Legal Encyclopedia Table of Contents
Q & A Table of Contents
Legal FAQ Table of Contents
What to Do If a Bill Collector Crosses the Line
Here's what to do if a bill collector uses abusive tactics.
In order to deal with debt collectors, it pays to learn what they can and cannot do. Although most bill collectors are careful to follow the law when contacting you, some are not. If a bill collector goes too far, you can take action.
The Fair Debt Collection Practices Act
The federal Fair Debt Collection Practices Act, or FDCPA (15 U.S.C. § 1692 and following), prohibits debt collectors from engaging in abusive behavior.
The FDCPA covers debt collectors who work for collection agencies. It does not cover debt collectors that are employed by the original creditor (the business or person who first extended you credit or loaned you money).
If a debt collector that works for a collection agency breaks the law, you can take steps to make sure it doesn't happen again.
What Debt Collectors Can't Do
Debt collectors from collection agencies cannot do any of the following:
- Call you repeatedly or contact you at an unreasonable time (the law presumes that before 8 a.m. or after 9 p.m. is unreasonable).
- Place telephone calls to you without identifying themselves as bill collectors.
- Contact you at work if your employer prohibits it.
- Use obscene or profane language.
- Use or threaten to use violence.
- Claim you owe more than you do.
- Claim to be attorneys if they're not.
- Claim that you'll be imprisoned or your property will be seized.
- Send you a paper that resembles a legal document.
- Add unauthorized interest, fees, or charges.
- Contact third parties, other than your attorney, a credit reporting bureau, or the original creditor, except for the limited purpose of finding information about your whereabouts. Unless you have asked collectors in writing to stop contacting you, they can also contact your spouse, your parents (if you are a minor), and your codebtors.
What to Do If Debt Collectors Break the Law
Here's what you can do if debt collectors engage in illegal activity:
1. Tell Them to Stop
Under the FDCPA, you have the right to tell a collection agency employee to stop contacting you. Simply send a letter stating that you want the collection agency to cease all communications with you. All agency employees are then prohibited from contacting you, except to tell you that collection efforts have ended or that the collection agency or original creditor intends to sue you or take advantage of some other legal remedy.
Don't hide from debt collectors. You can tell a collector to stop calling even if the collector is not breaking the law. However, many debt counselors feel that, unless you're judgment proof (that is, broke for the foreseeable future) or truly plan to file for bankruptcy, the best overall advice is not to ignore the debt or try and hide from the debt collector. Usually, the longer you put off resolving the issue, the worse the situation and the consequences will become. Whether you negotiate directly with the collector or obtain a lawyer's assistance, many counselors feel the best strategy almost always is to speak to the collector.
2. Document Illegal Behavior
If a debt collector breaks the law, document the violation as soon as it happens. Start a log and write down what happened, when it happened, and who witnessed it. Then, try to have another person present (or on the phone) during all future communications with the collector.
In some states, you can record phone conversations without the debt collector's knowledge. In others, this tactic is illegal. Check with your state consumer protection agency to find out what is permitted where you live.
3. File a Complaint
File a complaint with the FTC. File an official complaint with the Federal Trade Commission (FTC), the federal agency that oversees collection agencies. Contact the Federal Trade Commission at 6th and Pennsylvania Ave. NW, Washington, DC 20580, www.ftc.gov/ftc/complaint.htm. In your complaint:
- include the collection agency's name and address, the name of the collector, the dates and times of the conversations, and the names of any witnesses, and
- attach copies of all offending materials you received and a copy of any tape you made.
Send the complaint to state agencies. Send a copy of your complaint to the state agency that regulates collection agencies for the state where the agency is located. To find the agency, call information in that state's capital city or check the state's website.
Send the complaint to the creditor and collection agency. Finally, send a copy of the FTC complaint to the original creditor and the collection agency. The original creditor may be concerned about its own liability and offer to cancel the debt.
Once your complaint is filed, don't expect immediate results. The FTC may take steps to sanction the agency if it has other complaints on record. The state agency may move more quickly to sue the collection agency or shut it down for egregious violations. Your best hope is that the creditor will offer to cancel the debt.
4. Sue the Debt Collector
If you've been subject to repeated abusive behavior and can document it, consider suing the collection agency. But if the illegal behavior was merely annoying, don't bother. For example, if the collector called three times in one day but never again, you probably don't have a case.
To sue the debt collector, you can represent yourself in small claims court or hire a lawyer and go to regular court. (The other side may have to pay your attorneys' fees and court costs if you win.)
Money damages. If you win in court, you are entitled to recover:
- the amount of any actual financial losses you suffered -- for example, your therapy fees, if you suffered extreme anxiety as a result of the collector's actions, or the amount you paid to switch to an unlisted number to avoid harassment, and
- an additional amount (unrelated to actual losses) up to $1,000 for any violation of the FDCPA.
For a comprehensive discussion of how to deal with debt collectors, including sample letters and complaint forms, read Nolo's Solve Your Money Troubles: Get Debt Collectors Off Your Back & Regain Financial Freedom, by Robin Leonard and attorney John Lamb.
The New Bankruptcy Law: Changes to Chapter 7 and 13
Chapter 7 bankruptcy may be harder to file under the new law.
The latest changes to bankruptcy law may be making it harder for some people to file bankruptcy. And a few filers with higher incomes are no longer allowed to use Chapter 7 bankruptcy, but will instead have to repay at least some of their debt under Chapter 13. All debtors now have to get credit counseling before they can file a bankruptcy case -- and additional counseling on budgeting and debt management before their debts can be wiped out. And, because the law imposes new requirements on lawyers, it is sometimes tougher to find an attorney to represent you in a bankruptcy case.
Here are some of the most important changes.
Restricted Eligibility for Chapter 7 Bankruptcy
Under the old rules, most filers could choose the type of bankruptcy that seemed best for them -- and most chose Chapter 7 bankruptcy (liquidation) over Chapter 13 bankruptcy (repayment). The new law prohibits some filers with higher incomes from using Chapter 7 bankruptcy.
How High is Your Income?
Under the new rules, the first step in figuring out whether you can file for Chapter 7 bankruptcy is to measure your "current monthly income" against the median income for a household of your size in your state. If your income is less than or equal to the median, you can file for Chapter 7 bankruptcy. If it is more than the median, however, you must pass "the means test" -- another requirement of the new law -- in order to file for Chapter 7.
The Means Test
The purpose of the means test is to figure out whether you have enough disposable income, after subtracting certain allowed expenses and required debt payments, to make payments on a Chapter 13 plan. To find out whether you pass the means test, you subtract certain allowed expenses and debt payments from your current monthly income. If the income that's left over after these calculations is below a certain amount, you can file for Chapter 7.
If you're looking for an easy way to determine your eligibility under the means test, use our online means test calculator, created by the author of Nolo's book How to File for Chapter 7 Bankruptcy, Albin Renauer, J.D. Once you enter your zip code, the calculator uses the applicable income and expense standards for your state, county, and region to determine your eligibility.
Counseling Requirements
Before you can file for bankruptcy under either Chapter 7 or Chapter 13, you must complete credit counseling with an agency approved by the United States Trustee's office. (To find an approved agency in your area, go to the Trustee's website, www.usdoj.gov/ust, and click "Credit Counseling and Debtor Education".) The purpose of this counseling is to give you an idea of whether you really need to file for bankruptcy or whether an informal repayment plan would get you back on your economic feet.
Counseling is required even if it's obvious that a repayment plan isn't feasible or you are facing debts that you find unfair and don't want to pay. You are required only to participate, not to go along with any repayment plan the agency proposes. However, if the agency does come up with a repayment plan, you will have to submit it to the court, along with a certificate showing that you completed the counseling, before you can file for bankruptcy.
Toward the end of your bankruptcy case, you'll have to attend another counseling session, this time to learn personal financial management. Only after you submit proof to the court that you fulfilled this requirement can you get a bankruptcy discharge wiping out your debts. (The website above also lists approved debt counselors.)
Lawyers May Be Harder to Find -- and More Expensive
As you can see, the new law adds some complicated requirements to the field of bankruptcy. This makes it more expensive -- and time-consuming -- for lawyers to represent clients in bankruptcy cases, which means attorney fees have gone up.
The new law also imposes some additional requirements on lawyers, chief among them that the lawyer must personally vouch for the accuracy of all of the information their clients provide them. This means attorneys have to spend more time on bankruptcy cases, and charge their clients accordingly. This combination of new requirements have driven some bankruptcy lawyers out of the field altogether.
Some Chapter 13 Filers Will Have to Live on Less
Under the old rules, people who filed under Chapter 13 had to devote all of their disposable income -- what they had left after paying their actual living expenses -- to their repayment plan. The new law added a wrinkle to this equation: Although Chapter 13 filers still have to hand over all of their disposable income, they have to calculate their disposable income using allowed expense amounts dictated by the IRS -- not their actual expenses -- if their income is higher than the median in their state. And these allowed expense amounts must be subtracted not from the filer's actual earnings each month, but from the filer's average income during the six months before filing.
Other Changes
There are other changes that can affect bankruptcy filers negatively, including how property is valued (at replacement cost instead of auction value) -- this means more debtors are at risk of having their property taken and sold by the trustee -- and how long a filer must live in a state to use that state's exemption laws (this can make a big difference in the amount of property a bankruptcy filer gets to hold on to). These changes and others are explained in The New Bankruptcy: Will It Work for You?, by Attorney Stephen Elias (Nolo).
Also, you might find author Stephen Elias's podcast helpful: What Are the Rules Under the New Bankruptcy Law?A Chapter 7 Bankruptcy Overview
How Chapter 7 bankruptcy works.
Chapter 7 bankruptcy is sometimes called "liquidation" bankruptcy -- it cancels your debts, but you might have to let the bankruptcy court liquidate (sell) some of your property for the benefit of your creditors. ("Chapter 7" refers to the chapter of the federal Bankruptcy Code that contains the bankruptcy law.)
Chapter 7 Bankruptcy Costs in Time and Money
The whole Chapter 7 bankruptcy process takes about four to six months, costs $299 in filing and administrative fees, and commonly requires only one trip to the courthouse.
You must also complete credit counseling with an agency approved by the United States Trustee. (For a list of approved agencies in each state, go to the Trustee's website, www.usdoj.gov/ust, and click "Credit Counseling and Debtor Education.")
Who Can File
You won't be able to use Chapter 7 bankruptcy if you already received a bankruptcy discharge in the last six to eight years (depending which type of bankruptcy you filed) or if, based on your income, expenses, and debt burden, you could feasibly complete a Chapter 13 repayment plan. (For more information on these eligibility requirements, see Chapter 7 Bankruptcy -- Who Can File?)
Bankruptcy Forms
To file for Chapter 7 bankruptcy, you fill out a petition and a number of other forms and file them with the bankruptcy court in your area. Basically, the forms ask you to describe:
- your property
- your current income and monthly living expenses
- your debts
- property you claim the law allows you to keep through the Chapter 7 bankruptcy process (called "exempt property") -- most states let you keep some equity in your home, clothing, household furnishings, Social Security payments you haven't spent, and other necessities such as a car and the tools of your trade.
- property you owned and money you spent during the previous two years, and
- property you sold or gave away during the previous two years.
You'll find step-by-step instructions for filling out all of the required forms in How to File for Chapter 7 Bankruptcy, by Stephen Elias, Albin Renauer, and Robin Leonard (Nolo).
Bankruptcy's Magic Wand -- The Automatic Stay
Filing for Chapter 7 bankruptcy puts into effect an "Order for Relief" -- known informally as the "automatic stay." The automatic stay immediately stops most creditors from trying to collect what you owe them. So, at least temporarily, creditors cannot legally grab ("garnish") your wages, empty your bank account, go after your car, house, or other property, or cut off your utility service or welfare benefits. For more information, see How Bankruptcy Stops Your Creditors: The Automatic Stay.
Bankruptcy Court's Control Over Your Financial Affairs
By filing for Chapter 7 bankruptcy, you are technically placing the property you own and the debts you owe in the hands of the bankruptcy court. You can't sell or give away any of the property you own when you file, or pay off your pre-filing debts, without the court's consent. However, with a few exceptions, you can do what you wish with property you acquire and income you earn after you file for bankruptcy.
The Bankruptcy Trustee for Chapter 7 Bankruptcy
The court exercises its control through a court-appointed person called a "bankruptcy trustee." The trustee's primary duty is to see that your creditors are paid as much as possible on what you owe them. And the more assets the trustee recovers for creditors, the more the trustee is paid.
The trustee (or the trustee's staff) will examine your papers to make sure they are complete and to look for nonexempt property to sell for the benefit of creditors. The trustee will also look at your financial transactions during the previous year to see if any can be undone to free up assets to distribute to your creditors. In most Chapter 7 bankruptcy cases, the trustee finds nothing of value to sell.
The Creditors Meeting
A week or two after you file, you (and all the creditors you list in your bankruptcy papers) will receive a notice that a "creditors meeting" has been scheduled. The bankruptcy trustee runs the meeting and, after swearing you in, may ask you questions about your bankruptcy and the papers you filed. In the vast majority of Chapter 7 bankruptcies, this is the debtor's only visit to the courthouse.
What Happens to Your Property
If, after the creditors meeting, the trustee determines that you have some nonexempt property, you may be required to either surrender that property or provide the trustee with its equivalent value in cash. If the property isn't worth very much or would be cumbersome for the trustee to sell, the trustee may "abandon" the property -- which means that you get to keep it, even though it is nonexempt. (For information on which types of property are typically exempt, see When Chapter 7 Bankruptcy Isn't the Right Choice. However, which property is exempt varies by state -- you can find complete lists of exempt property for every state in How to File for Chapter 7 Bankruptcy, by Stephen Elias, Albin Renauer, and Robin Leonard (Nolo).)
Most property owned by Chapter 7 debtors is either exempt or is essentially worthless for purposes of raising money for the creditors. As a result, few debtors end up having to surrender any property, unless it is collateral for a secured debt (see below).
How Your Secured Debts Are Treated
If you've pledged property as collateral for a loan, the loan is called a secured debt. The most common examples of collateral are houses and automobiles. If you're behind on your payments, the creditor can ask to have the automatic stay lifted in order to repossess or foreclose on the property. However, if you are current on your payments, you can keep the property and keep making payments as before -- unless you have enough equity in the property to justify its sale by the trustee.
If a creditor has recorded a lien against your property because of a debt you haven't paid (for example, because the creditor obtained a court judgment against you), that debt is also secured. You may be able to wipe out the lien in Chapter 7 bankruptcy.
The Chapter 7 Bankruptcy Discharge
At the end of the bankruptcy process, all of your debts are wiped out (discharged) by the court, except:
- debts that automatically survive bankruptcy, such as child support, most tax debts, and student loans, unless the court rules otherwise, and
- debts that the court has declared nondischargeable because the creditor objected (for example, debts incurred by your fraud or malicious acts).
For more information and step-by-step help filing for Chapter 7 bankruptcy, see How to File for Chapter 7 Bankruptcy, by Stephen Elias, Albin Renauer, and Robin Leonard (Nolo).
Chapter 7 Bankruptcy -- Who Can File?
The bankruptcy "means test" and other Chapter 7 eligibility rules.
Filing for Chapter 7 bankruptcy can be a powerful tool for dealing with overwhelming debt. But it isn't available to everyone. There are several situations in which you won't be allowed to file Chapter 7 bankruptcy.
You Have Enough Income to Repay Your Debts
Under the old bankruptcy rules, the bankruptcy judge had the power to dismiss a Chapter 7 bankruptcy case if he or she thought the debtor had sufficient disposable income to fund a Chapter 13 repayment plan. There were no hard and fast rules dictating when a judge should dismiss a case on these grounds -- it depended on the facts of the case and the attitude of the judge.
Now that the new bankruptcy law has gone into effect, however, there are clear criteria that dictate who will be allowed to stay in Chapter 7 bankruptcy -- and who will be forced to use Chapter 13 bankruptcy if they want to file. Disabled veterans whose debts were incurred during active duty and people whose debts come primarily from the operation of a business get a fast pass to Chapter 7 bankruptcy. All others must meet the requirements set out below.
How High is Your Income?
Under the new rules, the first step in figuring out whether you can file for Chapter 7 bankruptcy is to measure your "current monthly income" against the median income for a family of your size in your state. Your "current monthly income" is your average income over the last six months before you file. If your income is less than or equal to the median, you can file for Chapter 7 bankruptcy.
If your income is more than the median, however, you must pass "the means test" -- another requirement of the new law -- in order to file for Chapter 7 bankruptcy.
Do You Have Enough Disposable Income to Repay Some Debts?
The purpose of the means test is to figure out whether you have enough disposable income, after subtracting certain allowed expenses and required debt payments, to repay at least a portion of your unsecured debts over a five-year repayment period.
For much more information on these new requirements, including detailed worksheets that will help you figure out whether you can use Chapter 7 bankruptcy, see How to File for Chapter 7 Bankruptcy, by Attorneys Stephen Elias, Albin Renauer, and Robin Leonard (Nolo).
You Previously Received a Bankruptcy Discharge
You cannot file for Chapter 7 bankruptcy if you obtained a discharge of your debts in a Chapter 7 bankruptcy case within the last eight years, or a Chapter 13 case within the last six years.
A Previous Bankruptcy Was Dismissed Within the Previous 180 Days
You cannot file for Chapter 7 bankruptcy if a previous Chapter 7 or Chapter 13 case was dismissed within the past 180 days because:
- you violated a court order
- the court ruled that your filing was fraudulent or constituted an abuse of the bankruptcy system, or
- you requested the dismissal after a creditor asked for relief from the automatic stay.
You Defrauded Your Creditors
A bankruptcy court may dismiss your case if it thinks you have tried to cheat your creditors or concealed assets so you can keep them for yourself.
Certain activities are red flags to the courts and trustees. If you have engaged in any of them during the past year, your bankruptcy case may be dismissed. These no-nos include:
- unloading assets to your friends or relatives to hide them from creditors or from the bankruptcy court
- running up debts for luxury items when you were clearly broke and had no way to pay them off
- concealing property or money from your spouse during a divorce proceeding, or
- lying about your income or debts on a credit application.
In addition, you must sign your bankruptcy papers under "penalty of perjury" swearing that everything in them is true. If you deliberately fail to disclose property, omit material information about your financial affairs, or use a false Social Security number (to hide your identity as a prior filer), and the court discovers your action, your case will be dismissed and you may be prosecuted for fraud.
The Bankruptcy Means Test: Is Your Income Low Enough for Chapter 7 Bankruptcy?
A means test calculator can determine whether you qualify for Chapter 7 bankruptcy -- try one online.
The "means test" is a formula designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy. Only bankruptcy filers with primarily consumer debts, not business debts, need to take the means test. High income filers who fail the means test may use Chapter 13 bankruptcy to repay a portion of their debts, but may not use Chapter 7 bankruptcy to wipe out their debts altogether.
However, having to take the Chapter 7 means test doesn't mean that you must be penniless in order to use Chapter 7 bankruptcy. You can earn significant monthly income and still qualify for Chapter 7 bankruptcy if you have a lot of expenses, such as a high mortgage payment. This article shows you simple ways to determine whether you can pass the means test -- and, therefore, use Chapter 7 -- if you were to file for bankruptcy.
How Does the Chapter 7 Means Test Work?
The means test was designed to limit the use of Chapter 7 bankruptcy to those who truly can't pay their debts. It does this by deducting specific monthly expenses from your "current monthly income" (your average income over the six calendar months before you file for bankruptcy) to arrive at your monthly "disposable income." The higher your disposable income, the more likely you won’t be allowed to use Chapter 7 bankruptcy.
To take the means test, you must first determine whether your income is more or less than the median income in your state. If you earn more than the median, you must figure out whether you would have enough left over, after subtracting certain expenses, to repay some of your debt.
Is Your Income More Than the Median?
The first step is simple: If your current monthly income is less than the median income for a household of your size in for your state, you pass. Period. You're done. You do not need to complete the rest of the means test. You can file for Chapter 7.
Do You Have Enough Disposable Income to Repay Some Debts?
For those whose household income exceeds the state median, the means test computations get significantly more complex. You must determine whether you have enough income left over (called "disposable income"), after paying your "allowed" monthly expenses, to pay off at least a portion of your unsecured debts (such as credit card bills). If your disposable income adds up to more than a certain amount, you fail the means test and cannot file for Chapter 7 bankruptcy.
Median income levels vary by state and household size, and each county and metropolitan region has different allowed amounts for categories of expenses: basic necessities, housing, and transportation. But don't worry: You can get through the math with the help of an online calculator.
Use a Chapter 7 Means Test Online Calculator
If you're looking for an easy way to determine your eligibility under the Chapter 7 means test, use our online means test calculator, created by the author of Nolo's book How to File for Chapter 7 Bankruptcy, Albin Renauer, J.D. Once you enter your zip code, the calculator uses the applicable income and expense standards for your state, county, and region to determine your eligibility.
You’ll have to supply some income and expense information, but the calculator will save you the trouble of looking up income and expense figures for your area and doing the math. And, if you decide to file for Chapter7 bankruptcy, you can use these figures on your official paperwork (the calculator closely follows the format of the means test form, Official Form 22A, that you must complete when you file for bankruptcy).
If You Pass the Chapter 7 Means Test
Just because you qualify under the means test does not necessarily mean you should file for Chapter 7 bankruptcy -- merely that you can. Any decision to file for Chapter 7 bankruptcy should be made only after considering alternatives and other factors discussed in other articles on this website or in Nolo's The New Bankruptcy: Will It Work for You?, by Attorney Stephen Elias.
Once you've made your decision to go ahead and file for Chapter 7 bankruptcy, Nolo's book How to File for Chapter 7 Bankruptcy, by Stephen Elias, Albin Renauer, and Robin Leonard, can walk you step by step through the filing process.
If You Don't Pass the Chapter 7 Means Test
If you don’t pass the means test, you are limited to using Chapter 13 bankruptcy, which requires you to make monthly payments over a five-year period according to a strict budget monitored by the court. Most people who file for bankruptcy prefer Chapter 7, which requires no repayment. However, Chapter 13 bankruptcy is still the best way to handle specific types of problems, like curing a default on a mortgage. (See Reasons to Use Chapter 13 Bankruptcy Instead of Chapter 7 Bankruptcy.)
For help filing a Chapter 13 bankruptcy, see Nolo's Chapter 13 Bankruptcy: Repay Your Debts, by Stephen Elias and Robin Leonard.
When Chapter 7 Bankruptcy Isn't the Right Choice
Chapter 7 bankruptcy may make you sacrifice property, yet not discharge all your debt.
If you are inclined to file for Chapter 7 bankruptcy, take a moment to decide whether it makes economic sense. You need to consider three questions:
- Are you judgment proof -- that is, are creditors legally barred from taking your property or income even if you don't file for Chapter 7 bankruptcy?
- Will Chapter 7 bankruptcy discharge enough of your debts to make it worth your while?
- Will you have to give up property you really want to keep?
Are You Judgment Proof?
Most unsecured creditors are required to obtain a court judgment before they can start collection procedures, such as a wage garnishment or seizure of personal property. (Collections for taxes, child support, and student loans are exceptions to this general rule.)
If your debts are mainly of the type that require a judgment, the next question is whether you have any income or property that your creditors can seize if they go to the trouble of obtaining a judgment. For instance, if all of your income comes from Social Security (which can’t be taken by creditors), and all of your property is exempt, there is nothing your creditors can take from you to satisfy their judgment. That makes you "judgment proof."
While you may still wish to file for Chapter 7 bankruptcy to get a fresh start, nothing bad will happen to you if you don’t file, no matter how much you owe.
Will Chapter 7 Bankruptcy Discharge Enough of Your Debts?
Certain categories of debts cannot be discharged in Chapter 7 bankruptcy. It doesn't make much sense to file for Chapter 7 bankruptcy if your primary goal is to eliminate these nondischargeable debts. The main nondischargeable debts are:
- back child support and alimony obligations
- student loans, unless repayment would cause you undue hardship
- income taxes less than three years past due
- recent debts for luxuries (more than $550 to any one creditor incurred within 90 days before you file for bankruptcy, and cash advances of more than $825 within 70 days before you file), and
- court judgments for injuries or death to someone arising from your intoxicated driving.
The bankruptcy judge may rule some types of debts as nondischargeable if the creditor objects to a discharge in the bankruptcy court. These debts include:
- debts incurred on the basis of fraud, such as lying on a credit application or writing a bad check
- debts from willful or malicious injury to another or another's property
- debts from larceny (theft), breach of trust, or embezzlement, or
- debts arising out of a marital settlement agreement or divorce decree that aren't otherwise automatically nondischargeable as support or alimony.
If the bulk of your indebtedness is from debts that creditors may object to being discharged, it may still make sense to file for Chapter 7 bankruptcy and hope your creditors don't object.
Codebtors will still be on the hook. If you want to discharge debts for which you have a codebtor (such as someone who cosigned a loan for you, or a business partner who is equally liable for the debt), bankruptcy won't wipe out the debt. If the debt is of a type that can be discharged in Chapter 7 bankruptcy, you will no longer be legally responsible for paying it, but your codebtor will.
How Much Property Will You Have to Give Up?
Whether or not you decide to file for Chapter 7 bankruptcy may depend on what property of yours will be taken to pay your creditors ("nonexempt" property) and what property you get to keep ("exempt" property).
Certain kinds of property are exempt in almost every state, while others are almost never exempt. The following are items you can typically keep (exempt property):
- motor vehicles, up to a certain value
- reasonably necessary clothing (no mink coats)
- reasonably needed household furnishings and goods (the second TV may have to go)
- household appliances
- jewelry, up to a certain value
- personal effects
- life insurance (cash or loan value, or the proceeds of life insurance), up to a certain value
- pensions
- part of the equity in your home
- tools of your trade or profession, up to a certain value
- a portion of unpaid but earned wages, and
- public benefits (welfare, Social Security, unemployment compensation) accumulated in a bank account.
Items you must typically give up (nonexempt property) include:
- expensive musical instruments (unless you're a professional musician)
- stamp, coin, and other collections
- family heirlooms
- cash, bank accounts, stocks, bonds, and other investments
- a second car or truck, and
- a second or vacation home.
Is Chapter 7 Bankruptcy More Than You Need?
You may be considering bankruptcy just to stop harassment by your creditors. However, in most cases, you can stop creditors from making telephone calls to your home or work by simply telling them to stop. For more information, see What to Do If a Bill Collector Crosses the Line.
Deciding Whether to File Chapter 7 Bankruptcy
If you determine that you are judgment proof, that you'll be stuck with significant debt following bankruptcy, or that you may have to give up too much property, Chapter 7 bankruptcy may not make sense for you. For a discussion of other options, including the possibility of doing nothing, see Alternatives to Bankruptcy.
When Chapter 7 Bankruptcy Is Better than Chapter 13 Bankruptcy
Chapter 7 bankruptcy has some significant advantages over Chapter 13 bankruptcy.
Most people who file for bankruptcy choose Chapter 7 bankruptcy because it's fast, effective, easy to file, and doesn't require payments over time.
Advantages of Chapter 7 Bankruptcy
A typical Chapter 7 bankruptcy case is opened and closed within three to six months, and the person filing emerges debt-free except for a mortgage, car payments, and certain types of debts that survive bankruptcy, such as student loans, recent taxes, and unpaid child support.
Although you can lose property in Chapter 7 bankruptcy, most filers don't. Bankruptcy lets you keep most necessities -- if you have little to begin with, chances are good you'll be able to keep all or most of your property (unless you pledged the item as collateral for a loan).
However, not everyone is eligible to use Chapter 7 bankruptcy. If your income is sufficient to fund a Chapter 13 repayment plan, after subtracting what you'll spend on certain allowed expenses and monthly payments for child support, tax debts, secured debts (such as a mortgage or car loan), and a few other types of debts, you won't be allowed to file for Chapter 7 bankruptcy.
Drawbacks of Chapter 13 Bankruptcy
Probably the main reason most people prefer Chapter 7 bankruptcy is that it doesn't require you to repay any portion of your debts, as Chapter 13 bankruptcy does. And if you use Chapter 13 bankruptcy, you must complete the entire three- to five-year repayment plan in order to have your remaining debts discharged (unless the court lets you off the hook early, for hardship reasons). The majority of those who file for Chapter 13 bankruptcy don't complete their plans, so filers run a very real risk that their debts won't ultimately be discharged.
Despite this major potential drawback, there are some good reasons why people who are eligible for both types of bankruptcy choose to use Chapter 13.
For More Information
For help filing a Chapter 7 bankruptcy, see How to File for Chapter 7 Bankruptcy, by Stephen Elias, Albin Renauer, and Robin Leonard (Nolo).
What Happens to Your Car in Chapter 7 Bankruptcy?
by Attorney Stephen R. Elias
Chapter 7 bankruptcy allows you to keep or surrender your car or truck.
People often wonder how Chapter 7 bankruptcy will affect their ability to keep their car. If you aren't making payments on a car, then you'll be able to keep it if its value falls under your state's vehicle exemption amount. However, if you are making payments on your car, it's not so simple. During your bankruptcy, you'll need to decide whether you want to surrender the vehicle or keep it by continuing to make payments. You let the bankruptcy court know what you want to do by filing an official form called the Statement of Intention (SOI) with your other bankruptcy papers, as well as mailing a separate copy of the SOI to your vehicle lender. Similarly, if you are leasing your car, you can either reject the lease on your SOI or can keep the car by assuming the lease.
Walking Away From the Car
If you want to walk away from the car, you list the lender on your SOI and state that you intend to surrender the vehicle -- that is, turn it in to the lender. This will clear you of any further liability on the debt after your bankruptcy. If you are leasing your car, you can get out of the lease by rejecting the lease on your SOI.
Keeping a Car You're Still Paying For
If you want to keep a car you are making payments on, no matter what else is going on in your bankruptcy, you should continue to make your payments as scheduled. You do have a choice, however, on how to keep the car: You can either pay the lender a lump sum to purchase the car at its current value (called
Sometimes your lender will let you keep the car without entering into a reaffirmation agreement, by simply allowing you to continue to make the payments under the old agreement (this is called the ride-through option). If your lender has been accepting your payments, it's a sign that you may be able to retain the vehicle and continue making payments without entering into a new reaffirmation agreement.
Negotiating With the Lender to Keep the Car
To find out whether your lender will require a new contract, call them and ask for the bankruptcy or loss mitigation department. Explain that you intend to file for bankruptcy and ask whether you need to reaffirm the promissory note or can instead retain the car and continue making payments without reaffirming.
If the lender agrees to let you retain the car and pay according to the old agreement, the lender will still have a
If the lender requires you to reaffirm the promissory note and you do reaffirm it, consider carefully whether you want to do this. The lender will have a right to repossess the car if you default on your payments and you will owe any deficiency that remains on your loan if that happens. If you want to reaffirm your loan, you'll take the following steps.
Negotiate the Reaffirmation Agreement
First, you'll state on your Statement of Intention that you intend to reaffirm the promissory note. Then, the lender will send you an agreement setting out the same or similar terms as your old agreement. At this point you should consider negotiating the terms more to your advantage. You do have some leverage here, because the lender knows that bankruptcy gives you the option of surrendering the car and canceling all liability. Lenders lose a lot of money on repossessions, so they have an incentive to cut you a better deal, such as reducing the principal of the loan to the car's current value. Don't be afraid to attempt to negotiate for this. All the lender can do is say "No." If the lender does say "No," you may want to consider surrendering the car at this point, and let the bankruptcy erase your liability for the remaining payments on the loan.
Have the Court Review the Reaffirmation Agreement
Once you and the lender have agreed on the terms of the reaffirmation agreement, you'll sign the agreement and file it with the court. At the "discharge hearing," near the end of your bankruptcy, the judge will decide whether the agreement should be enforced. After considering your income, the amount you owe on the car, and its value, the judge may decide that the reaffirmation will create an undue hardship for you or be against your best interests. If you still owe much more than the car's value, a judge might disallow the reaffirmation.
What Happens If the Judge Approves the Reaffirmation
If the judge approves the reaffirmation agreement, you will continue to be liable under its terms after your bankruptcy ends. For instance, if you have to give the car back due to a loss of income, at a time when you owe $25,000 under the agreement and your car is worth only $10,000, you'll be on the hook for the $15,000 deficiency. Remember that because you can't file another Chapter 7 bankruptcy for eight years, you could be back where you started before you filed for bankruptcy (another reason why a judge might not approve the reaffirmation in the first place).
What Happens If the Judge Disapproves the Reaffirmation
If the judge disapproves the reaffirmation agreement, you don't necessarily lose the car. According to several bankruptcy court opinions, you can keep the car as long as you remain current on your payments. These courts reason that as long as you do what is required of you by the bankruptcy code (state your intention to reaffirm, sign and file the reaffirmation agreement, and attend the discharge hearing), the fact that judge disapproves the agreement is beyond your control and should not result in your having to give up your car. All of this is conditioned, of course, on staying current on your payments. (See In re Moustafi, 371 Bankruptcy Reporter 434 (Bankr Ariz 2007).) You can read this case at www.georgiabankruptcyblog.com/moustafi.pdf. Paradoxically, if the judge disapproves the agreement, you will probably be better off, because you will be left with the practical equivalent of the ride-through option, meaning that you won't owe a deficiency should the car have to be surrendered or repossessed.
Where to Go for More Information
For more information on redeeming and reaffirming secured property in a Chapter 7 bankruptcy, see How to File for Chapter 7 Bankruptcy (Nolo), by attorneys Stephen Elias, Albin Renauer, and Robin Leonard.
An Overview of Chapter 13 Bankruptcy
The basic steps involved in a typical Chapter 13 bankruptcy case.
Chapter 13 bankruptcy, sometimes called reorganization bankruptcy, is quite different from Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, most of your debts are wiped out; in exchange, you must relinquish any property that isn't exempt from seizure by your creditors. In a Chapter 13 bankruptcy, you don't have to hand over any property, but you must use your income to pay some or all of what you owe to your creditors over time -- from three to five years, depending on the size of your debts and income.
Chapter 13 Eligibility
Chapter 13 bankruptcy isn't for everyone. Because Chapter 13 requires you to use your income to repay some or all of your debt, you'll have to prove to the court that you can afford to meet your payment obligations. If your income is irregular or too low, the court might not allow you to file for Chapter 13.
If your total debt burden is too high, you are also ineligible. Your secured debts cannot exceed $1,010,650, and your unsecured debts cannot be more than $336,900. A "secured debt" is one that gives a creditor the right to take a specific item of property (such as your house or car) if you don't pay the debt. An "unsecured debt" (such as a credit card or medical bill) doesn't give the creditor this right.
The Chapter 13 Process
Before you can file for bankruptcy, you must receive credit counseling from an agency approved by the United States Trustee's office. (For a list of approved agencies, go to the Trustee's website at www.usdoj.gov/ust and click "Credit Counseling and Debtor Education.") These agencies are allowed to charge a fee for their services, but they must provide counseling for free or at reduced rates if you cannot afford to pay.
In addition, you'll have to pay the filing fee, which is currently $274, and file numerous forms. For line-by-line instructions on filling out the required bankruptcy forms, see Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Stephen Elias and Robin Leonard (Nolo).
The Chapter 13 Repayment Plan
The most important part of your Chapter 13 paperwork will be a repayment plan. Your repayment plan will describe in detail how (and how much) you will pay each of your debts. There is no official form for the plan, but many courts have designed their own forms.
How Much You Must Pay
Your Chapter 13 plan must pay certain debts in full. These debts are called "priority debts," because they're considered sufficiently important to jump to the head of the bankruptcy repayment line. Priority debts include child support and alimony, wages you owe to employees, and certain tax obligations.
In addition, your plan must include your regular payments on secured debts, such as a car loan or mortgage, as well as repayment of any arrearages on the debts (the amount by which you've fallen behind in your payments).
The plan must show that any disposable income you have left after making these required payments will go towards repaying your unsecured debts, such as credit card or medical bills. You don't have to repay these debts in full (or at all, in some cases). You just have to show that you are putting any remaining income towards their repayment.
How Long Your Repayment Plan Will Last
The length of your repayment plan depends on how much you earn and how much you owe. If your average monthly income over the six months prior to the date you filed for bankruptcy is more than the median income for your state, you'll have to propose a five-year plan. If your income is lower than the median, you may propose a three-year plan. (To get the median income figures for your state, go to the United States Trustee's website, www.usdoj.gov/ust, and click "Means Testing Information.")
No matter how much you earn, your plan will end if you repay all of your debts in full, even if you have not yet reached the three- or five-year mark.
If You Can’t Make Plan Payments
If for some reason you cannot finish a Chapter 13 repayment plan -- for example, you lose your job six months into the plan and can’t keep up the payments -- the bankruptcy trustee may modify your plan, or the court might let you discharge your debts on the basis of hardship. Examples of hardship would be a sudden plant closing in a one-factory town or a debilitating illness.
If the bankruptcy court won’t let you modify your plan or give you a hardship discharge, you might be able to convert to a Chapter 7 bankruptcy or ask the bankruptcy court to dismiss your Chapter 13 bankruptcy case (you would still owe your debts, plus any interest creditors did not charge while your Chapter 13 case was pending). For information on your alternatives in this situation, see Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Stephen Elias and Robin Leonard (Nolo).
How a Chapter 13 Case Ends
Once you complete your repayment plan, all remaining debts that are eligible for discharge will be wiped out. Before you can receive a discharge, you must show the court that you are current on your child support and/or alimony obligations and that you have completed a budget counseling course with an agency approved by the United States Trustee. (This requirement is separate from the mandatory credit counseling you must undergo before filing for bankruptcy -- you can find a list of approved agencies at the Trustee's website, www.usdoj.gov/ust; click "Credit Counseling and Debtor Education.")
For more information, see Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Stephen Elias and Robin Leonard (Nolo).
Are You Eligible for Chapter 13 Bankruptcy?
Learn whether Chapter 13 bankruptcy is an option for you.
Chapter 13 bankruptcy is a good option for some debtors, but it isn't available to everyone.
Businesses Can't File for Chapter 13 Bankruptcy
A business, even a sole proprietorship, cannot file for Chapter 13 bankruptcy in the name of that business. Businesses are steered toward Chapter 11 bankruptcy when they need help reorganizing their debts.
If you own a business, however, you can file for Chapter 13 bankruptcy as an individual. You can include in your Chapter 13 bankruptcy case business-related debts for which you are personally liable. There is one exception to this rule: Stockbrokers and commodity brokers cannot file a Chapter 13 bankruptcy case, even if they want to discharge only personal (nonbusiness) debts.
You Must Have Sufficient Disposable Income
In order to qualify for Chapter 13, you will have to show the bankruptcy court that you will have enough income, after subtracting certain allowed expenses and required payments on secured debts (such as a car loan or mortgage), to meet your repayment obligations. Your plan must pay back certain debts in full, or the judge will not confirm (approve) it and allow you to proceed.
You can use the income from the following sources to fund a Chapter 13 plan:
- regular wages or salary
- income from self-employment
- wages from seasonal work
- commissions from sales or other work
- pension payments
- Social Security benefits
- disability or workers' compensation benefits
- unemployment benefits, strike benefits, and the like
- public benefits (welfare payments)
- child support or alimony you receive
- royalties and rents, and
- proceeds from selling property, especially if selling property is your primary business.
If you are married, your income does not necessarily have to be "yours." A nonworking spouse can file alone and use money from a working spouse as a source of income. And an unemployed spouse can file jointly with a working spouse.
Your Debts Must Not Be Too High
You do not qualify for Chapter 13 bankruptcy if your secured debts exceed $1,010,650. (This amount is adjusted for inflation every three years; the last increase took effect on April 1, 2007.) A debt is secured if you stand to lose specific property if you don't make your payments to the creditor. Home loans and car loans are the most common examples of secured debts. But a debt might also be secured if a creditor -- such as the IRS -- has filed a lien (notice of claim) against your property.
In addition, for you to be eligible for Chapter 13 bankruptcy, your unsecured debts cannot exceed $336,900. (This amount is also increased every three years.) An unsecured debt doesn't give the creditor a right to take a particular piece of property. Most debts are unsecured, including credit card debts, medical and legal bills, back utility bills, and department store charges.
You Must Be Current on Your Income Tax Filings
To file for Chapter 13, you will have to submit proof that you filed your federal and state income tax returns for the four tax years prior to your bankruptcy filing date. If you need some time to get current on your filings, the court can postpone the proceedings. Ultimately, however, if you don't produce your returns or transcripts of the returns for those four years, your Chapter 13 case will be dismissed.
Want to Learn More?
For more information on Chapter 13's eligibility requirements, see Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Robin Leonard and Stephen Elias (Nolo).
Reasons to Use Chapter 13 Bankruptcy Instead of Chapter 7 Bankruptcy
Sometimes it makes sense to file for Chapter 13 bankruptcy instead of Chapter 7 bankruptcy.
Many debtors choose not to file for Chapter 13 bankruptcy because it requires repayment of at least a portion of their debts (unlike Chapter 7 bankruptcy, which wipes out many debts entirely ).
In some situations, however, Chapter 13 bankruptcy is the better bankruptcy option. Not only that, but certain debtors don't get to choose: Not everyone is eligible for Chapter 7 bankruptcy, so Chapter 13 will by the only option available to some filers.
Here are some good reasons to file for Chapter 13:
You cannot file for Chapter 7. You won't be allowed to file for Chapter 7 if you cannot meet some new requirements imposed by the 2005 revisions to the bankruptcy law. Under these new rules, you cannot file for Chapter 7 if both of the following are true:
- Your current monthly income over the six months prior to your filing date is more than the median income for a household of your size in your state (go to the website of the United States Trustee, www.usdoj.gov/ust, and click "Means Testing Information" to see the median figures for your state).
- Your disposable income, after subtracting certain expenses and monthly payments for debts you would have to repay in Chapter 13, exceeds certain limits set by law. These calculations are commonly referred to as the "means test" -- if you have the means to repay a certain amount of your debt through a Chapter 13 repayment plan, you flunk the test and are ineligible for Chapter 7 bankruptcy. (For more information, including a link to an online calculator you can use to see whether you pass the means test, see The Bankruptcy Means Test: Is Your Income Low Enough for Chapter 7 Bankruptcy?)
The means test can get fairly complex -- and, to make matter worse, Congress has its own definitions of "disposable income," "current monthly income," "expenses," and other important terms, which sometimes operate to make your income seem higher than it actually is. You can find step-by-step instructions to determine if you qualify for Chapter 7 under these new rules in How to File for Chapter 7 Bankruptcy, by attorney Stephen Elias, attorney Albin Renauer, and Robin Leonard, J.D. (Nolo).
In addition, if you have received a Chapter 7 bankruptcy discharge within the last eight years, or a Chapter 13 discharge within the last six years, you may not file for Chapter 7 bankruptcy.
You are behind on your mortgage or car loan, and want to make up the missed payments over time and reinstate the original agreement. You cannot do this in Chapter 7 bankruptcy. You can make up missed payments only in Chapter 13 bankruptcy.
You have a tax obligation, student loan, or other debt that cannot be discharged in Chapter 7. You can include these debts in your Chapter 13 plan and pay them off over time.
You have a sincere desire to repay your debts, but you need the protection of the bankruptcy court to do so. This might be the case if creditors are coming after you, or if you simply require the formal structure and deadlines the Chapter 13 process provides in order to follow through on your good intentions.
You have nonexempt property that you want to keep. When you file for Chapter 7 bankruptcy, you get to keep only
In Chapter 13, you don't have to give up any property. Instead, you repay your debts out of your income. So, if you have nonexempt property that you can't bear to part with, Chapter 13 might be the better choice.
You have a codebtor on a personal debt. If you file for Chapter 7 bankruptcy, your codebtor will still be on the hook -- and your creditor will undoubtedly go after the codebtor for payment. If you file for Chapter 13 bankruptcy, the creditor will leave your codebtor alone, as long as you keep up with your bankruptcy plan payments.
For more help deciding which bankruptcy is right for you, see The New Bankruptcy: Will It Work for You?, by attorney Stephen Elias (Nolo). Or, for help filing Chapter 13, see Chapter 13 Bankruptcy: Repay Your Debts, by attorney Stephen Elias and Robin Leonard, J.D. (Nolo).
Your Obligations Under a Chapter 13 Bankruptcy Plan
Learn which debts you must pay back when you file for Chapter 13 bankruptcy.
To begin a Chapter 13 bankruptcy, you fill out a packet of forms -- mostly the same forms as you would use in a Chapter 7 bankruptcy -- listing your income, property, expenses, and debts. You file these forms and paperwork with a nearby bankruptcy court. You must also file a workable payment plan proposing how you plan to handle your debts over the payment plan period.
You must also file your tax return for the previous year, proof that you've filed your tax returns for the last four years, and a certificate showing that you've completed credit counseling with an agency approved by the United States Trustee (go to www.usdoj.gov/ust, then click "Credit Counseling and Debtor Education" for a list of approved agencies).
Under a Chapter 13 plan, you make payments, usually monthly, to the bankruptcy trustee, an official appointed by the bankruptcy court to oversee your case. The trustee in turn pays your creditors and collects a statutory commission based on the amounts paid out under your plan. You must make every payment, on time, in order to successfully complete your plan and get a discharge of your remaining debts.
How Much You'll Have to Pay
Some creditors are entitled to receive 100% of what you owe them, while others may receive a much smaller percentage (or nothing at all). Typically, Chapter 13 bankruptcy plans must provide that:
Administrative claims will be paid 100%. These include:
- your filing fee ($274)
- the trustee's commission (3% to 10% of each monthly payment), and
- attorney's fees, if you hire an attorney for help with your Chapter 13 bankruptcy.
Priority debts will be paid 100%. These include:
- back alimony and child support
- most tax debts (including state and federal income taxes)
- wages, salaries, or commissions you owe to employees, and
- contributions you owe to an employee benefit fund.
Mortgage defaults will be paid 100% if you want to keep your house.
Other secured debt defaults will be paid 100% if you want to keep the property. Missed car payments fall into this category.
Unsecured debts will be paid anywhere from 0% to 100% of what you owe. The exact amount depends on:
- the total value of your nonexempt property
- the amount of disposable income you have each month to put toward your debts, and
- how long your plan lasts.
Disposable Income
Your payment plan must commit to paying any leftover disposable income (your income less certain allowed expenses and payments on secured loans, such as a mortgage or car loan) towards your unsecured debts, such as credit card debts and medical bills.
Length of Payment Plan
The length of your payment plan depends on your income level. If your "current monthly income" (your average income over the six months prior to filing) exceeds the median monthly income for a household of your size in your state, your plan must last five years. If your income is less than the median, you can propose a three-year plan, even if your unsecured creditors cannot be fully repaid during that time. (To find the median income figures for your state, go to the United States Trustee's website, www.usdoj.gov/ust, and click "Means Testing Information.")
Your "current" monthly income might be out of date. Because your current monthly income, as calculated above, is an average, it may well be more than your actual monthly income at the time you file. For instance, if you were laid off unexpectedly three months before filing, your monthly income when you file may be quite low -- as compared to your average income over the last six months, which will have to include three months of your salary.
No Surrender of Property
If you file for Chapter 13 bankruptcy, you don't have to hand over any of your property; instead, you repay your debts out of your income. In exchange for getting to keep your property, your plan will have to pay your creditors at least the value of your nonexempt property. (In Chapter 7 bankruptcy, you must surrender your nonexempt property to the trustee, who can sell it and distribute the proceeds to your creditors. You do get to keep property that is
For more information on Chapter 13 bankruptcy, see Chapter 13 Bankruptcy: Repay Your Debts, by attorney Stephen Elias and Robin Leonard, J.D.
Can my bankrupt ex-husband get out of paying child support?
QUESTION:
A bankruptcy court just notified me that my ex-husband is filing for Chapter 7. I am one of his creditors, because: a) he owes back child support, including for medical bills; and b) he's not paying current child support. Will he be able to wiggle out of these debts?
ANSWER:
Bankruptcy can wipe out many types of debt, but child support is not one of them. Certain debts (referred to legally as "priority debts") are considered so important that they survive bankruptcy -- and child support is first on the priority debt list. This means that your ex will still owe you this money, despite filing for bankruptcy.
Can the bank take my car after I file for Chapter 13 bankruptcy?
QUESTION:
I filed a Chapter 13 bankruptcy and have already started paying the court. I sent a payment to the bank for a note owed on my van, but the check was returned. They then came and picked up the van. My work material was in the van along with personal items -- and we have not yet been notified as to where they are. What legal recourse do we have against the bank?
ANSWER:
When you're trying to get back on your feet, it seems especially unfair to have the rug tugged.
If payment to the bank was spelled out in your plan -- either outside of bankruptcy or within -- then the bank's action violates a court order, the confirmed plan. Sadly, your recourse is to invoke the slow grinding wheels of justice and sue the bank, within your bankruptcy case. Talk to the bankruptcy trustee about this.
Bankruptcy FAQ (Chapter 7 and Chapter 13)
Chapter 7 bankruptcy and Chapter 13 bankruptcy: what you need to know.
What's Below:
What exactly is bankruptcy? Will it wipe out all my debts?
What exactly is bankruptcy? Will it wipe out all my debts?
Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts or repay them under the protection of the bankruptcy court. Bankruptcies can generally be described as "liquidation" (Chapter 7) or "reorganization" (Chapter 13). Under a Chapter 7 bankruptcy, you ask the bankruptcy court to wipe out (discharge) the debts you owe. Under a Chapter 13 bankruptcy, you file a plan with the bankruptcy court proposing how you will repay your creditors. You must repay some debts in full; others may be repaid only partially or not at all, depending on what you can afford.
When you file either kind of bankruptcy, a court order called an "automatic stay" goes into effect. The automatic stay prohibits most creditors from taking any action to collect the debts you owe them unless the bankruptcy court lifts the stay and lets the creditor proceed with collections.
Certain debts cannot be discharged in bankruptcy; you will continue to owe them just as if you had never filed for bankruptcy. These debts include back child support, alimony, and certain kinds of tax debts. Student loans will not be discharged unless you can show that repaying the debt would be an undue burden, which is a very tough standard to meet. And other types of debts might not be discharged if a creditor convinces the court that the debt should survive your bankruptcy.
What is the difference between Chapter 7 and Chapter 13 bankruptcy? Which one lets me keep my property?
In Chapter 7 bankruptcy, you ask the bankruptcy court to discharge most of the debts you owe. In exchange for this discharge, the bankruptcy trustee can take any property you own that is not exempt from collection (see below), sell it, and distribute the proceeds to your creditors.
In Chapter 13 bankruptcy, you file a repayment plan with the bankruptcy court to pay back all or a portion of your debts over time. The amount you'll have to repay depends on how much you earn, the amount and types of debt you owe, and how much property you own.
You lose no property in Chapter 13 bankruptcy, because you fund your repayment plan through your income. In Chapter 7 bankruptcy, you select property you are eligible to keep from a list of state exemptions. Although state exemption laws differ, states typically allow you to keep these types of property in a Chapter 7 bankruptcy:
- Equity in your home, called a homestead exemption. Under the Bankruptcy Code, you can exempt up to $20,200 of equity. Some states have no homestead exemption; others allow debtors to protect all or most of the equity in their home.
- Insurance. You usually get to keep the cash value of your policies.
- Retirement plans. Most retirement benefits are protected in bankruptcy.
- Personal property. You'll be able to keep most household goods, furniture, furnishings, clothing (other than furs), appliances, books and musical instruments. You may be able to keep jewelry only worth up to $1,000 or so. Most states let you keep a vehicle as long as your equity doesn't exceed several thousand dollars. And many states give you a "wild card" amount of money -- often $1,000 or more -- that you can apply toward any property.
- Public benefits. All public benefits, such as welfare, Social Security, and unemployment insurance, are fully protected.
- Tools used on your job. You'll probably be able to keep up to a few thousand dollars worth of the tools used in your trade or profession.
Am I free to choose between Chapter 7 bankruptcy and Chapter 13 bankruptcy? Which type of bankruptcy should I use?
If you meet the eligibility requirements for both types of bankruptcy, then you can choose the type of bankruptcy that makes the most sense for your situation. However, you may not have a choice.
Under the new bankruptcy law, filers whose incomes are higher than the median income for a family of their size in their state may not be allowed to file for Chapter 7 bankruptcy if their disposable income, after subtracting certain allowed expenses and required debt payments, would allow them to pay back some portion of the unsecured debt over a five-year repayment period.
Also, if you have secured debts of more than $1,010,650 and unsecured debts of more than $336,900, for example, then you cannot use Chapter 13 bankruptcy.
Most people who file for bankruptcy choose to use Chapter 7, if they meet the eligibility requirements; Chapter 7 is a popular choice because, unlike Chapter 13, it doesn't require filers to pay back any portion of their debts.
However, Chapter 13 might be a better choice, depending on your situation. For example, if you are behind on your mortgage and want to keep your house, you can include your missed payments in your Chapter 13 plan and repay them over time. In Chapter 7, you would have to make up the whole past due amount right away -- and you might lose your house, if your equity exceeds the exemption amount available to you. For more on situations when Chapter 13 makes sense, see Reasons to Use Chapter 13 Bankruptcy Instead of Chapter 7 Bankruptcy.