Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their creditors. A declared state of bankruptcy can be requested by creditors in an effort to recoup a portion of what they are owed; however, in the overwhelming majority of cases, the bankruptcy is initiated by the bankrupt individual or organization.
The primary purpose of the laws of bankruptcy are: (1) to give an honest debtor a "fresh start" in life by relieving the debtor of most debts, and (2) to repay creditors in an orderly manner to the extent that the debtor has the means available for payment.
Bankruptcy in the United States is a matter placed under Federal jurisdiction by the United States Constitution (in Article 1, Section 8), which allows Congress to enact "uniform laws on the subject of Bankruptcy throughout the United States." Its implementation, however, is found in statute law. The relevant statutes are incorporated within the Bankruptcy Code, located at Title 11 of the United States Code, and amplified by state law in the many places where Federal law either fails to speak or expressly defers to state law.
While bankruptcy cases are always filed in United States Bankruptcy Court (an adjunct to the U.S. District Courts), bankruptcy cases, particularly with respect to the validity of claims and exemptions, are often highly dependent upon State law. State law therefore plays a major role in many bankruptcy cases, and it is often quite unwise to generalize bankruptcy issues across state lines.
Bankruptcy allows debtors to resolve debts through the division of non-exempt assets among creditors. Additionally the declaration of bankruptcy allows debtors to be discharged of most of the financial obligations, after their non-exempt assets are distributed, even if their debts have not been paid in full. During the pendency of a bankruptcy proceeding, the debtor is protected from extra-bankruptcy action by creditors by a legally imposed stay. The creditor will not be permitted to continue lawsuits, garnish wages, or contact the debtor by phone to demand payment.
Individuals can file for bankruptcy in a federal court under Chapter 7 ("straight bankruptcy", or liquidation) or Chapter 13 (a "reorganization", or debt adjustment case). (Although individuals can technically file Chapter 11 bankruptcies, those filings are rare.) In a Chapter 7 bankruptcy, the individual is allowed to keep certain exempt property. Some liens, however (such as real estate mortgages), survive. The value of property which can be claimed as exempt varies from state-to-state. Other assets, if any, are sold (liquidated) by the interim trustee to repay creditors. Many types of unsecured debt are cancelled. There are 19 (as of 2005) general classes of debt that are not discharged in a Chapter 7. Common exceptions to discharge include child support, most taxes, most student loans (unless the debtor prevails in a difficult-to-win adversary proceeding brought to determinate the dischargeability of the student loan), and fines and restitution imposed by a court for any crimes committed by the debtor.
A record of bankruptcy stays on the individual's credit report for 10 years. This may make credit less available and/or terms less favorable, although high debt can have the same effect. That must be balanced against the removal of actual debt from the filer's record by the bankruptcy, which tends to improve creditworthiness. Consumer credit and creditworthiness is a complex subject, however. Future ability to obtain credit is dependent on multiple factors and difficult to predict. From an individual debtor’s standpoint, one of the primary goals of filing a bankruptcy case is to obtain relief from burdensome debt. Relief is attained through the bankruptcy discharge, the purpose of which is to provide a "fresh start" to the honest debtor. The bankruptcy discharge varies depending on the type of case a debtor files: Chapter 7, 11, 12, or 13.
The information presented is designed to provide basic information to debtors, creditors, court personnel, the media, and the general public on different aspects of the federal bankruptcy laws. It is also provides individuals who may be considering bankruptcy with a basic explanation of the different chapters under which a bankruptcy case may be filed and to answer some of the most commonly asked questions about the bankruptcy process.
The various articles provide general information only. While every effort has been made to ensure that the information contained in it is accurate as of the date of publication, it is not a full and authoritative statement of the law on any particular topic. The information presented in this publication should not be cited or relied upon as legal authority and should not be used as a substitute for reference to the United States Bankruptcy Code (title 11, United States Code) and the Federal Rules of Bankruptcy Procedure.
Most importantly, these articles should not substitute for the advice of competent legal counsel or a financial expert. Neither the Courts, their Clerks, or a bankruptcy petition preparer can provide legal or financial advice. Such advice may only be obtained from a competent attorney, accountant, or financial adviser.
There are six types of bankruptcy under the Bankruptcy Code, located at Title 11 of the United States Code:
The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13.
Chapter 7 of the United States Bankruptcy Code is the Bankruptcy Code's "liquidation" chapter. Lawyers sometimes refer to it as a "straight bankruptcy." It is used primarily by individuals who wish to free themselves of debt simply and inexpensively, but may also be used by businesses that wish to liquidate and terminate their business.
The potential Chapter 7 debtor should understand that a straight bankruptcy case does not involve the filing of a plan of repayment as in Chapter 13, but rather envisions the bankruptcy trustee's gathering and sale of the debtor's nonexempt assets, from which holders of claims (creditors) will receive distributions in accordance with the provisions of the Bankruptcy Code. Part of the debtor's property may be subject to liens and mortgages that pledge the property to other creditors. In addition, under Chapter 7, the individual debtor is permitted to retain certain "exempt" property.
A Chapter 7 case begins with the debtor's filing a petition with the bankruptcy court.(1) The petition should be filed with the bankruptcy court serving the area where the individual lives or where the business debtor has its principal place of business or principal assets. 28 U.S.C. §1408.
In addition to the petition, the debtor is also required to file with the court several schedules of assets and liabilities, a schedule of current income and expenditures, a statement of financial affairs, a schedule of executory contracts and unexpired leases, documentary evidence of the debtor’s previous six months of income (usually paycheck stubs) and the means test. Bankruptcy Rule 1007(b).
In order to complete the Official Bankruptcy Forms which make up the petition and schedules, the debtor(s) will need to compile the following information:
A list of all creditors and the amount and nature of their claims;
To qualify for relief under Chapter 7 of the Bankruptcy Code, the debtor must be an individual, a partnership, or a corporation. 11 U.S.C. §§ 109(b); 101(41). Relief is available under Chapter 7 irrespective of the amount of the debtor's debts or whether the debtor is solvent or insolvent. A husband and wife may file a joint petition or individual petitions. 11 U.S.C. § 302(a). An individual cannot file under Chapter 7 or any other chapter, however, 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 the debtor voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. 11 U.S.C. §§ 109(g), 362(d) and (e).
Currently, the courts are required to charge a $245 case filing fee, a $39 miscellaneous administrative fee, and a $15 trustee surcharge (a total of $299). The fees should be paid to the clerk of the court upon filing or may, with the court's permission, be paid by individual debtors in installments. 28 U.S.C. §1930(a); Bankruptcy Rule 1006(b); Bankruptcy Court Miscellaneous Fee Schedule, Item 8. Rule 1006(b) limits to four the number of installments for the filing fee. The final installment shall be payable not later than 120 days after filing the petition. For cause shown, the court may extend the time of any installment, provided that the last installment is paid not later than 180 days after the filing of the petition. Bankruptcy Rule 1006(b). The $39 administrative fee and the $15 trustee surcharge may be paid in installments in the same manner as the filing fee. If a joint petition is filed, only one filing fee, one administrative fee, and one trustee surcharge are charged. Debtors should be aware that failure to pay these fees may result in dismissal of the case. 11 U.S.C. §707(a).
The filing of a petition under Chapter 7 "automatically stays" most actions against the debtor or the debtor's property. 11 U.S.C. §362. This 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 lawsuits, wage garnishments, or even telephone calls demanding payments. Creditors normally receive notice of the filing of the petition from the clerk.
A "meeting of creditors" is usually held 20 to 40 days after the petition is filed. If the United States trustee or bankruptcy administrator(3) designates a place for the meeting that is not regularly staffed by the United States trustee or bankruptcy administrator, the meeting may be held no more than 60 days after the order for relief. Bankruptcy Rule 2003(a). The debtor must attend this meeting, at which creditors may appear and ask questions regarding the debtor's financial affairs and property. 11 U.S.C. §343. If a husband and wife have filed a joint petition, they both must attend the creditors' meeting. The trustee also will attend this meeting. 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 to ensure that the debtor is aware of the potential consequences of seeking a discharge in bankruptcy, including the effect on credit history, the ability to file a petition under a different chapter, the effect of receiving a discharge, and the effect of reaffirming a debt. In some courts, 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. 11 U.S.C. §341(c).
Under Chapter 7, a trustee is appointed to administer the bankruptcy estate. A bankruptcy estate is created when the trustee takes possession of non-exempt property. This property is sold, and the proceeds are used to pay the creditors. In the vast majority of cases, however, the debtor is allowed to keep most, if not all of his or her property. This is accomplished by filing a schedule of exemptions whereby debtors elect to apply certain state or federal statutes to protect the equity they have in their property from the trustee and creditors.
Exemption statutes typically allow debtors to retain a portion or all of the equity they have in a given type of property like a homestead, a vehicle, household goods and furnishings, clothing, retirement accounts and tools-of-trade. In most cases, debtors have few if any non-exempt assets with equity they cannot protect in this manner. Thus, in most cases, they do not lose anything to the trustee. It should be noted the list of possible exempt assets differs slightly in each state and some states, like Texas, allow a debtor to elect either state or federal exemptions. The proper application of exemptions and choice of election statutes is complex. Therefore, it is important to consult a personal bankruptcy attorney to determine what you can and cannot keep.
One of the schedules that will be filed by the individual debtor is a schedule of "exempt" property. Federal bankruptcy law provides that an individual debtor(2) 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. 11 U.S.C. §522(b). 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 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.
One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual debtor a "fresh start." The discharge has the effect of extinguishing the debtor's personal liability on dischargeable debts. In a Chapter 7 case, however, a discharge is available to individual debtors only, not to partnerships or corporations. 11 U.S.C. §727(a)(1). Although the filing of an individual Chapter 7 petition usually results in a discharge of debts, an individual's 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.
In most Chapter 7 cases the discharge is entered about 90 days after filing. The discharge is an order by the bankruptcy court that permanently forbids creditors from attempting almost any act to collect a debt owed by the debtor that existed at the time the case was filed. One example of an act not forbidden by the discharge is the sending of a home mortgage statement to the debtor even though the personal obligation to pay the mortgage has been discharged (see discussion of secured debts below).
Chapter 13 bankruptcy is a reorganization plan for individuals providing for adjustment of debts of an individual with regular income. (Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.). To qualify for Chapter 13, an individual must have secured debts under $1,010,650 and unsecured debts under $336,900. Under Chapter 13 the debtor keeps all of their property, but in return they make regular payments to a trustee, who distributes the payments to the creditors. Most Chapter 13 plans last for three to five years, and then the remaining unpaid and eligible debts are discharged. The types of debt that can be discharged under Chapter 13 was substantially scaled back by the 2005 reform amendments. Creditors may challenge a Chapter 13 plan but a plan can still be confirmed over their objection if the criteria for confirmation is otherwise met. A requirement for confirmation of a Chapter 13 plan is that unsecured creditors would receive at least as much as they would receive in a Chapter 7 liquidation.
Chapter 13 of the United States Bankruptcy Code is frequently referred to as a "wage earner" chapter, although it is available to individuals with regular income from any source, not just wages. 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 three to five years. 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. 11 U.S.C. §§1322(d). During this time the law forbids creditors from starting or continuing collection efforts.
This chapter discusses six aspects of a Chapter 13 proceeding: the advantages of choosing Chapter 13, the Chapter 13 eligibility requirements, how a Chapter 13 proceeding works, what may be included in Chapter 13 repayment plan and how it is confirmed, making the plan work, and the special Chapter 13 discharge.
Advantages of Chapter 13
Chapter 13 offers individuals a number of advantages over liquidation under Chapter 7. Perhaps most significantly, Chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still make all mortgage payments that come due during the Chapter 13 plan on time. Another advantage of Chapter 13 is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the Chapter 13 plan. Doing this may lower the payments. Chapter 13 also has a special provision that protects third parties who are liable with the debtor on "consumer debts." This provision may protect co-signers. Finally, Chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a Chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under Chapter 13 protection.
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. 11 U.S.C. §§109(e). These amounts are adjusted periodically to reflect changes in the consumer price index. A corporation or partnership may not be a Chapter 13 debtor. Id.
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. 11 U.S.C. §§§109(g), 362(d) and (e). 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 briefing. 11 U.S.C. §§§109, 111. There are exceptions in emergency situations or where the U.S. Trustee (or bankruptcy administrator) has determined that there are insufficient approved agencies to provide the required counseling. If a debt management plan is developed during required credit counseling, it must be filed with the court.
How Chapter 13 Works
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. Fed.R.Bankr.P. 1007(b). 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. 11 U.S.C. §§521. 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 (including tax returns for prior years that had not been filed when the case began). Id. A husband and wife may file a joint petition or individual petitions. 11 U.S.C. §§302(a).
Chapter 13 bankruptcy filing is a way for individuals in the United States to undergo a financial reorganization supervised by a federal bankruptcy court. The Bankruptcy Code anticipates the goal of Chapter 13 as enabling income-receiving debtors a debtor rehabilitation provided they fulfill a court-approved plan. Compare the goal of Chapter 13 with the relief contemplated in Chapter 7 that offers immediate, complete relief of many oppressive debt(s).
An individual who is badly in debt can file for bankruptcy either under Chapter 7 (liquidation, or straight bankruptcy) or under Chapter 13 (reorganization). The choice of appropriate chapter depends on the situation. The debtor's disposable income and the type of relief sought plays a tremendous role in the choice of chapters. In some cases the debtor simply cannot file under Chapter 13, as he or she lacks the disposable income necessary to fund a viable Chapter 13 plan (see below).
Under Chapter 13, the debtor proposes a plan to pay his creditors over a 3 to 5 year period. During this period, his creditors cannot attempt to collect on the individual's previously incurred debt except through the bankruptcy court. In general, the individual gets to keep his property, and his creditors end up with less money than they are owed.
The disadvantage of filing for personal bankruptcy is that a record of this stays on the individual's credit report for 10 years. During the pendency of a Chapter 13 case the debtor is not permitted to obtain additional credit without the Chapter 13 Trustee's permission. Moreover, creditors may not be willing to risk lending money to such an individual. However, this disadvantage is not unique to Chapter 13; it may also apply to individuals currently in a Chapter 11 case or those who are in or have recently been in a Chapter 7 case.
The advantages of Chapter 13 over Chapter 7 include: the ability to stop foreclosures and to have a mortgage that has been accelerated declared reinstated upon bankruptcy plan completion; to achieve a super discharge of debts of kinds not dischargeable under Chapter 7; to value collateral; to bifurcate the security interest of creditors in certain property that creditors are either charging too much interest for, or are over-secured, or both, and in some cases; to prevent collection activities against non-filing co-signers (co-debtors) during the life of the case.
A Chapter 13 plan is a document filed with or shortly after a debtor's Chapter 13 bankruptcy petition. The plan details the treatment of debts, liens, and the secured status of assets and liabilities owned or owed by the debtor in regard to his bankruptcy petition filed in United States Bankruptcy Court. For the plan to be confirmable, it must, at a minimum (actually there are more requirements and these vary from state to state), meet all of the following tests:
A discharge releases the debtor from personal liability for discharged debts and prevents the creditors owed those debts from taking any action against the debtor or his property to collect the debts. The bankruptcy law regarding the scope of a Chapter 7 discharge is complex, and debtors should consult competent legal counsel in this regard prior to filing. As a general rule, however, excluding cases which are dismissed or converted, individual debtors receive a discharge in more than 99 percent of Chapter 7 cases. In most cases, unless a complaint has been filed objecting to the discharge or the debtor has filed a written waiver, the discharge will be granted to a Chapter 7 debtor relatively early in the case, that is, 60 to 90 days after the date first set for the meeting of creditors. Bankruptcy Rule 4004(c).
The grounds for denying an individual debtor a discharge in a Chapter 7 case are very narrow and are construed against a creditor or trustee seeking to deny the debtor a Chapter 7 discharge. Among the grounds for denying a discharge to a Chapter 7 debtor are that the debtor failed to keep or produce adequate books or financial records; the debtor failed to explain satisfactorily any loss of assets; the debtor committed a bankruptcy crime such as perjury; the debtor failed to obey a lawful order of the bankruptcy court; or the debtor fraudulently transferred, concealed, or destroyed property that would have become property of the estate. 11 U.S.C. §727; Bankruptcy Rule 4005.
What is a Discharge in Bankruptcy?
A bankruptcy discharge releases the debtor from personal liability for certain specified types of debts. In other words, the debtor is no longer legally required to pay any debts that are discharged. The discharge is a permanent order prohibiting the creditors of the debtor from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters, and personal contacts.
Most claims against an individual Chapter 7 debtor are discharged. A creditor whose unsecured claim is discharged may no longer initiate or continue any legal or other action against the debtor to collect the obligation. A discharge under Chapter 7, however, does not discharge an individual debtor from certain specific types of debts listed in section 523 of the Bankruptcy Code. Among the types of debts which are not discharged in a Chapter 7 case are alimony and child maintenance and support obligations, certain taxes, debts for certain educational benefit overpayments or loans made or guaranteed by a governmental unit, debts for willful and malicious injury by the debtor to another entity or to the property of another entity, debts for death or personal injury caused by the debtor's operation of a motor vehicle while the debtor was intoxicated from alcohol or other substances, and debts for criminal restitution orders under title 18, United States Code. 11 U.S.C. §523(a). To the extent that these types of debts are not fully paid in the Chapter 7 case, the debtor is still responsible for them after the bankruptcy case has concluded. Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, debts for willful and malicious injury by the debtor to another entity or to the property of another entity, and debts arising from a property settlement agreement incurred during or in connection with a divorce or separation are discharged unless a creditor timely files and prevails in an action to have such debts declared excepted from the discharge. 11 U.S.C. §523(c); Bankruptcy Rule 4007(c).
Although a debtor is not personally liable for discharged debts, a valid lien (i.e., a charge upon specific property to secure payment of a debt) that has not been avoided (i.e., made unenforceable) in the bankruptcy case will remain after the bankruptcy case. Therefore, a secured creditor may enforce the lien to recover the property secured by the lien.
When Does the Discharge Occur? The timing of the discharge varies, depending on the chapter under which the case is filed. In a Chapter 7 (liquidation) case, for example, the court usually grants the discharge promptly on expiration of the time fixed for filing a complaint objecting to discharge and the time fixed for filing a motion to dismiss the case for substantial abuse (60 days following the first date set for the 341 meeting). Typically, this occurs about four months after the date the debtor files the petition with the clerk of the bankruptcy court. In individual Chapter 11 cases, and in cases under Chapter 12 (adjustment of debts of a family farmer or fisherman) and 13 (adjustment of debts of an individual with regular income), the court grants the discharge as soon as practicable after the debtor completes all payments under the plan. Since a Chapter 12 or Chapter 13 plan may provide for payments to be made over three to five years, the discharge typically occurs about four years after the date of filing. The court may deny an individual debtor's discharge in a Chapter 7 or 13 case if the debtor fails to complete "an instructional course concerning financial management." The Bankruptcy Code provides limited exceptions to the "financial management" requirement if the U.S. Trustee or bankruptcy administrator determines there are inadequate educational programs available, or if the debtor is disabled or incapacitated or on active military duty in a combat zone.
How Does the Debtor Get a Discharge?
Unless there is litigation involving objections to the discharge, the debtor will usually automatically receive a discharge. The Federal Rules of Bankruptcy Procedure provide for the clerk of the bankruptcy court to mail a copy of the order of discharge to all creditors, the United States trustee, the trustee in the case, and the trustee’s attorney, if any. The debtor and the debtor’s attorney also receive copies of the discharge order. The notice, which is simply a copy of the final order of discharge, is not specific as to those debts determined by the court to be non-dischargeable, i.e., not covered by the discharge. The notice informs creditors generally that the debts owed to them have been discharged and that they should not attempt any further collection. They are cautioned in the notice that continuing collection efforts could subject them to punishment for contempt. Any inadvertent failure on the part of the clerk to send the debtor or any creditor a copy of the discharge order promptly within the time required by the rules does not affect the validity of the order granting the discharge.
Are All of the Debtor's Debts Discharged or Only Some?
Not all debts are discharged. The debts discharged vary under each chapter of the Bankruptcy Code. Section 523(a) of the Code specifically excepts various categories of debts from the discharge granted to individual debtors. Therefore, the debtor must still repay those debts after bankruptcy. Congress has determined that these types of debts are not dischargeable for public policy reasons (based either on the nature of the debt or the fact that the debts were incurred due to improper behavior of the debtor, such as the debtor’s drunken driving).
There are 19 categories of debt excepted from discharge under chapters 7, 11, and 12. A more limited list of exceptions applies to cases under Chapter 13.
Generally speaking, the exceptions to discharge apply automatically if the language prescribed by section 523(a) applies. The most common types of non-dischargeable debts are certain types of tax claims, debts not set forth by the debtor on the lists and schedules the debtor must file with the court, debts for spousal or child support or alimony, debts for willful and malicious injuries to person or property, debts to governmental units for fines and penalties, debts for most government funded or guaranteed educational loans or benefit overpayments, debts for personal injury caused by the debtor’s operation of a motor vehicle while intoxicated, debts owed to certain tax-advantaged retirement plans and debts for certain condominium or cooperative housing fees.
The types of debts described in sections 523(a)(2), (4), and (6) (obligations affected by fraud or maliciousness) are not automatically excepted from discharge. Creditors must ask the court to determine that these debts are excepted from discharge. In the absence of an affirmative request by the creditor and the granting of the request by the court, the types of debts set out in sections 523(a)(2), (4), and (6)will be discharged.
A slightly broader discharge of debts is available to a debtor in a Chapter 13 case than in a Chapter 7 case. Debts dischargable in a Chapter 13, but not in Chapter 7, include debts for willful and malicious injury to property, debts incurred to pay non-dischargeable tax obligations and debts arising from property settlements in divorce or separation proceedings. Although a Chapter 13 debtor generally receives a discharge only after completing all payments required by the court-approved (i.e., "confirmed") repayment plan, there are some limited circumstances under which the debtor may request the court to grant a "hardship discharge" even though the debtor has failed to complete plan payments. Such a discharge is available only to a debtor whose failure to complete plan payments is due to circumstances beyond the debtor’s control.
The scope of a Chapter 13 "hardship discharge" is similar to that in a Chapter 7 case with regard to the types of debts that are excepted from the discharge. A hardship discharge also is available in Chapter 12 if the failure to complete plan payments is due to "circumstances for which the debtor should not justly be held accountable."
Does the Debtor Have the Right to a Discharge or Can Creditors Object to the Discharge?
In Chapter 7 cases, the debtor does not have an absolute right to a discharge. An objection to the debtor’s discharge may be filed by a creditor, by the trustee in the case, or by the United States trustee. Creditors receive a notice shortly after the case is filed that sets forth important information, including the deadline for objecting to the discharge. To object to the debtor’s discharge, a creditor file a complaint in the bankruptcy court before the deadline set out in the notice. Filing of a complaint starts a lawsuit referred to in bankruptcy as an "adversary proceeding."
The court may deny a Chapter 7 discharge for any of the reasons described in section 727(a) of the Bankruptcy Code, including failure to provide requested tax documents; failure to complete a course on personal financial management; transfer or concealment of property with intent to hinder, delay, or defraud creditors; destruction or concealment of books or records; perjury and other fraudulent acts; failure to account for the loss of assets; violation of a court order or an earlier discharge in an earlier cas commenced within certain time frames (discussed below) before the date the petition was filed. If the issue of the debtor’s right to a discharge goes to trial, the objecting party has the burden of proving all the facts essential to the objection.
In Chapter 12 and Chapter 13 cases, the debtor is usually entitled to a discharge upon completion of all payments under the plan. As in Chapter 7, however, discharge may not occur in Chapter 13 ifthe debtor fails to complete a required course on personal financial management. A debtor is also ineligible for a discharge in a chpater 13 if he or she received a prior discharge in another case commenced within time frames discussed in the next paragraph. Unlike Chapter 7, creditors do not have standing to object to the discharge of a Chapter 12 or Chapter 13 debtor. Creditors can object to confirmation of the repayment plan, but cannot object to the discharge if the debtor has completed making plan payments.
The court may revoke a Chapter 7 discharge on the request of the trustee, a creditor, or the United States trustee if the discharge was obtained through fraud by the debtor or if the debtor acquired property that is property of the estate and knowingly and fraudulently failed to report the acquisition of such property or to surrender the property to the trustee. 11 U.S.C. §727(d).
Can a Debtor Receive a Second Discharge in a Later Chapter 7 Case?
The court will deny a discharge in a later Chapter 7 case if the debtor received a discharge under Chapter 7 or Chapter 11 in a case filed within eight years before the second petition is filed. The court will also deny a Chapter 7 discharge the debtor previously received a discharge in a Chapter 12 or Chapter 13 case filed within six years before the date of the filing of the second case unless (1) the debtor paid all "allowed unsecured" claims in the earlier case in full, or (2) the debtor made payments under the plan in the earlier case totaling at least 70 percent of the allowed unsecured claims and the debtor’s plan was proposed in good faith and the payments represented the debtor’s best effort. A debtor is ineligible for discharge under Chapter 13 if he or she received a prior discharge in a Chapter 7, 11, or 12 case filed four years before the current case or in a Chapter 13 case filed two years before the current case.
Can the Discharge Be Revoked?
The court may revoke a discharge under certain circumstances. For example, a trustee, creditor, or the United States trustee may request that the court revoke the debtor’s discharge in a Chapter 7 case based on allegations that the debtor: obtained the discharge fraudulently; failed to disclose the fact that he or she acquired or became entitled to acquire property that would constitute property of the bankruptcy estate; committed one of several acts of impropriety described in section 727(a)(6) of the Bankruptcy Code; or failed to explain any misstatements discovered in an audit of the case or fails to provide documents or information requested in an audit of the case. Typically, a request to revoke the debtor’s discharge must be filed within one year of the discharge or, in some cases, before the date that the case is closed. The court will decide whether such allegations are true and, if so, to revoke the discharge.
In a Chapter 11, 12 and 13 case, if confirmation of a plan or the discharge is obtained through fraud, the court can revoke the order of confirmation or discharge.
May the Debtor Pay a Discharged Debt After the Bankruptcy Case Has Been Concluded?
A debtor who has received a discharge may voluntarily repay any discharged debt. A debtor may repay a discharged debt even though it can no longer be legally enforced. Sometimes a debtor agrees to repay a debt because it is owed to a family member or because it represents an obligation to an individual for whom the debtor’s reputation is important, such as a family doctor.
What Can the Debtor Do if a Creditor Attempts to Collect a Discharged Debt After the Case is Concluded?
If a creditor attempts collection efforts on a discharged debt, the debtor can file a motion with the court, reporting the action and asking that the case be reopened to address the matter. The bankruptcy court will often do so to ensure that the discharge is not violated. The discharge constitutes a permanent statutory injunction prohibiting creditors from taking any action, including the filing of a lawsuit, designed to collect a discharged debt. A creditor can be sanctioned by the court for violating the discharge injunction. The normal sanction for violating the discharge injunction is civil contempt, which is often punishable by a fine.
Can an Employer Terminate a Debtor's Employment Solely Because the Person Was a Debtor or Failed to Repay a Discharged Debt?
The law provides express prohibitions against discriminatory treatment of debtors by both governmental units and private employers. A governmental unit or private employer may not discriminate against a person solely because the person was a debtor, was insolvent before or during the case, or has not paid a debt that was discharged in the case. The law prohibits the following forms of governmental discrimination: terminating an employee; discriminating with respect to hiring; or denying, revoking, suspending, or declining to renew a license, franchise, or similar privilege. A private employer may not discriminate with respect to employment if the discrimination is based solely upon the bankruptcy filing.
The Chapter 13 Discharge
The bankruptcy law regarding the scope of the Chapter 13 discharge is complex and has recently undergone major changes. Therefore, debtors should consult competent legal counsel prior to filing regarding the scope of the Chapter 13 discharge.
A Chapter 13 debtor is entitled to a discharge upon completion of all payments under the Chapter 13 plan so long as the debtor: (1) certifies (if applicable) that all domestic support obligations that came due prior to making such certification have been paid; (2) has not received a discharge in a prior case filed within a certain time frame (two years for prior Chapter 13 cases and four years for prior Chapter 7, 11 and 12 cases); and (3) has completed an approved course in financial management (if the U.S. Trustee or bankruptcy administrator for the debtor's district has determined that such courses are available to the debtor). 11 U.S.C. §1328. The court will not enter the discharge, however, until it determines, after notice and a hearing, that there is no reason to believe there is any pending proceeding that might give rise to a limitation on the debtor's homestead exemption. 11 U.S.C. §1328(h).
The discharge releases the debtor from all debts provided for by the plan or disallowed (under section 502), with limited exceptions. Creditors provided for in full or in part under the Chapter 13 plan may no longer initiate or continue any legal or other action against the debtor to collect the discharged obligations.
As a general rule, the discharge releases the debtor from all debts provided for by the plan or disallowed, with the exception of certain debts referenced in 11 U.S.C. §1328. Debts not discharged in Chapter 13 include certain long term obligations (such as a home mortgage), debts for alimony or child support, certain taxes, debts for most government funded or guaranteed educational loans or benefit overpayments, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine included in a sentence on the debtor's conviction of a crime. To the extent that they are not fully paid under the Chapter 13 plan, the debtor will still be responsible for these debts after the bankruptcy case has concluded. Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for restitution or damages awarded in a civil case for willful or malicious actions by the debtor that cause personal injury or death to a person will be discharged unless a creditor timely files and prevails in an action to have such debts declared nondischargeable. 11 U.S.C. §§ 1328, 523(c); Fed.R.Bankr.P. 4007(c).
The discharge in a Chapter 13 case is somewhat broader than in a Chapter 7 case. Debts dischargeable in a Chapter 13, but not in Chapter 7, include debts for willful and malicious injury to property (as opposed to a person), debts incurred to pay nondischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings. 11 U.S.C. §1328(a).
Filing the petition under chapter 7 or chapter 13 "automatically stays" (stops) most collection actions against your property. 11 U.S.C. §362. 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 make telephone calls demanding payments. Within days of filing the case, the bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor. The automatic stay is effective the minute the bankruptcy petition is filed and is not dependent upon the creditor having actual notice.
Filing the petition does not, however, stay certain types of actions listed under 11 U.S.C. §362(b). Furthermore, the stay may be effective only for thirty days when a prior bankruptcy case has been dismissed within the previous year. In such cases, a motion requesting the bankruptcy court extend the automatic stay is required. Where two prior cases have been dismissed within the previous year, there will be no automatic stay at all and you must file a motion requesting the bankruptcy court impose an automatic stay and show good cause to justify the imposition of the stay.
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. 11 U.S.C. §1301(a). Consumer debts are those incurred by an individual primarily for a personal, family, or household purpose. 11 U.S.C. §101(8).
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. Again, the mortgage company need not have actual notice of the bankruptcy to be subject to the automatic stay. Should the mortgage company proceed to foreclosure unaware that your bankruptcy case has been filed, the foreclosure will be void ab initio, meaning the mortgage company will have to undo the foreclosure. You should remember that you must file the bankruptcy prior to the foreclosure sale. You will still lose your home if the mortgage company completes the foreclosure sale under state law before the debtor files the petition. 11 U.S.C. §1322(c).
It is important not to become too overly confident by the effect of the automatic stay. Often, people feel the immediate relief from the pressure of foreclosure after filing for bankruptcy, only to return to habit of not budgeting for their mortgage payments or paying late in the month. In such cases, the mortgage company can request the bankruptcy court allow them to avoid, modify or lift the automatic stay to allow them to proceed to foreclosure. Thus, it is important to keep in mind that you may your home if you fail to make the regular mortgage payments that come due after the chapter 13 filing.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 "BAPCPA" (bankruptcy reform) was enacted on April 20, 2005 by congress after anecdotal testimony by powerful credit card lobbies about imagined bankruptcy abuses. This legislation was the biggest reform to the bankruptcy laws since 1978. It became became effective on October 17, 2005. A big misperception was and continues to be that the new law abolished bankruptcy. It did not. We did not return to the days of debtor's prison. What the Act did was make the filing process a little harder and it imposed a test, the "means test" to determine what type of bankruptcy a debtor may file.
Many consumers think if they fail this test, they cannot file at all. This is a common misconception. In fact, bankruptcy relief is still available, just not under the rules known as Chapter 7. This is the filing status presumed to be the most abused since it discharges a debtor from most of their obligations. BAPCPA was designed to discourage Chapter 7 filings in favor of Chapter 13 filings, which is perceived to provide more relief to creditors.
The test determines whether a filer has the means - income or assets - to work out a repayment plan with creditors. If they do not, they may proceed with a request to file under Chapter 7, otherwise they need to file under Chapter 13. It is not a straightforward calculation, which is why you should consult a knowledgeable attorney to help you under stand your options-and that you still have options.
The sensationalized stories of abuse which were used by the credit card industry to justify BAPCPA to congress related to a very tiny fraction of the total bankruptcies filed. These stories were designed to convince congress that bankruptcy is a lifestyle choice overspending consumers use to absolve themselves of debt obligations so they can begin anew overspending. Nothing could be further from the truth. Very few people intentionally overspend.
"So where did their money go? It went to basics. The real increases in family spending are for the items that make a family middle class and keep them safe (housing, health insurance), that educate their children (pre-school and college), and that let them earn a living (transportation, childcare, and taxes)...... In other words, today's family has no margin for error. There is no leeway to cut back if one earner's hours are cut or if the other gets sick. There is no room in the budget if someone needs to take off work to care for a sick child or an elderly parent. Their basic situation is far riskier than that of their parents a generation earlier. The modern American family is walking a high wire without a net." Elizabeth Warren, "The Middle Class on the Precipice," Harvard Magazine (January-February, 2006), full article available at:
The vast majority of people who need to file bankruptcy must do so after a catastrophic event like a divorce, job loss or medical issue sends them scrambling to pay bills. People in financial trouble often think their ship is about to come in - they accept offers of credit to tide them over assuming they will have a new job soon or the divorce will be settled quickly or the insurance company will reconsider and pay the hospital bill. When the ship does not materialize, they are too far in debt to get out.
We have invested a great deal of time and research in compiling the questionnaire we use to obtain the information necessary to complete your bankruptcy paperwork. We believe it is one of the most comprehensive questionnaires in the industry. Yet, it is also one of the most user friendly questionnaires in the industry, being fairly easy to complete.
The Questionnaire for Individuals Contemplating Bankruptcy is available for download:
If you operate a business, you should also download the Additional Questionnaire for a Debtor Operating a Business and Profit and Loss Forms to complete for the last six months:
To make completing the Bankruptcy Questionnaire even easier, you should gather the following information:
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.
The questionnaire is designed to help us obtain the information necessary to make a diligent inquiry into your financial affairs and to make sure your schedules are complete and accurate. Please carefully read and follow these instructions.
You are not eligible to file a bankruptcy unless you receive an individual or group briefing from an approved nonprofit budget and counseling agency. That briefing must outline your opportunities for available credit counseling and assist you in performing a related budget analysis. It must occur within 180 days prior to filing the bankruptcy. It can take place on the internet or by telephone. If you have not yet received the counseling and you want our assistance, we will help you make the arrangements for it.
You can download a list of approved credit counseling agencies here:
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 “BAPCPA” (bankruptcy reform) enacted a provision that protects creditors from monetary penalties for violating the stay if the debtor did not give “effective” notice pursuant to 11 U.S.C. §342, [11 U.S.C. §342(g)].
The new notice provisions require the debtor to give notice of the bankruptcy to the creditor at an “address filed by the creditor with the court,” or “at an address stated in two communications from the creditor to the debtor within 90 days of the filing of the bankruptcy case. The notice must also include the account number used by the creditor in the two relevant communications [11 U.S.C. §342(c)(2)(e)&(f)]. An ineffective notice can be cured if the notice is later “brought to the attention of the creditor.” This means that the notice must be received by a person designated by the creditor to receive bankruptcy notices.
This was one of the most ill-conceived and impractical aspects of bankruptcy reform as passed by the U.S. Congress and is one of the provisions which most poignantly illustrates how the bankruptcy reform passed in 2005 had absolutely nothing to do with consumer protection. Fortunately, most institutional creditors have registered their preferred notice address with the court clerks and the addresses are cross-referenced and, if necessary, replaced with the address filed by the creditor with the court through the electronic filing process.
The most noteworthy change implemented under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) occurred within 11 U.S.C. §707(b). Congress amended this section of the Bankruptcy Code to provide for dismissal (or conversion) of a Chapter 7 case upon a finding of “abuse” by an individual debtor (or married couple) with “primarily consumer debt.” Old §707(b) provided for dismissal of a Chapter 7 case upon a finding of “substantial abuse.”
New §707(b) defines “abuse” in two ways. “Abuse” can be found when there is an unrebutted “presumption of abuse” arising under a newly created “means test,” [§707(b)(2)]. The second way to find “abuse” is through general grounds, including bad faith, determined under a totality of the circumstances [§707(b)(3)].
To determine whether a presumption of abuse arises under the means test under §707(b)(2), it is necessary to look at the debtor’s income compared with the median income in the debtor’s state. Income for purposes of this bankruptcy code section is defined as “current monthly income.” “Current monthly income” is defined in 11 U.S.C. §101(10A) as a monthly average of all the income received by the debtor (and the debtor’s spouse in a joint case) including regular contributions to household expenses made by other persons, but excluding Social Security benefits and certain victim’s payments during a defined six-month time period prior to the filing of the bankruptcy case. Note that this average income may or may not be the debtor’s actual income at the time of filing.. This has led some commentators to refer to the bankruptcy code’s “current monthly income” as “presumed income.”
The applicable median income will vary by family size. Generally, the larger the family, the greater the state’s median income and the more money the debtor must earn before a presumption of abuse arises.
This code section then requires a comparison between the debtor’s “current monthly income” and the median income for the debtor’s state. If the debtor’s income exceeds the median income, then the debtor must apply a “means test” designed to objectively determine the extent of a debtor’s ability to repay unsecured creditors.. The “means test” requires the debtor to take the “current monthly income” and reduce it by a list of allowed deductions.. Note that just as the “current monthly income” defined in the bankruptcy code is not necessarily “current,” “monthly,” or “income”, these deductions are not necessarily the actual expenses the debtor incurs on a monthly basis. Similarly, some commentators have referred to these deductions as “presumed expenses.” The deductions applicable in the “means test” are defined in §707(b)(2)(A)(ii)-(iv) and include: (1) living expenses specified under the ‘’collection standards of the Internal Revenue Service,’’ (2) actual expenses not provided by the Internal Revenue Standards including “reasonably necessary health insurance, disability insurance, and health savings account expenses,” (3) expenses for protection from family violence, (4) continued contributions to care of nondependent family members, (5) actual expenses of administering a Chapter 13 plan, (6) expenses for grade and high school, up to $1,500 annually per minor child provided that the expenses are reasonable and necessary, (7) additional home energy costs in addition to those laid out in the IRS guidelines that are reasonable and necessary, (8) 1/60th of all secured debt that will become due in the five years after the filing of the bankruptcy case, (9) 1/60th of all priority debt, and (10) continued contributions to tax-exempt charities.
After the debtor’s “current monthly income” is reduced by the allowed deductions as described in the previous paragraph, it can be determined whether there will be a “presumption of abuse.” The “presumption of abuse” will arise if: (1) the debtor has at least $166.67 in current monthly income available after the allowed deductions (this equals $10,000 over five years) regardless of the amount of debt, or (2) the debtor has at least $100 of such income ($6,000 over five years) and this sum would be enough to pay general unsecured creditors more than 25% over five years. For example, if a debtor had exactly $100 of “current monthly income” left after deductions and owed less than $24,000 in general unsecured debt, then the presumption of abuse would arise, [§707(b)(2)(A)(i)].
Of course, presumptions could be rebutted and §707(b)(2)(B) requires the debtor swear to and document “special circumstances” that would decrease income or increase expenses such that the debtor’s remaining “current monthly income” would fall below the above two presumption of abuse trigger points discussed in the prior paragraph.
Even in cases where there is no presumption of abuse because the debtor’s “current monthly income” was below the median, or because the application of the “means test” did not trigger the presumption, it is still possible for a Chapter 7 case to be dismissed or converted. Only a judge or the United States Trustee (or bankruptcy administrator) can seek dismissal or conversion of the debtor’s case if the debtor’s “current monthly income” is below the median. Any party in interest can seek dismissal or conversion if the debtor’s “current monthly income” is above the median, even if no presumption of abuse was triggered. The grounds for dismissal under §707(b)(3) are “bad faith” or when “the totality of the circumstances (including whether the debtor seeks to reject a personal services contract and the financial need for such rejection as sought by the debtor) of the debtor’s financial situation demonstrates abuse.”
Longer waiting period between filings: Another change that resulted from the BAPCPA was an extension of the time between multiple bankruptcy filings. §727(a)(8) was amended to provide that the debtor would be denied a discharge if a debtor had received a discharge in a prior Chapter 7 case filed within eight (8) years of the filing of the present case. Prior to BAPCPA, the rule was six (6) years between Chapter 7 filings. BAPCPA did not change the rule for the waiting period if the debtor filed a Chapter 13 previously.
Credit counseling and debtor education requirements: Another major change to the law en
