Bankruptcy Petition

Things to Do and NOT Do If You Are Filing for Chapter 13 Bankruptcy

Introduction

Chapter 13 bankruptcy is generally used by two types of individual debtors: (1) either debtors who own an asset or assets – such as a home, investment property, vehicles, etc. which are secured by a loan – on which they are behind on payments, want to keep the asset, and need time to catch up and repay any amounts in arrears, or (2) who make “too much” income to qualify for Chapter 7 bankruptcy protection.

The amount a debtor has to repay creditors through the Chapter 13 Payment Plan is dictated by how much monthly disposable income they have.  Generally speaking, and as a very simplified approximation, a debtor’s disposable income is the difference between their gross income and their necessary and ordinary expenses.  (Please note that the actual calculation of a debtor’s monthly disposable income is a bit more complex, particularly in cases where a debtor’s gross income is above the median income for a household of similar size. For a detailed explanation of how a debtor’s disposable monthly income is calculated given the facts and circumstances of your case, always consult an attorney.)   The analysis, however, does not end there.  Even if a debtor has disposable monthly income (DMI), those amounts must be enough to allow a debtor to pay for: 1) all amounts that they are behind on for secured assets, such as a home, which they want to keep, 2) the bankruptcy trustee’s fee, 3) any attorney fees paid through the Plan, 4) any regular monthly amounts such as a mortgage or car payment that have to be paid through the Plan, and 5) any amounts to which unsecured creditors may be entitled (which in some cases may be zero dollars, but in cases of debtor’s with unexempt property may be higher.)

Things to Do and NOT Do Before You File

Before you file for Chapter 13 bankruptcy, every debtor should get:

  • Copies of pay stubs and/or other sources of income for the 6-months prior to the calendar month in which you expect to file for bankruptcy. For example, if you expect to file your case any day in May, you should get pay stubs for the November 1 – April 30 period;
  • Copies of your last 4 years of federal tax returns;
  • Copies of 6 months of any bank statements and investment accounts in your name.

A debtor should, naturally, also consult an attorney about the facts and circumstances of their case.  Equally as important, a debtor should NOT transfer title of any of their property prior to filing for bankruptcy without first consulting an attorney in order to ensure no potential fraudulent transfer issues can arise from such a transfer and complicate the debtor’s potential bankruptcy case. Finally, other than for a car loan or mortgage payment, a debtor should avoid paying any creditor more than $600 in the 90 days prior to the filing of their case in order to avoid the allegation that the debtor has given preferential treatment to one creditor over others.

Things to Do After You File

If you are current on your mortgage and/or car loan, try to have those payments be made through automatic debits from your bank or credit union accounts for at least the 6 months prior to your bankruptcy.  If you are current on your mortgage and/or car loans and have been making those payments via automatic debit prior to the filing of your bankruptcy, you can elect to keep making those payments directly and outside the Chapter 13 Plan.  The advantage of making direct payments outside of the Plan is that it saves you money as the bankruptcy trustee fee is normally 10% of any payments made through the Chapter 13 Plan.  The less you pay through the Plan, the smaller the bankruptcy trustee fee.

Also, if already have direct debit for your mortgage or car loan and are current on payments prior to filing, then ask your attorney to give you a letter which you can send to your mortgage or car lender and which authorizes them to continue to pull debits from your bank or credit union accounts and allows them to talk to you directly about your account status.  This is necessary as, absent this type of letter, many lenders will suspend automatic debits and refuse to talk to debtor in order to avoid running afoul of the injunction which prevents collection actions and is created automatically when a debtor files for bankruptcy.

Finally, make sure you make your Chapter 13 payments on time and keep your attorney appraised if any circumstances come up – such as job loss or medical emergency – which could affect your ability to continue making full and timely Chapter 13 payments.

As always, if you have questions about this article or bankruptcy in general, please feel free to contact us!

Bankruptcy Attorney

The Different Types of Bankruptcy for Individuals

The Bankruptcy Code is divided into chapters. The chapters which usually apply to consumer debtors are chapter 7, known as a Liquidation, and chapter 13, known as an Adjustment of the Debts of an Individual with Regular Income.

An important feature applicable to all types of bankruptcy filings is the automatic stay. The automatic stay means that the mere request for bankruptcy protection automatically “stays” or forces an abrupt halt to repossessions, foreclosures, evictions, garnishments, attachments, utility shut-offs, and debt collection harassment. It offers debtors a breathing spell by giving the debtor and the trustee assigned to the case time to review the situation and develop an appropriate plan. Creditors cannot take any further action against the debtor or the property without permission from the bankruptcy court.

Chapter 7

In a chapter 7, or liquidation case, the bankruptcy court appoints a trustee to examine the debtor’s assets and divide them into exempt and nonexempt property. Exempt property is limited to a certain amount of equity in the debtor’s residence, motor vehicle, household goods, life insurance, health aids, specified future earnings such as social security benefits and alimony, and certain other personal property. The trustee may then sell the nonexempt property and distribute the proceeds among the unsecured creditors. Although a liquidation case can rarely help with secured debt (the secured creditor still has the right to repossess the collateral), the debtor will be discharged from the legal obligation to pay unsecured debts such as credit card debts, medical bills and utility arrearages. However, certain types of unsecured debt are allowed special treatment and cannot be discharged. These include some student loans, alimony, child support, criminal fines, and some taxes.  Attorney’s fees in Chapter 7 cases are usually charged on a flat fee basis (with the court’s filing fee over and above the attorney’s fee).

Chapter 13

In a chapter 13 case, the debtor puts forward a plan, following the rules set forth in the bankruptcy laws, to repay all creditors over a period of time, usually from future income. A chapter 13 case may be advantageous in that the debtor is allowed to get caught up on mortgages or car loans without the threat of foreclosure or repossession and is allowed to keep both exempt and nonexempt property. The debtor’s plan is a simple document outlining to the bankruptcy court how the debtor proposes to pay current expenses while paying off all the old debt balances. The debtor’s property is protected from seizure from creditors, including mortgage and other lien holders, as long as the proposed payments are made. The plan generally requires monthly payments to the bankruptcy trustee over a period of three to five years.  Arrangements can be made to have these payments made automatically through payroll deductions.  Attorney’s fees in Chapter 13 cases are usually charged on a flat fee basis (with the court’s filing fee over and above the attorney’s fee).

Chapter 11

A case filed under Chapter 11 of the United States Bankruptcy Code is frequently referred to as a “reorganization” bankruptcy. Generally, the debtor, as “debtor in possession,” operates the business and performs many of the functions that a trustee performs.  A written disclosure statement and a plan of reorganization must be filed with the court that will voted on by creditors.

While individuals are not precluded from using chapter 11, it is more typically used to reorganize a business, which may be a corporation, sole proprietorship, or partnership. A corporation exists separate and apart from its owners, the stockholders. The chapter 11 bankruptcy case of a corporation (corporation as debtor) does not put the personal assets of the stockholders at risk other than the value of their investment in the company’s stock.

Attorney’s fees in Chapter 11 cases are usually charged on an hourly fee basis (with the court’s filing fee over and above the attorney’s fee) and since Chapter 11 cases are complex in nature, fees tend to be substantial.

Chapter 12

Chapter 12 of the Bankruptcy Code was enacted by Congress in 1986, specifically to meet the needs of financially distressed family farmers. The primary purpose of this legislation was to give family farmers facing bankruptcy a chance to reorganize their debts and keep their farms.  Attorney’s fees in Chapter 12 cases are usually charged on a flat fee basis (with the court’s filing fee over and above the attorney’s fee).