This webpage deals with bankruptcy (a federal court action (with
Iowa exemptions) staying the actions of creditors and collectors, paying or dismissing debts to creditors, and allowing a debtor to "start over"), a synopsis of Chapter 7 and 13 bankruptcies, filing requirements, and divorce implications. Bankruptcy is an often misunderstood activity, so I would strongly encourage people to have an initial consultation with an attorney concerning their rights and obligations. (Note: amounts in the codes change with the CPI. While every effort has been made to update these amounts on this webpage, amounts should be verified to determine if current.)
There are several types of bankruptcies (which are often referred to by their respective Chapters in the Federal Bankruptcy Code (Title 11 of U.S. Code, with bankruptcy rules promulgated pursuant to 28 USCA § 2075). Personal Bankruptcies include Chapter 7 (liquidation) and Chapter 13 (reorganization), and Businesses include Chapter 7 (liquidation but no discharge of debts for businesses) and Chapter 11 (reorganization). There is also a Chapter 12 bankruptcy for farmers and fishermen.
Certain debts are not discharged in bankruptcy including:
1. Alimony
2. Child Support
3. Most recent back taxes and government fines and penalties
4. Most student loans
5. Fraudulent debts
6. Cash advances of up to $825 made within 70 days of filing ($875 after April 1, 2010).
7. Recent large purchases of more than $550 made for luxury items within 90 days of filing ($600 after April 1, 2010).
Student loans:
To discharge in bankruptcy, you must show an extremely difficult standard of "undue hardship" to you, your family, and your dependents. To meet this standard, you basically must be physically unable to perform any work and chances of gainful employment in the future is virtually nonexistent. The standard must be met at the time of filing, not later during the bankruptcy process. If this is the case, a separate motion must be filed with the bankruptcy filing, and you must appear before the judge to explain the hardship.
Private loans are now treated the same as government insured loans under the 2005 reform act and are not dischargeable except under this undue hardship standard..
Chapter 13 might be an advantage for student loans, as it could clarify how much is owed by challenging the claim (often difficult to determine how much is owed when the loans are resold and transferred), and could make scheduled payments under Chapter 13. However after the plan is completed in 3-5 years, you will still be required to payback the remaining loan amounts. There are no longer any statute of limitations for collection of student loans so the Department of Education has the right if the loan is not discharged or repaid to:
1. Tack collection fees of up to 25% and collection agency commissions of up to 28% onto the loan.
2. Take your federal income tax return until the loan is repaid
3. Garnish up to 15% of your income without suing you first.
4. Take as much as $750/month (up to 15% of your income) in federal benefits to which you might be entitled (social security etc.)
5. Sue you for your debt and place liens on your property.
It may be best to work out a repayment plan over a longer period, consolidate the loans, or defer or forebear the loans, as bankruptcy will probably not help out student loans.
Chapter 7: Chapter 7 is often called a liquidation because a trustee accumulates the non-exempt assets of the estate and liquidates them to pay off as many debts according to priorities, but most people filing Chapter 7 bankruptcies have no non-exempt assets. Certain assets are exempt per state or federal laws. Chapter 7s can be filed by individuals, sole proprietors, partnerships, and corporations, but not insurance companies or banking institutions.
To be eligible for Chapter 7, an individual must pass a means test in which six months of household income (not including unemployment, social security but includes income paid by a person other than the debtor on a regular basis for household expenses) is compared to the state median income. If your income is below the state median, you are not subject to the means test. If your income is higher than the state median income, a second part of the test is required to compare expenses and deductions under national standards. A means test calculator is available at: Means Test . In Iowa the median income for Chapter 7 under the Means Test for bankruptcies filed after March 15, 2009 is: $41,381 for a single wage earner, $54,628 for a family of 2, $63,888 for a family of 3, $74,047 for a family of 4, and add $6900 for each individual in excess of 4. (Note: dollar amounts in bankruptcy are adjusted every three years based on the CPI Index).. Even if only one spouse files, the income of both spouses is included to determine the household income for the Means Test. However, only the actual contribution of non-spouse roommates or significant others are considered for the Means Test.
Most people are still eligible to file for Chapter 7 bankruptcy regardless of the means test. If an individual is not eligible for Chapter 7 bankruptcy, however, he may still be eligible for Chapter 13 bankruptcy.
Chapter 7 debts are discharged usually after about 3 months. About 20-40 days after filing for a Chapter 7, there is a section 341 meeting (creditor meeting). Before discharge, the trustee collects property and pays priority claims before other claims.
Within 45 days after the section 341 meeting you have to reaffirm car loans or redeem the car by buying it with a single payment for the car's present value, otherwise you may not retain the vehicle.
Sixty days after the section 341 meeting, the bankruptcy is usually discharged. Some debts are not dischargeable due to exceptions, but all dischargeable debts have an injunction against collection action after discharge. Creditors cannot require a new contract, but if there is new consideration, repayment can be required. If there is no new consideration, collection is prohibited, but the debtor can voluntarily repay.
Debtors can redeem secured claims in Chapter 7. They must pay in full in a lump sum and redeem for value of asset or loan whichever is less. The debtor can also reaffirm if the creditor agrees. The creditor can require fees and require full value of loan- different from redemption.
For a typical Chapter 7 Bankruptcy for an individual, my fees are $850 (plus court costs of $299). Fees for a couple typically run $1000. Fees for businesses may be higher. Because debts are discharged during bankruptcy, fees must be paid prior to filing for bankruptcy.
Chapter 13: Chapter 13 is often called a reorganization because the debtor pays his way out of bankruptcy keeping property not surrendered to the trustee, and paying debts over time. Chapter 13 is for individuals with regular income, fixed unsecured debts less than $360,475 (after April 1, 2010) and fixed secured debts less than $1,081,400 (after April 1, 2010). (Note debt limits are adjusted every 3 years on April 1st, beginning April 1, 1998.) The debtor has a monthly disposable income requirement- must have current monthly income less amounts reasonably necessary for maintenance or support. Thus Chapter 11 may be the only possible bankruptcy for wealthy with high debts.
The debtor must pay as much to creditors as he would have in a Chapter 7. If the debtor's income is below state income, Chapter 7 may be better since it can be discharged sooner, the debtor makes less payments in Chapter 7, and must commit disposable income in a Chapter 13.
The debtor may be able to modify secured loans in Chapter 13 (except for home loans).
Priority claims must be paid in Chapter 13 (unlike in Chapter 7 where they are paid if there is money from assets available).
The discharge is broader in Chapter 13 since there are not as many exceptions as in Chapter 7. In Chapter 13, but not in Chapter 7 the following are dischargeable:
a. Willfull and malicious torts, if not reduced to judgment.
b. Marital property settlement debt not in the nature of support.
c. Debts from a prior Chapter 7 case in which a discharge was denied.
d. Restitution, unless convicted of a crime; and
e. Debts incurred to pay nondischargeable income taxes.
If fraud, embezzlement, or larceny are involved, Chapter 13 is normally adviseable, even though section 523(a)(4) removes these issues from the scope of the chapter 13 discharge, but only so long as a complaint is timely filed by the creditor seeking a nondischargeability ruling. Rule 4007(c) establishes the deadline for such complaints as 60 days from the date first established for a meeting of creditors. Often, creditors fail to file such complaints and the debtor could find relief in chapter 13.
Reasons to file Chapter 13 instead of Chapter 7 include:
a. Flexibility: can dismiss case or convert to Chapter 7. Can modify plan if income changes. Can refinance or sell home during plan.
b. House can be saved from foreclosure as long as you make payments.
c. Strip wholly unsecured second mortgage, or value car if you've had the car more than 910 days.
d. Won't lose non-exempt property
e. Stretch out payments for secured debts such as cars
f. Challenge costs added to mortgage by lender
g. Trustees want plan to succeed and work with you for confirmation
h. More debts can be discharged (see above)
i. Chapter 13 doesn't allow income challenges as does a Chapter 7
j. Attorney's fees can be spread out (make payments)
k. Can keep a car without having to reaffirm it.
l. More advantages to having one spouse file Chapter 13.
m. Cure a tax problem or Domestic Support Obligation over 60 months.
In Chapter 13, the debtor keeps collateral, unlike in Chapter 7 where the debtor loses property unless he reaffirms.
Chapter 13 is voluntary only, unlike Chapter 7 in which creditors can force a debtor into Chapter 7.
At the end of Chapter 13, a creditor's rights pick up again if the debt was not dischargeable.
Chapter 13 includes assets accumulated after filing until the case is discharged. Discharge occurs when payments are completed (3-5 years).
For a typical Chapter 13 Bankruptcy for an individual, my fees are $950 (plus court costs of $274). Fees for a couple typically run $1100. Fees for businesses may be higher. Because payment plans are authorized during a Chapter 13 Bankruptcy, fees can be negotiated in a payment plan, but court costs must still be paid (as well as an initial retainer) prior to filing for bankruptcy.
Filing Requirements: (Section 521) (These are the items that must be filled out or completed prior to being able to file for bankruptcy. Please complete the requirements or draft lists of financial debts, creditors, income, etc. prior to your appointment with the attorney.
1. Prior to filing for bankruptcy, the debtor must attend credit counseling within 180 days before filing and a certificate from the counseling agency is required as part of the pleading for bankruptcy. List of approved credit counselors in Iowa.
2. Notice to debtor (will be completed by your attorney)
3. Two months of pay stubs or other payment advices (521 (a)(1)(B)(iv))
4. List of creditors (521(a)(1)(A))
5. Schedule of assets and liabilities
6. Schedule of current income and current expenditures
7. Statement of debtor’s financial affairs
8. Certificate of attorney that delivered notice required under 342(b) (will be completed by the attorney).
9. Statement of monthly net income
10. Statement of anticipated income or expenditure increases
11. Copy of debt repayment plan, if any (your attorney will help develop, if necessary).
12. The attorney signs the petition after investigating and determining that the pleadings are accurate
The filing of the bankruptcy consists of the Petition, schedules, and statement of financial affairs. To fill out the required paperwork, the filer should develop:
1. a list of creditors with the amount and type of the claim;
2. income listing source, amount, and frequency of income;
3. a listing of all property;
4. A detailed list of all monthly living expenses.
For a look at sample bankruptcy forms, look at the official website of the bankruptcy court.
Automatic Stay of Collection Actions and Acts (Sect 362)
Dates from time of filing, so don’t tell car lender or other secured lender that you will be filing bankruptcy because the asset might be repossessed to be utilized as a bargaining chip before bankruptcy.
The automatic stay is comprehensive and includes virtually all creditor collection activity including garnishments (if notice given to proper subdivision), dunning letters, legal action to collect, disconnecting utilities, repossession, liens on property, foreclosure, filing or continuing collection suits, enforcing judgments obtained prior to bankruptcy, obtaining or exercising control over property of estate including secured creditor’s claim, informal collection actions, any act to create, perfect, or enforce any lien against property of estate, act to collect, assess or recover claim that arose prior to commencement of case, setoff of any debt owed to debtor that arose prior to commencement of case against any claim against debtor, commencement or continuation of any proceeding before U.S. Tax Court concerning debtor. Judgments obtained past date of filing, but before notice, are invalid.
Emotions:
Bankruptcy can be an extrememly emotional decision. Often the stigma of bankruptcy scares the client. The fear of being published in the paper will often scare the client. In larger cities, the chances of anyone noticing are slim. In smaller cities, the rumor mill will be prominent anyway, so publishing the notice should not be a concern.
Bankruptcy should be viewed as a business decision. It is smarter to have a fresh start or to reorganize than to struggle and owe more due to collection fees and interest. Businesses and individuals with high incomes understand this concept and will utilize bankruptcy to start over. It's usually the people with lower incomes that are more concerned about bankruptcy. Bankruptcy happens in all walks of life and affects good people who have had usually unexpected unfortunate circumstances. The stigma of bankruptcy doesn't last long, and your credit is usually better after bankruptcy than immediately prior to bankruptcy. Look at bankruptcy as a business decision, not an emotional decision, and determine whether it makes sense for you.
Bankruptcy and Divorce:
Often bankruptcy follows a divorce and can affect the results of a divorce judgment or settlement. Support is not affected by bankruptcy and is not discharged, but property settlements may be affected and may be discharged in bankruptcy (not in Chapter 7, but may be affected in Chapter 13). Thus, if bankruptcy is anticipated, either all property settlements should be completed (quit claims signed in court or property exchanged prior to bankruptcy filing). However, issues could still be identified by the bankruptcy trustee in certain cases to bring the property back into the bankruptcy estate, and removed from the ex-spouse. Thus in some circumstances bankruptcy should be considered prior to a divorce settlement.
Timing and Transfers of Property Prior to Bankruptcy
Transfers of property prior to bankruptcy are not a good idea. The bankruptcy trustee can reverse the transfer and you then lose any possible exemption when you may have been able to keep the asset before the transfer. The trustee specifically looks for fraudulent conveyances and can go back differing amounts of time based on a number of factors including the time, financial situation and who you transferred to property to. You may also not receive a discharge if you transfer too many assets. The general rule is not to make transfers prior to filing bankruptcy, and exempt the property to which you are entitled to exempt.
A debtor is allowed to time his/her bankruptcy filing, however, and timing should be a smart part of planning the bankruptcy. The trustee will inquire about income tax refunds, money owed to the debtor, income that is still due to the debtor, and any lawsuits. Timing may also affect whether the debtor passes or avoids the means test by timing the "window" looked at by the means test and possibly avoid the presumption of abuse. Debtors are allowed to maximize their rights to the extent allowed by law, and filing the case at an opportune time is not an indicia of bad faith, but an acceptable exercise of rights granted by the Code. In re Hageney, 2009 WL5217674 (Bky E.D.Wash. Dec 31, 2009).
The debtor should also consider the possibility of a lawsuit. There are may class action lawsuits that are ongoing that the debtor could possibly be awarded some money. It is smart to determine if there are any class action lawsuits that the debtor is entitled to participate in, and to include the possibility of a lawsuit in the filing if a bankruptcy is possible.
Income Tax Refund
One asset that is often overlooked in a Chapter 7 filing is any income tax refund that is due to the debtor. The trustee will ask about a refund during the section 341 creditor meeting. If a refund is due at the time of filing (even if a tax return has not been filed), the trustee will grab the refund as a portion of the debtor's estate to pay creditors. The debtor needs to have calculated the refund before filing, schedule the refund as an asset (even if the amount is unknown), and then exempt the refund under one of the exemptions, if possible. Otherwise, the debtor may lose the entire refund. Better yet, don't file until after obtaining the refund. However, the trustee will still ask about the refund, and what the debtor did with the refund.
Never lie on the bankruptcy paperwork. You swear that the filing is accurate in several locations. Falsely filing a bankruptcy can lead to debts that are nondischargeable that may have otherwise been dischargeable, loss of exemptions when exemptions might have been allowed, fines, imprisonment, and possible closing of the case without discharge.
Attorney-Client Privilege
Attorney-Client privilege is limited in bankruptcy and may not even exist according to several court cases. A few decisions on this point indicate that the privilege does not extend to matters intended to be disclosed in a public document such as a banktuptcy petition. Additionally, if the debtor claims that he/she provided the correct information to the attorney, but the attorney incorrectly placed information on the petition, the attorney and his/her paralegal can be examined as to what was discussed.
Discrimination
Discrimination based on filing for bankruptcy is prohibited by U.S.C. section 525(b). This section reads: No private employer may terminate the employment of, or discriminate with respect to employment against an individual who is or has been a debtor under this title...because such debtor...is or has been a debtor under this title." 11 U.S.C. section 525(b). However, in Banner v. ABF Freight System, Inc. 5216883 (Bky.N.D.Tex. Dec. 30, 2009), the court allowed the firing of an employee since the firing was not solely related to the bankruptcy.
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