Chapter 7 and Chapter 13 are the most common forms of bankruptcy. After meeting with you, we can determine what type of bankruptcy will fit your situation. Depending on your circumstances, we are available to assist you, either with Chapter 7 or with Chapter 13.
Chapter 7 Bankruptcy is also known as a "fresh start" bankruptcy because it gives a person the chance to discharge most of their debt. The Supreme Court made this point about the purpose of the bankruptcy law in a 1934 decision:
"It gives to the honest but unfortunate debtor... a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt." Local Loan Co v. Hunt, 292 U.S. 234.
This section of the website regarding Chapter 7 of the Bankruptcy Code will offer a general overview into the Chapter 7 Bankruptcy process and will give you a general understanding of the protections offered in bankruptcy, qualification for a Chapter 7 bankruptcy, and the Chapter 7 process.
Powerful Protections from a Chapter 7 Bankruptcy
A Chapter 7 Bankruptcy offers many powerful protections. Once your bankruptcy petition is filed with the Federal Court, all creditors receive notice that you have filed for bankruptcy protection. After creditors receive this notice they may NOT contact you for the purpose of collecting any debt during your bankruptcy and after your debt has been discharged.
During your bankruptcy and after your obligation is discharged, creditors CANNOT sue you, garnish your wages, attach liens on your property or issue a negative report to the credit reporting agencies. In essence, a bankruptcy will protect you from all creditors that are dischargeable in a bankruptcy.
I Feel Guilty About Not Paying my Creditors
Most people have at least some regret regarding their decision not to pay their creditors. After a bankruptcy a person has zero obligation to pay their discharged debts and obligations, however they may choose to pay some debt back if they wish.
A person may pay their creditors after a bankruptcy at 0% interest and they may pay whatever amount they choose to their creditors without any harassment or any obligation to do so. A bankruptcy offers a person protection from their creditors and a fresh start so that they may rebuild their lives and be free to take care of the things that truly matter.
Will Bankruptcy Effect My Credit Score?
The negative effects of bankruptcy are not as severe as many people believe. It is true that a person's credit score will drop significantly following the discharge of his or her debt. However, in many cases, credit scores are not a person's most pressing concern. Typically, several missed payments have already caused scores to plummet. Most often, the primary goal is get our clients a little breathing room.
While it is true that one's credit report will reveal the bankruptcy for ten years after the debts have been discharged, this does not mean that credit scores will be impacted for that length of time. In fact, the bankruptcy can even help improve credit scores. This is true because it is difficult to raise a credit score as long as accounts appear on reports as delinquent with a balance owing. After bankruptcy, credit reports will indicate that the debt was discharged in bankruptcy and there is no balance owed. At this point, the rebuilding process may begin. Proper credit management, including making timely payments and keeping balances low, can result in an increase in credit scores in a relatively short period of time. While all circumstances are different and no promises can be made, people who have had their debts discharged in bankruptcy are often able to qualify for mortgages and very favorable auto loan terms within two to three years after the discharge.
While it cannot be denied that bankruptcy impacts credit scores negatively in the short term, so does the inability to pay debts, judgments, garnishments and other obligations. Not as readily quantifiable, however, is the personal and emotional price people and their families pay as they try to stay afloat financially by servicing overwhelming debt. Many people conclude that this personal cost far exceeds the temporary inconvenience caused by low credit scores.
Do I Qualify for a Chapter 7 Bankruptcy?
Generally, whether a person is eligible to file a Chapter 7 Bankruptcy relies on several different factors.
a. Consumer Debt
Chapter 7 addresses consumer debt. "Consumer debt" is debt that has been incurred for everyday living expenses.
b. Dischargeable Debt
The term "dischargeable debt" refers to debt that may be forgiven during a Chapter 7 bankruptcy. Most consumer debt is dischargeable, however, there important exceptions. For example, a debt that results from fraud is not dischargeable nor are debts that result when a debtor intentionally injures another person. Most educational loans and taxes cannot be discharged nor can spousal support and child support payments. Fines in criminal cases and traffic fines are non-dischargeable. There are several other categories of debts that cannot be discharged in a Chapter 7 bankruptcy proceeding. A competent bankruptcy attorney should be consulted so that a person who is considering bankruptcy has all information necessary to make an informed and intelligent decision.
Means Test
To qualify for Chapter 7 relief, a person or a family has to earn a gross income that is less than the state median income. The median is adjusted periodically. In April 2010, the median income in California for a single person is $47,969 and $70,638 for a family consisting of three persons.
The calculation of median income is not as easy as looking at your W-2 income report or your most recent pay stub. Congress has devised a test, known as a "means test," to establish eligibility for Chapter 7 bankruptcy and some aspects of Chapter 13 bankruptcy as well. The means test is a complex formula based on one's gross income before taxes minus all secured debt and other applicable expenses. A competent bankruptcy attorney will input all relevant financial data to determine eligibility for Chapter 7 bankruptcy. If, after calculation of the means test, it appears that a person's income exceeds the state median income, Chapter 13 of the Bankruptcy Code offers a good, and sometimes more desirable, alternative to Chapter 7 relief.
The Chapter 7 Process
At Floyd and Horrigan, the Chapter 7 bankruptcy process consists of six stages. These stages begin with the free consultation and, most often, conclude with our notice to you that your debts have been discharged. The following is a brief review of each stage in the process:
First Stage: Come in for a Free Consultation
The decision to meet with us to discuss your rights is the toughest decision you will have to make in the process. During our initial consultation we will review your debts and obligations, the income you earn, potential red flags with your case and the entire process as it relates specifically to you. We will consider and decide together if bankruptcy is the right option for you. The consultation will provide you with a very personal, detailed analysis of your rights and your potential bankruptcy case.
Second Stage: Complete the Bankruptcy Questionnaire and Gather All Required Documents
The second stage is to complete a financial questionnaire. This questionnaire will walk you through all necessary questions required for the bankruptcy process. Also, the Floyd and Horrigan questionnaire packet will give you a detailed check list on all documents needed to complete your bankruptcy and have your debts discharged.
Third Stage: Complete Credit Counseling Courses
Your attorney will provide you a list of all court approved credit counseling courses. You are required to complete two courses, the first being before your bankruptcy petition is filed and the second being before or immediately after the date one of our attorneys meets with you and the bankruptcy trustee. You do the courses at home, over the internet or by telephone. The courses go over the effects of bankruptcy, how to rebuild your credit, etc. After you complete each course the company will give you a certificate of completion, which we will file directly with the Federal Court.
Fourth Stage: Review Completed Bankruptcy Petition
The third stage is a very simple process of coming into our office to meet with your attorney and review your bankruptcy petition. If the petition is correct, you and your attorney will sign it. We will then file your petition electronically with the Federal Court.
Fifth Stage: Attend Trustee's Meeting Date with your Attorney
The fourth stage is to meet your attorney at the Federal Courthouse to meet with the bankruptcy trustee. The bankruptcy trustee is not a judge, but rather an attorney or CPA who reviews your petition to determine if there are any irregularities and to make sure that there is no abuse of the bankruptcy process. Trustees are paid a small fee for each Chapter 7 case they review and a percentage of property sold to help satisfy the claims of your creditors. For this reason alone it is critical that you be represented by a competent attorney who will use exemptions to protect your property from the reach of the trustee.
When your case is called by the trustee, you be asked a few basic questions about your petition. More challenging questions will be answered by your attorney for you to ensure that the meeting goes smoothly.
Sixth Stage: Waiting for Discharge
The sixth stage is the easiest because you are merely waiting for official notice from the Federal Court that your debt has been discharged. In general the whole process of a Chapter 7 Bankruptcy takes about four months, give or take a few weeks.
What are Bankruptcy Exemptions?
Exemptions are used by your attorney to protect your property from the reach of the bankruptcy trustee. In a Chapter 7 bankruptcy, the trustee may sell all property, not subject to an exemption, for the purpose of satisfying a person's creditors. A common mistake made by many who try to represent themselves in a bankruptcy proceeding is misapplication of exemptions. This can result in the sale of property that should not have been available for the trustee to sell.
There are two exemption schemes in California. Both plans provide for specific dollar amounts that may be exempted from a bankruptcy in several categories of property. The "homestead" exemption is often preferred when the debtor has a significant amount of equity in their primary homes. The "wild card" exemption is used in most other instances because it provides more flexibility in keeping other categories of property from the bankruptcy trustee.
During your consultation with one of our attorneys, we will discuss your individual situation and goals. We will outline the risks and benefits involved given your circumstances and devise a plan tailored so that you may achieve the maximum exemptions available. Rest assured nothing will be filed in court until all possible options are explored so that we, together, may make the best possible decisions for you and your family.
The Home Saver Bankruptcy
A Chapter 13 Bankruptcy offers many benefits, which may not be available in a Chapter 7 Bankruptcy. An example of these benefits include:
1- Possible Lien Stripping of a 2nd mortgage
2- Paying Credit Card Debt at 0% Interest
3- No More Harassing Phone Calls or other forms of Harassment from Creditors
4- Potential Cram Down of Vehicle Debt.
5- And other benefits.
The Chapter 13 Plan gives debtors in opportunity to get debts under control and sets them up on a plan to re-build their lives without the mistakes of the past.
In general, a Chapter 13 Bankruptcy is used when one either makes more money than the Bankruptcy Means Test allows for, or they want to save their home from foreclosure, or they want to save their vehicle from repossession.
HOW CAN I SAVE MY HOUSE?
If you have missed mortgage payments for your residence a Chapter 13 can be used to save your house from Foreclosure. A Chapter 13 can be filed at anytime to save ones house before the house is auctioned off in a Foreclosure Sale.
HOW DOES A CHAPTER 13 LIEN STRIP MY 2ND MORTGAGE?
A Chapter 13 can be used to make your 2nd Mortgage an unsecured creditor, if the following conditions are met.
Your house must be valued at a price that is lower than your 1st Mortgage.
So, hypothetically, if you owe $200,000 on your 1st Mortgage and your house is worth $199,999 or less then you may lien strip your 2nd Mortgage to have it discharged accordingly in the Chapter 13 Plan in the same manner that your Credit Card Debts are discharged.
HOW MUCH WILL MY CHAPTER 13 PAYMENT BE PER MONTH
This is a very important questions that a lot of debtors have. And the answer is... it depends.
It depends on several very important factors because the plan involves a very complex computation of all your debt. In a nutshell the plan is divided between Secured Debt and Unsecured Debt.
FIRST PART TO MONTHLY PAYMENT - SECURED DEBT
Under a Chapter 13 Plan you must pay 100% back for all Secured Debt that is not Lien Stripped. That means that if you have a 1st Mortgage, that is part of your 13 plan, then you have to pay the full monthly amount that is contractually due. Generally Secured Debt includes:
1- House Mortgages that are not lien stripped
2- Missed Mortgage Payments divided over the life of the plan
3- Car Loan divided over the life of the plan
4- And others such as tax debts.
Hypothetically, if you have a 1st Mortgage due every month of $1,200.00 and 8 missed payments. Then your Chapter 13 plan will start off with the 1st Mortgage of $1,200.00 and all 8 missed payments divided over the life of the plan.
SECOND PART TO MONTHLY PAYMENT - UNSECURED DEBT
Unsecure debt includes:
Credit Card Debt
2nd Mortgage that has lien stripped
Medical Bills
Private Loans
And Much More.
All unsecure debt is paid at 0% interest rate. In order to calculate the amount of monies paid toward Unsecure Debts we fist need to calculate your Disposable Monthly Income otherwise known as your (DMI). The DMI is the monthly amount that is applied to your unsecure debts.
The Disposable Monthly Income is computed by first looking at your past 6 months of pay stubs. We take your gross income average and deduct all secured debt paid, taxes, retirements, child care necessities, health expenses etc.
Deductions are also allowed, pursuant to IRS guidelines, for health, living and automotive expenses. At the end of this calculation we have your Disposable Monthly Income (DMI).
The Disposable Monthly Income is the dollar amount that is applied to you unsecure debts. Depending on the amount of the DMI, you may pay back a total of zero 0% to100% of your unsecured debt.
THIRD PART- MONTHLY PAYMENT
For the final part of the calculation we take your Disposable Monthly Income, which will include a small percentage paid to the Court Trustee, and add it to your Secured Debt Payment. Whatever these numbers add up to will generally be your monthly payment.
HOW LONG DOES A CHAPTER 13 PLAN LAST FOR?
A Chapter 13 payment plan will either be 36 months to 60 months depending on how much money you earn.
Generally, those persons making less than your state's median wages, will be placed on a 36 month plan.
If you earn more than your state's median guideline wages, you will be placed on a 60 month plan.
WHAT IS THE PROCESS INVOLVED WITH A CHAPTER 13?
The Chapter 13 Process is actually very similar to that of a Chapter 7 Process with a few variations. In total the process for a Chapter 13 has an average total of 6 steps.
1. Consultation
The Chapter 13 Process begins first with a Consultation with an Attorney. At the Consultation, the Attorney will go the factors of your case and bankruptcy options along with non-bankruptcy options, which may be available to you.
2. Completing the Questionnaire and Gathering All Required Paper Work
You will receive a questionnaire to fill out, where you must disclose all your credit accounts, mortgages, wages, and other required financial information. If necessary, a member of our staff will be happy to assist you. After the questionnaire is completed and all required paper work is turned in, we will begin constructing your Petition.
3. Completing Your Credit Counseling Courses
Federal law requires, every person who files a bankruptcy petition to complete two (2) counseling courses. Our office will give you a catalogue of all courses that are accepted by the court.
These courses generally cost on average of about $40- $50 and they may take 45 minutes to an hour to complete. The courses go over the effects of the bankruptcy, how to rebuild your credit, etc. The first course must be completed before we file your Petition and the Second Course must be completed around the time of the Creditors Meeting.
4. Reviewing Your Petition with the Attorney and Filing Your Petition
After your Petition is completed, an Attorney will go over your Petition and Plan Payment with you and answer any questions you may have.
5. Creditors Meeting
After your Petition is filed with the Federal Court, a Creditors Meeting Date will be assigned to you.
At the Creditors Meeting, the Attorney will meet you at the Federal Courthouse and guide you into the room of the Creditors Meeting.
A Chapter 13 Trustee will swear you in, verify your identification and will ask you questions about your case. Your Attorney will also be there to assist the Trustee by providing an explanation of how the plan was constructed etc.
6. Confirming Your Plan
If the Trustee does not object to your Chapter 13 Plan then the next step is for the Court to confirm your Plan.
7. Discharge
Upon completing your plan, your Attorney will file for a discharge of all unsecured debt, which has not been paid.
Reaffirmation Agreements
Simply stated, a reaffirmation agreement is a new contract between yourself and one or more of your creditors, allowing you the opportunity to keep your secured property.
Secured property is generally a vehicle or a house; however, such property could also include items bought specifically with a line of credit, known as a purchase money security agreement. Typically, these items may include furniture, jewelry or a computer, to name a few.
Often, property is worth less than what is owed against it. If such is the case, we can negotiate with your creditor in order to gain more favorable terms. Generally, this means a lowered principal balance, a lower interest rate, or both, resulting in lower monthly payments. However, keep in mind that a creditor is under no obligation to renegotiate the terms of the original contract.
We encourage our clients to carefully consider all options before signing a reaffirmation agreement. We will discuss your options with you and advise you of your responsibilities under a reaffirmation agreement. You are in no way obligated to sign a reaffirmation agreement. In fact, applicable law lets you rescind a signed reaffirmation agreement either prior to your bankruptcy discharge or within sixty days after you signed the reaffirmation agreement, whichever is later.
The court also has to review and approve the signed reaffirmation agreement. Generally, the court will want to make sure that the debtor can afford the agreed upon payments. If an attorney does not represent the Debtor, a court appearance will be required, allowing the court to ascertain this information directly from the Debtor.
You need to keep in mind that you will owe every debt that you reaffirm after your other debts have been discharged in bankruptcy. As such, you will generally not have the protection afforded under bankruptcy laws should you be unable to meet the terms of this new contract.