What is a Chapter 7 Bankruptcy?

                 A Chapter 7 Bankruptcy will grant you a discharge of most of your debt, including credit card debt, personal debt, medical bills, foreclosures and automobile repossessions.  Generally, student loans and tax debt are not eliminated.

             Under a Chapter 7 Bankruptcy, you may not keep large assets, but you are allowed to keep certain assets within limits, such as bank accounts, automobiles, pension plans, IRA’s, and even your house, up to certain limits.

       Additionally, under the new Bankruptcy laws, your family income must be less than the average family income in the county in which you live.  The amount of the average family income in your county is changed approximately every three months by the U.S. government.

       As soon as you file a Chapter 7 Bankruptcy, the Bankruptcy Court imposes an injunction on all of your creditors called the “Automatic Stay”.  The Automatic Stay prohibits creditors from any collection activities, including lawsuits, wage garnishments, collection calls, collection letters, bank restraints, foreclosures or repossessions.

  Which of my debts will not be eliminated?

       “Non-dischargeable” debt under the Bankruptcy laws includes recent income taxes, student loans, alimony, child support, restitution or compensation ordered by a Criminal Court, civil judgments for injuries due to intentional torts or driving while intoxicated, and any debts incurred by fraud.

  Will filing Bankruptcy stop a foreclosure?

       Yes.  On the day that you file your Bankruptcy Petition, all foreclosure proceedings are immediately stopped.  In fact, if you file a Bankruptcy case even one hour prior to the foreclosure sale, the foreclosure will be deemed null and void.  

       As soon as you file a Bankruptcy Petition, the Bankruptcy Court imposes an injunction on all of your creditors called the “Automatic Stay”.  The Automatic Stay prohibits your mortgage lender from any collection activities, including foreclosure.  In the average Bankruptcy case, your bank may only proceed with a foreclosure action after making a Motion to the Bankruptcy Court and proving to the Court that you have not complied with the requirements of the Bankruptcy Code as it relates to your mortgage and home.

  Can I keep my bank account?

       Yes.  In New York State, a Debtor is allowed to retain up to $5,000 in cash or in a bank account.  The Bankruptcy Court will not close your bank account.

       If you have more than $5,000 for each individual filing Bankruptcy, then the Bankruptcy Trustee would be allowed to take the remainder of the cash in order to pay your creditors.

  Can I keep my pensions, IRA’s and retirement accounts?

       Under the Bankruptcy law, IRA’s, pension or profit sharing plans, or other retirement plans protected as IRA’s or 401k’s are exempt from your Bankruptcy case.  Therefore, you can keep unlimited funds in these protected accounts, even though you are filing a Chapter 7 Bankruptcy.

Will the Bankruptcy Court garnish my wages?

       No.  Neither the Bankruptcy Court nor creditors have a right to garnish your wages while you are under the protection of the Bankruptcy Court.

  May I keep my house under a Chapter 7 Bankruptcy?

       Yes, under very limited circumstances.  For instance, if your home is currently valued less than the full amount of your mortgage (or first mortgage and second mortgage combined), which means that your house has no value as an “asset” to you, and you meet all other requirements of the Chapter 7 Bankruptcy Court, then under certain circumstances you may be able to keep your house and discharge all your remaining debt.

  Will the Bankruptcy Court take my car?

       Each Debtor in New York is allowed to keep $2,400 worth of car.  In a Chapter 7 case, if your car is worth more than $2,400, the Trustee may require you to make cash payments to the Trustee for the difference between the value of your car and the $2,400 exemption, in order to pay your creditors.  Alternatively, you have the right to surrender your car to the Trustee, who will sell the car, pay you the first $2,400, and use the remaining proceeds to pay your creditors.

       If your car is secured by a car loan, or is under a lease, then in most cases the Bankruptcy Court will not touch your car.

Will the IRS be notified of my Bankruptcy case?

       Yes.  However, even the IRS must stop its collection actions once a Bankruptcy Petition is filed.  Also, since most tax debt is non-dischargeable, the IRS will continue its collection efforts after the Chapter 7 Bankruptcy case is closed.

Will a Bankruptcy affect the taxes that I pay?

       No.  In most Chapter 7 cases, your tax debt is not discharged, and the IRS cannot penalize you for filing a Bankruptcy case.

       In fact, when you negotiate a credit card debt, or obtain a debt reduction in a credit card case, the IRS will treat that portion of your savings as income for tax purposes. 

In a Bankruptcy case, the IRS cannot tax you on all the credit card debt, medical bills and personal loans that you have discharged in Bankruptcy.

Will the Bankruptcy Trustee come to my house?

       In a normal Bankruptcy case, no one will come to your house to examine your personal belongings.  However, if your Bankruptcy Trustee has a reasonable suspicion that you have hidden or transferred assets, or have undervalued your possessions, the Trustee may have the right to send an appraiser to your home.  Once again, this is a rare and exceptional occurrence, and will only happen if the Bankruptcy Trustee has reasonable grounds to believe that you are attempting to defraud your creditors, or hide your assets.

 

Will my employer be notified of my Bankruptcy?

       No.  The Bankruptcy Court only notifies those creditors which you list on your Bankruptcy Petition, for the purpose of giving those creditors adequate notice that their debt will be discharged in Bankruptcy.  If your employer is not a creditor (you do not owe your employer money), then your employer is not notified of the Bankruptcy Petition.  This is the opposite of a wage garnishment, when a creditor obtains a judgment against you, and is allowed by law to notify your employer and garnish your wages.  Once again, in a Bankruptcy case, all wage garnishments cease immediately once the Bankruptcy Petition is filed.

 

May I keep one or two credit cards during Bankruptcy?

       The Bankruptcy law requires that you list all of your credit card debt on your Bankruptcy schedules.  You are not allowed to “prefer” one creditor over another by choosing to repay one creditor and not the others. 

       Nonetheless, you can choose to “reaffirm” any debt after you file a Bankruptcy Petition.  This means that you can voluntarily pay a creditor, even though you are now legally released from paying back that debt.  The most common type of “reaffirmation ” of a debt is when a Debtor wishes to keep one credit card or keep a car that is under a car loan or lease.

       However, be aware that a credit card company is not obligated to let you reaffirm its debt.  Most major credit card issuers will cancel your credit card as soon as you file a Bankruptcy Petition.

       Additionally, even if you do not list a credit card on your Bankruptcy schedules, many credit card issuers will be notified of your Bankruptcy through the credit reporting agencies, and may cancel your card even if you have not listed the credit card on your Bankruptcy schedules.  Also, omitting any debt on your Bankruptcy Petition means that that debt will not be discharged in your Bankruptcy case. 

 

Does my husband or wife have to file Bankruptcy with me?

       No.  Each person may file as an individual, or as a married couple.  The effect of your Bankruptcy on your spouse will depend on your individual Bankruptcy circumstances.

 

What happens to my credit when I file a Bankruptcy case?

       In most cases, a person’s credit is already ruined when he or she files his/her Bankruptcy case.  Late payments, collections, lawsuits, foreclosures and repossessions all destroy your credit.  A person usually files  Bankruptcy after some or all of these events have occurred.

       The credit reporting laws allow for credit reporting agencies to report your debt for 10 years.  This 10 year period applies to late payments, collection efforts, foreclosures, and repossessions.  This 10 year period also applies to a Bankruptcy case.

       Nonetheless, the general rule is that 12 months after a Bankruptcy case is completed, you will once again be eligible for credit card offers.  Approximately 24 months after your Bankruptcy case is completed (or twenty four months into your Chapter 13 Bankruptcy Plan), mortgage lenders and auto finance companies will be willing to be extend credit to you.  The reason for this is that once you have filed a Bankruptcy, you have become a better risk to your remaining creditors.  You have eliminated much of your other debt, allowing you to keep current on your mortgage or car loan.  Additionally, in most cases you cannot file another Bankruptcy within the next eight years, so that your new creditors are assured that you will not be able to discharge their new debt under the Bankruptcy laws.

 

Should I transfer my assets to someone else’s name before I file a Bankruptcy?

       No.  The Bankruptcy Trustee has the right to “look back” at transfers made up to 10 years ago.  In certain cases where the transfers were made with the intent to hide assets from your creditors, or defraud your creditors, the Bankruptcy Trustee may have the right to recover those assets from the persons who received the assets.  For example, if you transfer your house to a relative right before filing a Bankruptcy, the Trustee would have the right to proceed against your relative to transfer the house back to your name, and sell the house to pay your creditors.  Additionally, the Bankruptcy Trustee may recommend a denial of your entire Bankruptcy discharge based upon your wrongful transfers.

  

Would I be better off with debt consolidation or debt negotiation?

       Overall, most debt consolidation companies or debt negotiators achieve poor results, and further hurt your credit.

       Most debt consolidators or negotiators will collect a monthly payment from you over the course of 12 to 24 months.  In the meantime, these companies have stopped paying your credit cards, and the interest rates, penalties, late charges and over the limit fees accumulate.  Additionally, your credit score goes from bad to worse.  These companies will then approach each credit card company and attempt to negotiate your debt using the sums they have collected from you during the last 12 to 24 months.  Sometimes these methods are effective, but usually they are not.  Most creditors do not make it easy to negotiate or consolidate the debt.  Even if the debt is paid at a reduced rate, your credit is not restored.

       Additionally, when you negotiate a credit card debt, or obtain a debt reduction in a credit card case, the IRS will treat that portion of your savings as income for tax purposes.  In a Bankruptcy case, the IRS cannot tax you on all the credit card debt, medical bills and personal loans that you have discharged in Bankruptcy.

       Debt negotiation may be an option if you have liquid assets to settle the debt with a reduced lump sum.  Debt that is still with the issuing card is easier to settle than debt that has been sold to a debt purchasing company, or debt that you have been sued on in court. 

 

What happens when I file a Bankruptcy Petition?

       A Bankruptcy attorney will prepare a Bankruptcy “Petition” to file with the court.  A Petition can be 50 pages or more.  It includes all of your financial information, your financial history, a list of all of your assets, cars, real estate property, bank accounts, CD’s, IRA’s, and life insurance policies.  It also includes lists of all of your debt, including credit card debt, medical bills, personal loans, bank loans, mortgages, and car loans.  The Bankruptcy Petition also lists the names and addresses of all of your creditors.

       As soon as you file the Bankruptcy petition, the Bankruptcy Court imposes an injunction on all of your creditors called the “Automatic Stay”.  The Automatic Stay prohibits creditors from any further collection activities, including lawsuits, wage garnishments, collection calls, collection letters, bank restraints, foreclosures or repossessions.

       The Bankruptcy Court will then appoint a “Trustee” to supervise your case.  The Bankruptcy Trustee is a Bankruptcy attorney who will review your Bankruptcy Petition.  You must provide to the Trustee  copies of your tax returns, paystubs, bank statements and appraisals for your home or car.

       Approximately 3-4 weeks after your Bankruptcy Petition is filed, you will meet with the Bankruptcy Trustee in the Bankruptcy Court.  There is no judge present.  The Trustee conducts this meeting in a conference room.  The meeting usually lasts from five to fifteen minutes, and it is tape recorded.  This meeting is also called a “Creditors Meeting” because your creditors have the right to appear at this meeting and to challenge your Bankruptcy case.  However, most banks, credit card companies and collection agencies never appear at these meetings.

       In a Chapter 7 case, if the Bankruptcy Trustee approves your case, then you will receive a discharge of all of your debts within 4-6 weeks after the Creditors Meeting.

 

Do I need a lawyer to file Bankruptcy?

       No.  All Bankruptcy forms are located on the U.S. Bankruptcy Court website at www.uscourts.gov/Bankruptcy courts.html.

       However, unfortunately for the layperson, the Bankruptcy laws and the Bankruptcy Petition have become so detailed and complicated that many people filing a Bankruptcy case without an attorney end up having their cases dismissed by the Bankruptcy Trustee.  Alternatively, many people who initially file their cases without an attorney end up hiring an attorney to sort out problems that arise in filing your own case.

What is the Credit Counseling Requirement?

       Prior to filing a Bankruptcy under either Chapter 7 or Chapter 13, you must complete a credit counseling course.  This course is approximately ninety minutes long, and is available in person, by telephone, or through the internet.  The course must be given by an agency approved by the U.S. Trustee’s Office.  You are then given a certificate which must be filed with your Bankruptcy Petition.

       Our firm will arrange and register you for the credit counseling course.  Almost all of our clients take this course by telephone or via the internet.

What is the Personal Financial Management Course or Debtor Education Course?

       After you file your Chapter 7 or Chapter 13 Bankruptcy Petition, the Court requires that you complete a second course called a “Personal Financial Management Course” or “Debtor Education Course”.  Again, this course is approximately ninety minutes long, and is available in person, by telephone, or through the internet.  The course must be given by an agency approved by the U.S. Trustee’s Office.

       Our firm will arrange and register you for the Debtor education course.  Almost all of our clients take this course by telephone or via internet.

       Once the course is completed, the accredited agency will issue a certificate of completion which will be emailed to our office.  We will then file this certificate with the Bankruptcy court.

 

What is the new Means Test Calculation required by the 2005 Bankruptcy Code?

       In order to qualify for a Chapter 7 Bankruptcy, the new Bankruptcy Code requires that you complete a Statement of Current Monthly Income and Means Test Calculation.  These are mathematical calculations designed to ensure that Chapter 7 debtors are eligible to file. 

Essentially, the Means Test Calculation compares your current monthly income to the current monthly income of a family of your size in the county in which you reside.  The Current Monthly Income Calculation is not the same as your actual monthly income.  Rather, it starts with an average of your actual income received during the last six months and reduces it by certain IRS and government deductions.  Your disposable monthly income is then calculated and this sum will be used by the Bankruptcy Court to determine whether you are eligible for a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy.

 

What if I earn more than the average family income for the county in which I live?

      

       If your family income is greater than the average family income for the county in which you live, then you must file a Chapter 13 case, in which your excess income will be used to pay your unsecured creditors a portion of the debt owed to them.  The Chapter 13 Plan would be in effect for a period of 3-5 years.  The Chapter 13 Plan can provide for as little as 5 – 10% payback of your unsecured debt.  The remainder of the debt will then be discharged forever.

 

Is it immoral to file Bankruptcy?

       Homeowners and individuals in debt often feel that it is “wrong” or “immoral” to file a Bankruptcy and “cheat” their creditors.

       There are no moral or ethical issues in filing a Bankruptcy case, just as there are no morals or ethical issues in the contract you entered into with your credit card company or mortgage lender.

       United States law clearly states that a credit card company or mortgage lender may contract with you to adjust its interest rates, charge you late fees, over the limit fees and other penalties  If you are late in making a payment, the law allows your creditor to call you numerous times a day, use a collection agency to harass you, or sue you in court.  If the creditor obtains a legal judgment against you, the law allows the creditor to freeze your bank account, garnish your wages, repossess yo ur car or sell your home in foreclosure.

       The United States law also enacted the U.S. Bankruptcy Code, which prohibits creditors from collection activities, including lawsuits, wage garnishments, collection calls, collection letters, bank restraints, foreclosures or repossessions.  The same U.S. Bankruptcy Code allows eligible debtors to eliminate their debt to creditors.

       Even the Bible provides for some discharge of debt.  “At the end of every seven years you shall grant a release of debts.  And this is the form of the release:  every lender who has lent anything to his neighbor shall release it; he shall not require it of his neighbor or his brother, because it is called the Lord’s release” (Deuteronomy 15:1-2).

Am I wrong to try to avoid paying my debt?

       Most of our clients have been trying to pay their debts for years.  In most cases, our clients have experienced loss of employment, divorce, or a serious illness.  Most of our clients come to Bankruptcy after borrowing or extinguishing their pension plans, IRA’s and retirement accounts.  Many clients have been living off of their credit cards (and encouraged to do so by their credit card companies) while they have undergone these periods of economic struggle.

       Most clients who file for Bankruptcy are honest individuals who have been trying to support their families and home through difficult times of loss of employment, illness, divorce and other personal hardship

How do I stop creditors from harassing me before I file bankruptcy?

       According to the Federal Trade Commission's Guide for Consumer Protection against Creditors,  you have the right to write to the creditor and tell them to leave you alone. You should mail a letter, via Certified Mail Return Receipt Requested, or via overnight mail, so that you can obtain proff that the creditor actually received your letter. Remember however, when writing to your creditor, avoid acknowledging the debt and and amount being claimed against you.

     You should also review the Federal Trade Commission Guide for Consumer Protection.

     Federal Trade Commission's Guide for Consumer Protection

     

 

 Chapter 13 Bankruptcy FAQ's

What is a Chapter 13 Bankruptcy?

       A Chapter 13 Bankruptcy is for families that have assets, value to their home or earn above the average family income for the county in which they live.

       A Chapter 13 Bankruptcy allows you to keep your assets while under the protection of the Bankruptcy Court.

       In exchange for keeping your assets, the Bankruptcy Court requires a Chapter 13 Debtor to submit to a “Plan” over the course of 3-5 years.  The Plan will allow you to catch up on your mortgage payments and automobile payments while stopping your creditors from all collection activities.

       Under a Chapter 13 Plan, Debtors repay their unsecured creditors only what they can afford to pay based upon their income and expenses.  “Unsecured” debt includes credit cards, medical bills, personal loans or debts owed on car loans or mortgages once the car has been repossessed, or the home has been sold in foreclosure.  

“Unsecured” debt is  repaid  from 5% to 100% over a 3-5 year period.  Once a Chapter 13 Plan is completed, all remaining debt is eliminated (“discharged”).

       As soon as you file a Chapter 13 Bankruptcy, the Bankruptcy Court imposes an injunction on all of your creditors called the “Automatic Stay”.  The Automatic Stay prohibits creditors from any collection activities, including lawsuits, wage garnishments, collection calls, collection letters, bank restraints, foreclosures or repossessions.

Which of my debts will not be eliminated?

         “Non-dischargeable” debt under the Bankruptcy laws includes recent income taxes, student loans, alimony, child support, restitution or compensation ordered by a Criminal Court, civil judgments for injuries due to intentional torts or driving while intoxicated, and any debts incurred by frau

What is the Means Test Calculation Required by the Bankruptcy Code? 

        In order to qualify for a Bankruptcy, the Bankruptcy Code requires that you complete a Statement of Current Monthly Income and Means Test Calculation.  These are mathematical calculations designed to ensure that you are eligible for the Bankruptcy. 

 Essentially, the Statement of Current Monthly Income and Means Test Calculation will determine your disposable monthly income and this sum will be used by the Bankruptcy Court to determine how much you must repay your unsecured creditors during your Chapter 13 Plan.

        In a Chapter 13 Bankruptcy case, you will then have to submit a Chapter 13 Plan to the Court to prove to the Court that you can maintain your assets and pay your creditors over a three to five year period (even at a reduced rate).  Then, a “Confirmation Hearing” before the judge will be scheduled.  At this hearing, the Bankruptcy Trustee and the Court will either confirm your Plan, recommend changes to your Plan, or dismiss your case.  The Confirmation Hearing usually lasts from five to fifteen minutes.  In almost all cases, your Bankruptcy attorney and the Bankruptcy Trustee will have communicated with one another before the hearing to determine what changes, if any, to your Plan are necessary.

         In a Chapter 13 case, once your Plan is confirmed by the Court, then you will have three to five years to complete your Chapter 13 Plan.  At the end of the three to five year period, you will receive a discharge of all remaining debt.

Can I keep my bank account?

        You may keep as much money as you wish in your bank account.  The reason for this is that under a Chapter 13 Plan, you are paying your creditors (albeit at a reduced amount).  Therefore, the Bankruptcy Court does not touch a Debtor’s assets in a Chapter 13 case.

Can I keep my pensions, IRA's and retirement accounts?

       Under the Bankruptcy law, IRA’s, pension or profit sharing plans, or other retirement plans protected as Individual Retirement Accounts, are exempt from your Bankruptcy case.  Therefore, you can hold unlimited funds in these protected accounts, even though you are filing a Chapter 13 Bankruptcy.

May I keep my house under a Chapter 13 Bankruptcy?

       Yes.  Under a Chapter 13 Plan, you must prove to the Court that you have sufficient income to once again start paying your monthly mortgage payments.  You must also prove to the Court that you can pay the past due amounts to your mortgage lender (“arrears”), spread out over a 3-5 year period, with no interest.  As long as you can restart your monthly mortgage payments, and pay the arrears over 3-5 years, then your mortgage lender is prevented from foreclosing on your home.

Am I eligible for a Chapter 13 Bankruptcy?

       To file a Chapter 13 Bankruptcy, you must be an individual (no corporation, business or partnership), you must have a regular income, you must have disposable income at the end of each month (your income is greater than your reasonable living expenses), your unsecured debts may not exceed $337,000, and your secured debts may not exceed $1,010,650.

Will the IRS be notified of my Bankruptcy case?

       Yes.  However, even the IRS must stop its collection actions once a Bankruptcy Petition is filed.  However, since most tax debt is non-dischargeable, any claims by the IRS against you must be paid through the Chapter 13 Bankruptcy.

How do I stop creditors from harassing me before I file bankruptcy?

       According to the Federal Trade Commission's Guide for Consumer Protection against Creditors,  you have the right to write to the creditor and tell them to leave you alone. You should mail a letter, via Certified Mail Return Receipt Requested, or via overnight mail, so that you can obtain proff that the creditor actually received your letter. Remember however, when writing to your creditor, avoid acknowledging the debt and and amount being claimed against you.

     You should also review the Federal Trade Commission Guide for Consumer Protection.

     Federal Trade Commission's Guide for Consumer Protection