Federal statutes: 11 USC § 101 et seq. Note: specific statutory links are provided below
- 28 U.S.C. § 157
- 28 U.S.C. § 1334
- 28 U.S.C. § 1408
- 28 U.S.C. § 1930
- Federal Rules of Bankruptcy Procedure
What is bankruptcy
A decision to file for bankruptcy should be made only after determining that bankruptcy is the best way to deal with the client’s financial problems. Bankruptcy is a legal proceeding in which people who cannot pay their bills can get a fresh financial start or can reorganize their finances. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled exclusively in federal court. Filing for bankruptcy immediately stops almost all of a consumer’s creditors seeking to collect debts, at least until those debts are sorted out according to the law. Note: collection of child support and other domestic support obligations are exceptions.
When should a client file for bankruptcy
As a general rule, there is little reason to file for bankruptcy if the total amount of debt is small, or if all of the client’s current income and assets are considered "exempt". Since there are limits on filing a subsequent bankruptcy, the client should not “waste” a bankruptcy in a situation where the benefit of filing bankruptcy compared to other alternatives is small. Likewise, clients should not immediately file a bankruptcy if they think they are at risk of going deeper into debt in the foreseeable future. A bankruptcy may be appropriate if the client is in immediate danger of losing important property, such as a home, car or utility service. Every case is unique, and the client should consult with an attorney to determine if filing for bankruptcy is appropriate.
What Bankruptcy Can Do
Bankruptcy may make it possible for a client to:
- Eliminate the legal obligation to pay most or all of the client’s debts. This is called a "discharge" of debts. It is designated to give the client a fresh financial start;
- Stop foreclosure on the client’s house, mobile home, or repossession of a motor vehicle and allow an opportunity to catch up on missed payments. Bankruptcy does not, however, eliminate mortgages and other liens on the real estate without payment;
- Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed;
- Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt; and
- Restore or prevent termination of utility service.
What Bankruptcy Cannot Do
- Eliminate certain rights of "secured" creditors. A secured creditor has taken a mortgage or other lien on property as collateral for the loan. Common examples are car loans and home mortgages. A consumer can force secured creditors to take payments over time in a Chapter 13 case, and bankruptcy can eliminate the obligation to pay any additional money if the property is taken. Nevertheless, a consumer generally cannot keep the collateral unless the consumer continues to pay the debt, either by agreement with the creditor in a Chapter 7 case or as part of a Chapter 13 plan;
- Discharge types of debts singled out by the bankruptcy law for special treatment, such as child support, alimony, court restitution orders, criminal fines, and some taxes; and
- Discharge debts that arise after bankruptcy has been filed.
Types of consumer bankruptcy
Consumers have two very different bankruptcy options:
- Chapter 7
- Chapter 13
This option liquidates non-exempt assets to pay debts, and leaves the debtor with little or no further responsibility to repay.
Chapter 7 is best for those who:
- Can exempt most of their assets
- Need not worry about non-dischargeable debts (11 USC § 523)
- Have limited excess funds in budget
- All creditors’ claims are addressed at once, in one forum, in a Chapter 7 proceeding;
- An automatic stay stops further collection action by creditors, until the bankruptcy is closed; and
- Chapter 7 allows the debtor to protect certain exempt assets from liquidation for satisfaction of debts, see below for list of exemptions.
- Chapter 7 will discharge most but not all debts;
- The client may have to give up non-exempted property for sale by the trustee;
- The filing shows up on the consumer's credit report; and
- Chapter 7 is available only once every eight years as a remedy, and filing Chapter 7 prevents a debtor from receiving a discharge in a Chapter 13 case for 4 years. 11 U.S.C. § 727(a)(8) and 1328(f)(1)
Thus, it is wise to postpone filing if the situation will remain bad or worsen.
This option enables the debtor to repay debts in whole or in part over a three to five year period.
Chapter 13 is best for those who:
- Have a stable and regular income
- Are behind on secured debts but could pay them over time
- Have debts that are non-dischargeable under Chapter 7 but are dischargeable under Chapter 13
- Have assets in excess of the statutory exemption levels
- Want automatic stay to protect co-debtors while paying off joint debt; and/or
- Want to avoid moral stigma of "complete" bankruptcy
- Debtor can submit a plan for complete or partial repayment of debts; and
- After approval of the plan, the debtor retains control of assets during pendency of case.
- The plan must provide for payment of trustee’s fee as well as repayment of debts;
- Chapter 13 is available only once every two years as a remedy; and
- The debtor must have sufficient income to sustain the repayment plan as ordered by the court.
Exempt assets in bankruptcy
In both Chapter 7 and Chapter 13, the debtor may exempt certain assets, which do not have to be included in the estate of the debtor, the assets subject to sale to satisfy creditors.
What property can be kept?
In a Chapter 7 case, the consumer can keep all property which is "exempt" from the claims of creditors and is not secured by a mortgage or other lien. Illinois has opted out of the federal bankruptcy exemptions. 735 ILCS 5/12-1201. Residents of Illinois are only able to exempt property that is exempt under Illinois law or a non-bankruptcy federal law.
An explanation of exemptions allowed under Illinois law can be found at Debt Collection: Exemption Rights.
In a Chapter 13 case, consumers can keep all of their property if the plan meets the requirements of the bankruptcy law. The plan must provide for secured debts, but in most cases the repayment terms can be modified.
735 ILCS 5/12–901 is the Illinois Homestead Exemption statute. It provides the owner/occupier of a home, which includes condominiums and mobile homes, with a $15,000 exemption. If there are two or more owners, an additional $15,000 exemption is allowed. If your client owns a $250,000 house with a $245,000 mortgage, he cannot lose it to his creditors or a bankruptcy trusteem as long as he is current in his mortgage payments. However, the $35,000 used mobile home which the client just finished paying off may be taken either by creditors, or by the trustee. Upon the sale of the property, the client would be awarded his homestead exemption, $15,000, and the balance of the proceeds would be used to pay the creditors.
Illinois also recognizes a tenancy by the entirety ownership in property that is the debtor’s principal residence. A property that is owned in a tenancy by the entirety is property that is jointly owned by a married couple or the parties to a civil union as a marital entity and is not owned separately by each individual. If a couple has a tenancy by the entirety ownership in their home or real estate, then that property will be exempt as long as there are not any debts that are jointly owed.
735 ILCS 5/12–1001 deals with personal property exemptions, other than retirement accounts. This statute is extremely important to your client, because it lists what cannot be lost to a creditor. The personal property enumerated here is what the Illinois legislature has determined to be the minimum everyone has a right to retain, no matter what they owe or whom they owe it to. The most common and important exemptions are as follows:
- Personal property including family pictures, schoolbooks, health aids, and necessary wearing apparel;
- A "wild card exemption" of $4,000 worth of any other property, not including wages that have been garnished. This is called the "wild card exemption" because the debtor has the right to choose the exempt property. It could be a bank account, a tax refund, household furniture and furnishings, jewelry, furs, collections, or anything or any combination of things as long as the total value does not exceed $4,000;
- A motor vehicle exemption of $2,400 is included. If your client owns a car worth $40,000 but owes $39,000 on it, it cannot be taken. However, a $6,000 car which the client owns free and clear is at risk, at least theoretically. Note also that the $4000 "wild card" exemption can be "stacked" on top of the $2,400 motor vehicle exemption to create a $6,400 equity exemption of a motor vehicle;
- Tools of the trade of the debtor which do not exceed $1,500. These are items that a person uses to make a living;
- Life insurance proceeds payable to a wife or husband or to a child, parent, or other person dependent upon the deceased;
- Social security, unemployment compensation, public assistance, veteran’s benefits, disability or illness payments and alimony or support payments reasonably necessary for the support of the debtor and any of the debtor’s dependents. This includes the earned income tax credit In re Royal, 397 BR 88 (Bankr. N.D. Ill. 2008); In re Brockhouse, 220 B.R. 623 (Bankr.C.D.Ill.1998); In re Fish, 224 B.R. 82 (Bankr.S.D.Ill.1998).; and
- A payment of up to $15,000 for personal injury is exempt.
All of these exemptions also apply to what a trustee may take from the debtor’s estate in a bankruptcy. In reality, however, if the trustee finds the debtor’s assets to just slightly exceed his statutory exemptions, it is probably not worth the trustee's time and expense to pursue them. Of course, what "just slightly" means depends on the case and the trustee. While we try to make sure that everything a client owns fits into one of the exempt categories when we file a bankruptcy, a client with as much as a few thousand dollars in non-exempt personal property, furniture and furnishings for example, may well be able to keep everything he owns.
If, after reviewing the foregoing information, it appears that the client has no assets that can be lost, it is difficult to see how a bankruptcy would improve the client’s condition. While the filing of a Chapter 7 stops creditors from taking the assets of the debtor, a collection-proof debtor has, unfortunately, already attained that level of protection. Still, there are limited instances when it is not unreasonable for even a collection-proof client to seek a bankruptcy. For example:
- Suspension of a driver’s license. Illinois law requires drivers to carry liability insurance. An uninsured driver who has been involved in an auto accident may have his driving privileges suspended by the Secretary of State’s office unless he can show the Secretary’s hearing officer:
- He was not responsible for the accident;
- He is willing to deposit an amount equal to the damages claimed by the other driver with the Secretary of State’s office to insure payment if the other driver sues and obtains a judgment; and
- He enters into an installment agreement with the other driver to pay off the amount of damages claimed and makes all required payments.
The client who needs his license for work, as a delivery person, for example, or to transport a chronically ill child to and from the doctor, may need to file a bankruptcy even though he is collection proof. As long as the debt is dischargeable, the driver’s license must be reinstated after the case has been filed. 11 U.S.C. §525(a); Perez v. Campbell, 402 US 637 (1971). The debtor can be required to provide that he has insurance to cover future liability.
- Restoring utility service. A client whose gas or electricity has been turned off may not be able to restore service in any way other than through bankruptcy. 11 U.S.C. §366. This is one instance where the time of year may have a direct impact on legal proceedings. Late fall, the cold weather motivates some people to seek bankruptcy. While this may be a reason to file a bankruptcy for an otherwise collection-proof client, you should investigate two possible complications:
- Once service is restored, does the client have the resources to pay for the current service? If not, a bankruptcy will be a very short lived solution. The utility will terminate service again and the client will have lost the right to file bankruptcy for another eight years; and
- If the client’s bill is as a result of "tapping," (the illegal usage of the service provided by the utility) the creditor utility may file a lawsuit within the debtor’s bankruptcy – called an adversary complaint – objecting to the dischargeability of this debt. This complaint seeks a judgment that finds the debt to be non-dischargeable. The bankruptcy then proceeds to conclusion, but the debt to the utility is not wiped out. Again the client would lose the right to file a Chapter 7 for another eight years.
- Health of the debtor. In certain instances, a collection-proof debtor may be under so much pressure from creditors that there is a chance that they will suffer real physical or mental illness as a consequence. If the debt collection efforts are covered by the Fair Debt Collection Practices Act, 15 U.S.C. §1692 et seq., the debtor can tell the debt collector to stop contacting her.
Preparing the bankruptcy
If it appears that a bankruptcy will benefit the client and the client wishes to proceed, the following questions and issues need to be addressed:
- Have you ever filed a bankruptcy before? If so, when;
- Regardless of the answer to the questions, the attorney should conduct a search on PACER to see if the debtor has filed before;
- Individuals who voluntarily dismissed a prior bankruptcy case within the past 180 days after a motion to lift the automatic stay was filed are excluded from seeking bankruptcy relief;
- Individuals who had a prior bankruptcy case involuntarily dismissed within the past 180 days for willful failure to appear before the court in proper prosecution of the case or failure to obey court orders are excluded from seeking bankruptcy relief; and
- Is there an order in a previous case barring the debtor from filing again for a specified time?
If the client is not barred from filing or receiving a discharge, under what chapter can she file? 11 USC § 109 of the Bankruptcy Code provides the answer. Different chapters of the Code are restricted to different entities. For example:
- Chapter 7 is available to a person, defined as an individual, partnership or corporation, with certain specific exceptions, such as railroads, domestic insurance companies, banks and savings and loans; and
- Chapter 13 is available to an individual, no partnerships or corporations, with regular income who owes less than $360,475 in unsecured debts and less than $1,081,400 in secured debts. These dollar amounts are adjusted every three years. 11 U.S.C. § 104
A debtor with primarily consumer debts who files under the Chapter 7 bankruptcy will be subject to the "means test." If the debtor does not pass the means test, the case may be dismissed as a substantial abuse. It involves a 2-step process.
First, a debtor’s income is compared to the median income of the state for a family of the same size as the debtor’s. If the debtor’s income is lower than the median income of the state, then the case cannot be dismissed as a substantial abuse. If the debtor’s income is higher than the median income of the state, then the second step of the means test is triggered. Under that step, a debtor’s disposable income is found by subtracting certain expenses from the debtor’s total income. The median income numbers and allowable expenses can be found on the website of the office of the United States Trustee.
There are three different outcomes to the test depending on the debtor’s projected disposable income:
- If the projected disposable income is less than $7,025 over the following five years, the debtor will remain eligible for Chapter 7 bankruptcy;
- If the debtor's projected disposable income is higher than $11,725 over the following five years, then there is a presumption that Chapter 7 bankruptcy is an abuse of the bankruptcy system;
- If the debtor’s projected disposable income is between $7,025 and $11,725 over the following five years, then the debtor’s projected disposable income is compared to the amount of the debtor’s unsecured debt. If the projected disposable income is greater than 25% of the unsecured debt, there is a presumption that Chapter 7 bankruptcy is an abuse of the bankruptcy system. If the debtor’s projected disposable income is less than 25% of their unsecured debt, then the debtor may file for Chapter 7 bankruptcy; and
- Even if the debtor does not pass the means test, the debtor may still be able to defeat a motion to dismiss the Chapter 7 case if he or she can demonstrate special circumstances. 11 U.S.C. § 707(b)(2)(B)
Note: While 11 USC § 109 requires a debtor to either reside in the US, be domiciled in the US or have property located in the US, it does not require that a debtor be a citizen of the U.S.
Will it work?
The ultimate question of any bankruptcy is, will it accomplish the goal of the debtor, namely a fresh start free of the burden of debt? And if not, is it still worth filing?
Discharge v. dischargeability
A discharge is the release of all pre-bankruptcy liabilities. 11 USC § 727 provides that a discharge shall be granted unless any one of ten specific grounds are shown to exist. 11 § USC 523 specifies which particular debts are not dischargeable even if a discharge is granted. It reduces the benefit the debtor may receive from the discharge.
Of the ten grounds for not granting a discharge is that the debtor has received a discharge in a Chapter 7 proceeding within the last 8 years or has received a discharge in a Chapter 13 proceeding within the last 6 years in which the debtor paid less than 70% of the unsecured debt. 11 U.S.C. § 727(a)(8) and (9). Filing a Chapter 7 for this client would be a useless act as she is not eligible to receive another Chapter 7 discharge at this time. However, if it has been more than 4 years since the filing of a case in which the debtor received a Chapter 7 discharge, the debtor is eligible to receive a discharge in a Chapter 13 case.
It is most important to look at the client’s debts and be aware of the red flags which may signal problems with dischargeability. The following are some typical debts that you will encounter and problems that each may present:
- Procedure: There are three categories of debts where the creditor must file an adversary proceeding and get a ruling from the bankruptcy court that the debt is nondischargeable, otherwise the debt is discharged. These are:
- Theft, embezzlement, or defalcation while acting in a fiduciary capacity
- A debt for willful and malicious injury by the debtor to another entity or the property of another entity 11 U.S.C. § 523(a)(2), (4), and (6)
Student loans are nondischargeable unless the debtor obtains a ruling from the bankruptcy court that the debt should be discharged because it causes an undue hardship for the debtor and the debtor’s dependents. The other exceptions to discharge are self-enforcing.
- Credit cards: It is very important to find out when the client last used the card. Clients should be advised to stop using their credit cards immediately. If the debtor has made charges for luxury goods or services totaling more than $600 in the 90 days before bankruptcy is filed, those charges are presumed to be nondischargeable. Cash advances aggregating more than $875 obtained within 70 days of the filing of a bankruptcy are presumed to be non-dischargeable. 11 USC 523(a)(2)(C). Regardless of the amount or timing, charges made by a debtor before bankruptcy with no intention to repay can be challenged by a credit card company by way of an adversary complaint;
- Traffic accidents: Always ask if the accident occurred as a result of the client’s use of drugs or alcohol. 11 USC § 523(a)(9) exempts from discharge any debt for death or personal injury caused by the debtor’s operation of a motor vehicle while under the influence of drugs or alcohol. But note that a property damage claim is dischargeable;
- Student loans: Student loans are not dischargeable, unless the debtor can show that payment of the loan will impose an undue hardship on the debtor and their dependents. 11 U.S.C. § 523(a)(8);
- Taxes: A personal income tax debt can be discharged in a bankruptcy. However, to be dischargeable, the debt must fall within these strict guidelines:
- The debtor must have filed an individual tax return for the year in question;
- The return filed was not fraudulent; and
- It has been more than 3 years since the debtor's tax return was due and 2 years since the return was filed.
- Domestic Support Obligations: Any domestic support obligation in the nature of alimony, maintenance, or support of a spouse, former spouse, child of the debtor, or parent of the debtor’s child cannot be discharged in any kind of bankruptcy. 11 U.S.C. § 523(a)(5); 11 U.S.C. § 1328(a)(2). The definition of a domestic support obligation can be found at 11 U.S.C. § 101(14A);
- Property settlements in divorces: Obligations to a spouse or former spouse or child that are not domestic support obligations that arise out of divorce or separation are not dischargeable in a Chapter 7 case. 11 U.S.C. § 523(a)(15).
- Parking tickets: Even though parking tickets must be listed on the bankruptcy, 11 USC 523(a)(7) does not permit their discharge; and
- Debts due to the Department of Public Aid, Unemployment Compensation and other public benefit agencies: The question here is, how was the debt incurred? If the debt was the result of an error by the agency involved, the obligation can be extinguished by a bankruptcy.
For example, the debtor was a recipient of Public Aid for several years. Each time the debtor was employed he would submit copies of his paystubs to his case worker and would receive a monetary supplement based on his pay. At some point his case worker mistakenly computed his supplementary benefit incorrectly with the result that the debtor received several hundred dollars of excess benefits. The debtor was eventually notified of the error on the part of the Department and the amount of overpayment. If the debtor goes into bankruptcy, this debt will be discharged. If, however, the debt was incurred as result of provable fraud on the part of the debtor (i.e., failure to report employment income) while receiving Public Aid, the Department may file an adversary proceeding and prevent discharge of the debt.
- Bad checks: Bad checks may be dischargeable. Much depends on the circumstances. Did the debtor know that there were no funds to cover the check when it was written, or did the debtor think there was money in the account, or there would be money in the account by the time the check would be presented? Is there a pattern of bad checks over a period of time or is there a single event, "My boyfriend always deposited his pay into my account on Friday so I thought I had the money", which may have resulted in a number of bouncing drafts? The client should be advised that a bad check debt will be discharged in a bankruptcy unless the creditor files a successful adversary complaint; and
- Utility bills: Utility bills are dischargeable. 11 USC § 366 of the Bankruptcy Code prohibits a utility from refusing, discontinuing service to, or discriminating against a debtor simply because they have filed a bankruptcy. However, the debtor must, within the 20 days of the filing of the bankruptcy, provide the utility with "adequate assurance of payment" for future service.
Note: As discussed previously, it is important to find out from your client how the utility bills were incurred, especially very large bills in the thousands of dollars. While these debts can be discharged, a utility bill incurred through fraud or theft can be found to be non-dischargeable.
For example, Commonwealth Edison disconnects service to the home of a client who has failed to pay his bill for several months. The client, at this point, could file a bankruptcy and discharge the debt. Instead, the client illegally hooks his service up again. ComEd finds the illegal tap, again disconnects service, and sends the client an estimated bill for the months of unauthorized usage. The client should be advised that the utility may now file an adversary complaint to determine the dischargeability of the debt if a bankruptcy is filed. Only the service obtained after the illegal self-restoration is nondischargeable. If the utility chooses not to file an adversary complaint the debt will be discharged.
- Secured debts: Clients who seek to file a bankruptcy in order to avoid paying secured creditors while retaining the secured items should be advised that a secured creditor has the right to expect payment or a return of the security, whether or not the debtor goes into a bankruptcy. Therefore, if the purpose of the bankruptcy is to wipe out the car loan or the mortgage, this will only be accomplished in conjunction with the return of the car or the house to the creditor. Sometimes, the creditor will offer to reduce a secured debt, typically on furniture or home appliances, if the debtor will agree to reaffirm on this lower figure;
- Post-petition debts: These debts are not dischargeable. This is why someone who is at risk of incurring medical bills not covered by insurance needs to be careful when deciding whether to file bankruptcy and the timing of the filing; and
- Medical bills: These are always unsecured. However, finding out the reason for these bills may be very important. A client who went to the emergency room because of a broken arm or had successful surgery some time ago is in a much different position than the client who suffers from a chronic condition or a life threatening illness. The first individual should have no qualms about proceeding with a bankruptcy. Time should be taken with the second person to make sure that the client understands that:
- A bankruptcy can only discharge debts which have been incurred as of the date of the filing of the petition. This means that if a new medical bill is incurred the day after the bankruptcy is filed, it cannot be included in that bankruptcy; and
- A second Chapter 7 bankruptcy cannot be filed within 8 years of the first. If the purpose of the bankruptcy is to wipe out medical bills, but the individual suffers from a chronic condition which can result in hospitalization at any time and the client does not have medical insurance, the client should be advised of the drawbacks of bankruptcy to make sure she is making a fully informed decision.
Choice of Individual vs. Joint Husband/Wife Bankruptcy
One spouse can file for bankruptcy without the other spouse joining in the action, or a husband and wife can file jointly. In a joint filing, both spouses must sign the bankruptcy documents.
Cost to file: fees
- The fee to file a Chapter 7 is $335;
- The fee to file a Chapter 13 is $310. A husband and wife may file jointly for the same fee;
- The filing fee for a Chapter 11 is $1717; and
- Filing fees for a Chapter 7 case can be waived for debtors earning below 150 percent of the federal poverty level.
Pay stubs and tax returns
After filing for bankruptcy, the debtor must send their pay stubs for the 60 days preceding the filing of the bankruptcy case to the trustee for his case. In a Chapter 7 case the debtor must also provide the trustee with the most recently filed tax return. In a Chapter 13 case the debtor must provide tax returns for the 4 years before the case was filed. If the debtor has not received any pay stubs or pay advices, the debtor can submit an affidavit or declaration to that effect.
Filing a bankruptcy petition results in an automatic stay of a broad range of actions by creditors seeking to reach debtor’s property, including:
- Commencing or continuing virtually any debt collection efforts, including dunning letters or other informal collection methods
- Obtaining, perfecting, or enforcing a lien
- Enforcing a pre-petition judgment against "property of the estate" of the debtor
- Issuing or use of process in a judicial, administrative or other proceeding against the debtor
- Any act to obtain possession from the debtor
Note: In a Chapter 13 bankruptcy, the automatic stay provides the above protection to co-debtors as well.
Exceptions to stay
Exceptions to the stay are limited but include:
- Commencement or continuation of a criminal action;
- Establishing paternity, establishing or modifying a domestic support obligation;
- Collecting a domestic support obligation from property that is not property of the estate, or by withholding of income pursuant to court or administrative order, intercepting a tax refund, or suspension of a drivers license, professional, or occupational license or a recreational license;
- Filing or continuing a divorce;
- If a case is filed within a year of dismissal of a previous case, the stay only lasts for 30 days, unless it is extended by the court; and
- If a case is filed and two cases have been dismissed in the year before the case was filed, there is no stay, unless and until a stay is imposed by the court.
Relief from stay
If their action does not fall within the listed exceptions, parties requesting relief from the automatic stay must petition the bankruptcy court. Examples of parties who might be granted relief are:
- Landlords seeking eviction
- Secured creditors seeking to foreclose on a mortgage or to repossess personal property
- Spouses seeking a division of marital property, divorce, or child custody
Mechanics of Chapter 13 repayment plan
Debtor’s proposed plan
After the bankruptcy petition is filed and creditors are notified, the debtor files a proposed repayment/discharge plan. The first payment under the plan must be made within 30 days of the filing of the case.
The first meeting of creditors is then held. At that time, creditors can question the debtor, under oath, about the plan, debts, assets, income, etc.
Confirmation of plan
At the confirmation hearing, a judge determines whether the debtor’s proposed plan can be confirmed. Creditors can raise objections to the plan.
To be confirmed, the plan must:
- Be proposed in good faith
- Be feasible
- Satisfy the "liquidation test" i.e., the present value of proposed payments to each unsecured creditor must be at least equal to what that creditor would have received in a Chapter 7 liquidation
- Either be accepted by secured creditors or provide for their secured claims in accordance with the Bankruptcy Code
- Provide for payment in full of certain priority claims e.g., domestic support obligations and nondischargeable income taxes
If unsecured creditor(s) or the trustee object to the plan, it cannot be confirmed unless it meets an additional test. Under the additional test, the plan must either:
- Pay the full amount of the claim; and
- Use all of debtor’s excess income to repay creditors over either a three-year period, if the debtor’s “current monthly income” as determined by the means test is under the state median income, or over a five year period.
Discharge of debts
Discharge of remaining debts is granted after all plan payments have been made. All debts within the plan are discharged except:
- Alimony/child support
- Debts maturing after the term of the plan
- Debts that have been determined to be the result of fraud, embezzlement, defalcation while in a fiduciary capacity
- Debts resulting from drunk driving or willful or malicious injury that caused personal injury or death
A "hardship discharge" may be granted despite debtor’s failure to complete the plan, if:
- The failure is beyond the debtor’s control;
- The sums the debtor has paid under the plan are at least as much as creditors would have received under Chapter 7; and
- Modification of the plan is not feasible.
The debtor may amend the petition to include creditors who were owed money when the petition was filed but were left off after bankruptcy is filed. The case of In re: Mendiola, 99 B.R.864 (N.D. Ill. 1989) states that subsequent to discharge in a no-asset Chapter 7 bankruptcy there is no need to amend the petition to add creditors that were inadvertently omitted from the petition as those debts are discharged despite the failure of the debtor to list them.
Modification of Chapter 13 plan
The debtor may modify the proposed plan before confirmation as long as it will still meet confirmation requirements.
To modify the plan after confirmation, the debtor must notify all creditors. If any creditors object to the modification, a hearing must take place to determine whether the changes should be approved.
Chapter 7 to 13
The debtor has a right to convert from Chapter 7 to 13 if the debtor is eligible to be in Chapter 13, but there is no 7 to 13 conversion unless the debtor requests it. The debtor must file a motion to convert the case.
Chapter 13 to 7
The debtor may convert at any time. This is done by a notice of conversion. A creditor may also request a 13 to 7 conversion, but if the creditor requests conversion, there is no conversion unless it is approved by court after notice and a hearing. The debtor has the right to dismiss a Chapter 13 case, and may prefer to have the case dismissed instead of converted. If a case is converted from Chapter 13 to Chapter 7, debts incurred after the Chapter 13 case was filed and before conversion are eligible to be discharged, if they are dischargeable in a Chapter 7 case. Conversion does not affect eligibility for discharge. If the debtor was not eligible for a Chapter 7 discharge when the case was filed under Chapter 13 she will not be eligible for a discharge after the case is converted, even if the conversion occurred more than 8 years after the prior Chapter 7 bankruptcy was filed. This is an example of a situation where dismissal would be preferable to conversion.
- Chapter 7: May be dismissed only "for cause" after notice and a hearing.
- Chapter 13: The debtor may obtain dismissal upon request, as long as the case has not been converted to another chapter.
Necessity to go to court
In most bankruptcy cases, the consumer only has to go to a proceeding called the "meeting of creditors" to meet with the bankruptcy trustee and any creditor who chooses to come. Most of the time, this meeting will be a short and simple procedure where the consumer is asked a few questions about the bankruptcy forms and their financial situation.
Occasionally, if complications arise, or if the debtor chooses to dispute a debt, the consumer may have to appear before a judge at a hearing. If the debtor needs to go to court, the debtor will receive notice of the court date and time from the court or from the attorney.
Things to know about bankruptcy
What will happen to the clients' car and home?
In most cases, the consumer will not lose his home or car during the bankruptcy case as long as the equity in the property is fully exempt. Even if the property is not fully exempt, the consumer will be able to keep it, if he pays its non-exempt value to creditors in Chapter 13.
However, some of the creditors may have a "security interest" in the home, automobile or other personal property. This means that the consumer gave that creditor a mortgage on the home or put other property up as collateral for the debt. Bankruptcy does not make these security interests go away. If the consumer doesn’t make payments on that debt, the creditor may be able to take and sell the home or the property, during or after the bankruptcy case.
There are several ways that the consumer can keep collateral or mortgaged property after filing the bankruptcy. If she is current on her payments, she can agree to keep making payments on the debt until it is paid in full. In a Chapter 7 case, if the property is exempt personal property, she can pay the creditor the amount that the property is worth. This is called redemption, and the payment has to be in a single payment. 11 U.S.C. § 722. In some cases involving fraud or other improper conduct by the creditor, she may be able to challenge the debt. If the consumer put up her household goods as collateral for a loan, other than a loan to buy them, she may be able to keep that property without making any more payments on that debt by filing a motion to avoid the lien if the property is exempt.
What the debtor can own after bankruptcy?
Many people believe they cannot own anything for a period of time after filing for bankruptcy. This is not true. The consumer can keep exempt property and anything obtained after the bankruptcy is filed. However, if the consumer receives an inheritance, a property settlement, or life insurance benefits within 180 days after filing for bankruptcy, that money or property may have to be paid to creditors if the property or money is not exempt.
How will future credit be affected?
There is no clear answer to this question. Unfortunately, if the consumer is behind on bills, their credit may already be bad. Bankruptcy will probably not make things any worse.
The fact that the consumer has filed a bankruptcy can appear on their credit record for ten years. But since bankruptcy wipes out the old debts, the consumer is likely to be in a better position to pay current bills, and therefore may be better able to get new credit.
Other things to know
Discrimination. A government agency cannot discriminate against the consumer because of a filing for bankruptcy. A private employer cannot fire or refuse to promote an employee because the employee has filed for bankruptcy.
Co-signers. If someone has co-signed a loan with the consumer who files for bankruptcy, the co-signer may have to pay the debt.
Necessity for an attorney
Although it may be possible for some people to file a bankruptcy case without an attorney, it is not a step to be taken lightly. The process is difficult and consumers may lose property or other rights if they do not know the law. It takes patience and careful preparation. Chapter 7, straight bankruptcy, cases are easier. Very few people have been able to successfully file Chapter 13, debt adjustment, cases on their own.
Credit counseling requirement
Within 180 days prior to filing a Chapter 7 or 13 bankruptcy, the debtor must receive a briefing from a nonprofit budget and credit counseling agency that has been approved by the United States trustee or bankruptcy administrator. This can be done the same day that the case is filed, as long as it is completed before the case is filed. Agencies must waive the fee for debtors who are unable to afford the fee. If an agency refuses to waive the fee and the debtor is very low income, the debtor should shop around. There are many approved agencies. The briefing can be done by phone or by internet, and can be done quickly, so the courts almost never waive the credit counseling requirement. After the case is filed debtors must also complete an instructional course on personal financial management in order to get a discharge.
Services to avoid
Document preparation services, also known as "typing services" or "paralegal services", involve non-lawyers who offer to prepare bankruptcy forms for a fee. Problems with these services often arise because non-lawyers cannot offer advice on bankruptcy cases and they offer no services once a bankruptcy case has begun. There are also many shady operators in this field, who give bad advice and defraud consumers.