CHAPTER 7 BANKRUPTCY BASICS

What is Chapter 7 Bankruptcy?

Chapter 7 Bankruptcy generally discharges all your unsecured debt. Most common forms of unsecured debt are credit cards and medical bills. Some debts such as old IRS delinquent taxes under certain circumstances can also be discharged. Some unsecured debts such as child support and student loans cannot be removed. Once you file a bankruptcy case, all creditors must immediately cease any communication with you until the bankruptcy court orders otherwise. This is often referred to as the “automatic stay”. During the automatic stay, if creditors contact you, they will be in violation of the law, and may be penalized in some situations. Each person can file a new bankruptcy case every 8 years. The good thing about a Chapter 7 bankruptcy case is that it wipes off most of your unsecured debt, and there may be some situations where your secured debt, such as a wholly unsecured second mortgage can also be wiped off. Based on reports from many of our Firm’s clients, lenders are offering new credit to them within two years of their bankruptcy case.

Should You File a Chapter 7 Case?

When you are faced with mounting debt and you feel that there is no way out, you may want to consider filing bankruptcy as an option. With people losing homes to foreclosures in record numbers, unemployment or under employment, mounting debt, and banks more willing to pursue borrowers on deficiencies, one serious option is filing a Chapter 7 Bankruptcy. By doing so, in many instances you can wipe out your personal debt and keep creditors away. Over the years, we have helped many people file for, and successfully discharge their debt in Chapter 7 bankruptcy. If you are considering filing for Chapter 7 Bankruptcy as an option, it is important to contact Attorney Josue Merino to discuss your options, alternatives and solutions. Your initial consultation is always free of charge.

Eligibility Requirements.

In order to qualify for Chapter 7 Bankruptcy, you must first pass a “Means Test”. The Federal Government each year determines the median income of the population in each State on an annual basis, and requires that an individual filing a Chapter 7 case show income below the median income amount. for 2015, the Florida median income has been $42,036 for one person, $51,584 for a family of 2; $57,052 for a family of 3; and $66.461 for a family of 4. If your gross income is above these limits, do not despair. You can have a much higher income and may still qualify for a Chapter 7 filing, when certain deductions are taken from your bottom line. In order to find out if you qualify, you are encouraged to call us and we will be glad to give you a firm answer based on your particular income and expenses.

Is my Home Protected? (Homestead Protection)?

Under the Florida Constitution your personal home enjoys protection from creditors. This is referred to as homestead protection, which means that creditors cannot place a lien, or force you out of your home unless they hold a mortgage on it. If your mortgage lender takes your home in a foreclosure action, filing bankruptcy will help avoid any deficiency. This means if the lender takes and sells the home in foreclosure for an amount less than is owed, if you file bankruptcy, you will avoid personal liability and lawsuit by that lender.

What you need to know when considering filing for bankruptcy.

Our government has bankruptcy laws to protect not only the creditors, but you! If you have an unmanageable debt-load, it may be time to face financial facts. With the right information, filing bankruptcy could give you the financial footing you need to get a fresh start.

Bankruptcy can be used to STOP creditor harassment, bank account garnishment, lawsuits, foreclosure, auto repossession, wage garnishments and tax levies. Review our answers to commonly asked bankruptcy questions or use our “FREE Consultation” form and we will respond to you promptly. You can always call the Forest Lake Law, P.A. to speak directly with an attorney.

Bankruptcy Means Test:   Determining if you qualify for a Chapter 7

The Means Test evaluates whether your current monthly income (from all sources) is greater or less than the applicable median income. Current Monthly Income (CMI) is defined as the average monthly gross income received during the six full months just prior to your bankruptcy filing. CMI includes gross income from all sources including income of a non-filing spouse, regular gifts or assistance from family members, and gross income from a wholly-owned business. On the other hand, social security income is excluded from the definition of CMI.

Failing the means test means there is a “presumption of abuse” and you cannot file a Chapter 7 bankruptcy, but you may be able to overcome that presumption if special circumstances call for an adjustment to your income or expenses. Some examples of possible “special circumstances” are job loss or pay cut, a serious medical condition, or unusually high child care expenses. To establish that your financial situation is a special circumstance that warrants a waiver of the means test formula, you will have to show that your expenses incurred are reasonable and that you have no reasonable alternative. Judges are given discretion to determine if special circumstances allow filing a Chapter 7 bankruptcy by a debtor who cannot pass the means test formula.

When is Chapter 7 Bankruptcy Appropriate?

An individual Chapter 7 bankruptcy case is used for liquidation of debts, but an individual debtor may claim certain property exempt and retain it.  In addition to preserving exempt property, the individual debtor seeks a discharge of most debts.

If you own assets that are nonexempt, you may be required to liquidate them. The court would then distribute the proceeds from the sale to your unsecured creditors as partial satisfaction of the debts you owe. Any remaining unpaid debt would then be discharged (with some exceptions), and you would no longer be held responsible for it. You can only file under Chapter 7 if you pass the Means test. Otherwise, you must file under Chapter 13 for relief.

Mandatory Credit Counseling and Debtor Educational Courses:

Under the bankruptcy law, bankruptcy filers are required to complete pre-bankruptcy credit counseling and pre-discharge debtor education from an approved nonprofit credit counseling agency.

There are only three situations where credit counseling is not required:

1. Incapacity, where the person is so impaired by reason of mental illness or deficiency that the individual is incapable of making rational decisions.
2. Disability, where the person is so physically impaired that the individual is unable, after reasonable effort, to participate in an in person telephone or internet briefing session.
3. Active military duty in a military combat zone. You must file a separate motion if you want the court to grant you this type of exemption. Only credit counseling organizations and debtor education course providers that have been approved by the U.S. Trustee program may issue these certificates.  Once completed, a certificate is faxed or e-mailed by the agency to our office. Most clients complete this course over the phone or on the Internet.

How Will Bankruptcy Affect My Credit Score?

In most instances, the score improves over a short period of time. Typically our clients report to us that they were able to rebuild their credit within about 2 years of discharge. The reason for this is that creditors know that you have little or no remaining debt after discharge, and that you will not be eligible to file another bankruptcy case for 8 years. So, they see those coming out of a bankruptcy discharge as a “good risk” and are willing to extend new credit. We suggest that you use a reputable credit reporting agency to see your score prior to filing and to monitor your score after filing.

Can Bankruptcy Stop Foreclosure of My Home?

Yes, but it depends.  Chapter 7, 11 or 13 will stop a foreclosure as long as there are no prior bankruptcy filings that might restrict another filing against the property. If you have previously filed bankruptcy, ask us.  In some rare cases, the filing of a bankruptcy will not stop the foreclosure. Chapter 7 will temporarily stop a foreclosure. Chapter 11 or 13 will stop the foreclosure and allow you to reorganize the mortgage debt, but only if you pay the regular monthly payments plus arrearages going forward from the filing date.

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CHAPTER 13 BANKRUPTCY BASICS

Who is Eligible for Chapter 13 Bankruptcy

Chapter 13 bankruptcy is unique and for those who can show income that exceeds their monthly expenses. Because Chapter 13 requires you to use your income to repay some or all of your debt, you must show to the court that you are able to afford or meet your payment obligations. If your income is less than your expenses and you are in a deficit at the end of each month, or if your income is variable and unpredictable, you Chapter 13 Bankruptcy Judge may not allow you to file for Chapter 13.

Also, you cannot have a total secured and unsecured debt burden over a certain amount to be eligible. From time to time the Chapter 13 Bankruptcy laws tend to change this amount, but currently (in 2014) your total secured debts cannot exceed $1,149,525 and your unsecured debts cannot be more than $383,175. Secured debts are debts usually secured by some property, most commonly real estate, or your automobile. If you do not pay back monies owed on your secured debts, your creditor can take back the property that secured the debt. Conversely, unsecured debts such as a credit cards or medical bills do not normally give any rights to the creditor to take anything from you unless a court case is filed against you and your property is seized, or your wages garnished.

The Chapter 13 Process

In order to become eligible for filing Chapter 13 Bankruptcy, you must first receive a credit counseling course from an approved credit counseling agency approved by the United States Trustee’s office.  An approved list of course can be found at:  www.usdoj.gov/ust.

Each credit counseling agency may charge a fee for providing you the required counseling and providing you a certificate of completion of the course. The courses are often very simple, and take anywhere from 20-40 minutes online. The prices vary, but the most reasonable ones are about $10.00 per person, per course. If you cannot afford the counseling, these agencies must do the course for you for free or at reduced rates.

The Chapter 13 Repayment Plan Basics

The most important part of your Chapter 13 paperwork will be a repayment plan. Your repayment plan will describe in detail how much you will pay each of your debts for a period of 3 or 5 years depending on your particular case. Once the repayment period is successfully completed, the Court will discharge any unpaid unsecured debts that you may have at that time.

Often, clients tend to pay back the majority of their secured debt (such as their home and auto loans) and very little of their repayments end up going to their unsecured creditors (such as credit cards).  Most Chapter 13 plans tend to outline all secured debts, priority debts (such as IRS payments), the Chapter 13 trustee fees, your scheduled attorney’s fees, if any, and the amount of unsecured debt being paid back over the repayment period.

What Will you Have to Pay to Maintain you Chapter 13 Case

You must first pay back priority debts. Priority debts are such things as IRS back taxes, child support and alimony, wages you owe to employees, and certain other tax obligations.

Also, your plan must include your regular payments on secured debts, such as your home mortgage, or an automobile loan. You must also pay back all of the back payments on any secured debts that you have not paid.  These are your delinquency or arrearages with the lender. Most commonly these arrearages are on your home mortgage which accumulate over time when you do not make your monthly mortgage payments.

You Chapter 13 Plan must show all disposable income you have left after making these required payments. Any additional payments will go towards repaying your unsecured debts, such as credit cards or medical bills. Remember, you don’t have to repay these debts in full (or at all, in some cases) but you must pay back what is left over as disposable income. Often, those who are paying large amounts of priority and secured debts, will have pennies on the dollar to pay the secured creditors. After 3 or 5 years, depending on your case, the remainder of what you have not paid to these unsecured creditors will be discharged and you will not have to pay the rest of what you owe to the creditor.

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