What is Chapter 7 Bankruptcy? Chapter 7also called "straight" or "liquidation" bankruptcy, is a way to legally discharge which is a legal term meaning wipe out or cancel your debts. When a person or married couple file a Chapter 7 bankruptcy, they are basically seeking a fresh start financially. Most of my clients complain that creditors and collection agencies are calling them at home and at work, utility companies have shut them off or are threatening to do so, or perhaps their wages are being garnished. Filing a Chapter 7 bankruptcy can stop all of these dead in there tracks. Basically filing a Chapter 7 is accomplished by filing papers with the United States Bankruptcy Court asking for protection. As soon as your case is filed (stamped with the date and time) an Order for relief is entered. The Order for relief creates the "automatic stay" described in more detail below. Most people who file a Chapter 7 are seeking to wipe out debts like credit cards, medical bills, utility bills, bank and credit union loans, car loans for which the car was repossessed, in an accident with no insurance or just broke down before it was paid off. A Chapter 7 discharge will wipe out or extinguish all of these debts. Chapter 7 involves an exchange between the person filing and the US Trustee, whose job it is to gather any non-exempt property of the debtor for the benefit of creditors. The person filing the Chapter 7 in exchange for getting all of their dischargeable debts wiped out, must disclose all of their assets (things and rights they own) to the Trustee. In the vast majority of Chapter 7 cases that are filed, nothing is taken and sold by the Trustee, most cases are no asset cases. Remember, Chapter 7 is designed to leave you with a fresh start. This means that the law is very generous in what you are allowed to keep or claim exempt. The most important thing is to list or disclose everything you own in your bankruptcy petition. Most, but not all debts are dischargeable in Chapter 7 bankruptcy. Chapter 7 gives you a fresh start on your economic life within certain limitations. A person cannot file a Chapter 7 more than once every 6 years and certain types of debts are not dischargeable. Student loans, most taxes, alimony and child support and debts for death or personal injury caused as a result of drunk driving or other intoxication are not dischargeable as a matter of public policy. Also, some people may have used credit in a fraudulent manner. For example, Chapter 7 bankruptcy is not for people who run up their credit cards with the intent of shortly thereafter going into bankruptcy. Chapter 7 bankruptcy is also not for people who charge much more than they could ever afford to pay just to discharge those debts. Moreover, it is not for anyone who basically acts in a dishonest or fraudulent manner. It is for the honest debtors, who, for circumstances they cannot control, find themselves overwhelmed in debt. Chapter 7 is also generally not appropriate for someone trying to save his house from a mortgage foreclosure. Generally, if you are about to lose your home for any reason, a Chapter 13 should be filed. Further, Chapter 7 is not for someone with the ability to make some reasonable payment on a month basis to unsecured creditors. For instance, if your budget would allow you to pay even ten cents on a dollar to creditors, you should generally file a Chapter 13 instead. See attorney Walter Metzen for a professional analysis of your financial situation and a thorough discussion of which Chapter may be best for you.
What is the "automatic stay"? THE AUTOMATIC STAY IS THE COURT ORDER THAT STOPS CREDITORS IMMEDIATELY, even if they don't yet know you filed bankruptcy. The automatic stay is one of the most powerful tools you as the debtor get when you file your bankruptcy petition. It happens automatically upon the filing of your case either Chapter 7 or Chapter 13. It is so powerful that it can stop a foreclosure, a car repossession a utility shut-off and even a wage garnishment. I have even had the repo man return a car that he took from my client because a bankruptcy had been filed even though the repo man did not know. Most creditors who are regularly in the business of lending money know and respect the power of the automatic stay in bankruptcy and will abide by the law. The automatic stay is an automatic injunction against most continued collection activities. The automatic stay goes into effect as soon as your bankruptcy case is filed with the bankruptcy court. The automatic stay is important because it protects you from continued harassment from your creditors. The automatic stay applies to virtually everyone and stops virtually all activities that are calculated to collect money from you, or make it uncomfortable or embarrassing on you so that you want to pay. It stops everyone except for criminal courts demanding fines or restitution. It does not get you out of paying child support. It does not get you out of spousal support. It does not stop you for being arrested for not paying a fine. It does not give you criminal immunity. The automatic stay is "automatic". The automatic stay goes into effect immediately upon the filing of your bankruptcy petition.
Should I seek credit counseling before bankruptcy? Many of my clients have tried credit counseling before coming to see my to file a bankruptcy. Credit counseling agencies which advertise heavily on television and call themselves non-profit agencies. Credit counseling agencies have no "real power" to deal with your creditors. Most actually get paid a percentage of the money that you pay your creditors through the agency. Most charge a start-up fee and a monthly maintenance fee which over the long run can add up significantly. Most people in credit counseling eventually do need to file a bankruptcy to deal with their creditors so the credit counseling was in vain. Some credit counseling agencies request access be given to a persons checking account so that the collection agency can take money out of the account every month or every pay period. I strongly discourage giving anyone such access to a bank account, I have seen many problems result from giving such access, such as bounced checks and inability of the debtor to make other necessary payments due to a disruption in their income. Credit counseling may be a good idea to avoid bankruptcy, however, keep in mind certain things. Most credit counselors get paid by a percentage of what is paid to the creditors, by the creditors receiving the funds. this means that they have an interest in seeing that the creditors get the maximum. Credit counselors, therefore, do not have a "confidential relationship" with you. A confidential relationship is the type of relationship you have with an attorney. The attorney is legally obligated to avoid conflicts and represent only your interests. An attorney could be disciplined or disbarred from accepting payments from adverse parties, such as your creditors. Statements made to attorneys are always confidential, if made in private (between you, your spouse and the attorney, with no one else present). Statements made to a counselor are not. Does this mean that credit counseling is always a bad idea? No, credit counseling can be good for some people. It helps many people avoid bankruptcy, however, it is an open question whether is makes much of a difference on your credit record.
In some circumstances, credit counseling is a very wrong answer. These include many of the reasons that people file chapter 13 in the first place:
- You should not seek credit counseling first (you should seek legal counsel) if your home or other real estate is in foreclosure.
- You should not seek credit counseling if you have been sued in court.
- There may be other reasons. If you have a question, it is always better to speak with an attorney first. Credit counselors simply cannot give legal advice you can rely upon, like an attorney can.
I owe a lot of money to DTE Energy or SBC Ameritech, will they shut off my utilities if I file a bankruptcy?
No, a utility may not deny you service because you exercised your constitutional privilege to file a bankruptcy petition seeking relief from your creditors. In fact, I have filed many cases for individuals or couples for the only reason that they have huge utility bills and have been shut-off. The filing of a Chapter 7 will wipe-out all the past debt owed to the utility and the company has to start you fresh as if you just moved to Detroit from Timbuktu. The utility companies by law cannot deny you service simply because you filed bankruptcy. The law recognizes them as a public monopoly because you can't simply go to Meijer's and buy electricity or natural gas for your home. The way it works is this: You file your bankruptcy petition, being sure to list whichever utility company you owe on your list of creditors (schedule F and Matrix). Approximately 10 days to 2 weeks later, the Bankruptcy Court mails out notices to all of the creditors you listed in your case. All of the utility companies regularly get bankruptcy notice and most even have a bankruptcy department. The company looks up all the accounts in your name, sometimes using a combination of your name and social security number. Any and all accounts in your name are then wiped out and started fresh back to the date your petition was filed. Note: You are responsible for paying the new utility debts you incur after filing your bankruptcy (either Chapter 7 or 13). If your utilities were cut off prior to your filing bankruptcy, tell my office and a fax will be sent to the utility company with proof of your filing and instructions asking them to restore service. They will always restore the service unless it was turned on illegally (which is fraud and may not be dischargeable) or it turns out that the utility service was in some other person's name (who did not file bankruptcy). Your utility company may not discriminate against you because you have filed a bankruptcy case. This means they must continue supplying you with service and may not cut you off. Please note that your utility company will probably request a deposit from you for continued service. The deposit remains your money, but is held by the utility company as security for service. The deposit is usually equal to approximately twice your average monthly bill. If you owe no money to your utility company and do not list them as a debt, then utility companies may waive the requirement for a deposit. Note: Some services such as cable tv, internet or cell phone services are not considered utilities since you can go to another service provider (i.e. they are not a monopoly) or they are not considered essential utilities (yet).
How quickly can I or we (joint husband and wife cases) file a Chapter 7 Bankruptcy ?
Very quickly depending on your situation. I have literally filed a bankruptcy case within the same hour that the person came to see me. This was an emergency situation to prevent the foreclosure of the person's home. Filing the bankruptcy before the sheriff's sale was concluded stopped the sale and gave the debtor a breathing spell. Usually depending on your situation and the difficulty of your case, I prepare your case and file it within a matter of a few weeks of your initial consultation. In cases where a person's wages are being garnished, I will file the case the same week. How quickly the case gets filed also depends on you. All documents required must be supplied to my office and all Court and attorney fees required must be paid before the filing. My office generally files cases every week. If your case requires an urgent filing, please come see me in my office to make arrangements to get your automatic stay in place as soon as possible.
I'm married and want to file alone. How will my filing Bankruptcy affect my spouse?
There is no requirement to file jointly if you are married. Many of my cases are filed for only one spouse of the married couple. If you are married and need to file by yourself the other spouse's credit report is usually not affected, because it is separate and distinct from yours, especially if there are no joint creditors. If both husband and wife are joint on a debt (such as a credit card or medical bill), I would normally recommend a joint bankruptcy filing.
How much debt do I need to be in to file a Chapter 7 Bankruptcy?
There is no minimum debt requirement in order to be able to file a Chapter 7. The analysis of whether to file a Chapter 7 depends more on your present ability to repay your creditors. Other factors to consider are the level of creditor harassment (i.e. calling you at home and work), utility shut offs, wage garnishments or other creditor actions. I usually don't recommend a Chapter 7 Bankruptcy for any individual unless there is at least $5000 in debt to wipe out or discharge, making the filing worthwhile. However, I have filed Chapter 7 cases for individuals with less debt but were being garnished by one or more creditors and made only minimum wage therefore making it impossible to file a Chapter 13 repayment plan. I have also filed cases for people whose utilities were shut off and needed the Bankruptcy Court protection of the automatic stay to get turned back on.
Do I have to file Bankruptcy on all of my Credit Cards? What if I want to keep one?
Yes, if you owe a balance, list the debt. The law requires you to list all of your creditors on your bankruptcy petition. I tell my clients that even if they owe the local video store $3.79 for an overdue video, to list it on your bankruptcy schedules. Many of my clients are worried that they cannot live without their Mastercard. Trust me, life is possible without credit cards. If you truly must have a credit card, there are options. If you have a credit card with a zero balance, it does not have to be listed and you may use it after you file bankruptcy. If you have a credit card with a low balance, you may wish to pay it off before filing your case. Some creditors, particularly Sears, offer to cut your current balance to $500, even if you owe them $10,000 or more, if you reaffirm (sign an agreement that says you promise to pay them despite the bankruptcy) with them. Many of my clients are reporting to me that they are receiving pre-approved credit card applications shortly after filing their Chapter 7 case. These are solicitations from credit card companies, even some of the same that were just discharged, enticing you to get back into the game. If used wisely and frugally (i.e. paying the balance in full each month), these may help you re-establish your credit. Remember though, in many cases, overspending and overuse of credit cards are what often lead to the bankruptcy in the first place. Be careful!
Where does my Chapter 7 Bankruptcy case get filed?
If you live in the Metro Detroit Area it will be filed in the US Bankruptcy Court for the Eastern District of Michigan, Southern Division located at 211 West Ford, Downtown Detroit. Remember, bankruptcy law is a federal law and is therefore assigned to the Federal District Courts. The Bankruptcy Courts are a subset of the Federal District Courts and hear all cases assigned to them. All cases filed in Wayne, Oakland, Macomb, Monroe, St. Clair and Washtenaw Counties must all be filed in the Detroit Bankruptcy Court. If you live in the Flint or Bay City area, your case may be filed in there own jurisdiction.
What happens after my case is filed with the Bankruptcy Court in Detroit?
After your case is filed, the Court clerk usually mails out the "Notice of Commencement of Chapter 7 Bankruptcy" to you, your attorney, the Trustee assigned to your case and most importantly, all of your creditors. This is why it is important to try your best to list all of your creditors in your bankruptcy. They need to have "Notice" that you filed. The Notice of Commencement contains information about you such as your name, address and social security number so that the creditors can enter the fact that you filed a bankruptcy in your system and end collection activities. The notice contains instructions and explanations regarding the automatic stay and penalties for violating the stay (i.e. trying to collect a debt from you). The notice also tells you when and where your Meeting of Creditors will take place. This is your Court date and you must attend it otherwise your case will be dismissed. I as your attorney am also required to attend your "meeting of creditors." This "meeting" is actually not much of a meeting at all. You (and your spouse if this is a joint filing) must attend. I will be there because I include this in your fee, and the Interim Trustee will be there. The trustee is an attorney who is appointed to ask you questions about your case, which you will be required to answer under oath. The trustee then reports to the bankruptcy judge as to whether he recommends a discharge. All this may sound scary, but it is actually a brief and routine procedure. Most people are amazed at how easy it is. You will learn more of this later in the case. Naturally, your creditors may attend the meeting, but they rarely do. Once the meeting of creditors is concluded, the trustee will make his report to the court and will usually recommend a discharge. After the trustee makes his recommendation, the court will enter a "discharge" within about three months. The reason you will not be granted a discharge immediately, is that the creditors are given some time to object to your discharge (approximately 60 days after your .341 meeting of creditors unless an extension is granted), or to make application to the Court why their particular debt should not be discharged.
What about my credit report, how will it look after filing Chapter 7 Bankruptcy?
My friends tell me that I won't get credit for seven years after I file, is this true? I get this one all the time. First of all, understand that there is no law that says a future creditor or some other lender cannot give you credit after you file bankruptcy. In fact, these days with well over 1 million personal bankruptcies being filed every year, there is an entire credit industry that has evolved that solicits actively to individuals and couples who have recently filed a case. My clients call me all the time just a few months after their bankruptcy and want to know what is going on, why are they getting all of these pre-approved credit card applications in the mail and how come all these finance companies want to sell them a car? Well the short answer is that these potential creditors want to be first in line to be your new credit cards after your fresh start. They no that most people will only file one bankruptcy in their life. That if the original bankruptcy was filed just because of bad financial planning (i.e. not loss of job, disability, divorce etc.) that the debtor probably has learned something from the experience and will be more careful with the way they use credit in the future. Finally, the creditor knows that you may not file another Chapter7 bankruptcy seeking the discharge of new debt for a period of six years. There is no question that a bankruptcy will hurt your ability to get credit in the future. But by the time a person comes into my office, their credit is already very bad. The benefits of the bankruptcy discharge will greatly outweigh any negative impact on the credit report in the vast majority of cases that are filed. The fact that you filed a chapter 7 will appear on your credit record for ten years. Generally, the best (and probably the only) way to get good credit is to pay your bills on such terms as you originally agreed when they become due, i.e., pay at least the minimum payment. Bankruptcy, as you probably have figured out already does not pay your bills, it only releases you from personal liability or responsibility on them. In effect, the debt will still exist, but your creditors will be legally stopped from collecting anything from you, forever. Even if a year later you will $100 million in the lottery. In other words, and for all intents and purposes, the indebtedness is canceled. While the bankruptcy will be listed on your credit record, you may be fortunate enough to find a creditor willing to overlook this, but then again, you may not; this question is entirely left up to the creditor. No one can be forced to give you credit and you should not contract for credit while your bankruptcy case is pending. Be careful with new credit card or other credit offers, remember, credit card are what got you here in the first place.
If you pay your post-bankruptcy case bills after the case is closed, you may find some creditors that are willing to give you credit -- possibly as soon as a year or two after you get your discharge. When you use credit again, it is in your best interests to use it with great restraint. In order to reduce the risk that you will have to ask the court for relief again, it is better to pay cash until you are very certain that circumstances are substantially changed from the way they were when you filed. Since you cannot ask the court for a Chapter 7 discharge more than once every six years (Chapter 13 may still be available though), you may put yourself and your family into jeopardy unintentionally and unnecessarily.
My incorporated business is ceasing operations, should it file for chapter 7 bankruptcy?
It depends. A corporation is entitled to no exemptions and receives no discharge. Good reasons to file a corporate chapter 7 would include: to stop a creditor from executing on valuable assets that could otherwise be utilized to pay debts for which the principals are liable (e.g. trust fund taxes or other personally guaranteed debts); to recover preference payments that could be used to pay debts for which the principals are liable; to insulate the principals from allegations that the liquidation of the corporation was handled improperly; the principals would rather turnover liquidation of the corporation to a trustee instead of handling it themselves. Good reasons for the corporation to not file for bankruptcy might include the time and expense of the bankruptcy and the scrutiny of past dealings between the corporate insiders and the corporation. There is no requirement that a insolvent corporation file for bankruptcy and state law dissolutions or simply "shutting the doors" are common alternatives.
Why would a debtor choose chapter 13 over chapter 7?
The primary reasons include: the debtor owns nonexempt property that the debtor would like to retain but could not in chapter 7; a debtor is behind on car or house payments and needs to cure the arrearages over time; a debtor seeks to "strip-down" the amount of a secured debt to the value of the collateral (not available as to first mortgages on a debtor's residence); the debtor has received a prior bankruptcy discharge within 6 years; the debtor has debts that are not dischargeable in chapter 7 (e.g. certain taxes, fraud, defalcation of fiduciary duty, or willful and malicious injury); a debtor is seeking to protect a co-debtor; or a debtor likely has need of bankruptcy relief in the future. In some cases, a debtor with a high income and an ability to repay debts over a period of time, may be not be permitted a discharge in chapter 7 and therefore chapter 13 will be his only option.
How much do creditors receive in a chapter 13 plan?
The debtor must pay all his available disposable (after reasonable monthly expenses) income to the plan for at least 36 months. The creditors must receive at least as much money in chapter 13 as they would have received in chapter 7 (also known as the liquidation test). Secured creditors such as mortgage holders are generally paid in full or caught current with the chapter 13 payments. Priority claims, which include attorney fees, certain taxes and back alimony and child support, must be paid in full under the plan. Different plans will pay the unsecured creditors anywhere between 10% to 100% of their claim depending on the liquidation test and the debtor's ability to pay. In the Eastern District of Michigan, a plan typically will pay the general unsecured creditors no less than 10 cents on the dollar. The plan must be feasible in light of income and expenses and must be proposed in good faith.
Are there limits to what a chapter 13 debtor can claim as a reasonable expense?
Yes. In the Detroit district, debtors must generally cease 401(k) contributions as well as 401(k) loan repayments while in chapter 13. Expenses such as high car payments, jet-ski payments, motorcycle payments, private school tuition, assistance to adult children may not be allowed as these may be considered luxury items by the Trustee and objected to unless you are offering 100% to your unsecured (credit card, medical bills, etc.) over 36 months. Charitable contributions (including tithes and offerings) will generally be allowed if the debtor in fact makes these contributions (the Trustee may wish to see proof such as a letter from your Church, Temple or whatever charity you contribute to).
Is it necessary to go to court when filing for bankruptcy?
Not typically, but all debtors must appear at the meeting of creditors (also known as a "341 meeting") 20-40 days after their petition is filed. While this is not a Bankruptcy Court hearing (i.e. the Judge will not be there) it is a required proceeding pursuant to the Bankruptcy Code-you must attend. Failure to attend will result in the Trustee filing a motion to dismiss your case. At the meeting, a trustee will ask the debtor about their petition, schedules and Statement of Financial Affairs. Such meetings are often routine and short. If the debtor has retained an attorney, then the attorney will appear with the debtor as legal counsel. Creditors may ask the debtor questions at the meeting, but usually do not attend. The creditors meetings in Detroit are held at 211 West Fort Street, Detroit MI 48226 in the basement, Suite B100. The building is on the corner of Fort Street and Washington, Downtown.
What if a debtor has filed for bankruptcy previously?
A debtor may not be eligible to file a petition if, within the preceding 180 days, he voluntarily dismissed a bankruptcy case after a Relief from Stay motion was filed or if the debtor failed to appear in a bankruptcy case. If a chapter 13 case was dismissed for failure to make the monthly payments then it can generally be re-filed without delay but it is generally helpful to show a positive change of circumstances that has occurred since the previous dismissal. No chapter 7 discharge will be granted where a prior discharge was granted within the past 6 years.
Do spouses have to file for bankruptcy together?
No, spouses may file jointly or individually. It is quite common for just one spouse to file in order to preserve the credit standing of the non-filing spouse, especially if the other spouse has OK credit.
What effect does bankruptcy have on a co-debtor or co-signer?
A non-filing co-debtor remains liable just as before (i.e. they are not filing bankruptcy). However, a filing debtor may be able to protect the non-filing co-debtor by filing a chapter 13. In any event, a notation that the account was included in a bankruptcy will likely appear on the co-debtors credit report which may damage their credit standing. That is simply the risk one takes when signing a contract with a co-signer.
Are there debts that bankruptcy will not dispose of?
Yes. In chapter 13, some non-dischargeable debts include: (1) long-term debt which by the terms of the underlying contract, is payable at least in part after the last payment is due under the chapter 13 plan; (2) money owed for alimony, maintenance or support; (3) most student loans; (4) debt for death or personal injury arising from driving under the influence; (5) criminal fines and restitution.
In chapter 7, non-dischargeable debts include: (1) money owed for child support or alimony; (2) certain taxes; (3) some debts not listed on certain bankruptcy petitions; (4) debts incurred through fraud; (5) debts resulting from ¿willful and malicious¿ harm; (6) defalcation of fiduciary duty; (7) student loans unless the court decides that payment would be an undue hardship; (8) mortgages and certain liens (such as on a car) which are not paid in the bankruptcy case; (9) government fines, forfeitures, and restitution; (10) debt arising from driving under the influence; (11) debt incurred to pay a non-dischargeable federal tax.
What if a debtor accidentally forget to schedule a creditor?
In a "no-asset" chapter 7 where the creditor alleges no fraud, willful or malicious injury, or defalcation of fiduciary duty, the debt is still discharged.
Can a chapter 7 debtor own anything after bankruptcy?
Yes. A chapter 7 debtor may keep exempt property (property protected from creditors) and property obtained after the bankruptcy is filed. However, if a debtor receives an inheritance, a property settlement, or life insurance benefits within 180 days after filing, that money or property may have to be paid to the creditors (through the trustee) if the property or money is not exempt. You should immediately notify your attorney and the Chapter 7 Trustee should this happen to you. Do not dispose of any property you acquire via any of the above within the 6 months after filing.
What is equity?
Equity is determined by deducting the amount of a secured creditor's lien from the fair market value of the asset. (e.g. a car that is valued at $10,000 with a $9,000 lien against it, has $1,000 in equity).
What if all of the debtor's assets are exempt?
This is a common occurrence and is referred to as a "no-asset" case. This means that the Trustee has not found any property that can be sold to raise cash for the benefit of your creditors. Almost all Chapter 7 cases are no-asset cases. I will do a thorough analysis prior to filing and let you know the likelihood if your case is an asset case.
What if a debtor wants to retain non-exempt assets?
A chapter 13 should be considered. However, it should be noted that even though some assets may exceed the allowable exemption level, the chapter 7 trustee may elect to abandon the asset back to the debtor if the liquidation of the asset would yield an insignificant amount of money. Also, chapter 7 debtors may be afforded the opportunity to compensate the bankruptcy estate (pay the Trustee the value with the Bankruptcy Courts approval) for the un-exempt portion of an asset in order to avoid liquidation.
Should a debtor sell non-exempt assets in order to purchase exempt assets prior to a bankruptcy?
This is a form of exemption planning. Exemption planning is not prohibited per se, but problems can arise. A debtor would be advised to consult an attorney prior to proceeding.
Should a debtor seek to protect non-exempt property by transferring it to friends or relations prior to bankruptcy?
No. The transfer could be deemed a fraudulent conveyance or a preference. The trustee has the power to avoid pre-petition fraudulent conveyances. Furthermore, such transfers may result in a denial of the debtor's discharge if bad faith or concealment is proven.
What if a lien has been filed against a debtor's assets?
A debtor may avoid the fixing of a lien which impairs an exemption if the lien is: 1. a judicial lien (except arising from alimony or child support); or 2. a non-possessory, non-purchase money security interest in: (a) household furnishings, household goods, wearing apparel, appliances, books, animals, crops, musical instruments or jewelry held primarily for the personal, family, or house hold use of the debtor or dependent of the debtor; (b) implements, professional books or tools of the trade of the debtor or of the trade of a dependent of the debtor; or (c) professionally prescribed health aids for the debtor or a dependent of the debtor.
What happens to secured property in a chapter 7 case?
A debtor must file a statement of his intention to either retain or surrender the property within 30 days of the date of filing. Should the debtor choose to retain the property than he must either (1) reaffirm the debt with the creditor; (2) redeem the property by paying the creditor the wholesale value of the collateral (only available with tangible personal property); or (3) keep the contractual payments current. Because it is not usually in the debtor's best interest to reaffirm a debt and because a creditor is not obligated to reaffirm, it is preferable for a debtor to have payments current on secured debts when filing for bankruptcy.
Will bankruptcy stop calls from bill collectors, repossessions, foreclosures, evictions, lawsuits, judgments, or wage attachments?
Yes. Under the "automatic stay", all collection efforts must immediately stop. The creditors are usually notified within two weeks of filing although they can be notified quicker if necessary.
Can a bankruptcy be filed simply to delay a creditor?
Though some debtors do this, it is an improper purpose for filing a petition. A Bankruptcy petition should only be filed in good faith, not simply to frustrate a creditor.
How much does it cost to file for bankruptcy?
At this writing, the court filing fees for chapter 7 are $200. The court filing fees for chapter 13 are $185. My attorney fee ranges from is $400-$800 for a typical chapter 7case and at lease one-half must be paid prior to the case being filed. For a chapter 13, I charge a total of $1,400 of which I typically require $300 in addition to the court filing fee to be paid up front. The remaining fee (typically $1,100) will be paid through the plan (out of the money that the debtor pays to the chapter 13 trustee). I offer free consultations by phone or personally in my office.
Who interacts with the creditors and bill collectors after the bankruptcy petition is filed?
Me, your attorney and my staff. You should direct all creditor calls to my office. Use my local phone number as the toll free number only works within Michigan.
How long will a bankruptcy appear on a credit report?
A chapter 7 bankruptcy will appear on a credit record 10 years. A chapter 13 bankruptcy will appear on a credit report for 7-10 years. Other negative items on a credit record will remain for 7 years.
After bankruptcy, can a debtor obtain credit?
Yes, although the decision will vary depending on the particular lender. Some lenders may consider a more balanced debt/income ratio and an inability to obtain another chapter 7 discharge for the next 6 years to be plus factors in evaluating a prospective borrower. Other lenders will consider a bankruptcy a permanent indicator of poor judgment. Other factors lenders might consider include: stability of employment and/or residence; time elapsed since bankruptcy; and level of income. In general, if a debtor otherwise qualifies, two years after a discharge, Fannie Mae and Freddie Mac will not hold the bankruptcy against the debtor when attempting to obtain a low interest mortgage. Note that while in chapter 13 in the Eastern District of Michigan, a debtor must obtain permission before making purchases or obtaining loans which exceed $1,000.00.
How can credit be reestablished following bankruptcy?
Common methods are to obtain a secured credit card and/or to obtain credit with the help of a cosigner.
How can a credit report be obtained?
The three major credit reporting agencies are Equifax (800-685-1111), TransUnion (800-916-8800), and Experian (formerly TRW) (800-682-7654). I can obtain a credit report for a prospective clients who comes for a consultation and has a need for it. Usually there is a need for a credit report where the debtor is may have lost track of some debts, creditors, judgments, etc.
What are some alternatives to bankruptcy?
The alternatives include: doing nothing, negotiating with creditors for extensions or compromises, or going through credit counseling. Doing nothing may be appropriate as to debts that are small and/or where the debtor is elderly and "judgment proof" (no foreseeable consequence for unpaid debt). Creditors are also willing to settle on debts for a percentage of the balance due (45-75% is common) once they become 90-120 days delinquent. One problem with settling is that the entire amount may need to be paid at once in one lump sum or in a brief span of time. There may also be tax consequences as the forgiven debt is treated as income by the IRS (unless the taxpayer is insolvent). Credit counselors are funded by creditors and will set up a program to pay back almost everything to the debtor's unsecured creditors. Often times a credit counselor is able negotiate extensions, reduced interest rates, and forgiveness of late fees. The debtor's credit report may reflect that he is in credit counseling which may hinder his ability to obtain credit. All other things being equal, it would be better to go to an established local credit counselor and not one over the internet or telephone. As with bankruptcy, the alternatives have positives and negatives which should be considered in light of individual circumstances.
Will a debtor's family, friends, or employer find out about the bankruptcy filing?
Although the bankruptcy petition is a public record that is accessible from the Internet, it is unlikely that a person would find out unless that person is also a creditor. Current employers and government agencies cannot legally discriminate against a debtor because of a bankruptcy filing. Chapter 13 payments are commonly made through payroll deduction so the employer in that instance will learn of the filing.
How should a debtor prepare for bankruptcy?
A consultation with an attorney may be quite helpful. In any event a debtor should probably: withdraw funds from any bank to whom he owes money to avoid a set-off; stop using credit cards, pay certain debts (e.g. utility bills, house payment, car payment, child support) and not pay other debts (e.g. credit cards and other dischargeable debt).
Does a debtor have to list all his creditors and assets on the bankruptcy petition?
Yes. The failure to do so may result in a dismissal, a denial of discharge or perhaps even being charged with a bankruptcy crime. A debtor is not allowed to file against only certain creditors. Even creditors who are family members or friends must be listed.
May debts owed to friends and family members be repaid?
Yes, a debtor may repay any or all of their debts after bankruptcy, but they are not legally obligated to do so unless the debtor has signed a valid reaffirmation agreement.
I still have room on my credit card, should I "Max it out" before I file to take full advantage of the Bankruptcy discharge? Should I take out some cash advances before I file?
This is not recommended before filing bankruptcy. The Bankruptcy Code does not allow for a discharge of every debt. Certain types of debts and certain conduct of the debtor will prevent a discharge of the debtor or a discharge of a particular debt. Section 523 of the Bankruptcy Code explains what debts cannot be discharged under chapter 7 (and 13 in some cases). In particular, look at section 523(C):
(C) for purposes of subparagraph (A) of this paragraph, consumer debts owed to a single creditor and aggregating more than $1,000 for ''luxury goods or services'' incurred by an individual debtor on or within 60 days before the order for relief under this title, or cash advances aggregating more than $1,000 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 60 days before the order for relief under this title, are presumed to be non-dischargeable; ''luxury goods or services'' do not include goods or services reasonably acquired for the support or maintenance of the debtor or a dependent of the debtor; an extension of consumer credit under an open end credit plan is to be defined for purposes of this subparagraph as it is defined in the Consumer Credit Protection Act;
This means that if you take large cash advances within 60 days before you file, these may not be discharged. You may be stuck with the debt after the court cancels your debts. Furthermore, if it can be shown that you had no intent or present ability to pay the debt (cash advances or your "running up" your credit card; i.e. buying a whole lot of stuff before you file knowing that there would be no way to pay), then the court could consider it a fraud and disallow the discharge of that debt even though you are outside the 60 days. Be careful. Filing bankruptcy is not like winning the jackpot. Bankruptcy is meant for honest debtors who honestly incurred debt. It is not meant for people wanting to make a quick killing in the consumer market or even for someone who really needs the money but has no way to repay it.
What is the Bankruptcy Discharge and how will the discharge affect me?
If no objections are filed, you will receive a discharge in bankruptcy. The discharge "cancels" or "wipes out" certain debts that you had at the time the bankruptcy was filed. A bankruptcy discharge also has the following effects:
- It voids (cancels) any judgment determining personal liability on a debt; and
- It prohibits creditors from taking any action to collect a debt as a personal liability of yours.
However, if a debt is secured by a lien on any property belonging to you (e.g., a home mortgage or lien on a title to a vehicle), the discharge does not prevent the creditor from repossessing that property. Generally speaking, you must pay a secured debt according to its terms to avoid repossession.
Also, while a discharge relieves you of responsibility, it does not relieve anyone else who may be responsible with you on that debt, i.e., a cosigner or co maker. Therefore, if your parent, friend, or relative cosigned on the loan papers, guess who that creditor will go after? Right, your cosigner may be sued by the creditor, and that creditor does not even have to wait until the case is over. This can be an embarrassing situation for both parties. In a Chapter 13 case, your cosigner may be protected.
You will not be required to appear in court to get your discharge order. If the court receives no objections to your discharge, you can expect to receive an order in the mail in approximately three months after your creditor's meeting. When you receive the discharge order, you should put it in a safe place with your other valuable and important papers because you may have to show it to creditors later. Please don't call the Court clerk, the Trustee or my office trying to speed up the discharge process. Wait for the court to mail it.
Are all my debts discharged by the court?
Most will be, however, there are exceptions. The next sections list these:
- Only debts owed from the period before the bankruptcy was filed will be discharged. This bankruptcy discharge will not discharge debts that you became obligated to pay during the bankruptcy. Your discharge will only cover your personal obligation to pay debts. It will not cover cosigners on your debts and it will have no effect on most security interests, like home mortgages and encumbrances on motor vehicles.
Are there some debts that are never discharged?
Unfortunately, the answer is yes. The Bankruptcy Code specifies some debts that are not discharged in your Bankruptcy. The list includes:
- Most income taxes (special rules apply)
- Student loans, unless you file a complaint in bankruptcy court claiming and "undue hardship," i.e. very unusual and compelling circumstances (i.e. so disabled you will never work again).
- Governmental fines and costs (parking tickets, traffic tickets, Court restitution).
- Debts arising from a judgment against you as a result of your operation of a motor vehicle while you were intoxicated causing death or personal injury to another.
- Consumer debts owed to a single creditor in an amount in excess of $1,000 for luxury goods or services within 60 days of the date you file, or for cash advances on your credit line aggregating more than $1,000 within 60 days of your filing date.
- If a creditor files a complaint and proves that your debt to them arises from fraud, breach of fiduciary duty, larceny, embezzlement, defalcation or a material lie on an application for credit, a drunk driving accident restitution for damage you caused, or for willful injuries you caused to another.
- Alimony, maintenance and support to a spouse, former spouse or a child.
What about property with liens on it? Is that debt also discharged?
Yes, but the lien remains; and it is still subject to seizure once the case is finished (see above). However, the following may be of interest to you:
- Certain liens (judgments, levies, non-purchase-money interests in household goods) can be eliminated entirely by asking the court to do so. There is an additional fee for this service. If you are interested in this service, let me know and I will quote such a fee.
- Other liens, like mortgages, motor vehicle encumbrances, and purchase money security in other goods cannot be eliminated. If you want to keep the mortgaged house, encumbered vehicle, or secured item, you may have to enter into an agreement to pay a part of the debt (reaffirmation) or the value of secured consumer debts (redemption). Usually you are better off just continuing to pay for the secured item rather than signing a reaffirmation agreement.
- If you think any of these agreements or motions should be filed in your case, or if you want additional information, contact me. A creditor cannot be forced to reaffirm an obligation, but they may be forced into a redemption (where you pay the fair-market value of the security in one lump sum). Redemptions are rare because most people don't have the money. Remember, if you want to reaffirm a debt, avoid a lien, or redeem property, you must do so before the discharge order is signed. I won't always sign a reaffirmation agreement unless I (personally) feel it is in your best interest.
Note: You can pay anybody you want after your discharge, however, few debtors do. It is important that you know the significance of your discharge order. If a debt is discharged, that creditor cannot force you to pay that particular debt. This means that the creditors cannot legally file an action against you (for that debt), continue an action they had filed before the bankruptcy, send you collection letters or harass you in any other way.
Do the automatic stay provisions of the Bankruptcy Code protect money I have in the bank, or is it seized by the court?
Money in the bank may or may not be taken by the trustee, depending on the bankruptcy exemptions claimed. Your exemptions may be either federal or state. Ordinarily, the trustee is the only party that can seize your account once you have filed your bankruptcy case with the court; however, there is one important exception. If you have an account in a bank, credit union, savings and loan or other financial institution to which you also owe money, that institution may refuse to release account funds to you once you have filed bankruptcy. This right of set-off is most commonly used by Credit Unions where you may be a member. This is a very important, and often overlooked aspect that must be considered prior to filing. By the way, there is nothing that prevents a debtor from simply closing an account before he or she files a bankruptcy case.
Are there any circumstances where I could make myself liable on a debt after my discharge?
Yes. Such circumstances occur when the debtor signs a reaffirmation agreement. Reaffirmation agreements are legally binding contracts between the debtor and a creditor wherein the debtor agrees to be liable once again to the creditor after the entry of the discharge order. Such agreements must always be approved by the court. This approval is necessary to discourage unscrupulous creditors from coercing a debtor to become liable to the creditor after the debtor has been discharged (which legally cancels indebtedness). The court usually discourages reaffirmation agreements, except for good cause. After all, these are generally the same debts that got the debtor into trouble in the first place. Reaffirmation agreements:
- must be voluntary;
- must not place too heavy a burden on you or your family;
- must be in your best interests; and
- can be canceled anytime before the Court issues your discharge or within 60 days after the agreement is filed with the Court, whichever gives you the most time.
If you are an individual and not represented by an attorney, the Court must hold a hearing to decide whether to approve the agreement. The agreement will not be legally binding until the Court approves it. If you reaffirm a debt, which the Court approves and fail to pay it, it is the same as if you never filed bankruptcy respecting that debt (your other debts are still discharged). This means the creditor can sue you and take your property! This is not a good position to be in!
What is a trustee, and who will be appointed?
After a bankruptcy case is filed, the court appoints a trustee. The trustee has many functions, but primarily, he is appointed to examine your case, as well as the debtor, orally, to determine whether there would be any assets available for creditors. Most people can take the necessary exemptions to protect their property from their creditors and the trustee, who, after his examination makes a determination as to whether he will take physical possession of, or abandon (return legal control) to the debtor. In the vast majority of cases, the trustee will abandon all property to the debtor. Rarely will the trustee take actual possession of property in a consumer case. However, if a debtor owns a valuable piece of non-exempt property, the trustee will take the item and expose it to public sale for the benefit of creditor.
Can I just list and discharge the debts I want and keep the "good debts."
No. All debts must be listed. Even debts to people you like, or feel a special obligation. After the case is discharged, nothing prevents you from paying anyone at all. If you fail to list a creditor, you chances of a discharge are decreased and they are eliminated for the debt you did not list.
I need a credit card. Can I keep one?
Possibly, if you do not owe any money to the creditor issuing the credit card, however, the trustee may demand that you cut up all your credit cards. Once you have made the decision to file bankruptcy, you should not charge anything on any credit cards that you will seek to discharge in your bankruptcy.
Once I file a Chapter 7, what if I need to do it again? Is there a limit to my re-filing?
Once you receive your discharge in a chapter 7 case, you cannot file another bankruptcy and get another discharge, in a chapter 7 case unless six years have passed between the date this bankruptcy was filed and the date on which the new bankruptcy (chapter 7) is filed. This does not mean you cannot file for relief under Chapter 13 of the Bankruptcy Code, also known as a "Wage Earner Plan." You may indeed obtain substantial assistance through a Wage Earner Plan under Chapter 13.
This information sheet is intended as a summary of certain points only. The terms used in this information sheet are intended to be simple so that they can be understood, the law is much more detailed. This information therefore is not "the law" and is designed only to help you understand basic bankruptcy concepts. Each bankruptcy is unique. Your case may have special facts making further discussion necessary. Feel free to raise any issue if you feel uneasy or unsure about it.