Federal Bankruptcy Generally

• What are the main purposes of bankruptcy?

Bankruptcy laws serve two main purposes. The two main policies of bankruptcy are the fresh start for the honest but unfortunate Debtor (you) and equal treatment of Creditors (the people you owe). If you file for bankruptcy and follow the Bankruptcy Code rules, bankruptcy law gives you a fresh start by canceling many of your debts through a court order known as the Discharge. Bankruptcy will allow you to pay your Creditors a portion of what they are owed depending on what you can pay. After bankruptcy, the Discharge prevents your creditors from trying to collect the remainder of what you owe them.

• What are the different kinds of bankruptcy?

There are four types of bankruptcy available to individuals:

• Chapter 7 (a two to three month process in which your property is sold to pay your debts);
• Chapter 13 (a three to five year process in which you pay a portion of your debts under a court-supervised repayment plan);
• Chapter 12 (like Chapter 13, but only available to family farmers and fishermen); and
• Chapter 11 (a more complex process used primarily by business debtors, but sometimes by individuals with substantial debts and assets).

The two most important types of cases for consumers are chapter 7 and chapter 13. Both provide for some possible payments to creditors, a discharge for you and supervision by a Trustee appointed by the court. In both types of bankruptcy, most creditors must stop efforts to collect debts after you file your case. This protection is called the "Automatic stay".

Chapter 7 involves surrendering some of your property in return for a discharge of many of your debts. The Trustee sells this property and pays your creditors. In chapter 13, you keep your property but must commit to a three- to five-year repayment plan. You then obtain a Discharge of most of the debts not paid in the plan.

Chapter 7 Business Bankruptcy

Chapter 7 refers to the provision of the United States Bankruptcy Code that permits a business in financial distress to liquidate or sell its assets for the benefit of its creditors. When a business files a Chapter 7 petition it immediately ceases operations and a trustee is appointed to take control of its assets, sell those assets and distribute the proceeds to creditors. At the same time, creditors are automatically enjoined from starting or continuing any efforts to collect debts that are owed them. The decision to file a Chapter 7 petition is usually the most difficult and painful decision a business ever has to make. This is particularly true for businesses.

• What is the difference between chapter 7 and chapter 13?

	Chapter 7	Chapter 13
What property do I keep?	Only Exempt property, which usually means necessities. A Trustee appointed by the court will sell the rest of your property to pay people you owe (your Creditors).	All of your property. You pay your debts out of future income.
How much time does it take?	Two to three months.	Three to five years. During this time, you will be paying people you owe a portion of what you owe them.
How much does it cost?	$299 to file the papers (the Petition) with the court. You should have to hire a lawyer, and you will have to pay that lawyer’s fees, which depend on the lawyer.	$274 to file the papers (the Petition) with the court. You should hire a lawyer, and you will also have to pay that lawyer’s fees, which will depend on the lawyer.
What happens to my credit report?	Stays on your credit report for 10 years.	Stays on your credit report for 7 years.
What happens to my retirement account or pension if I file for bankruptcy?	You will be allowed to keep it.	You will be allowed to keep it.

Chapter 7: A Brief Overview

Chapter 7 bankruptcy is liquidation. That means that a bankruptcy trustee will sell ("liquidate") certain property that you own at the time you file the bankruptcy case. The trustee uses the proceeds of the sale to pay creditors. In most cases, you will not have any assets that the trustee can sell because of state and federal laws that may allow you to keep necessities. These laws are called "Exemption Laws" and the property that the trustee may sell is known as "non-exempt" property. If all of your property is Exempt, the trustee will not sell any of your property.

About 90 days after you file chapter 7, most of your debts will be discharged, if yours is the typical case. This means you are no longer liable to pay the debt. Some debts are not discharged, however, and you still must pay them. Examples include past-due child support payments, some taxes and student loans. Debts for which you have pledged Collateral (such as cars, homes and household goods) also do not go away entirely in a bankruptcy.

Filing for bankruptcy allows you to discharge only the debts you list at the time of the bankruptcy case (your "pre-petition" debts). You must pay debts you incur after the filing the bankruptcy case as usual. You may keep the money that you earn after filing a chapter 7 bankruptcy cases, as well as most other property that you obtain after the filing.

Chapter 13: A Brief Overview

Chapter 13 is very different. If you file under chapter 13, you may keep your property and you agree to pay your debts over time from your income, pursuant to a court-approved plan. The amount that you will repay to creditors under the plan will vary based on your particular circumstances.

The payments you make to creditors under the plan must total at least as much as creditors would have received if you filed a case under chapter 7. The payments are made to a trustee, who distributes the payments to the creditors.

The plan usually lasts until the end of a three- to five-year period. Your lawyer can tell you whether you will have to pay over three or five years. You receive a discharge at the completion of the plan.

• Do I have to "qualify" for bankruptcy? How will I know if I am eligible?

Chapter 7 Eligibility

If you are an individual with primarily Consumer Debts and you want to file a case under chapter 7, your lawyer will examine your finances to determine if you can afford to pay creditors. If you can, based on a set formula known as the "means test", you will not be eligible to file a chapter 7.

If you do, the court will either dismiss your bankruptcy case or you may choose to convert your case to chapter 13. If your income is at or below the median income for your state, the means test will not apply and you will be permitted to file for chapter 7.

If your income is above the median income for your state, the means test compares your monthly income, minus your permitted living expenses, to the amount of your Unsecured Debt to determine how much you could repay to creditors if you were in a chapter 13. Unsecured debts are those for which you have not given collateral. An example is credit card debt. Because this calculation is hypothetical and does not necessarily reflect your true financial condition, you may appear to be able to repay the minimum portion of your debts but you, in reality, cannot. In that situation, the court may permit you to stay in chapter 7. The means test is very complicated and you should talk to a lawyer who can help you decide the chapter under which to file.

Chapter 13 Eligibility

There are two principal requirements for eligibility in a chapter 13 case. First, you must have regular income, although this need not be from a job; regular benefit payments (such as unemployment or disability payments) or rental income would qualify. Second, you must not have debts over a certain amount. The debt limits are $1,081,400 in Secured Debt (like home deed of trust s and auto loans), and $360,475 in Unsecured Debt (like most credit card debt). These numbers go up every three years.

• How does bankruptcy help me in the short run?

The moment you file for bankruptcy, you are protected from your creditors. The Automatic Stay stops all collection efforts against you and against your property. Creditors must stop calling you and sending letters to you. If a creditor has already sued you, that lawsuit must stop. The automatic stay also prevents creditors from repossessing your property and from foreclosing on your home. The automatic stay is explained in more detail below.

• What is a discharge?

If a debt is discharged, you no longer have an obligation to pay the debt, and the creditor may not make any effort to compel you to repay. However, if some other person (such as a relative or friend) has co-signed or guaranteed your loan, his/her obligation is not discharged. In addition, if you have property that is collateral for a loan, the creditor may still be able to repossess that property if you do not repay the loan.

• Do all debts get discharged?

No, not all debts will be discharged through the bankruptcy, even if you have followed all of the Bankruptcy Code’s rules during your case. First, a bankruptcy case only discharges debts that you owed and listed at the time you filed the case, not those you incurred after filing the case.

In addition, even after bankruptcy, you will have to pay debts that are not discharged. Non-dischargeable debts include:

• debts for income and property taxes
• debts to creditors you did not list in your bankruptcy paperwork
• domestic support obligations such as alimony and child support debts
• fines payable to any governmental unit, such as a city or state
• restitution imposed on you as part of a criminal sentence
• student loans

Other debts that may not be discharged include debts you may have incurred through fraud or by willful or malicious actions. An example of a debt incurred by fraud is a loan you obtained when you knew you could not repay. Some credit card use immediately before bankruptcy may be considered fradulent, especially if you use the card to pay for "luxury" goods or services, such as a vacation. If the creditor does not ask the court to rule on these debts, they will be discharged.

• How much does it cost to file bankruptcy?

The current filing fee for a chapter 7 case is $299 and for a chapter 13 case is $274. Some courts also impose an additional administrative fee. You may pay the filing fee in installments. The court may waive the filing fee in a chapter 7 case if your income is below specified levels and the court finds that you cannot pay the filing fee in installments. You should hire an attorney to assist you with filing bankruptcy. Attorneys usually charge a fixed fee for certain services in a bankruptcy case and the fees typically differ depending on the chapter under which you file. Your lawyer may request payment up front, especially if you are filing for chapter 7.

• Can I obtain bankruptcy protection again if I have filed a bankruptcy in the past and am now falling behind in payments again?

Yes, you can file again, unless you have been in bankruptcy within the past six months and either:

• your case was dismissed because you did not follow the orders of the bankruptcy court or did not show up in court when you were supposed to; or
• you asked the court to dismiss your case after a creditor moved for relief from the Automatic Stay.

If you have been in bankruptcy within the past year, you may not get the full protection of the Automatic Stay. Because the automatic stay protects you from your creditors after you file a bankruptcy case, it might not be worth it for you to file for bankruptcy if the automatic stay will not apply. Your lawyer can tell you if it makes sense for you to file for bankruptcy if you have been in bankruptcy within the past year.

As explained above, the bankruptcy Discharge gives you your fresh start. But if you have received a bankruptcy discharge in the past, you may not be eligible for another discharge right now.

If your last bankruptcy was a chapter 7 and:

• you filed within the last four years, you will not receive a Chapter 13 discharge or a Chapter 7 discharge if you file today;
• you filed within the past eight years, you will not receive a Chapter 7 discharge if you file today.

If your last bankruptcy was a chapter 13 and:

• you filed within the past two years, you will not receive a Chapter 13 discharge if you file today;
• you filed within the past six years, you will not receive a Chapter 7 discharge unless you paid your creditors at least 70% of what they were owed in your Chapter 13 plan.
• your lawyer can tell you whether it makes sense to file for bankruptcy even if you cannot receive a discharge.