Watch out for attorneys who operate a "bankruptcy mill". Some law firms boast of handling thousands of cases from multiple locations. They churn out case after case using a "cookie cutter" approach to solving debt problems. You talk to a different lawyer every time you call. The lawyer you meet at the initial consultation is not the lawyer who attends your creditor's meeting.
Chapter 7 Bankruptcy is also known as a liquidation or straight bankruptcy.
Chapter 13 Bankruptcy is also known as a wage earner’s bankruptcy or reorganization.
Chapter 7 bankruptcy is also known as liquidation or straight bankruptcy.
In a Chapter 7 you do not have to pay back most of your creditors - ever! Those debts are discharged. This is a great option if you are not a homeowner or if your equity in your home is low and your mortgage payments are current.
Automatic Stay. When you file a Chapter 7 an “Automatic Stay” immediately goes into effect. This is a court order that strictly prohibits any type of collection of a debt that arose prior to filing bankruptcy. This applies to lawsuits, judgments, foreclosures, garnishments and repossessions. Utilities cannot be shut off. Creditors cannot call.
In a Chapter 7 Bankruptcy, certain debts are not dischargeable and must be paid even if listed on your Chapter 7. The following are the main types of debt which cannot be discharged:
Means Test to qualify for Chapter 7 Bankruptcy
Chapter 7 is for debtors who do not have the ability to pay their existing debts. The bankruptcy court has designed the Means Test to determine whether a case is permitted to proceed under Chapter 7. The court established a set of median income figures based on the state you live in and family size. If your income is below the median income set by the court you automatically qualify to file a Chapter 7. You may still qualify if you have extra-ordinary expenses. If you do not qualify to file a Chapter 7 then you may want to consider filing a Chapter 13.
Credit Counseling Briefing required before filing Chapter 7
Every debtor who files for Chapter 7 must receive a briefing by an approved nonprofit budget and credit counseling agency. The briefing must take place less than 180 days before the bankruptcy filing. The briefing outlines the available opportunities for credit counseling and provides assistance in performing a budget analysis. This briefing can be done over the telephone or internet and usually takes about one to complete. The agency provides a Certificate of Completion which must be filed with the Bankruptcy Clerk.
Meeting of Creditors (341 meeting)
Every debtor must attend a creditor's meeting in which a Bankruptcy Trustee examines the debtor under oath. The meeting is held about 30 - 45 days after the Chapter 7 Bankruptcy petition is filed. At the meeting the Trustee will ask the debtor questions about the value of assets owned by the debtor to determine if there will be any distribution to creditors. In almost every case there are no assets available for creditors and the Trustee files a "Report of No Distribution". The meeting takes about five minutes and usually no creditors attend. Your attorney will be with you at the 341 meeting.
Debtor Education Class required before discharge
After filing a Chapter 7 Bankruptcy every debtor must complete a course on personal financial management by a court approved provider. The course provides tips and tools for wise money management and credit use. The class can be done over the telephone or internet and usually takes about two hours to complete. The agency provides a Certificate of Completion and the debtor must sign a certification that he has completed the course. The certification must be filed with the Bankruptcy Clerk in a timely manner for the debtor to receive a Discharge.
Reaffirming a debt
Sometimes a debtor wants to continue making payments on certain debts in order to keep the property. This is usually the case if the debtor is making mortgage payments and/or car payments. The debtor signs a document known as a Reaffirmation Agreement. The Reaffirmation Agreement must be filed with the court. When a debt is reaffirmed the debtor agrees to continue making payments; but if he fails to make the payments the creditor can take action to recover the property and take legal action to obtain a judgment. Under certain limited circumstances a debtor can cancel a Reaffirmation Agreement and surrender the property.
Discharge is issued
In practically every case an ORDER OF DISCHARGE is issued to the debtor within 4 months from the initial filing date. A few days later the case is officially closed. The Chapter 7 Bankruptcy Discharge Order eliminates a debtor's legal obligation to pay discharged debts.
Chapter 13 is also known as a wage earner’s bankruptcy or reorganization.
A Chapter 13 allows a debtor to repay some or all of his debts over a period of three to five years. The debtor’s attorney prepares a plan detailing how debts are to be paid. The plan must be approved by the bankruptcy court. To qualify for a Chapter 13 Bankruptcy a debtor must be employed or have some other source of income. A debtor must have enough income after paying current living expenses to make payments to a bankruptcy Trustee, who then pays creditors according to the plan.
A Chapter 13 Bankruptcy is most often filed when a debtor has fallen behind in mortgage or car payments.
In a Chapter 13 the debtor can catch up on missed payments. Some people file a Chapter 13 because their income is above the median income as determined by a Means Test calculation. Others file a Chapter 13 because 8 years has not elapsed since they filed a Chapter 7.
When a Chapter 13 Bankruptcy is filed, a court order known as an “Automatic Stay” immediately goes into effect. The Automatic Stay prohibits any type of collection of a debt that arose prior to filing bankruptcy. Filing a Chapter 13 Bankruptcy stops foreclosures, repossessions, lawsuits, garnishments and harassing phone calls.
Secured and unsecured debt.
In a Chapter 13 Bankruptcy a debtor pays 100% of his secured debt but often pays substantially less than 100% of his unsecured debt. If the debtor completes the planned payments he will receive a discharge of the remaining balance of unsecured debt. A discharge is a court order eliminating the legal obligation to pay a debt.
Just as in a Chapter 7 Bankruptcy, the following debts are not dischargeable in a Chapter 13 Bankruptcy:
Credit Counseling Briefing required before filing Chapter 13.
Every debtor who files a Chapter 13 must receive a briefing by an approved nonprofit budget and credit counseling agency. The briefing must take place less than 180 days before filing bankruptcy. The briefing outlines the available opportunities for credit counseling and provides assistance in performing budget analysis. The briefing can be done over the telephone or internet and usually takes about one to complete. The agency provides a Certificate of Completion which must be filed with the Bankruptcy Clerk.
Meeting of Creditors (341 meeting)
Every debtor must attend a creditor’s meeting in which a Bankruptcy Trustee examines the debtor under oath. The Trustee examines the debtor’s income and expense schedules, paychecks and proposed plan. The plan payments may or may not be adjusted. At a later hearing the Trustee will make a recommendation to the Bankruptcy Judge whether the plan should be confirmed.
Payments into the plan:
Even before the 341 meeting the debtor must begin making monthly payments to fund the plan. Payments are made by sending a money order or cashier’s check to the Trustee. The best way to pay is to agree to have the money automatically deducted from the debtor’s paycheck. If the debtor does not make payments the Chapter 13 will be dismissed and the debts will not be discharged.
Prior to completing payments under the plan the debtor is required to take a Debtor Education course. The course provides tips and tools for wise money management and credit use. The course can be done over the telephone or internet and usually takes about two hours to complete.
Discharge is issued
Upon successful completion of the payment plan the debtor becomes eligible to receive an Order of Discharge from the U.S. Bankruptcy Court. The discharge wipes out the debtor's remaining debt and the case is closed.