What is Bankruptcy?
Bankruptcy a legal proceeding that allows an individual who cannot pay his or her bills can get a fresh financial start. The right to file for bankruptcy is provided in the Federal Bankruptcy Law, and all bankruptcy cases are prosecuted in Federal Court. The filing of a bankruptcy petition immediately stops all creditors from seeking to collect debts while the Court accesses your financial situation and determines if bankruptcy relief may be granted in your case.
What is Chapter 7 Bankruptcy?
Chapter 7 Bankruptcy is that part of the United States Bankruptcy Code that deals with liquidation, which means the selling of all non-exempt assets by a court appointed trustee. The proceeds of the sale are used to pay creditors. In return, a debtor receives a discharge, which releases a debtor from all dischargeable debts and orders creditors to forever stop their attempts to collect the discharged debts.
When a debt is discharged, a debtor is forever relieved of the obligation to pay that debt. Not all debts are dischargeable. Non-discharged include certain taxes, alimony, child support, student loans, debts that have not been listed in the Chapter 7 Bankruptcy petition, and debts which have been incurred as a result of either an intentional tort or the defrauding or misleading of a creditor.
What is a Chapter 13 Bankruptcy?
Chapter 13 of the United States Bankruptcy Code is designed primarily for residential homeowners, and allows a person or married couple to pay off all, or a portion, of their debts under the supervision and the protection of the U.S. Bankruptcy Court.
Chapter 13 Bankruptcy is designed for working people, with steady incomes, who are overwhelmed with bills, judgments, lawsuits and other financial concerns. A Chapter 13 Plan is primarily used to repay mortgage arrears, and a percentage, or all, of the money owed to your other creditors, over a 3-5 year period. Chapter 13 Bankruptcy can also be used as an alternative to credit counseling wherein an individual can repay their credit card debt over a 3-5 year period without the accrual of additional interest charges.
While a Chapter 13 Bankruptcy case is in effect, creditors can not start or continue their collection efforts, and must accept what the plan pays to them. Any individual or married couple, even if self-employed, can receive Chapter 13 relief if they owe less than $387,000.00 in unsecured debt and less than $1.039,000.00 in secured debt.
Upon the successful completion of a Chapter 13 repayment plan, the debtor receives an official discharge and certificate of completion, which extinguishes all obligations to make further payments on unsecured debts, even though these creditors may not been paid in full. In fact, many people in Chapter 13 Bankruptcy pay their unsecured creditors no more than 10, 20 or 30 percent of the total amount owed.
What are Property Exemptions?
Lawmakers have determined that, even if you owe a substantial amount of debt, you are still entitled to protect and retain certain of life’s necessities from the grasp of your creditors. This personal property is classified as exempt property, meaning that you can keep it, even after you receive a discharge of your debts in bankruptcy.
Under New York State Law, effective 1/22/2011, the following is a sample of the types of personal property that are considered exempt: (A) cash, checking or savings accounts, U.S. Savings Bond, stocks, and other marketable securities, tax refunds, household furnishings and appliances, basic wearing apparel and jewelry up to an aggregate maximum total $10,000.00; (B) equity in a motor vehicle up to $4,000.00; (C) $150,000.00 of the equity in your home, co-op or condo (NY Metro area); (E) social security benefits; (F) IRA, 401K and other qualified retirement accounts. In addition, there is also a wildcard provision that allows an individual to use some of the unused portion of the $10,000.00 exemption above (if available) to protect other assets of their choice, such as equity in a motor vehicle that exceeds the $4,000.00 limit, or the right to receive a tax refund.
Claiming certain exemptions will limit your ability to use others. For example, if you are claiming the $150,000.00 homestead exemption, you cannot claim any exemption for cash, savings and tax refunds.
In addition, for the first time, New York residents now also have the option to elect to claim the Federal exemptions provided under Section 522 of the Bankruptcy Law. The Federal exemptions can be a good option for those individuals who do not own a home or those who own a home with little or no equity. The Federal exemptions vary slightly from the New York State exemptions in that the limits on personal property are slightly higher and are more flexible in terms of how they can be applied to certain property.
The bottom line is that you can walk away from a bankruptcy with much, sometimes all of your cash and other personal belongings.
Special Note about Tax Refunds – The right to receive a tax refund, until it is received and spent, is technically an asset for bankruptcy purposes. If you regualrly receive a large tax refund, you should disclose this to your attorney at your initial consultation. An experienced bankruptcy attorney will be able to provide you with guidance and review your options as to how to deal with this issue.
Special Notes about Inherited IRAs – If you have inherited an IRA account, it may impact your ability to file. In May, 2014, the Supreme Court ruled that an inherited IRA is no longer exempt and beyond the reach of creditors and/or an interim Chapter 7 Trustee. If you are considering bankruptcy and have an IRA account that you have inherited, call our office for guidance.
What is the Means Test?
Most individuals or couples filing for protection under either Chapter 7 Bankruptcy or Chapter 13 Bankruptcy must now meet certain eligibility requirements under a “Means Test.” Under the Means Test, you must first determine if your average monthly income for the last six months is below the median income for your state, based upon the size of your household.
If your average monthly income for the past six months is below the median income for your state, you have passed the first hurdle, and so long as you meet the other eligibility requirements, you can file for protection under Chapter 7 Bankruptcy. If your average monthly income for the past six months is above the median income for your state, you must proceed to the second hurdle – do you have the ability to repay a portion of your debt?
The second hurdle is the determination of your ability to repay a portion of your debt. Under the present law, you are required to perform an analysis of your income and expenses (based upon the Internal Revenue Service guidelines for your state) – the Means Test. If, after completing the Means Test analysis, it is determined that your net disposable income is less than $125.00 per month, you have passed the second hurdle and you can proceed with your filing so long as you meet the other requirements.
If you can afford to repay at least $187.50 per month, or $11,250.00 (or 25% percent of your debt, whichever is less) over a five year period, you are not eligible to file a petition for protection under Chapter 7 Bankruptcy and, you shall be required to file a petition under Chapter 13 Bankruptcy, in which you shall be required to repay a portion of your debt over a period of up to five years.
Will the filing of a Bankruptcy stop my bill collectors from taking action?
When you file for bankruptcy protection, an automatic stay is immediately imposed upon your creditors that preclude them from taking any further action against you to collect a debt, including the prosecution of court judgments, wage garnishments and repossession. For example, if you have been served with a summons by one your creditors to appear in court regarding the repayment of a debt, the bankruptcy filing will immediately stop this lawsuit and the creditor, and its attorney, must abide by the requirements of the bankruptcy law.
Can I keep any of my existing credit cards accounts after bankruptcy?
The law requires a debtor to schedule all outstanding debts that are owed by the debtor as of the date of the filing of a bankruptcy petition. If you have a credit card account that has a zero balance as of the time you file your petition, this account does not have to be scheduled in your bankruptcy petition as, technically, the lender or servicing agent on this card is not a creditor, and thus will not be discharged in bankruptcy.
Even if you have an outstanding balance when you file, you may still be able to keep your account. In order to do this, you usually must agree with the creditor to repay part or all of your outstanding balance as of the time of filing. When you make an agreement of this nature, you and your creditor will execute a document known as Reaffirmation Agreement that, in most cases, requires the approval of the Bankruptcy Court before taking effect.
How are my creditors notified that I have filed for bankruptcy?
Normally, within 7-10 business days of the filing bankruptcy petition, the Bankruptcy Court mails a notice of the bankruptcy filing to the creditors listed in your petition. Sometimes, it may be necessary for you to contact an individual creditor directly to obtain immediate relief and supply that creditor with your case number and the date of the filing of your petition. Once a creditor has been notified of your filing, they must immediately stop all collections efforts against you.
How long does a typical bankruptcy case take?
The life of a typical Chapter 7 bankruptcy case is normally 4-6 months. A Chapter 13 bankruptcy case takes anywhere to 3-5 years to complete.
Will I have to go to Court?
In a Chapter 7 Bankruptcy proceeding, the only Court appearance that is required is your appearance before the Court appointed Trustee at your Meeting of Creditors. This meeting usually takes place between 20-45 days after a petition is filed.
In a Chapter 13 Bankruptcy case, you are also required to appear at a Meeting of Creditors with your Chapter 13 trustee. In addition, your appearance may also be required at the hearing in which the Bankruptcy Court considers final approval of your plan of repayment. This hearing, called a Confirmation Hearing, usually takes place approximately 3-6 months after a Chapter 13 petition is filed.
What is a Meeting of Creditors?
Section 341 of the United States Bankruptcy Code affords creditors the right to meet with the debtor to determine if a discharge or a reorganization of debt is appropriate based upon the facts and circumstances presented by a debtor in their bankruptcy petition. While creditors do technically have the right to attend these proceedings and to question the debtor, creditors rarely appear at these proceedings.
In Chapter 7 proceeding, the Meeting of Creditors serves two important purposes: (A) the Court, through examination by the Court appointed Trustee, verifies that all of the representations contained in your bankruptcy petition are true and correct to your best of your belief and knowledge. In addition, the Bankruptcy Court Trustee also utilizes this meeting to verify on behalf of the Court that there are no assets that maybe considered non-exempt, which could be sold by the Trustee to repay part, or all, of your debt. A typical meeting of creditors in a Chapter 7 proceeding takes approximately 5-10 minutes to complete.
In Chapter 13 proceeding, a debtor is also required to appear before the Chapter 13 trustee. In a Chapter 13 case, the meeting of creditors serves a slightly different purpose. In addition to verifying that all of the representations made by a debtor are true and correct, the Chapter 13 trustee will also verify that the debtor has the financial ability with which to make the payments proposed in the proposed Chapter 13 plan.
Verification of a debtor’s ability to make payments in a Chapter 13 case is based upon both the debtor testimony at the meeting and various documentation, usually tax returns and/or pay statements, that must be presented to the Chapter 13 trustee to verify the representations made in your Chapter 13 petition. As in a Chapter 7 case, a typical meeting of creditors in Chapter 13 case takes between 5-10 minutes to complete.
How many years will a bankruptcy filing show on my credit report? How long will it take me to obtain new credit after I file for bankruptcy?
Under the provisions of the Fair Credit Reporting Act, the filing of a bankruptcy petition shall remain on an individual’s credit report for 10 years, but only 7 years if a debtor is successfully complete to Chapter 13 plan.
With respect to obtaining new credit after the filing of a bankruptcy petition, the decision to grant credit in the future is strictly up to an individual creditor and varies from creditor to creditor and state to state depending on the type of credit requested. While there is no law that prevents an individual from extending credit to you immediately after obtaining a discharge in bankruptcy, you should anticipate a period of time in which you would have to establish credit. In most cases, the easiest manner in which to reestablish credit is to obtain a secured credit card from a major grantor of credit after you obtain your discharge.
How often can I file for protection under Chapter 7?
An individual debtor can obtain relief under Chapter 7 Bankruptcy every eight years. Please note however that the 8-year period does not run from the date of the filing of the first petition, but rather from the date the court issues the bankruptcy discharge. If you have filed for Chapter 7 protection in the past, you can file a second Chapter 7 petition so long the applicable time period have past since the issuance of the discharge in your prior case.
In addition, if an individual has received a Chapter 7 discharge within the last 8 years, they may still be eligible to file a Chapter 13 petition, and propose to repay a portion of their debt over a minimum period of 3 years. As long as the discharge in the proposed Chapter 13 case would be issued beyond the 8 year period, a second bankruptcy case can be filed.
Can utility bills be discharged in a bankruptcy proceeding, and if so, will my utility services be terminated?
Obligations for utility services can be listed in a bankruptcy petition, and those pre-petition debts can be discharged. In addition, it is a violation of Public Service Commission regulations for a utility service to terminate the service to a bankrupt on a basis of their filing a bankruptcy petition. However, a utility may, and in most cases, will, require that you pay a security deposit to that utility to guarantee that post petition obligations shall be paid in a timely fashion.
Can my employer discriminate against me because I have filed for a bankruptcy?
Absolutely not. Federal law prohibits governmental units and private employers from discriminating against you because you file a bankruptcy petition or because you have failed to pay a dischargeable debt.
Will Bankruptcy affect my Immigration status?
There is presently no immigration law, statute, or regulation that specifically forbids individuals who have filed for bankruptcy from applying for Naturalization. Additionally, there is no specific question on Form N-400, Application for Naturalization, inquiring into bankruptcy. Please note however, that your immigration status can be affected if you have not filed required tax returns or if you owe money to the IRS.
The INS is basically looking to see if an individual seeking naturalization has evidence of “poor moral character” which could be grounds to deny an application. The filing of a bankruptcy petition as a consequence of financial hardship clearly does not rise to the level of “poor moral character.”
Are student loans dischargeable in bankruptcy?
Generally, student loans are not dischargeable in a bankruptcy proceeding. 11 U.S.C. Section 523(a)(8) cites two exceptions to this general rule:
- The student loan maybe discharged if it is neither insured or guaranteed by a governmental unit, nor made under any program funded in whole or in part by a governmental unit or non-profit institution.
- The student loan maybe discharged if paying the loan will “impose an undue hardship on the debtor and debtor’s dependents.”