General Questions & Answers About Bankruptcy
1. Will I lose my property if I file for personal bankruptcy?
Generally, you may file a bankruptcy and retain all of your personal belongings, including your house, your car and all household goods. Even if your property is worth more than what is owed on it, usually you can use the state bankruptcy exemptions to protect these items.
You may be more at risk of losing property if you don’t file bankruptcy, as creditors can sue you and attach your bank accounts, garnish your wages and attach and seize your property. As a result, you may miss rent, mortgage or car payments, making it difficult to provide even your most basic necessities.
2. Do I need an attorney to file for bankruptcy?
You may file a bankruptcy petition on your own if you are an individual, but not if you are a corporation or partnership. If you cannot afford one or feel comfortable in completing your own paperwork, this site provides a step-by-step approach with all the resources you will need to complete your own bankruptcy…be your own lawyer.
3. What are the different “Chapters” in bankruptcy for consumers?
The majority of consumers will file for bankruptcy qualify for Chapter 7. It is the liquidation chapter of the Bankruptcy Code. Chapter 7 cases are often referred to as “straight bankruptcy” or “liquidation” cases. Under Chapter 7, a trustee is appointed to collect and sell all property that is not exempt and to use any proceeds to pay creditors. In the case of an individual, the debtor is allowed to claim certain property as exempt pursuant to federal bankruptcy law or their state law. An individual debtor gets a discharge, which means the debtor does not have to pay certain types of debts. This site allows you to answer a few short questions to see if you will likely qualify for a Chapter 7 bankruptcy. If you do not qualify and need to file a Chapter 13 bankruptcy, we can provide an immediate link to an attorney who your community that can help you prepare it.
Chapter 13 is the debt repayment chapter for individuals with regular income whose debts do not exceed $1,532,700 ($383,175 in unsecured debts and $1,149,525 in secured debts), including individuals who operate businesses as sole proprietorships. Corporations and partnerships cannot file under Chapter 13. Chapter 13 generally allows a debtor to keep property by repaying creditors out of future income. Each Chapter 13 debtor proposes a repayment plan which must be approved by the Court. The amounts set forth in the plan must be paid to the Chapter 13 Trustee, who distributes the funds for a small fee. Some nondischargeable debts can be paid over time in a Chapter 13 plan. After the completion of all the plan payments, over three to five years, Chapter 13 debtors receive a discharge of most debts.
4. What steps are followed to file for bankruptcy?
The particular steps in a bankruptcy are different based on the Chapter you file. However, all bankruptcy cases start as follows:
a) First you must decide whether you will prepare the bankruptcy yourself or use an attorney. This site provides a step-by-step approach to preparing and filing your own bankruptcy. However, if at any time you decide that you prefer to have an attorney represent you, this site has links to bankruptcy attorneys in your community who will credit the fee you pay for this do-it-yourself service towards their attorney fees.
b) Next, you should begin to accumulate the documents and information needed to complete the bankruptcy paperwork.
Completing the bankruptcy paperwork requires debtors to provided detailed information about their assets (consisting of a list of the assets and the fair market value of the assets), liabilities (including the names, addresses and account numbers for each creditor), income (during the three years prior to the bankruptcy, and month to month beginning 6 months before the bankruptcy is filed), and expenses.
You will need to have month to month records of your gross income and payroll deductions for the 6 months prior to your bankruptcy filing, and will need to have copies of all paystubs and other evidence of wages of salaries received within 60 days of the bankruptcy filing.
c) A precondition to the bankruptcy filing is a mandatory credit counseling briefing by an agency which has been approved by the Office of the United States Trustee. This site will link you directly with an agency that can provide the briefing over the phone and internet. If you have not undergone a briefing during the 180 days prior to your bankruptcy filing your case will be dismissed. You must file a certificate of completion (provided by the counseling agency) with your Bankruptcy Paperwork.
d) After the case is filed all debtors must attend a first meeting of creditors (also called the “Section 341 Meeting”). A trustee will preside at the meeting. The Trustee uses the meeting to ask you questions about your bankruptcy paperwork, to determine if you have assets which exceed the amount of allowable exemptions. In addition, all your creditors receive notice of the meeting and can attend and question you about your financial condition and the bankruptcy, although creditors seldom appear.
5. What is a Joint Bankruptcy Petition?
A joint bankruptcy petition is the filing of a single petition by a husband and wife. Only a couple who is married (including common law marriage) on the date of filing may file a joint petition. Unmarried people, corporations, and partnerships must file separate petitions.
6. Does my spouse have to file if I file?
No. Married individuals can choose to file a joint petition, but one spouse can file alone. However, information about assets and wages of the non-filing spouse must appear in your statements and schedules, to give a complete picture of your financial situation.
7. Where do I file my case?
You file your case at the United States Bankruptcy Court nearest to where you live. A list is included in our downloaded forms and materials. You may not fax your paperwork to the Court, only mail or in person.
8. What documents do I need to submit to file bankruptcy?
The following documents must be filed in all bankruptcies filed on and after October 17, 2005. Additional documents may be necessary depending upon your chapter and your individual situation. Clip (do not staple) the following forms together in this order for a petition packet:
a) Voluntary petition – Form 1 and any necessary exhibits required by the Form.
b) Statement of Financial Affairs – Form 7
c) Summary of Schedules A-J – Form 6-Summary
d) Schedules A, B, C, D, E, F, G, H, I, and J – Forms 6A through 6J
e) Declaration Concerning Debtor’s Schedules – Form B6
f) For each debtor, copies of all payment advices, paycheck stubs, or other evidence of all salary, commissions or income received within 60 days before the bankruptcy case was filed, copied on 8 1/2 by 11 paper with the debtor’s first and last name printed on top of each page (and bankruptcy case number, if a number has been assigned).
g) Verification of Creditors’ Matrix
h) Creditors’ Matrix (verify with your local bankruptcy court as to how to file)
i) Additional Items due from Individual Debtors:
Social Security Number Statement – Form 21
Statistical Summary of Certain Liabilities – Form 6-
Exhibit D Individual Debtor’s Statement of Compliance with Credit Counseling Requirement (Official Form 1 Exhibit D)
Certificate of Credit Counseling showing that each debtor completed credit counseling from an approved counselor within the 180 days BEFORE they filed the case. If each debtor did not receive the counseling, then, each debtor must file a request with the voluntary petition that states sufficient facts to justify an extension of time to get counseling.
For Chapter 7 Individual Debtors:
Statement of Current Monthly Income and Means Test Calculation Form 22A (unless the nature of debts are from the operation of the debtor’s business)
Statement of Intention – Form B8 (due thirty days post-petition) (the failure to comply with your stated intentions and file reaffirmation agreements or motions to redeem personal property that the debtor does not intend to surrender has ramifications beginning 45 days after the first scheduled meeting of creditors.
Exhibit D, Individual Debtor’s Statement of Compliance with Credit Counseling Requirement
9. What is the mailing matrix?
It is a list of the creditors in your case which must be filed in the proper format so that it can be used by the Court’s automated noticing system. Check with your local bankruptcy court as to the format they use for filing your mailing matrix.
a) Generally, the matrix must be prepared as follows- Do NOT include page titles, headers, or page numbers One single column per page Five (5) lines per address maximum Special characters such as @#$%^&*()_+? are not permitted City, state and zip code must be on one (1) line City, state and zip code must be on the last line of the address Triple space between each creditor’s address (see example below) Maximum of forty (40) characters per line. Our forms automatically alphabetize the creditors on Schedules D, E, and F (required by the court) and automatically creates a mailing matrix page for you.
b) Do NOT include the names and addresses for the following people as they will be retrieved automatically by the system for noticing:
- Debtor and/or joint debtor
- Attorney for the debtor, if any
- Any 341Trustee
- U.S Trustee
c) The form, Verification of Creditor Matrix must be prepared and filed.
d) A supplemental or amended creditor(s) matrix shall include ONLY new creditor(s) NOT PREVIOUSLY SUBMITTED. If you wish to change the address of a creditor already submitted, file a completed Change of Address form and DO NOT file an amended matrix.
10. What is the filing fee?
Currently, (May, 2013) The current fee for filing a Chapter 7 petition is $306.00. The current fee for filing a Chapter 13 petition is $281.00. The Court does not accept personal checks or credit cards from debtors for the payment of these fees.
11. Are there forms for credit counseling and personal financial management instruction-and what is the difference between the two?
Credit counseling is the counseling that you obtain before you file bankruptcy from a credit counselor authorized by the United States Trustee. It is required for ALL individual debtors. When you complete your credit counseling from a credit counselor, the credit counselor will issue a certificate that must be filed with the Bankruptcy Court. If you are filing jointly with your spouse, both of you must complete credit counseling. The failure to timely file a properly issued credit counseling certificate will result in the dismissal of your bankruptcy case in almost all circumstances. The credit counselor may develop a proposed budget and repayment plan if it appears that you could afford such a plan (if one is prepared, it is to be filed along with the certificate).
Personal Financial Management Instruction is the instruction that you obtain after you file bankruptcy from an agency authorized by the United States Trustee. It is only required for Chapter 7 and 13 individual debtors. Once you complete the instruction you are to file Official Form B 23 and if a certificate was provided, it should be attached. In Chapter 7 cases, the certificate of completion of a course in financial management must be filed within 45 days of the first scheduled 11 U.S.C. § 341 Meeting of Creditors. In Chapter 13 cases, the certificate of course completion is due prior to the completion of all plan payments so that a discharge may be obtained. The failure to timely file the certificate of course completion in either a Chapter 7 or Chapter 13 case could result in your case being closed without the issuance of a discharge. If this happens, you will need to pay a filing fee to reopen the case to file the certificate so that a discharge may be obtained.
You will be linked directly to an approved agency from this site as a part of the service we provide or you can visit http://www.usdoj.gov/ust/ for the most recent information on approved credit counseling agencies and approved personal financial management instructional course providers.
12. What is the Means Test?
The means test is used in cases where the Chapter 7 individual debtor’s(s’) current monthly income exceeds the state’s median family income. It is used to determine if a debtor has the ability to repay a minimum level of general unsecured debt after the payment of allowable monthly expenses. If the means test shows a debtor has such an ability to repay, there is a “presumption of abuse.” In other words, if the debtor(s) receive(s) a Chapter 7 discharge, this would be an abuse of the bankruptcy process, because the debtor(s) may have the ability to repay debts outside of bankruptcy or through a Chapter 13 repayment plan over time. The analysis involves application of certain IRS guidelines for expenses in determining the ability to repay as well as a review of income from the previous six months to determine if the debtor(s) is/are above the median income for the state where they reside. All of this is explained in the step-by-step procedures in this site. The links to the IRS guidelines and median income information are also found on the United States Trustee’s website at http://www.usdoj.gov/ust/ under Means Testing Information.
13. How can I change or correct information in the petition, statements, and schedules I have filed?
The information contained in your petition, statements, and schedules is submitted under penalty of perjury. Accordingly, one who intentionally submits such information that is inaccurate or misleading may have committed a serious crime. Therefore, you must be certain this information is correct when you sign these documents. If you later discover something is inaccurate, you must correct the documents by filing an amendment with the Clerk’s Office. If a schedule is amended, an appropriate amended schedule must be filed showing the correction, along with an Amended Summary of Schedules. If you are adding a creditor or changing a creditor’s address, you must also submit another diskette showing only the changes (see question on Creditor’s Matrix for instruction on making a diskette). A fee of $26.00 must be paid to amend schedules of creditors or lists of creditors for the purpose of adding a creditor. The debtor must include the debtor’s full taxpayer identification number in the notice mailed to the added creditor, but only include the last 4 digits of the identification number in the notice or certificate of service filed with the Court. The debtor must give notice to the creditor(s) impacted, changed or added by the amendments by mailing them a copy of the Notice of meeting of Creditors. A Certificate of Service evidencing such must be filed with the court.
14. What is a Meeting of Creditors? What happens there?
The meeting of creditors is a hearing all debtors must attend in any bankruptcy proceeding. It is held outside of the presence of the judge and usually occurs between 20 and 40 days after the filing of the petition. The meeting permits the trustee or the representative of the U.S. Trustee to review the debtor’s petition and schedules face-to-face with the debtor. The debtor is required to answer questions under penalty of perjury (swearing or affirming to tell the truth) about the debtor’s conduct, property, liabilities, financial condition, and any other matter that may affect the administration of the case or the debtor’s right to discharge. In addition, the trustee or U.S. Trustee’s representative will ask questions to ensure that the debtor understands the bankruptcy process.
The meeting is referred to as a “meeting of creditors” because creditors are notified that they may attend and ask the debtor questions pertaining to assets or any other matter pertinent to the administration of the case. It is also referred to as a “341 meeting” because it is mandated by Section 341 of the Bankruptcy Code. Creditors are not required to attend these meetings and do not waive any rights if they do not attend. The meeting usually lasts only about ten to fifteen minutes and may be continued if the trustee or U.S. Trustee’s representative is not satisfied with the information presented.
If the debtor fails to appear and provide the information requested, the trustee or U.S. Trustee’s representative may request that the case be dismissed, or may seek other relief against the debtor for failure to cooperate. If the case involves spouses filing jointly, both spouses must appear at the meeting of creditors.
15. What kinds of debts are not discharged?
Nondischargeable debts include: certain tax obligations (including taxes due within three years of the bankruptcy filing); debts resulting from fraudulent conduct on the part of the debtor; debts owed to unlisted creditors; debts resulting from breaches of fiduciary duties; support obligations; debts resulting from willful and malicious conduct; fines, penalties and restitution obligations; student loans (unless such an exception would impose an undue hardship on the debtor or a dependent); and domestic obligations.
In addition, a debtor may be denied discharge as to all debts if, among other things, the debtor: transfers or conceals property within a year of the bankruptcy filing with the intent to hinder, delay or defraud a creditor; fails to keep or preserve relevant records; makes a false oath with respect to, among other things, information provided in the bankruptcy paperwork or to the bankruptcy trustee; or refuses to cooperate with the trustee in the administration of the estate.
16. How do I know if a debt is secured, unsecured, priority, or administrative, so I can fill out my schedules correctly?
Secured Debt: A secured debt is a debt that is backed by a mortgage, pledge of collateral, or other lien, including a properly recorded judgment lien. It is a debt for which the creditor has the right to pursue specific pledged property upon default. Typically, things like a car or a house are used as collateral to secure consumer loans. Unsecured Debt: If you have simply promised to pay someone a sum of money at a particular time and have not pledged any property, it is an unsecured debt. This may include a judgment that is not secured by a lien. Typically, things like medical bills and gas or electric bills are unsecured debts.
Priority Debt: These are debts that are entitled to be paid ahead of most other unsecured debts. These are called priority debts. Examples of priority debts are some taxes, wage claims of employees, debts related to goods and services provided to a debtor’s estate during the bankruptcy case, and alimony, maintenance, or support or a spouse, former spouse, or child.
Administrative Debt: An administrative debt is a type of priority debt and arises when someone provides goods or services to the bankruptcy estate during the case. In some cases, attorney’s fees are an example of administrative debt, as are trustee’s fees and costs.
17. What are exemptions?
The Bankruptcy Code allows an individual debtor to hold back from the bankruptcy process certain property. Such property is called an exempt asset. Exempt assets are protected by state law from distribution to creditors. Examples of exempt assets include vehicles up to a certain value, equity in a home up to a certain value, and tools of your trade. Exemptions must be claimed or lost and they are claimed on Schedule C. If no one objects to the claimed exemptions within a specified time, the assets may not be part of your bankruptcy estate.
The Bankruptcy Code allows states to choose to use their own exemptions rather than the Federal exemptions listed in 11 U.S.C. §522. A full list of state and Federal exemptions is included in the service on this site.
18. What happens after I file my bankruptcy case?
When you file your petition, an “automatic stay” will usually take effect. The automatic stay prohibits creditors from taking collection action against you or your property. The Court issues a notice to all creditors advising them of the filing, the case number, the automatic stay, and the name of the trustee assigned to the case. The notice also tells creditors the date of the meeting of creditors (the “341 meeting”) the deadline for filing objections to the debtor’s discharge or to the dischargeability of certain debts, and whether and where to file claims. All debtors must appear at the meeting of creditors or the case may be dismissed.
In an individual’s Chapter 7 case, creditors generally have 60 days from the first date set for the meeting of creditors to object to the debtor’s discharge or the dischargeability of certain debts. If the deadline passes without any objections to the debtor’s discharge being filed, the Court may issue the discharge order. Other matters that may prevent or delay the discharge are: certain pending reaffirmation agreements, if a hearing is required and has not been held, the failure to file the verification of completion of an Instructional Course in Personal Financial Management. If any objections to the dischargeability of debts are filed, they will be heard by the Court, but will not stop the entry of the discharge as to other debts. Only an individual debtor receives a discharge.
19. What is the Discharge?
A discharge order issued by the Court permanently prohibits creditors from taking action against a debtor personally to collect debts incurred before the filing of the bankruptcy petition. The discharge does not prevent secured creditors from seizing collateral if payments are not kept up. The discharge does not prevent collection of debts incurred after the filing of the bankruptcy. Some debts are not dischargeable, and some debts are not dischargeable under certain circumstances.
Some examples of debts that may not be discharged include: certain taxes and fines, debts not listed in your bankruptcy, alimony, child maintenance or support, debts from willful and malicious injury to another, debts created through fraudulent conduct or by providing false information to a creditor.
20. What is a Reaffirmation Agreement?
A reaffirmation agreement is an agreement between the debtor and a creditor by which a debtor becomes legally obligated to pay all or a portion of an otherwise dischargeable debt. Such an agreement should be filed within 45 days after the first date set for the meeting of creditors. A debtor who signs a reaffirmation agreement has 60 days after the agreement is filed, or until the discharge date, whichever occurs later, to change his mind and inform the creditor that the agreement is rescinded. Debtors entering into a reaffirmation agreement without counsel representing them will need to attend a hearing before a judge to determine if the agreement will be valid. Since a reaffirmation agreement takes away some of the effectiveness of your discharge, you are strongly advised to consult legal counsel before agreeing to a reaffirmation of a debt.
21. What can I do if a creditor keeps trying to collect money after I have filed a bankruptcy?
You can write the creditor and provide them your case name and number or a copy of your petition and your discharge order. If the collection efforts continue, you may be entitled to take further legal action, which would normally require representation by a qualified bankruptcy attorney.
22. Can the Court waive the filing fee?
Federal law, 28 U.S.C. §1930, requires a fee to file a bankruptcy petition. If you cannot pay the full fee at the time of filing, you may apply to pay the fee in installments. A form, which is available from the bankruptcy clerk’s office, must be completed to make that application. If your application to pay in installments is approved, you will be permitted to complete paying the fee over the course of four months. Chapter 7 debtors in certain specific circumstances may request a waiver of the initial filing fee upon showing that they meet certain criteria. If the Court denies the request, you will be required to pay the fee in installments.
23. Can my Social Security be tapped to pay defaulted student loans?
Yes. The Debt Collection Improvement Act of 1996 (31 U.S.C. Section 3716(c)(A)(i)) now allows federal government agencies to offset Social Security benefits to collect debts such as student loans. Formerly these benefits were totally exempt; now you’re left with a maximum exemption of $9,000 each year.
Chapter 13 FAQ’s
Are you eligible for Chapter 13 bankruptcy?
For many, Chapter 13 bankruptcy is a good option. But not everyone is eligible for Chapter 13 bankruptcy.
A business, even a sole proprietorship, cannot file for Chapter 13 bankruptcy in the name of that business. Businesses must Chapter 11 bankruptcy if they need help reorganizing their debts.
If you own a business you can file for Chapter 13 bankruptcy as an individual. You can include in your Chapter 13 bankruptcy case business-related debts for which you are personally liable.
You Must Have Sufficient Disposable Income
In order to qualify for Chapter 13, you will have to show the bankruptcy court that you will have enough income, after subtracting certain allowed expenses and required payments on secured debts (such as a car loan or mortgage), to meet your repayment obligations. Your plan must pay back certain debts in full, or the judge will not confirm (approve) it and allow you to proceed.
You can use the income from the following sources to fund a Chapter 13 plan:
- regular wages or salary
- income from self-employment
- wages from seasonal work
- commissions from sales or other work
- pension payments
- Social Security benefits
- disability or workers’ compensation benefits
- unemployment benefits, strike benefits, and the like
- public benefits (welfare payments)
- child support or alimony you receive
- royalties and rents, and
- proceeds from selling property, especially if selling property is your primary business.
If you are married, your income does not necessarily have to be “yours.” A nonworking spouse can file alone and use money from a working spouse as a source of income. And an unemployed spouse can file jointly with a working spouse.
Your Debts Must Not Be Too High
You do not qualify for Chapter 13 bankruptcy if your secured debts exceed $1,081,400. A debt is secured if you stand to lose specific property if you don’t make your payments to the creditor. Home loans and car loans are the most common examples of secured debts. But a debt might also be secured if a creditor — such as the IRS — has filed a lien (notice of claim) against your property.
In addition, for you to be eligible for Chapter 13 bankruptcy, your unsecured debts cannot exceed $360,475. (This amount is also periodically adjusted for inflation.) An unsecured debt doesn’t give the creditor a right to take a particular piece of property. Most debts are unsecured, including credit card debts, medical and legal bills, back utility bills, and department store charges.
You Must Be Current on Your Income Tax Filings
To file for Chapter 13, you will have to submit proof that you filed your federal and state income tax returns for the four tax years prior to your bankruptcy filing date. If you need some time to get current on your filings, the court can postpone the proceedings. Ultimately, however, if you don’t produce your returns or transcripts of the returns for those four years, your Chapter 13 case will be dismissed.
How to File for Chapter 13 Bankruptcy
1. Make sure Chapter 13 is the right choice.
2. Analyze your debt. If your debts are too high, you may not eligible or you may not be able to propose a feasible plan.
3. Gauge your income. You must have sufficient income to make payments under a Chapter 13 plan. If you don’t, the court will not let you proceed.
4. Value your property. Before you file, you’ll need to know how much property you own and how much of it is exempt. This will factor into the amount you’ll have to pay under a Chapter 13 bankruptcy plan.
5. Fill out the bankruptcy forms. Once you’ve determined that you qualify, you must enter all of your financial data on official bankruptcy forms and prepare your repayment plan.
6. File your forms.
7. Attend two hearings. Within a few weeks after you file, you’ll meet with the trustee at the courthouse to review your forms and your plan. Creditors may also attend this meeting, and may ask you questions or perhaps negotiate the terms of your plan. Shortly after this meeting you will attend a confirmation hearing at which the bankruptcy judge will decide whether to confirm your plan. Creditors can raise objections to your plan at this hearing, and the judge will rule on them.
8. Make required plan payments. You must start to make payments according to your repayment plan within 30 days. You may have to go back to court if any problems arise during your case. If you miss payments, your case will be dismissed.
9. Get your bankruptcy discharge. If you complete your plan payments, you will get your bankruptcy discharge. The discharge relieves you of any legal obligation for any unpaid balance on the unsecured debts listed in the plan. As long as you’ve paid the amount you promised in the plan, you’re done. Congratulations! Debt Free.
Your Car in Chapter 13 Bankruptcy
If you’re considering filing for Chapter 13 bankruptcy, you probably want to know what will happen to your car or truck. Does Chapter 13 bankruptcy let you keep your a car? Will the car be repossessed if you’re behind on your loan or lease payments? And what happens if the car is worth less than the amount of the car loan? This article discusses when you can keep your car in Chapter 13 bankruptcy, whether you can reduce the amount of your car loan, how Chapter 13 bankruptcy affects repossessions, and more
Keeping Your Car in Chapter 13 Bankruptcy
Generally, in a Chapter 13 bankruptcy, you keep your property, but you must use your income to pay some or all of what you owe to your creditors over time — from three to five years — through a repayment plan that’s approved by the court.
If you are behind on your car loan or lease and you file for Chapter 13 bankruptcy, you can keep your car if you pay the arrearage (the amount you are behind) through your repayment plan and continue to make your regular car payments. As long as you stay current on your car loan and your repayment plan, the lender cannot repossess your car.
The Automatic Stay and Car Repossessions
When you file for Chapter 13 bankruptcy, most creditors are instantly prohibited from continuing collection efforts against you. This is called the “automatic stay.” The automatic stay also prevents your car loan lender from repossessing your car. Here’s how the automatic stay protects you in two different situations: When the lender has not repossessed your car before you file for bankruptcy, and when the lender has already repossessed your car when you file for bankruptcy.
No repossession can happen when you file for bankruptcy. If the lender has not repossessed your car and you file for bankruptcy, the automatic stay prevents the lender from repossessing your car until the bankruptcy judge approves your repayment plan. Then, if your repayment plan deals with the back payments (the arrearage) on your car loan, the lender cannot repossess your car during and after the bankruptcy provided you stay current on your payments.
Although the lender cannot repossess the car due to having back payments, you must make “adequate protection” payments from the time you file for bankruptcy until your plan is approved. These payments are designed to cover the depreciation of your car during this time period. Usually, adequate protection payments are equal to the amount of your car payment. So, once you file for bankruptcy, keep on making your car payments until your plan is confirmed.
If your car is repossessed before you file for bankruptcy you may be able to get the car back if payment of the arrearage is provided for in your repayment plan and you are able to continue making your monthly payments.
Your Car Expenses Must Be Reasonable
First, let’s look briefly at how a repayment plan works. In a Chapter 13 bankruptcy, your repayment plan must show that all of your disposable income, that’s your income minus your necessary living expenses, is used to repay your unsecured debts under your repayment plan. In determining your disposable income, you may deduct only those expenses that are reasonably necessary for the support of you and your dependants. So, for example, you cannot deduct the cost of going to your country club to play golf several times each month. This “reasonableness” provision might come into play if you own a luxury car.
Bankruptcy Cramdowns: Lowering Your Car Loan Amount
If the amount of your car loan is greater than the value of your car, Chapter 13 bankruptcy has a special provision that can reduce the amount of your loan. This provision, which applies to certain other forms of property as well, is called a “cramdown.”
Here’s how it works: The bankruptcy court can reduce your car loan so that it equals the replacement value of your car. (The replacement value is what you would pay a retail vendor given the car’s age and condition.) The remainder of the loan amount becomes like any other unsecured debt, which is treated as a last priority in bankruptcy, meaning you may not have to pay it. Chapter 13 debtors usually pay only a small portion of their unsecured debt. In addition to reducing the principle on your car loan, the court will reduce the interest rate to between 1 and 2 percentage points above the prime rate.
For example, Billy Bob’s car loan is $9,000 and the interest rate is 9%. His car is worth $4,000. The cramdown reduces his car loan to $4,000, which he makes payments on as part of his bankruptcy repayment plan. The remaining $5,000 is added to his unsecured debt, towards which he ends up paying pennies on the dollar in a Chapter 13 bankruptcy repayment plan. Billy Bob’s new car note carries an interest rate of 6%.
There’s one catch to qualifying for a cramdown — you must have bought the car more than two and a half years ago. Car loans for cars purchased within two and a half years of the bankruptcy filing cannot be crammed down. Also, you will have to complete your payments on the car within the term of your repayment plan. If your plan is for three years, you’ll have to finish paying for the car in that time. This sometimes requires that your plan provide for a balloon payment at the end of the plan period.
Letting Your Car Go in Chapter 13 Bankruptcy
Sometimes it doesn’t make sense to keep your car in Chapter 13 bankruptcy. If your car is worth less than your car loan and you don’t qualify for a cramdown, it may be better to “walk away” and let the lender repossess the car. Even if you qualify for a cramdown, it still might make more sense to let the car go.
If you let the lender repossess your car, the lender will sell it, deduct the costs of repossession and sale from the sales proceeds, and then take the amount remaining on your loan. If there is anything left over, you are entitled to any amount. Most often, the sale price minus repossession and selling costs is not enough to cover the amount of your loan. The difference between what you owe and what the lender was able to collect toward the loan is called the deficiency, which you now owe to the lender. In Chapter 13 bankruptcy, the deficiency becomes part of your unsecured debt. As mentioned above, you may pay some of your unsecured debt through your repayment plan, but the rest will be discharged at the end of the bankruptcy.
If you plan to give up your car, consider selling it yourself or negotiating with the lender to reduce the deficiency. For example, if you voluntarily turn the car in (“surrender” it), the lender may waive some or all of the deficiency.
Car Leases in Chapter 13 Bankruptcy
If you have a car lease, the bankruptcy trustee (a court-appointed person who is in charge of your property during bankruptcy) can decide to assume the lease as property of the bankruptcy estate or reject the lease. Usually, the trustee will reject the car lease because the lease would not provide any value for your unsecured creditors. If that happens, you have two options:
- Assuming the lease. You can assume the lease by continuing to make your payments outside of the bankruptcy repayment plan.
- Rejecting the lease. You may choose to reject the lease and let the leaseholder repossess the car. The amount you owe under the lease contract becomes part of your unsecured debt, which is paid through your repayment plan. Like all unsecured debt, usually you pay only a portion of it and the remainder is discharged at the end of the bankruptcy.
Your Home in Chapter 13 Bankruptcy
Chapter 13 bankruptcy provides opportunities for homeowners to delay or prevent foreclosure and pay off back debt on their mortgages. In some cases, homeowners can also eliminate the amount of second or third mortgages. Chapter 13 bankruptcy is particularly helpful to people who are behind in mortgage payments and need time to get current on their payments so they can keep their home indefinitely.
Let’s look at how Chapter 13 bankruptcy affects foreclosure proceedings, your mortgage obligations, and more.
If you are behind on your mortgage payments, and cannot get current, Chapter 13 bankruptcy may be a good way to save your home. In Chapter 13 bankruptcy, you pay all or a portion of your debts over time through a repayment plan. Chapter 13 bankruptcy lets you pay off a mortgage “arrearage” (late, unpaid payments) over the length of the repayment plan — usually three or five years, depending on your income and the time it will take you to meet all the plan’s requirements.
In order for this option to work, you’ll need enough income to at least meet your current mortgage payment and your other basic expenses at the same time you’re paying off the mortgage arrearage. Assuming you make all the required payments up to the end of the repayment plan, you’ll avoid foreclosure and keep your home.
Warning: Before You File
If saving your home is your only goal in filing for Chapter 13 bankruptcy, first explore the many non-bankruptcy options for avoiding foreclosure — such as negotiating with your lender or taking advantage of government “mortgage modification” programs.
Eliminating Second and Third Mortgages
Chapter 13 bankruptcy may help you eliminate the payments on your second or third mortgage. That’s because if your first mortgage is secured by the entire value of your home (which is possible if the home has dropped in value), you may no longer have any equity with which to secure the later mortgages. If this is the case, the bankruptcy court may “strip off” the second and third mortgages and recategorize them as unsecured debt –which, under Chapter 13 bankruptcy, takes last priority. Unsecured debts are usually not paid in full in Chapter 13 bankruptcy and sometimes do not have to be paid back at all.
Halting or Delaying Foreclosure: The Automatic Stay
When you file a Chapter 13 bankruptcy petition, all foreclosure proceedings must stop (with one exception, discussed below) until your Chapter 13 repayment plan is approved by the court. This is called the “automatic stay.” If your repayment plan includes provisions for paying off your mortgage arrearage, then once the plan is confirmed (approved by the bankruptcy judge) the lender is bound by the plan and cannot continue with the foreclosure, assuming you make your regular mortgage and bankruptcy plan payments.
If your repayment plan does not include provisions to pay off your mortgage arrears, then once the court approves the repayment plan, the lender may continue with foreclosure proceedings. If you don’t want to keep your home as part of the Chapter 13 bankruptcy, filing for bankruptcy will give you a reprieve from foreclosure of at least several months, during which time you can continue to live in your home. In addition, since most bankruptcy judges give debtors several chances at proposing a feasible repayment plan, the confirmation process may take a long time — giving debtors an even longer respite from foreclosure. (However, if it appears that you’ll never propose a feasible repayment plan, the confirmation process can be greatly shortened.)
There is one exception to the automatic stay. If you have filed another bankruptcy petition within the previous two years, and that filing resulted in the automatic stay being lifted at the request of the party seeking a foreclosure, the filing of this Chapter 13 bankruptcy will not halt foreclosure proceedings. This is to prevent people from filing a series of bankruptcy petitions just to stall foreclosure.
Modification of Certain Mortgages
Chapter 13 bankruptcy allows the bankruptcy court to modify some debts secured by property if the amount you owe is greater than the value of the property. The amount of the debt equal to the value (or equity) of the property remains secured (meaning the collateral can be taken to pay the debt if you don’t make the payments). The remainder of the debt becomes part of your unsecured debt and is treated as a nonpriority debt (which means you will pay less, or even none of it, in your repayment plan). This is called a “cramdown.” For example, let’s say your loan is for $300,000 and the property value is only $200,000. If the loan is eligible for a cramdown, $200,000 remains secured by the property and the remaining $100,000 is added to your unsecured debt.
For the most part, you cannot cram down a mortgage on your residence. However, cramdowns are allowed if:
- the mortgage is for a multi-unit building
- the loan is for other buildings or property not part of your residence (like a farm)
- the loan is for a mobile home that is considered to be personal property, or
- the loan is not secured solely by your residence (for example, both your residence and a business asset secure the loan).
If one of these exceptions applies, the court may cram down the loan, but you will have to pay off the entire crammed-down loan through your Chapter 13 repayment plan. For this reason, even if you meet one of the above exceptions, mortgage cramdowns rarely make sense unless you will have the capacity to make a balloon payment at the end of your plan.