, Chapter 13 Bankruptcy, Chapter 7, Chapter 7 Bankruptcy, Scottsdale Attorneys, Scottsdale Legal Help
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How Often Can You File For Bankruptcy?

How Often Can You File For Bankruptcy?

There’s no limit to how many times you can file for bankruptcy in your lifetime, but there are waiting periods you must adhere to between filings. These waiting periods depend on the specific chapters of bankruptcy you file under and whether your previous filings were successful.

Chapter 7 bankruptcy:

  • You must wait 8 years after a successful Chapter 7 filing before filing again.
  • If your previous Chapter 7 filing was dismissed within the past 6 years due to your failure to comply with court orders or provide required documents, you must wait 6 years to file again.

Chapter 13 bankruptcy:

  • You must wait 4 years after a successful Chapter 13 filing before filing for Chapter 7.
  • You can file for Chapter 13 again 2 years after a successful Chapter 13 filing, as long as you paid off at least 70% of your debts through the previous plan.
  • If your previous Chapter 13 filing was dismissed within the past 6 years due to your failure to comply with court orders or provide required documents, you must wait 6 years to file for Chapter 13 again.

Exceptions:

  • There are a few exceptions to these waiting periods. For example, if you can demonstrate that you have experienced undue hardship since your last filing, you may be able to file again sooner.
  • You can also file for a different chapter of bankruptcy than you used before without waiting the full period. For example, if you filed for Chapter 7 in the past, you can file for Chapter 13 now, or vice versa.

It’s important to consult with a bankruptcy attorney to discuss your specific situation and determine the best course of action for you.

Here are some additional things to keep in mind about filing for bankruptcy:

  • Bankruptcy can have a negative impact on your credit score.
  • You may lose some of your assets in a Chapter 7 bankruptcy.
  • You will need to complete credit counseling before filing for bankruptcy.

It is not appropriate for everyone to file for Chapter 7 bankruptcy. Even if filing for Chapter 7 bankruptcy seems like the best option for you to reduce your debt, you should weigh the drawbacks first.

If your income is too high, you cannot file for Chapter 7.

You must not have any disposable income and make less than the state median income in order to qualify for Chapter 7. Individuals with disposable income are those who have money left over after covering their essential living expenses and can save. The means test can be used to get your disposable income.
If you have too much extra money than you need, you can’t just stop paying off your debt. While filing under Chapter 13 repayment plans is not permitted, you can still receive a bankruptcy discharge.

There Will Be a Brief Detriment to Your Credit

Prior to filing for bankruptcy, those who are able to make their monthly payments on time and maintain a high credit score will initially see a decline in their score. Additionally, your interest rates may rise momentarily. Nonetheless, declaring bankruptcy frequently improves a filer’s credit rating over time. You have the chance to raise your credit score right away if your bankruptcy discharge is approved.

Not All Unsecured Debts Are Erased by Chapter 7

Certain unsecured debts, such as child support or alimony, are never dischargeable in bankruptcy. Certain debts, such as tax obligations and certain student loans, may be difficult to discharge through bankruptcy. A common misconception is that filing for bankruptcy cannot be used to discharge student loan debt. According to the Bankruptcy Code, you may be able to discharge your student loan debt if repaying it would put you through extreme hardship. The Department of Justice gave courts more precise guidelines in late 2022 regarding what constitutes undue hardship. See if you qualify for this requirement by reading our article on how to file for bankruptcy while having student loans. Our group even produced a filing tool to facilitate the cancellation of student loans.

Some Property Types May Be Lost

Giving up some pricey things could be one of the trade-offs for receiving a bankruptcy discharge in a matter of months. We refer to these things as nonexempt property. In Chapter 7 bankruptcy proceedings, the bankruptcy trustee may sell assets of this kind to satisfy creditors. Having said that, Chapter 7 cases hardly ever involve this.

Your Bankruptcy Under Chapter 7 Others Are Not Protected by Filing (Like Co-signers)

Your only obligation to pay the debt is eliminated by Chapter 7. It does not relieve someone else of their debt. The only kind of bankruptcy that can shield a co-signer is Chapter 13, but that protection is limited to situations where you pay off the debt through your repayment plan.

What Is Bankruptcy Under Chapter 13?

For those seeking a fresh start, Chapter 7 and Chapter 13 bankruptcy are both effective debt relief options. Chapter 13 (also known as the “reorganization” bankruptcy) may be appropriate for you if you have a lot of disposable income, nonexempt assets that you wish to preserve, and the ability to adhere to a payment schedule.

The Price of Bankruptcy Filing

The cost of declaring bankruptcy can be high. The two required credit counseling and debt education courses, the court filing fee, and the cost of legal representation (should you decide to retain counsel) must all be taken into account. For Chapter 7 cases, the Bankruptcy Court levies a $338 filing fee, which, unless you are granted a waiver, you must pay. The court will dismiss your case if you fail to pay the fee in full, even though you are able to request to pay it in four installments. In addition to the court filing fees, you will be required to pay the attorney fees of any law firm or bankruptcy attorney you retain for assistance. This usually adds up to roughly $1,500, and it needs to be paid before your case is filed.
The price of attending the required debt education and credit counseling courses is in addition to the filing fee and legal fees.

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What Is The Downside of Filing For Bankruptcy

What Is The Downside of Filing For Bankruptcy

It is not appropriate for everyone to file for Chapter 7 bankruptcy. Even if filing for Chapter 7 bankruptcy seems like the best option for you to reduce your debt, you should weigh the drawbacks first.

If your income is too high, you cannot file for Chapter 7.

You must not have any disposable income and make less than the state median income in order to qualify for Chapter 7. Individuals with disposable income are those who have money left over after covering their essential living expenses and can save. The means test can be used to get your disposable income.
If you have too much extra money than you need, you can’t just stop paying off your debt. While filing under Chapter 13 repayment plans is not permitted, you can still receive a bankruptcy discharge.

There Will Be a Brief Detriment to Your Credit

Prior to filing for bankruptcy, those who are able to make their monthly payments on time and maintain a high credit score will initially see a decline in their score. Additionally, your interest rates may rise momentarily. Nonetheless, declaring bankruptcy frequently improves a filer’s credit rating over time. You have the chance to raise your credit score right away if your bankruptcy discharge is approved.

Not All Unsecured Debts Are Erased by Chapter 7

Certain unsecured debts, such as child support or alimony, are never dischargeable in bankruptcy. Certain debts, such as tax obligations and certain student loans, may be difficult to discharge through bankruptcy. A common misconception is that filing for bankruptcy cannot be used to discharge student loan debt. According to the Bankruptcy Code, you may be able to discharge your student loan debt if repaying it would put you through extreme hardship. The Department of Justice gave courts more precise guidelines in late 2022 regarding what constitutes undue hardship. See if you qualify for this requirement by reading our article on how to file for bankruptcy while having student loans. Our group even produced a filing tool to facilitate the cancellation of student loans.

Some Property Types May Be Lost

Giving up some pricey things could be one of the trade-offs for receiving a bankruptcy discharge in a matter of months. We refer to these things as nonexempt property. In Chapter 7 bankruptcy proceedings, the bankruptcy trustee may sell assets of this kind to satisfy creditors. Having said that, Chapter 7 cases hardly ever involve this.

Your Bankruptcy Under Chapter 7 Others Are Not Protected by Filing (Like Co-signers)

Your only obligation to pay the debt is eliminated by Chapter 7. It does not relieve someone else of their debt. The only kind of bankruptcy that can shield a co-signer is Chapter 13, but that protection is limited to situations where you pay off the debt through your repayment plan.

What Is Bankruptcy Under Chapter 13?

For those seeking a fresh start, Chapter 7 and Chapter 13 bankruptcy are both effective debt relief options. Chapter 13 (also known as the “reorganization” bankruptcy) may be appropriate for you if you have a lot of disposable income, nonexempt assets that you wish to preserve, and the ability to adhere to a payment schedule.

The Price of Bankruptcy Filing

The cost of declaring bankruptcy can be high. The two required credit counseling and debt education courses, the court filing fee, and the cost of legal representation (should you decide to retain counsel) must all be taken into account. For Chapter 7 cases, the Bankruptcy Court levies a $338 filing fee, which, unless you are granted a waiver, you must pay. The court will dismiss your case if you fail to pay the fee in full, even though you are able to request to pay it in four installments. In addition to the court filing fees, you will be required to pay the attorney fees of any law firm or bankruptcy attorney you retain for assistance. This usually adds up to roughly $1,500, and it needs to be paid before your case is filed.
The price of attending the required debt education and credit counseling courses is in addition to the filing fee and legal fees.

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What Are the Chapter 7 Bankruptcy Rules?

The most common form of bankruptcy in the United States is Chapter 7. At Canterbury Law Group, we constantly work with clients to file Chapter 7, which allows individuals to extinguish all debts which are “dischargeable” under the Bankruptcy Code. In a Chapter 7, all of the debtor’s non-exempt assets on the petition date are liquidated through the priorities set forth in the bankruptcy code. At the time of filing, the bankruptcy code establishes the creation of your “debtor’s estate” which includes all “non-exempt assets.” As a Debtor you have various duties and obligations, including significant duties of co-operation, which are owed to the Bankruptcy Trustee. These obligations are designed to assist the Trustee in the administration of your bankruptcy estate.

The Scottsdale bankruptcy lawyers at Canterbury Law Group will counsel you regarding these duties, which if followed, will make your case run smoothly. Unfortunately, many debtors who are not fully informed of these obligations run the risk of not receiving a full discharge of some or all or their debt. If you’re thinking of filing Chapter 7, here are some recommendations from our lawyers:

1. Complete the Mandatory Credit Counseling – Before you can file chapter 7 bankruptcy, it is essential to complete credit counseling. It is a mandatory step before you can file and often requires paying a fee. Otherwise, your filing will not be allowed to continue.

2. File All Chapter 7 Paperwork – Complete and file all necessary paperwork in court. Make sure all of your paperwork is accurate. Determine any fees associated with your filing.

3. Meet With Your Creditors – Approximately one month after filing the petition, you will need to meet with your creditors, an arrangement made by the court. During this important meeting, your creditors will question you regarding your finances and property. Typically this meeting involves only a few people connected with the credit card companies to whom you owe your debt. Your lawyer can certainly be present to aid you through this process.

4. Attend the Personal Financial Management Instruction Course – In addition to your credit counseling course, a personal financial management course generally costs about $30 and is necessary for completing your filing of chapter 7. If you skip the money management course, you risk dismissal of your case.

Although there are a lot of rules, Chapter 7 bankruptcy rules are not as complicated to comprehend as you might think. To guarantee a successful Chapter 7 bankruptcy filing and to gain a basic understanding of the rules, continue reading.

The local court regulations and the bankruptcy laws of the United States are combined to create Chapter 7 bankruptcy rules. The Bankruptcy Code and the Bankruptcy Rules are two distinct categories of US bankruptcy laws.

There are many of them since all bankruptcy cases are covered by these laws. But do not fret! Not all of them need to be learned. It’s a good idea to be somewhat familiar with Chapter 7 bankruptcy rules if you plan to file for Chapter 7 bankruptcy to ensure that a small mistake doesn’t ruin your fresh start.

Unofficial Guideline That All Filers Should Adhere To

Being sincere is the most crucial bankruptcy rule. The bankruptcy laws grant the “honest but unfortunate debtor” a fresh start. Even if they abide by all the other guidelines to the letter, anyone attempting to conceal anything risks punishment. Because of this, it’s crucial that you submit an amendment if you discover that something is missing from your forms.

Guidelines for Chapter 7 Bankruptcy to Adhere to Before Filing

When getting ready to file your case, there are a few easy guidelines to adhere to. To be eligible to file Chapter 7, you must complete an approved credit counseling course, use the official bankruptcy forms from the U.S. Courts, and pass the means test.

A Credit Counseling Appropriate Course Must Be Taken

Everyone is required to enroll in a credit counseling course offered by an authorized credit counseling agency at some point during the six months—180 days, to be exact—before declaring bankruptcy. You cannot file for any kind of bankruptcy without it. You must also have the United States Trustee’s approval for the credit counseling organization you select for this hour-long course.

The Official Bankruptcy Forms Must Be Used

The bankruptcy courts in the United States mandated that all individuals filing for bankruptcy, regardless of location, must utilize identical bankruptcy forms. The U.S. Courts website offers the forms at no cost. The only way to ensure that any bankruptcy forms you download are the official version is to ensure that you are downloading them from a.gov website.

Furthermore, your state’s bankruptcy court might have unique local forms. These local bankruptcy forms are not a substitute for the federal ones; they must be filed in addition to them, if necessary. Required local forms can be obtained by speaking with the clerk at your local bankruptcy court or by visiting the website of your bankruptcy district.

The Means Test Must Be Passed

Chapter 7 filing is subject to income restrictions. Using a means test, the court determines whether you are within those bounds. There are mixed feelings when one fails the means test. One the one hand, your high income precludes you from filing for Chapter 7 bankruptcy. Nonetheless, your monthly income is fairly stable, even though it might not be sufficient to meet all of your creditors’ demands for payments each month. Investigate if Chapter 13 bankruptcy would be a better choice for you in this situation.

How Is the Means Test Operational?

In essence, it establishes the income thresholds for Chapter 7 bankruptcy. You pass the means test if your monthly income is currently less than the state median income. You might still pass the means test even if your income is higher than the median. In order to file for Chapter 13 bankruptcy, you must demonstrate that your disposable income (after your living expenses and income tax withholdings are subtracted) is insufficient to pay off at least 25% of your unsecured creditors.

Chapter 7: Bankruptcy Guidelines for Following Case Filing

The automatic stay, which is a feature of the bankruptcy laws, protects you from creditors as soon as your Chapter 7 case is filed. Once a bankruptcy petition is filed, the Bankruptcy Code prohibits any further collection efforts against the debtor or their assets. Wage garnishments must therefore end immediately upon the filing of a bankruptcy case.

That isn’t the only thing that occurs, though. For the individual filing for Chapter 7 bankruptcy, their creditors, and the bankruptcy trustee managing the case, there are extra regulations.

Chapter 7: Guidelines for Bankruptcy Filers

Each individual filing for bankruptcy must fulfill the Bankruptcy Code’s requirements. Following the filing of your Chapter 7 bankruptcy case, you have the following obligations:

Apply for a fee waiver or pay the court filing fee.

Your final federal income tax return should be turned in to their bankruptcy trustee.
Attend the creditors’ meeting.
Finish the second bankruptcy course, also known as financial management or debtor education.

That is, of course, the absolute minimum. Additionally, you must work with your bankruptcy trustee. This usually entails providing them with additional paperwork in advance of the creditors’ meeting, such as bank statements. At times, this entails informing the trustee if, within six months of your filing date, you are qualified to inherit something. It all depends on the circumstances surrounding your case.

Additionally, in the event that your contact information changes, you must make sure to notify the trustee and the bankruptcy court.

What Part Does the Trustee Play in This Whole Thing?

Finding non-exempt assets that can be sold to pay off unsecured creditors is the trustee’s responsibility. This entails going over tax returns, bank account statements, and bankruptcy forms, among other documents. Asset cases remain open for as long as the trustee needs to complete them, and even after the bankruptcy discharge is approved, the filer must keep collaborating with them.

Since most Chapter 7 bankruptcy filers do not possess any nonexempt property, the trustee’s duties are restricted and frequently completed prior to the debts being discharged.

Guidelines for Handling Secured Debts

Secured debts are associated with a particular item of property. One common type of secured debt in Chapter 7 proceedings is auto loans. If you possess this kind of debt, you must file a Statement of Intentions to inform the secured creditor of your plans. That’s not all, though.

There isn’t much more to do if you are returning the car. But the Chapter 7 bankruptcy rules demand that you actually follow through on any plans you may have to redeem the car or reaffirm the loan. That typically entails signing a reaffirmation agreement or submitting a motion to redeem. The automatic stay expires and the bank is free to come pick up the car whenever they choose if you don’t act within 45 days of the date of the creditors’ meeting.

Chapter 7: Rules for Creditors in Bankruptcy

The most significant of these is the previously mentioned automatic stay found in the Bankruptcy Code. In addition, if creditors wish to object to anything in your case, they must submit their objections by a specific date. Unsecured creditors frequently take no action at all in no-asset cases. Credit card debt, personal loans, the majority of tax debt, and student loans are examples of unsecured debt.

Having a trusted legal team on your side is critical during bankruptcy. Call Canterbury Law Group today to schedule your consultation. 480-744-7711.

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Is Filing for Bankruptcy Bad?

Is Filing for Bankruptcy Bad?

We are committed to providing accurate content that helps you make informed money decisions. Our partners have not commissioned or endorsed this content. Read our editorial guidelines here

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Bankruptcy is a legal option that can provide relief for people who can no longer keep up with their debts. While this route can alleviate an excessive financial burden, there are pros and cons of filing for bankruptcy. For instance, while it can provide you with a fresh start, it can make it difficult to be eligible for new forms of credit down the road.

 

The decision to file for bankruptcy should be considered carefully, weighing not only the benefits and the potential relief it can bring but also the drawbacks. So, what are the pros and cons of filing for bankruptcy?

 

There are a lot of misconceptions about what it means to file for bankruptcy, which can lead to unnecessary stigma.

 

For instance, there is a commonly held belief that those who file for bankruptcy are irresponsible when it comes to managing money. In reality, the high cost of medical expenses is one of the leading causes of bankruptcies.

 

Other misconceptions are that if you file for bankruptcy, you can lose all of your belongings or never be eligible for credit again. Neither of these statements is true. Your assets are often protected by federal or state exemption laws — though you may have to sell some of your belongings in a Chapter 7 case — and many bankruptcy filers are able to secure forms of credit again.

 

There are six types of bankruptcy, but the average consumer will usually file one of two:

 

  • Chapter 7: This is the most common form of bankruptcy for individuals. With this method, valuable assets are liquidated to settle debts. Chapter 7 is typically split into asset cases and no-asset cases; if you are determined to be a no-asset filer, you won’t have to give up your belongings. Chapter 7 bankruptcy can stay on your credit report for up to 10 years, starting on the filing date.
  • Chapter 13: This is the second most common form of bankruptcy that individuals file. With Chapter 13 bankruptcy, a three-to-five-year repayment plan is created. This form of bankruptcy can stay on your credit profile for up to seven years.
  • The type of bankruptcy you qualify for may depend on your income and the value of your assets. For example, to see if you qualify for Chapter 7 bankruptcy, you’ll have to take a means test to determine your eligibility. If you’re not eligible for Chapter 7, you may have to file for Chapter 13.

 

 Filing bankruptcy: The Good

While it shouldn’t be undertaken lightly, bankruptcy can be a much-needed life raft for consumers who are drowning in debt. Here’s a look at some of the benefits of filing for bankruptcy.

 

  You’re granted an automatic stay

The instant you file, you are protected under a provision in bankruptcy law called the automatic stay. Creditors cannot pursue payment of your debts or take other actions against you until the bankruptcy is discharged or a repayment plan has been finalized.

 

  You’ll get relief from dealing with multiple creditors

Filing bankruptcy can mitigate the pressure and overwhelming nature of handling numerous creditors. In fact, you may experience immediate relief once your debts are discharged and you no longer have to repay some or all of your financial obligations.

 

  You’ll receive a court-appointed representative

Once you file your petition for bankruptcy, you’ll be assigned a trustee who will see your case through to discharge. They will operate on your behalf throughout the process, including handling all communication between you and your creditors, and in the case of Chapter 13 bankruptcy, they will be the one to receive and process your payments.

 

  Bankruptcy can prevent further legal action

One of the largest benefits of bankruptcy is that you could be legally cleared of responsibility for your debt. On top of that, it could potentially prevent any future legal trouble related to the nonpayment of that debt. Keep in mind that not all debts are dischargeable, but most forms of unsecured consumer debt can be wiped out in bankruptcy.

 

  You may be able to keep some assets

In Chapter 13 bankruptcy, you are likely to be able to keep your assets as you repay your debts, but even when your assets are liquidated under Chapter 7, some valuables may be protected by federal or state exemption laws, depending on where you live.

 

  Some back taxes can be addressed

Filing bankruptcy can be an effective way to deal with back taxes, especially in a situation in which wages are being garnished. While most tax debts cannot be dismissed in bankruptcy, some older tax debts can be discharged. To be eligible, your tax debts must be at least 3 years old and must be income taxes. Fraud penalties and payroll taxes are never eligible for discharge.

 

  Bankruptcy may prevent home foreclosure or car repossession

Chapter 13 bankruptcy can be a tool to delay or stop a foreclosure or car repossession. You may also be able to keep your vehicle if it is covered under exemption laws.

 

For example, a federal exemption allows you to have up to $4,450 in equity for your vehicle. If your vehicle is worth $4,000, for example, you may be able to keep the car because it falls under a federal exemption.

 

  Your debts may be settled for less than what you owe

Your creditors will be forced to accept whatever payment is determined in your bankruptcy case, which sometimes means receiving no payment at all. If you qualify for a Chapter 7 bankruptcy, you could have all of your unsecured debts dismissed, including credit card debt, personal loans and medical debt.

 

However, Chapter 13 bankruptcy can be trickier because you may have to repay some of those debts over the course of three to five years.

 

  Some debts will be completely written off

Once your bankruptcy case is closed, any debts that are discharged are gone for good. Your creditors cannot come back and try to collect on any debts that were dismissed during bankruptcy.

 

  Bankruptcy could potentially increase your credit score

It’s no secret that bankruptcy can hurt your credit. But if your credit score wasn’t great before you filed for bankruptcy, you could potentially see an increase after your debts are discharged. Debt elimination could help lower your credit utilization ratio, which is one of the factors that determine your credit score.

 

  You can take on new credit after your debts are discharged

The process of rebuilding your credit after bankruptcy can start immediately after your debts are discharged. In some cases, individuals are approved for credit cards almost immediately after they receive their discharge order. You will face some limitations as you attempt to take on new credit, however, especially since your credit score is likely to be low. A good place to start may be a secured credit card.

 

  You’ll get a fresh start

Bankruptcy can potentially provide you with a much-needed clean slate to begin rebuilding your financial life. This new start can help consumers reestablish their credit and build healthy habits around money.

 

 Filing bankruptcy: The Bad 

Of course, filing bankruptcy also comes with many drawbacks. Given the complex nature of the process, we recommend contacting an experienced bankruptcy attorney to assist with your case.

 

  You could lose assets of value

Depending on which type of bankruptcy you qualify for, your income, the equity in your assets and other factors, you may lose your home, your car and other valuable items. Your trustee may be required to sell these items to repay your creditors.

 

  Bankruptcy can be expensive

You’ll need to cover the costs of bankruptcy, including service and court fees. The average Chapter 7 bankruptcy case costs between $1,000 and $1,750 in out-of-pocket costs, while the average Chapter 13 bankruptcy costs around $3,300.

 

  Federal student loans are exempt from bankruptcy

In most cases, federal student loans are not dischargeable; there are some exceptions, but they are rare. Instead, if you’re struggling to keep up with your federal student loan payments, you may have to look into forbearance, deferment or income-based payment plans.

 

  You may still be responsible for some debts

While most debts can be discharged, there are some debts you will still be responsible for repaying. Besides federal student loans, certain other liabilities are not dischargeable, including taxes, alimony, child support, court orders and debts incurred through illegal activity.

 

  If you have joint accounts, the other party is still responsible

Creditors can demand payment from the nonbankrupt debtor or any cosigners you have. This is an important factor to consider before adding a co-applicant to a credit application, and you’ll want to be sure your co-borrower understands this as well.

 

  You could face criminal charges if you aren’t honest

The information you provide when filing for bankruptcy will be scrutinized. If you provide inconsistent or false information, you could face legal action. It is in your best interest to be completely honest about the assets you own and any income you receive.

 

  Bankruptcy is a long process

A Chapter 7 bankruptcy moves pretty quickly and typically discharges within a few months after filing. A Chapter 13 bankruptcy, however, is a much longer process since you’ll have to follow a three-to-five-year payment plan before your case is discharged.

 

  You could lose your business

If you own a business and the trustee in your case determines it has value, you could be forced to sell it. In some instances, the trustee may operate the business until the sale is complete.

 

  You may face eviction

If you rent your home and are behind on your payments, you could be forced to leave the property once the bankruptcy is discharged. However, if you are current on your rent payments, it is uncommon to be evicted over a bankruptcy filing.

 

  You’re likely to have trouble renting in the future

You could experience difficulty renting a home after declaring bankruptcy, as some landlords or management companies may automatically reject prospective tenants who have a bankruptcy in their credit history.

 

  Bankruptcy can impact your job or career

Bankruptcy may disqualify you from holding certain positions, though it’s rare for this to happen. Filing for bankruptcy is most likely to cause trouble for those who work with money, including jobs in accounting or payroll. When you apply for a new job, a potential employer could see your bankruptcy filing during a credit check for employment since it’s public record.

 

  Your bankruptcy will be made public

Bankruptcies are publicly reported, so people you know could potentially discover that you filed. This includes if someone runs a background check on you for employment or housing.

 

  Your trustee may continue to administer your assets after discharge

Depending on the specifics of your case, the trustee may pursue the sale and distribution of your assets after your debts have been discharged. This can include any assets and income acquired within 180 days of the discharge, such as an inheritance or divorce settlement.

 

  Your credit score is likely to drop

Depending on your credit score before filing, you could see a significant drop. If you had a good credit score before you filed for bankruptcy, you may see a pretty big drop. However, if your score is already low, there may not be much of an impact on your credit score.

 

  You’ll experience difficulty gaining future credit

Your bankruptcy will follow you for quite some time. Chapter 13 can stay on your credit report for up to seven years, while Chapter 7 can remain for up to 10 years. If you apply for a form of credit and the lender runs a credit inquiry, it will be able to see your bankruptcy and may not approve your funding request.

 

  You’ll receive high interest rates and low credit limits

Even though you may qualify for new credit after filing for bankruptcy, it may come at a premium. You’re more likely to be charged high interest rates, as creditors may see you as a risky borrower, and you may only be eligible for low amounts of credit.

 

  You’ll have to wait to purchase a home

Before you can qualify for a mortgage, you’ll have to wait anywhere from one to four years, depending on the type of mortgage. If you file for Chapter 7 and plan to apply for a conventional mortgage, the waiting period is four years. With a Chapter 13 bankruptcy, you’ll have to wait two years from your discharge date.

 

  Your car insurance premiums will go up

Car insurance companies use an industry-specific credit report based on your credit file, so if you need to secure auto insurance after filing bankruptcy, your rates will likely be impacted.

 

  Bankruptcy stays on your credit report for up to 10 years

Your bankruptcy will remain on your credit report for up to 10 years from the date of discharge. While the impact will lessen over time, it can play a factor in any financial moves that require credit inquiries.

 

  It doesn’t address the cause of your financial trouble

While bankruptcy can be a solution in certain circumstances, it doesn’t fix what led to the problem in the first place. Without a solid plan in place, you could repeat your mistakes and end up needing to file bankruptcy a second time.

 

  It cannot be undone

Bankruptcy is final. You cannot change your mind once your case is finalized. This is why it’s important to fully understand what you’re signing up for when you decide to file for bankruptcy. Credit counseling — which is required when filing for bankruptcy — can help you determine whether it’s the right move for you.

 

Source

https://upsolve.org/learn/is-it-bad-to-file-for-bankruptcy/

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Understanding Bankruptcy Reorganization Plans

Creditor Objection to Chapter 13 Plan

Discover the four chapters that enable debt restructuring for bankruptcy filers.

There are two bankruptcy systems available to assist people and businesses with astronomical debt. The first option, Chapter 7 liquidation bankruptcy, is for people who lack the resources to pay their debts. The second system offers a way for people and companies with some disposable income—but not enough—to manageably restructure their debt. In essence, a reorganization plan is the budget that a debtor who files for bankruptcy (debtor) proposes to use to pay creditors.

The Four Reorganization Bankruptcy Chapters Depending on the specific situation, debtors may elect to reorganize under Chapter 9, 11, 12, or 13. According to filing frequency, a summary of each is displayed.

Individuals and Couples in Chapter 13

This chapter permits individuals who are single or married to contribute their discretionary income—the sum left over after covering living expenses—to a plan for a period of three to five years, but not businesses other than sole proprietorships.

Your plan will last 60 months if your family’s income is higher than the median income for your state. When income is below the median, 36 payments are necessary; however, if necessary, you can propose a plan that spreads out the required payments over 60 months. (Click on Means Testing Information on the U.S. Trustee website to view the median income for your state.)

What Happens to Debts During the Plan Period?

Some debts are given a higher priority under bankruptcy law, and the debtor is required to pay them in full over the course of a three- to five-year plan. These are some examples of priority claims:

Recent income tax debts, past-due alimony and child support obligations, as well as overdue payments on secured debts like house notes (you don’t have to pay off the entire mortgage within the plan, but you must make progress toward it).

The majority of your other debts, including credit cards and medical expenses, will be classified as general unsecured debts and won’t necessarily receive any payment. Only if you have extra cash after paying all of your higher priority claims will they receive something. Even then, the unpaid claims may only receive pennies on the dollar. At the conclusion of the case, the outstanding debt is discharged.

Making a Secured Debt More Affordable Through the Plan

The ability of a Chapter 13 plan to cram down (reduce) a secured debt that isn’t a mortgage on your home or a recently bought car is another intriguing feature. You can propose to pay just the asset’s value plus interest that is one or two points above prime if the collateral (the asset used to secure the debt) is worth less than what you owe. This can help you save thousands of dollars if you have high-interest loans that are in default.

Regrettably, not all secured loans are crammed down. It is not available for home mortgages or auto loans that are less than 2.5 years old at the time your case is filed. Additionally, for high-value property like vacation rentals, you must be able to pay off the entire cram down sum over the course of the plan, which is something many people are unable to do.

Although you cannot cram down your home mortgage, you may be able to remove a junior mortgage through a Chapter 13 plan if the value of your property has fallen too low to pay off your primary mortgage. (This was frequently used during the housing crisis; however, due to rising property values, its availability is constrained.)

Chapter 11: Organizations and People

The best-known benefit of Chapter 11 bankruptcy is that it helps keep big businesses from going out of business. Due to the costs associated with filing a Chapter 11 case, small businesses use it less frequently, and occasionally, individuals whose debt balances exceed the Chapter 13 debt limitations will do so.

In many Chapter 11 cases, creditors actively collaborate with the debtor to assess the debtor’s financial situation and choose the most effective strategy for paying off the debt. Renegotiating loan terms is just one aspect of this collaboration, though it is a significant part of the overall strategy.

The parties carefully examine a number of aspects of the business during the initial months of a Chapter 11 case. Choosing to carry out one or more of the following actions is possible:

Change the leadership, sell off underperforming assets, or restructure the business to be more productive.
The debtor then suggests a strategy for repaying its obligations. Not only must the bankruptcy court approve a Chapter 11 plan, but also the creditors who are owed the most money. A creditor (or the trustee, if one has been appointed) may offer a plan that will be put to a vote by the creditor body in the absence of a confirmable plan from the debtor. Once a plan is approved, the debtor can take years to implement its provisions.

Operation of Farms and Fishing in Chapter 12

You’ll probably decide to file for Chapter 12 bankruptcy if farming or fishing is your main business. While Chapter 12 bankruptcy offers more flexibility due to its recognition of the seasonal nature of the farming and fishing industries, Chapter 13 bankruptcy cases follow a similar procedural framework.

A plan lasting between three and five years must be proposed by the Chapter 12 debtor within 90 days of filing the case. The Chapter 12 plan may permit one-time payments during certain seasons as opposed to the monthly payments mandated by Chapter 13 bankruptcy. Almost any secured debt, including mortgages on homes and farmland, may be crammed down under the plan, and the modified secured debt payments may go beyond the five-year plan limit.

Chapter 9: Local Government

Municipalities and other governmental entities like utilities and taxing districts are the only ones permitted to file for bankruptcy under Chapter 9. Chapter 9 bankruptcy plans and the procedure for approving them are comparable to Chapter 11 plans. In a Chapter 9 case, creditors cannot make a plan proposal; however, both taxpayers and creditors may object to a plan.

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Bankruptcy Exemptions:

How Do Bankruptcy Exemptions Work

Exemptions from bankruptcy play an important role in both Chapter 7 and Chapter 13 bankruptcy. Exemptions are used in Chapter 7 bankruptcy to determine how much of your property you get to keep. Exemptions in Chapter 13 bankruptcy help you keep your plan payments modest. Learn more about bankruptcy exemptions and how they work by reading on.

What Are the Different Types of Bankruptcy Exemptions?

Exemptions allow you to keep a specific amount of assets, such as a cheap car, professional tools, clothing, and a retirement account, safe in bankruptcy. You don’t have to worry about the bankruptcy trustee appointed to your case taking an asset and selling it for the benefit of your creditors if you can exclude it.

Many exclusions cover specific property kinds up to a certain dollar value, such as a car or furnishings. An exemption can sometimes protect the asset’s total worth. Some exemptions, known as “wildcard exemptions,” can be used on any of your properties.

Is it okay if I keep my baseball cards? Jewelry? Pets?

The goal of bankruptcy is to give you a fresh start, not to take away all of your possessions. You’ll probably be able to protect other items as well, such as religious literature, a seat in a building of worship, or a burial plot, in addition to the fundamentals. Chickens and feed are even exempt in some states. However, you should not make the mistake of assuming that everything will be well.

  • Items of high value. There are no exemptions for boats, collections, pricey artwork, or holiday homes. Instead of filing for bankruptcy, owners with such valuable assets often sell the property and pay off their debts.
  • Jewelry. Many states provide protection for wedding rings up to a certain value. Don’t expect to preserve your Rolex, diamond necklace, or antique broach collection, though.
  • Pets. The dog or cat you rescued from the shelter is unlikely to fall into the trustee’s hands. Why? It’s not that you’ll have a specific exemption to protect it; rather, the trustee would have to pay more to sell it than it’s worth in most circumstances. However, if you own a valuable show dog or a racehorse with high breeding costs, you may be forced to sell it or pay for it in bankruptcy.

Exemptions: What Are They and How Do They Work?

Whether you’re filing a Chapter 7 or Chapter 13 bankruptcy, exemptions play a significant role.

Bankruptcy under Chapter 7

A liquidation bankruptcy is one in which the appointed trustee sells your nonexempt assets to satisfy your creditors. Because the bankruptcy trustee cannot sell exempt property, exemptions assist you protect your assets in Chapter 7 bankruptcy. If your state offers a $5,000 motor vehicle exemption and you only own one automobile worth $4,000, for example, you can keep it. See Exemptions in Chapter 7 Bankruptcy for more details.

Bankruptcy under Chapter 13

You can keep all of your property and rearrange your debts with a Chapter 13 bankruptcy (which can mean paying less on some of them). The amount you must pay specific creditors, however, is still determined by how much property you can exclude. Unsecured creditors who are not priority (such as credit card companies) must be paid an amount equal to your nonexempt assets. Exemptions assist keep your Chapter 13 bankruptcy plan payments modest by lowering the amount you must pay creditors. See Exemptions in Chapter 13 Bankruptcy for more details.

Bankruptcy Exemptions at the State and Federal Level

There are bankruptcy exemptions in each state. A series of exemptions is also provided by federal law. (See The Federal Bankruptcy Exemptions for further information.) Some states force you to use their exemptions, while others allow you to choose between their exemptions and the federal system (you cannot mix and match the two).

The state exemption rules you’ll be able to use will be determined by where you lived in the previous two years (called the “domicile requirements.”). Read Which Exemptions Can You Use In Bankruptcy? for more information on the distinctions between state and federal exemptions and domicile requirements.

Nonbankruptcy Exemptions in the United States

In addition to state and federal bankruptcy exemptions, there are a number of federal nonbankruptcy exemptions. These exemptions work in a similar way to bankruptcy exemptions in terms of preserving your assets. Nonbankruptcy exemptions from the federal government are only available if you use your state’s exemptions (you cannot combine the federal bankruptcy and nonbankruptcy exemptions). You can use nonbankruptcy exemptions in addition to state exemptions if you are using state exemptions. See The Federal Nonbankruptcy Exemptions for further details.

If You File for Bankruptcy, What Can You Keep?

The purpose of bankruptcy isn’t to strip you of all of your belongings—it’s to give you a fresh start. Most people can keep the basic items needed to work and live.

However, if you’re considering filing for bankruptcy, you might be wondering, “Can I keep my baseball cards? Jewelry? Pets? The simple answer is that it depends.

You’ll likely be able to protect other things, like religious texts, a seat in a house of worship, or a burial plot. Some states even exempt chickens and feed. But you shouldn’t assume that everything will be safe.

  • Luxury items. Exemptions for yachts, collections, expensive artwork, and vacation homes don’t exist. Owners of such valuable assets often sell the property and pay off debt instead of filing for bankruptcy.
  • Jewelry. Many states protect wedding rings up to a particular dollar amount. However, don’t count on keeping a Rolex, diamond necklace, or antique broach collection.
  • Pets. The dog or cat you rescued from the shelter is probably safe from the trustee’s clutches. Why? It’s not that you’ll have a specific exemption to protect it, but rather that in most cases, it would cost more for the trustee to sell it than what it would be worth. If, however, you own an expensive show dog or a racehorse that fetches sizeable breeding fees, you might have to turn it over—or pay for it—in bankruptcy.

Find out what you can protect by reviewing your state’s exemptions.

How Do Bankruptcy Exemptions Work?

Exemptions always protect the same amount of property regardless of the chapter filed. However, what happens to “nonexempt” property you can’t protect with a bankruptcy exemption will depend on whether you file for Chapter 7 or Chapter 13 bankruptcy.

Chapter 7 Bankruptcy and Exempt Assets

Chapter 7 bankruptcy is a liquidation bankruptcy where the appointed trustee sells your nonexempt assets to pay your creditors. Exemptions help you protect your assets in Chapter 7 bankruptcy because the bankruptcy trustee can’t sell exempt property.

For example, suppose your state has a $5,000 motor vehicle exemption, and you have one car worth $4,000. In that case, the exemption will cover all of the car’s equity, and you can keep it. For more information about keeping a car in Chapter 7 and other property, see Exemptions in Chapter 7 Bankruptcy.

Chapter 13 Bankruptcy and Exempt Assets

A Chapter 13 bankruptcy allows you to keep all your property while paying some or all of your debt in a three- to five-year Chapter 13 repayment plan. But this benefit comes at a cost. You’ll have to pay nonexempt creditors for the property you can’t protect with an exemption.

Nonpriority unsecured creditors, such as credit card issuers, must receive at least as much as the value of the property you can’t exempt. So in Chapter 13 bankruptcy, being able to exempt all or most of your property helps keep your monthly plan payment low.

Learn more about exemptions in Chapter 13 bankruptcy.

State and Federal Bankruptcy Exemptions

Each state has a set of bankruptcy exemptions, and federal law provides a federal bankruptcy exemption set, too. Some states require you to use the state exemptions, while others allow you to choose the state or the federal bankruptcy exemption set. But you must choose one or the other–you can’t mix and match exemptions from two sets.

The state’s exemption laws you’ll qualify to use will depend on where you lived during the last two years, called the “domicile requirements.” For more information about the differences between state and federal exemptions and domicile requirements, read Which Exemptions Can You Use In Bankruptcy?

Federal Nonbankruptcy Exemptions

A second set of federal exemptions called “federal nonbankruptcy exemptions” can be used along with your state’s exemptions. For more information, see The Federal Nonbankruptcy Exemptions.

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When Is a Bankruptcy Claim Contingent, Unliquidated, or Disputed?

The bankruptcy procedure requires you to categorize your debts or “claims” as contingent, unliquidated, or disputed. You’ll need to be familiar with these phrases in order to properly identify and categorize your debts on the various bankruptcy forms.

In a bankruptcy, You Must List All Debts or “Claims”

You describe your financial condition to the court, trustee, and creditors on your bankruptcy filings. Your financial information will be disclosed, along with your monthly budget, real estate and personal property holdings, debts or “claims” you owe, income, and recent real estate transactions.

When listing claims in your documentation, you must include the name, address, and amount owed to each creditor. Find out how to fill out bankruptcy forms.

Not Every Bankruptcy Debt Is Conditional, Unliquidated, or Contestable

Because the label is only necessary if it is unclear whether you owe the loan, the majority of debts won’t require a contingent, unliquidated, or contested label. There will almost always be no doubt that you owe the money. You won’t need to describe the claim as contingent, unliquidated, or contested if you don’t have a defense to use to avoid paying the debt.

Consider the scenario when you have a car loan that is past due. The claim would then be for the remaining sum. Other common responsibilities, like credit card debt, would follow the same rules.

Types of Creditor Claims in Bankruptcy: Secured, Unsecured & Priority explains additional claim classifications that you should be aware of.

When a Contingent, Unliquidated, or Disputed Debt Will Arise

Sometimes it’s difficult to determine how much money you owe a creditor. Each of the labels—contingent, unliquidated, and disputed—identifies a specific problem that must be fixed before the claim may be paid.

Maybe how much you owe will rely on what someone else does, or maybe it won’t. Alternatively, you and the creditor may differ on the amount you owe.

If there is an issue, you should note it when filing the claim on your bankruptcy papers under the relevant heading of contingent, unliquidated, or contested claim (the form provides checkboxes for these designations).

A contingent claim is what?

Payment of the claim is subject to a future occurrence that may or may not take place. For example, if you cosigned a secured loan (like a mortgage or auto loan), you aren’t liable for paying it until the other cosigner defaults. Your responsibility as a cosigner depends on the default.

An Unliquidated Debt Is What?

There are times when you owe money but are unsure of how much. Although the precise amount of the debt hasn’t been established, it might exist. Let’s take the example of a lawsuit you filed against someone for injuries you had in a car accident. Your attorney has accepted the case on a contingency basis; if you win, the attorney will receive a third of the recovery; if you lose, the attorney will receive nothing. The debt owed to the attorney is unpaid. The amount of the attorney’s fee won’t be known until the case is settled or won at trial.

A Disputed Debt Is What?

You will tick this box if there is a discrepancy between the amount you owe and what you owe, if anything at all. Consider a scenario in which the IRS has an involuntary tax lien on your property and claims that you owe them $10,000. On the other hand, you think you just owe $500. You should state that the claim is disputed and include the total amount of the lien rather than the amount you believe you owe (you can clarify how much you believe you owe in the notes).

In Bankruptcy, You Must List All Claims

For a variety of reasons, it’s typical for someone to desire to exclude a claim from the bankruptcy petition. You cannot succeed. All claims, including those you believe you owe and those that others think you owe, must be listed.

It’s ideal for you to do that. Even if it would typically be considered a dischargeable debt, if you don’t list a claim, it might not be eliminated or “discharged” in your situation.

Claims Payment in Bankruptcy

Following the payment of creditors, the following will take place:

Creditors will be notified by the bankruptcy trustee assigned to the case that it is a “asset case.”
In order to get a portion of the available funds, a creditor must submit a proof of claim form by a specific deadline.
The claims will be examined by the trustee, who will then pay them in accordance with bankruptcy law’s priority payment system.
But keep in mind that every circumstance is different. Consult with an experienced bankruptcy lawyer if you are unclear about what will happen to the claims in your bankruptcy case.

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