Bankruptcy

Bankruptcy

We can’t be sure if these are the best of times or the worst of times, but recently most assuredly these are bankruptcy word/term times. People who file bankruptcy are generally from the middle class. The most common causes for the need to file bankruptcy are clearly the loss of job, divorce and loss of health. However, recently we have seen General Motors, Chrysler, Washington Mutual and Lehman Brothers file some pretty spectacular bankruptcy paperwork.

In the archives of the Bankruptcy Court you could find names like Abe Lincoln, Henry Ford and Walt Disney. More recently, Larry King, Kim Basinger, MC Hammer, Willie Nelson, Bernie Kosar, Tom Petty, Lenny Dykstra and Michael Vick have all utilized the protections available through the Bankruptcy Court.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was signed into law on April 20th 2005.The BAPCPA made severe and demanding changes; the most significant of which is the requirement of Means Testing. These dramatic changes to the Bankruptcy Code were the most significant changes in bankruptcy law since the Bankruptcy Code became law. Special interests groups i.e. the credit card, banking and lending industries spent untold million$ of dollars making sure that this legislation got passed.

The message I want to NOW convey is that in spite of it all ... BANKRUPTCY IS NOT DEAD!!! It is more demanding and more complex (your creditors can now demand to see your tax returns) BUT most assuredly bankruptcy is still DOABLE!

BANKRUPTCY LEGISLATION/ HISTORY

The United States Constitution authorizes Congress to enact "Uniform Laws on the subject of Bankruptcies." From a historical perspective, Congress recently enacted the "Bankruptcy Code" of 1978. The Bankruptcy Code, which is codified as title 11 of the United States Code, has a long history and has been amended numerous times since its enactment.

The procedural aspects of the bankruptcy process are governed by the Federal Rules of Bankruptcy Procedure (often called the "Bankruptcy Rules") and also by the local rules of each bankruptcy court. The Bankruptcy Rules contain a set of official forms for use in bankruptcy cases.

The court official with the decision-making power over federal bankruptcy cases is the United States bankruptcy judge, a judicial officer of the United States District Court. The bankruptcy judge may decide any matter connected with a bankruptcy case.

The bankruptcy system recently went through major changes in 2005. Many of these changes were sought after by major lenders/creditors in the financial sector for many years. (Since the passage of the Bankruptcy Code of 1978). These new restrictions/changes were passed by Congress and signed by George Bush and the new legislation was called the BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was enacted on April 20, 2005. Most new provisions became effective on October 17, 2005.

SOME OF THE RECENT CHANGES IN BAPCPA ARE:

Waiting Periods if Previous Filing - A debtor who previously filed a bankruptcy and obtained a discharge, may not receive another discharge unless there has been sufficient time between the two cases. You can't file for Chapter 7 bankruptcy if you previously had your debts discharged in:

  • A Chapter 7 bankruptcy filed within the previous eight years, or
  • A Chapter 13 bankruptcy filed within the previous six years.

You can't get a Chapter 13 discharge if you received a discharge in a previous Chapter 13 case in the last two years, or a discharge in a Chapter 7 case filed within the last four years. You aren't barred from filing a Chapter 13 in these circumstances, but you can't get a discharge until the requisite time has passed.

Pre-Bankruptcy Counseling - Within 180 days prior to filing a case, a debtor must attend a briefing from a certified counseling agency concerning the availability of credit counseling. A debtor will receive a certificate of credit counseling to be filed with the Court after counseling has been completed.

Financial Counseling After Filing - The debtor will not receive a discharge unless the debtor completes a course on personal financial management education and files a certification of completion of this counseling. The certificate is due within 45 days following the first date set for the 341a meeting of creditors. If the debtor fails to file a certificate of completion of or exemption from this counseling, the court will close the bankruptcy case without issuing a discharge.

Tax Return- Individual debtors must provide a copy of their most recent tax return to the trustee and to any creditor who requests a copy of the return. This must be provided to the parties at least 7 days prior to the date set for the 341a meeting of creditors.

Means Test- Individual debtors who file a chapter 7,11 or 13 petition must file a new form which will give detailed information about their income for the purpose of determining whether a debtor's filing represents an abuse of the bankruptcy system. Some debtors may be prohibited from filing a chapter 7 case if their income would permit them to make payments to their creditors. This form must be filed within 15 days of the filing of the petition.

Filing of Wage Statements and Monthly Net Income Calculations. - An individual debtor must send to the trustee copies of all payment advices or wage statements given to a debtor by any employer within 60 days before the date of filing of a case. These are not filed with the court. The debtor must file with the court a form showing the average income earned per month during the 6 months prior to the filing date. Both the wage statements and the average income calculation are due 15 days from the date of filing the petition.

SOME OF THE RECENT PROOF DEMANDS HAVE BECOME:

Proof that the debtor has done Prepetition credit counseling session:

  • Debtor must file counseling certification
  • Debtor must file copy of debt repayment plan if developed. Debtor must obtain copies of tax returns
  • Debtor must have tax returns for most recent year and must provide to trustee
  • Chapter 13 debtors must have filed returns for past four years in order to confirm plan

Proof of complete disclosure of assets:

  • Record of property transfers for past two years
  • Record of secured transactions for past 910 days
  • Records of all bank accounts including IRA's
  • Copies of bank statements for past 90 days
  • Copies of all insurance policies
  • Copies of all pending causes of action in which the debtor is the plaintiff
  • Educational individual retirement accounts
  • State tuition programs
  • Medical savings plans
  • List of all residences and dates for last 4 years

Proof of complete disclosure of liabilities

  • Copies of bills for past 90 days
  • Copy of debtor's credit report
  • Copies of any judgments against debtor
  • Copies of orders creating domestic support obligations
  • Copies of all pending causes of action in which the debtor is a defendant
  • Copies of secured loans (autos, land, etc.)

Proof of complete disclosure of income and expenses

  • Copy of checkbook transaction pages for past six months
  • Copy of pay stubs for past 6 months
  • Proof of income from other sources
  • Verify stability or consistency of income

AUTOMATIC STAY

The filing of a petition under a bankruptcy "automatically stays or stops" most actions against the debtor or the debtor's property. The stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally cannot initiate or continue any lawsuit, wage garnishment, or even telephone calls demanding payments. Creditors normally receive notice of the filing of the petition from the clerk of the bankruptcy court. Debtors may also give notice to creditors.

EXEMPT PROPERTY

Some of the most important decisions the bankruptcy attorney makes for the client is determining which exemptions to use on behalf of the debtor. Federal bankruptcy law provides that the individual debtor can protect some property from the claims of creditors either because it is exempt under federal bankruptcy law or because it is exempt under the laws of the debtor's home state. Many states have taken advantage of a provision in the bankruptcy law that permits each state to adopt its own exemption law, in place of the federal exemptions. In other jurisdictions, the individual debtor has the option of choosing between a federal package of exemptions or exemptions available under the state law. Thus, whether certain property is exempt and may be kept by the debtor is often a question of state law. Legal counsel should be consulted to determine the law of the state in which the debtor lives.

CAN OTHER PEOPLE FIND OUT ABOUT MY DEBTS?

Yes, if you don't pay your bills, you can end up with a bad credit rating, which is a report on your financial situation. Credit ratings are issued by credit reporting agencies. These companies get information about your debts from your creditors, and they make their reports available to others, including creditors, employers and landlords.

A credit reports includes such information as whether you pay your bills on time, have had a foreclosure, owe money as a result of a lawsuit or were convicted of a crime. Each piece of information stays in the report for a certain number of years. For example, a bankruptcy might be listed for 10 years.

What if a store refuses to give a debtor a charge account because you have a bad credit rating? The store must give you the name and address of the credit reporting agency, and the agency must let you see the report.

If you tell the agency that some of the information in the report is wrong, it must look into the matter, if the agency decides that it's information is correct, you can explain your side of the story in writing. Then anyone who checks your credit rating will see your explanation. If you ask, the agency also must send your explanation to anyone who received your credit rating for employment purpose in the last two years and to anyone else who received your rating within the last six months.

CAN I BE FORCED TO PAY SOMEONE ELSE'S DEBTS?

Sometimes you can.

For example, if your spouse obtains a necessity of life -- such as food, clothing or medical care-and cannot pay for it, you can be made to pay. This may be true for a former spouse, too, if you were married and not separated when your spouse got into debt.

In most cases, people under the age of 18 can get out of agreements to buy something. However, you are responsible for the debt if you co-sign a contract or loan agreement for someone under 18 or for anyone else. This means you promise to make the payments if the other person fails to live up to there agreement.

What if you co-sign an agreement for someone who ends up filing for bankruptcy? The other person may not have to pay the debt, but you will.

CAN MY CREDITORS PESTER ME?

Creditors or bill collection agencies -companies that try to collect past due bills-- cannot legally call you over and over (harass you) on the telephone. It is also against the law to threaten you with harm or contact you at work after you tell them not to. In addition, the law says that if you write and ask them not to contact you at all, they must stop. Then, they can get in touch with you only to let you know that they are suing you. Be sure to keep copies of all the letters you write.

Creditors and collection agencies are not supposed to contact your employer, except to make sure that you are employed. And, they cannot send you anything that is meant to look like a legal document when it is not.

If you are bothered in any of these ways, you should get in touch with a consumer protection agency or a law enforcement agency. You can also ask a lawyer for help.

AS A DEBTOR IN BANKRUPTCY IS THERE ANY PROTECTION AGAINST DISCRIMINATORY ACTIONS OR TREATMENT?

One of the objectives of the Bankruptcy Code is to provide a post-bankruptcy "fresh start" for bankruptcy debtors. The drafters of the Code realized that a serious obstacle to a fresh start for many debtors is the stigma associated with bankruptcy. This stigma is especially damaging to a debtor if it is acted upon by persons in a position to discriminate against the debtor with respect to matters of financial importance, such as employment and the issuance of governmental licenses, permits and grants. To assist debtors in overcoming these obstacles to a fresh start, a section dealing with debtor discrimination was left alone in BAPCPA. §525.

In its present form, then, Section 525 prohibits three basic forms of discrimination against bankruptcy debtors: (1) discrimination by governmental units with respect to employment and with respect to the granting of licenses, permits, franchises and similar grants; (2) discrimination by private employers with respect to employment; and (3) discrimination with respect to the making or insuring of student loans. It should be understood that the discrimination protection provided by Section 525 is applicable to debtors under any chapter of the Bankruptcy Code. Therefore, a chapter 7 debtor, a chapter 13 debtor, a chapter 12 debtor, or a chapter 11 debtor may invoke the provisions of Section 525.

CAN MY PROPERTY BE TAKEN TO PAY A DEBT?

Usually, a creditor must go to court and win a lawsuit against you before taking your property. However, let's say you make a written promise to either pay your debt or give the creditor something you owe. The item you promise to give is called a "security", and the money you owe is called "secured debt". If you fail to pay a secured debt, the creditor usually can take the security.

Let's say if you borrow money to buy a car and the car is the security. If you fall behind on payments, the lender can repossess, or take back, the car without going to court. However, the car must be on public property when it is repossessed. Even if the car is repossessed, you still might end up owing the lender money. For example, suppose you owe $8,000 on the car when it is repossessed, and the lender gets only $7,000 by selling the car at an auction. Then, you can be sued for the $1,000 that the lender is out - plus any money spent to repossess the car and sell it.

WHAT HAPPENS IF I AM SUED?

If you have a secured debt, the creditor can sue you for either the security or the amount of money it is worth or both. If you don't have a secured debt, you will be sued for the money you owe.

In this event, do not ignore any court summons or paperwork that you receive. This is a paper that says you are being sued. If you don't respond to the summons and complaint within a certain time, you automatically lose the case - and your property or bank accounts can be taken.

As soon as you receive a summons, you should:

  • Consult a lawyer.
  • Get in touch with a lawyer hired by the person suing you and try to negotiate, or work out, a way to settle the dispute.
  • Be sure and mark your calendar- you must file an answer to avoid a default (usually 30 days- but a shorter time can apply- so see an attorney immediately)

WHAT HAPPENS IF I LOSE A LAW SUIT?

Suppose the lawsuit demanded that you return a secured item. The creditor can get an order from the judge allowing a sheriff or marshal to take the item from you and give it to the creditor. Once this happens, your debt usually is cancelled.

Maybe the suit demanded money and you did not pay the amount that the judge ordered you to pay. In this case, something you own can be attached, or taken.

A judge also can order your employment to withhold up to 25 percent of your take-home pay to pay a debt. This is called a "garnishment of wages".

CAN I PROTECT MY PROPERTY IF I AM SUED?

The commencement of a bankruptcy case creates an "estate". The estate technically becomes the temporary legal owner of all of the debtor's property. The estate consists of all legal or equitable interests of the debtor in property as of the commencement of the case.

As discussed above the automatic stay should stop all collection activities of the creditor (s). As is often the case, all of the debtor's assets can be exempt and there will be no distribution to unsecured creditors. Typically, most chapter 7 cases end up being no asset cases. If the case appears to be an "asset" case, unsecured creditors who have claims against the debtor must file their claims with the bankruptcy court within 90 days after the first date set for the meeting of creditors. In the typical no asset consumer chapter 7 case, there is no need for creditors to file proofs of claim. Although secured creditors are not required to file proofs of claims in chapter 7 cases in order to preserve their security interests or liens, there may be circumstances when it is desirable to do so.

ROLE OF CHAPTER 7 TRUSTEE

The primary role of a chapter 7 trustee in an "asset" case is to liquidate the debtor's nonexempt assets in the way that maximizes the return to the debtor's unsecured creditors. The trustee will try to accomplish this in several different ways. First, the trustee will attempt to liquidate the debtor's nonexempt property. This includes both property that the debtor owns free and clear of the liens and property which has market value above the amount of any security interest of lien and any exemption that the debtor holds in the property. The trustee pursues causes of action (lawsuits) belonging to the debtor and pursues the trustee's own causes of action to recover money or property under the trustee's "avoiding powers".

The trustee's avoiding powers include the powers to set aside preferential transfers made to creditors within 90 days before the petition, the power to undo security interests and other prepetition transfers of property that were not properly that were not properly perfected under nonbankruptcy law at the time of the petition, and the power to pursue nonbankruptcy claims such as fraudulent conveyance and bulk transfer remedies available under state law. In addition, if the debtor is a business, the bankruptcy court may authorize the trustee to operate the debtor's business for a limited period of time, if such operation will benefit the creditors of the estate and enhances the liquidation of the estate. All of these activities of the trustee are designed to produce the maximum return for the debtor's unsecured creditors.

The distribution of the property of the estate is governed by section 726 of the Bankruptcy Code, which sets forth order of payments of all claims. Under section 726, there are six classes of claims; and each class must be paid in full before the next lower class is paid anything. The debtor is not particularly interested in the trustee's disposition of the estate assets, except with respect to the payment of those debts which for some reason are not dischargeable in the bankruptcy case. The debtor's major interests in the chapter 7 case are in securing exempt property and in getting a discharge that covers as many debts as possible.

MEETING WITH CREDITORS 341 (a)

A "meeting of creditors" is held 20 to 40 days after the bankruptcy petition is filed. If the United States trustee designates a place for the meeting that is not regularly staffed by the United States Trustee, the meeting may be held no more than 60 days after the order for relief. The debtor will attend this meeting with her/his attorney and the creditors may appear and ask questions regarding the debtor's financial affairs and property. If a husband and wife have filed a joint petition, they both "must" attend the creditors' meeting. The trustee also will attend this meeting and question the debtor on the same matters.

It is important for the debtor to cooperate with the trustee and to provide any financial records or documents that the trustee requests. The trustee is required to examine the debtor orally at the meeting of creditors. In some courts, the trustees may provide written information on these topics at or in advance of the meeting to ensure that the debtor is aware of this information. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the meeting of creditors.

WILL CHAPTER 7 WIPE OUT ALL MY DEBTS?

No, Chapter 7 does not cancel:

  • Secured debts.
  • Most income taxes incurred in the last three years.
  • All students loans, unless you qualify for a hardship discharge.
  • Child and spousal support.
  • Any money that you owe as a result of being sued for drunken driving.

Your debts also will not be cancelled if a creditor proves that you lied about how much money you have, tried to hide some of your property or committed fraud.

You may choose to reaffirm a secured debt. This means that you decide to pay the debt and keep the security, even though Chapter 7 would otherwise cancel the debt.

Chapter 7 Eligibility

To qualify for relief under chapter 7 of the Bankruptcy Code, the debtor may be an individual, a partnership, or a corporation or other business entity. Subject to the "MEANS TEST" for individual debtors, relief is available under chapter 7 irrespective of the amount of the debtor's debts or whether the debtor is solvent or insolvent.

No individual may be a debtor under chapter 7 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing. If a debt management plan is developed during required credit counseling, it must be filed with the court.

Fresh Start

One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual debtor a "fresh start." The debtor has no liability for discharged debts. In a chapter 7 case, however, a discharge is only available to individual debtors, not to partnerships or corporations. Although an individual chapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute, and some types of debts are not discharged. Moreover, a bankruptcy discharge does not extinguish a lien on property.

Chapter 7 Workings

A chapter 7 case begins with debtor filing a petition with the bankruptcy court serving the area where the individual lives or where the business debtor is organized or has its principal place of business or principal assets. (3) In addition to the petition, the debtor must also file with the court: (1) schedules of assets and liabilities; (2)a schedule of current income and expenditures; (3) a statement of financial affairs; and (4) a schedule of executory contracts and unexpired leases. Debtors must also provide the assigned case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed when the case began.

Document Filing Requirements

Individual debtors with primarily consumer debts have additional document filing requirements. They must file: a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling; evidence of payment from employers, received 60 days before filing; a statement of monthly net income and any anticipated increase in income or expenses after filing; and a record of any interest the debtor has in federal or state qualified education or tuition accounts. A husband and wife may file a joint petition or individual petitions. If filing jointly, a husband and wife are subject to all the document filing requirements of individual debtors.

Court Costs

The courts must charge a $245 case filing fee, a $39 miscellaneous administrative fee, and a $15 trustee surcharge. Normally, the fees (299.00) must be paid to the clerk of the court upon filing.

During the course of his/her bankruptcy the debtor must provide the following:

  1. A list of all creditors and the amount and nature of their claims;
  2. The source, amount, and frequency of the debtor's income;
  3. A list of all of the debtor's property; and
  4. A detailed list of the debtor's monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.

Married individuals must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files, the income and expenses of the non-filing spouse is required so that the court, the trustee and creditors can evaluate the household's financial position.

Means Test As of 2005, there is a new eligibility rule for using Chapter 7: If the court determines, based on income and expense figures you provide, that you have enough money to pay off at least some of your debts, you will be required to use Chapter 13. This new rule, called "the means test," can get quite complicated. Here are some of the basic steps you have to consider:

  1. You must-calculate your average monthly income in the six months before you file for bankruptcy.
  2. You must-compare your income to your state's median income for a family of your size (you can find median income figures at the website of the U.S. Trustee, www.usdoj.gov/ust).
  3. If your income is equal to or less than the median, you may use Chapter 7. If your income is more than the median, you'll have to add up your expenses-in some cases, using amounts allowed by the IRS rather than what you actually spend-and compare them to your income. If these figures show that you would have enough money left over to pay a portion of your debts, you may not be allowed to use Chapter 7.

Exemption

Among the schedules that an individual debtor will file is a schedule of "exempt" property. The Bankruptcy Code allows an individual debtor to protect some property from the claims of creditors because it is exempt under federal bankruptcy law or under the laws of the debtor's home state. Many states have taken advantage of a provision in the Bankruptcy Code that permits each state to adopt its own exemption law in place of the federal exemptions. In other jurisdictions, the individual debtor has the option of choosing between a federal package of exemptions or the exemptions available under state law. The debtor should always ask the attorney to determine the exemptions available in the state where the debtor lives.

Automatic Stay

Filing a petition under chapter 7 "automatically stays" (stops) most collection actions against the debtor or the debtor's property. But filing the petition does not stay certain types of actions, and the stay may be effective only for a short time in some situations. The stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.

Chapter 13

A chapter 13 bankruptcy is also called a wage earner's plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over a three to five year plan. If the debtor's current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period "for cause." (1) If the debtor's current monthly income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years. During this time the law grants the debtor some "grace" or breathing time and forbids creditors from starting or continuing collection efforts.

Chapter 13 Fees

When the Chapter 13 case is filed there is a $274.00 fee. During the course of the Chapter 13, the standing Chapter 13 trustee assesses a fee of 10% percent on all payments made by the debtor under the terms of the plan.

Chapter 13 Eligibility

Any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual's unsecured debts are less than $336,900 and secured debts are less than $1,010,650. These amounts are adjusted periodically to reflect changes in the consumer price index. A corporation or partnership may not be a chapter 13 debtor.

An individual cannot file under chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. In addition, no individual may be a debtor under chapter 13 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group setting.

Chapter 13 Basic Essentials

A chapter 13 case begins by filing a petition with the bankruptcy court serving the area where the debtor has a domicile or residence. Unless the court orders otherwise, the debtor must also file with the court: (1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a schedule of executory contracts and unexpired leases; and (4) a statement of financial affairs. The debtor must also file a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling; evidence of payment from employers, if any, received 60 days before filing; a statement of monthly net income and any anticipated increase in income or expenses after filing; and a record of any interest the debtor has in federal or state qualified education or tuition accounts. The debtor must provide the chapter 13 case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case. A husband and wife may file a joint petition or individual petitions.

Debtor's Duties

As stated above, the court must charge a $235 case filing fee and a $39 miscellaneous administrative fee. Normally the fees must be paid to the clerk of the bankruptcy court upon filing. ($274.00)

In order to proceed with a chapter 13 bankruptcy a debtor must provide the following information:

  1. A list of all creditors and the amounts and nature of their claims;
  2. The source, amount, and frequency of the debtor's income;
  3. A list of all of the debtor's property; and
  4. A detailed list of the debtor's monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.

Married individuals must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files, the income and expenses of the non-filing spouse is required so that the court, the trustee and creditors can evaluate the household's financial position.

Trustee

When an individual files a chapter 13 petition, an impartial trustee is appointed to administer the case. In some districts, the U.S. trustee or bankruptcy administrator appoints a standing trustee to serve in all chapter 13 cases. The chapter 13 trustee both evaluates the case and serves as a disbursing agent, collecting payments from the debtor and making distributions to creditors.

Automatic "Stop" Or Stay

Filing the petition under chapter 13 "automatically stays" (stops) most collection actions against the debtor or the debtor's property. Filing the petition does not, however, stay certain types of actions and the stay may be effective only for a short time in some situations. The stay or stop order arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even make telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.

Chapter 13 also contains a special automatic stay provision that protects co-debtors. Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a "consumer debt" from any individual who is liable along with the debtor. Consumer debts are those incurred by an individual primarily for a personal, family, or household purpose.

Individuals may use a chapter 13 proceeding to save their home from foreclosure. The automatic stay stops the foreclosure proceeding as soon as the individual files the chapter 13 petition. The individual may then bring the past-due payments current over a reasonable period of time. Nevertheless, the debtor may still lose the home if the mortgage company completes the foreclosure sale under state law before the debtor files the petition. The debtor may also lose the home if he or she fails to make the regular mortgage payments that come due after the chapter 13 filing.

Meeting of Creditors

Between 20 and 50 days after the debtor files the chapter 13 petition, the chapter 13 trustee will hold a meeting of creditors. If the U.S. trustee or bankruptcy administrator schedules the meeting at a place that does not have a regular U.S. trustee or bankruptcy administrator staffing, the meeting may be held no more than 60 days after the debtor files. During this meeting, the trustee places the debtor under oath, and both the trustee and creditors may ask questions. The debtor must attend the meeting and answer questions regarding his or her financial affairs and the proposed terms of the plan. If a husband and wife file a joint petition, they both must attend the creditors' meeting and answer questions. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the creditors' meeting. The parties typically resolve problems with the plan either during or shortly after the creditors' meeting. Generally, the debtor can avoid problems by making sure that the petition and plan are complete and accurate, and by consulting with the trustee prior to the meeting.

In a chapter 13 case, to participate in distributions from the bankruptcy estate, unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors. A governmental unit, however, has 180 days from the date the case is filed to file a proof of claim.

After the meeting of creditors, the debtor, the chapter 13 trustee, and those creditors who wish to attend will come to court for a hearing on the debtor's chapter 13 repayment plan.

The Chapter 13 Plan and Confirmation Hearing

Unless the court grants an extension, the debtor must file a repayment plan with the petition or within 15 days after the petition is filed. A plan must be submitted for court approval and must provide for payments of fixed amounts to the trustee on a regular basis, typically biweekly or monthly. The trustee then distributes the funds to creditors according to the terms of the plan, which may offer creditors less than full payment on their claims.

Priority Secured Unsecured

There are three types of claims: priority, secured, and unsecured. Priority claims are those granted special status by the bankruptcy law, such as most taxes and the costs of bankruptcy proceedings. Secured claims are those for which the creditor has the right to take back certain property (the collateral) if the debtor does not pay the underlying debt. In contrast to secured claims, unsecured claims are generally those for which the creditor has no special rights to collect against particular property owned by the debtor.

The plan must pay priority claims in full unless a particular priority creditor agrees to different treatment of the claim or, in the case of a domestic support obligation, unless the debtor contributes all "disposable income" - to a five- year plan.

If the debtor wants to keep the collateral securing a particular claim, the plan must provide that the holder of the secured claim receive at least the value of the collateral. If the obligation underlying the secured claim was used to buy the collateral (e.g., a car loan), and the debt was incurred with certain time frames before the bankruptcy filing, the plan must provide for full payment of the debt, not just the current value of the collateral. Payments to certain secured creditors, (the home mortgage lender), may be made over the original loan repayment schedule so long as any arranges are made up during the plan. The debtor should consult an attorney to determine the proper treatment of secured claims in the plan.

Disposable Income

The plan need not pay unsecured claims in full as long it provides that the debtor will pay all projected "disposable income" over an "applicable commitment period," and as long as unsecured creditors receive at least as much under the plan as they would receive if the debtor's assets were liquidated under chapter 7. In chapter 13, "disposable income" is income (other than child support payments received by the debtor) less amounts reasonably necessary for the maintenance or support of the debtor or dependents and less charitable contributions up to 15% of the debtor's gross income. If the debtor operates a business, the definition of disposable income excludes those amounts which are necessary for ordinary operating expenses. The "applicable commitment period" depends on the debtor's current monthly income. The applicable commitment period must be three years if current monthly income is less that the state median for a family of the same size- and five years if the current monthly income is greater that a family of the same size. The plan may be less that the applicable commitment period (three or five years) only if unsecured debt is paid in full over a shorter period.

Adequate Protection

Within 30 days after filing the bankruptcy case, even if the plan has not yet been approved by the court, the debtor must start making plan payments to the trustee. If any secured loan payments or lease payments come due before the debtor's plan is confirmed (typically home and automobile payments), the debtor must make adequate protection payments directly to the secured lender or lessor- deducting the amount paid from the amount that would otherwise be paid to the trustee.

Plan Confirmation

No later than 45 days after the meeting of creditors, the bankruptcy judge must hold a confirmation hearing and decide whether the plan is feasible and meets the standards for confirmation set forth in the Bankruptcy Code. Creditors will receive 25 days' notice of the hearing and may object to confirmation. While a variety of objections may be made, the most frequent ones are that payments offered under the plan are less than creditors would receive if the debtor's assets were liquidated or that the debtor's plan does not commit all of the debtor's projected disposable income for the three or five year applicable commitment period.

If the court confirms the plan the chapter 13 trustee will distribute funds received under the plan "as soon as is practicable." If the court declines to confirm the plan, the debtor may file a modified plan.

ADDITIONAL BANKRUPTCY CONCERNS

Beware of Credit Offers Aimed at Recent Bankruptcy Filers

"Disguised" Reaffirmation Agreement- Carefully read any credit card or other credit offer from a company that claims to represent a lender you listed in your bankruptcy. This solicitation may be from a debt collection company that is trying to trick you into reaffirming a debt. The fine print of the credit offer or agreement will likely say that you will get new credit, but only if some or all of the balance from the discharged debt is added to the new account. You would in essence be bringing a dead debt back to life if you agreed by signature.

"Secured" Credit Card- another type of credit marketed to recent bankruptcy filers as a good way to reestablish credit involves "secured" credit cards. These are cards where the balances are secured by a bank deposit. The card allows you a credit limit up to the amount you have on deposit in a particular bank account. These may be useful to establish that you can make regular monthly payments on a credit card after you have had trouble in the past.

Credit Repair Companies- Beware of companies that claim: "We can erase bad credit." These companies rarely offer valuable services for what they charge, and are often an outright scam.

The truth is that no one can erase bad credit information from your report if it is accurate. And if there is old or inaccurate information on your credit report, you can correct it yourself for free.

Avoid High Cost Predatory Lenders

Don't assume that because you filed bankruptcy you will have to get credit on the worst terms. If you can't get credit on decent terms right after bankruptcy, it may be better to wait. Most lenders will not hold the bankruptcy against you if after a couple of years you can show that you have avoided problems and can manage your debts.

Be wary of auto dealers, mortgage brokers and lenders who advertise: "Bankruptcy? Bad Credit? No Credit? No Problem!" They may give you a loan after bankruptcy, but at a very high cost. The extra costs and fees on these loans can make it impossible for you to keep up the loan payments. Getting this kind of loan can ruin your chances to rebuild your credit.

Mortgage Loans

If you own your home, some home improvement contractors, loan brokers, and mortgage lenders may offer to give you a home equity loan despite your credit history. These loans can be very costly and can lead to serious financial problems and even the loss of your home. Avoid mortgage lenders that:

  • Charge excessive interest rates, "points," brokers' fees and other closing costs
  • Require that you refinance your current lower interest mortgage or pay off other debts
  • Add on unnecessary and costly products, like credit insurance
  • Make false claims of low monthly payments based on a "teaser" variable interest rate
  • Include a "balloon" payment term that requires you to pay all or most of the loan amount in a lump sum as the last payment
  • Charge a prepayment penalty if you pay off the loan early
  • Change the terms at closing
  • Make false promises that the rate will be reduced later if you make timely payments

Small Loans

It is always best to save some money to cover unexpected expenses so you can avoid borrowing. But if you are in need of a small loan, avoid the following high cost loans:

Payday Loans- Some "check cashers" and finance companies offer to take a personal check from you and hold it without cashing it for one or two weeks. In return, they will give you an amount of cash that is less than the amount of your check. The difference between the amount of your check and the cash you get back in return is interest that the lender is charging you. These payday loans are very costly. For example, if you write a $256 check and the lender gives you $200 back as a loan for two weeks, the $56 you pay equals a 728% interest rate! And if you don't have the money to cover the check, the lender will either sue you or try to get you to write another check in a larger amount. If you choose to write another check, the lender gets more money from you and you get further into debt.

Auto Title Loans- For many years, pawn shops have made small high-interest loans in exchange for property. A new type of "pawn" is being made by title lenders who will give you a small loan at very high-interest rates (from 200% to 800%) if you let them hold your car title as collateral for the loan. If you fall behind on the payments, the lender can repossess your car and sell it.

Rent-to-Own- By renting a TV, furniture or appliance from a rent to own company, you will often pay three or four times more than what it would cost to buy. The company may make even more profit on you because the item you are buying may be previously used and returned. And if you miss a payment, the company may repossess the item leaving with you no credit for the payments you made.

WHAT YOU CAN DO TO AVOID PROBLEMS

  • If you don't need it, don't get it. If you have doubts about whether you really need the loan or service, or whether you can afford it, don't let yourself get talked into it at the last minute by a salesperson using high-pressure tactics. You can always walk away from a bad deal, even at the last minute.
  • Shop around. You may qualify for a loan with normal rates from a reputable bank or credit union. Don't forget that high-cost lenders are counting on your belief that you cannot get credit on better terms elsewhere. Do not let feelings of failure or embarrassment about your past problems stop you from shopping around for the best credit terms.
  • Compare credit terms. Do not consider just the monthly payment. Compare the interest rate by looking at the "annual percentage rate," as this takes into account other fees and finance charges added on the loan. Make sure you know exactly what fees are being charged for credit and why.
  • Read before you sign. If you have questions, get help from a qualified professional to review the paperwork. A lender that will not let you get outside help should not be trusted.
  • If you give a lender a mortgage in a refinancing deal, remember your cancellation rights. In home mortgage refinancings, federal law gives you a right to cancel for three days after you sign the papers. Exercise these rights if you feel you signed loan papers and got a bad deal. Don't let the lender talk you out of canceling.
  • Get help early. If you begin to have financial problems, or you are thinking of consolidating unmanageable debts, get help first from a local nonprofit housing or debt counseling agency.

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