What is Bankruptcy?
Bankruptcy is a legal process in which you ask the Bankruptcy Court to grant you relief from your debts. In order to obtain a discharge of your debts, you need to honest and truthful about what assets you own or may have owned but no longer own, what debts you owe, your income and expenses and what your past financial dealings have been like. There are several types of Bankruptcy. The most common types are Chapter 7, 11 and 13. Most consumers typically consider Chapter 7 or Chapter 13 Bankruptcy. But, occasionally, individuals may find it advantageous to file for Chapter 11 Bankruptcy.
What is Chapter 7?
Chapter 7 Bankruptcy is known as a “liquidation”. What this means is that in return for a discharge of your personal liability for debts such as credit cards, car loans, personal loans, retail accounts, lines of credit and mortgage loans, you give up all non exempt assets. In New York State, you have a choice of exemptions that you can apply to your assets. One of the most recent changes to New York exemption laws, for example, allows homeowners to exempt up to $150,000 ($300,000 for married couples who are both owners) of equity in their home. In many cases, an individual filing for Chapter 7 is able to keep all of the property that is important to them and able to gain a fresh start without paying any money to their creditors. If you are considering filing for Chapter 7 Bankruptcy, it is very important to speak with a qualified attorney who can assist you with exemption planning. Remember, only a lawyer can counsel you on how Bankruptcy exemptions apply to your property.
What is Chapter 13?
Chapter 13 Bankruptcy is a “reorganization” of your debts. In Chapter 13 Bankruptcy, you propose a plan on how to deal with your debts.The plan must conform to the requirements of the Bankruptcy code, which addresses 1) how certain debts are classified and paid back, 2) how much you must commit to a Chapter 13 plan, 3) what debts are not dischargeable and 4) many other aspects of your Chapter 13 case. A chapter 13 plan can last between 3-5 years. There is also a limit on the amount of debt a person can have in a Chapter 13 plan. If you exceed this debt limit, you are not eligible to file for Chapter 13 Bankruptcy.
The main difference between Chapter 7 and Chapter 13 is that in Chapter 13, you are making monthly payments towards your debt. Often, these monthly payments will be much less than the amount you would normally pay just towards credit card minimums each month. The difference is that in a Chapter 13 case, your payments actually mean something and your debt is being resolved.
However, just because you are making monthly payments does not mean you are necessarily paying back 100% of your debt in a Chapter 13 plan. In fact, in many cases individuals pay a very small percentage of their debt back. However, there may be many circumstances in which it is in your favor to pay certain debt back in full and Chapter 13 is a way to accomplish this at a much lower cost than outside the Bankruptcy process.
I thought Chapter 11 was just for businesses. Why would I consider this option?
Chapter 11 is the only kind of Bankruptcy where a business may obtain a discharge. However, individuals may also take advantage of Chapter 11 Bankruptcy. This may be particularly useful if you wish to reorganize your debts and create a payment plan but your debts exceed the debt limits in a Chapter 13 or where you cannot propose a feasible plan to pay your debts in 5 years and need a longer repayment period.
A Chapter 11 plan is more costly than a Chapter 13 but the benefits offered by Chapter 11 Bankruptcy may significantly outweigh the costs of a Chapter 7 liquidation or not having any Bankruptcy protection at all.
What is the difference between debt consolidation and Bankruptcy?
Often, debt consolidation companies only make your debt problems worse. Many of these companies may not have your best interests at heart. Frequently, clients have come to me after paying these companies hundreds of dollars with the same or more debt than they had when they first began that process. When you begin paying one of these companies and stop paying your bills, some creditors decide to take matters into their own hands and may file a lawsuit against you in your local court. If you are able to settle your debts, you may find yourself dealing with 1099-c tax liability for any amount of money in excess of $600.00 that was “forgiven” as a result of the settlement. Imagine thinking you resolved one of your debts but are now smacked with an IRS tax bill that comes straight out of your refund, or worse, that is a bill you now owe to the IRS!
On the other hand, debts discharged in bankruptcy are not taxable income. While it is true that filing for bankruptcy is not great for your credit, neither is “debt consolidation”. This is because if you stop paying your bills, creditors can report to credit reporting agencies that you have done so or that you are delinquent. If a creditor agrees to accept less than what you owe them, they can also report this. All of these things can negatively affect your credit. Imagine if you could have filed for Chapter 7 bankruptcy and not paid all this money and instead focused on taking care of your family!
Debt consolidation often just delays the inevitable and costs you much more money than paying for a Bankruptcy which gives you real and immediate protection from your creditors.
Why would I file Chapter 13 over Chapter 7?
There are many advantages to filing for Chapter 13 that you may not be aware of. Here are a few examples:
- Chapter 13 Bankruptcy can stop the foreclosure process and help you evaluate what options you have to stay in your home including reinstating your mortgage by resuming your monthly payments while paying back your arrears over 36-60 months interest free.
- Chapter 13 Bankruptcy can allow you to strip a second mortgage which is completely unsecured due to a decrease in the value of your home.
- Chapter 13 Bankruptcy can allow you to manage your tax debts and pay them back, often times interest free and also penalty free over time.
- Chapter 13 Bankruptcy can help you lower your monthly car payments by spreading the total balance due over 60 months or by allowing you to “cram down” a loan to the actual value of your car.
- Chapter 13 Bankruptcy can help you stretch payment of your child support arrears over 36-60 months which may dramatically reduce the amount of the garnishment you are experiencing each pay period.
- Chapter 13 Bankruptcy can help you develop a realistic repayment plan that prioritizes your most important debts and helps you regain control of your financial life.
- Chapter 13 Bankruptcy provides for an automatic stay of collection against any “co-signors” of consumer debts, which means the person who helped you get a loan won’t suffer just because you filed for bankruptcy.
How long will my Chapter 13 case last?
A Chapter 13 case will last between 3-5 years. The length of your plan is determined by your income and how it compares to the median income of a household of your size in your state. If you are below the median income, you are entitled to file a 36 month plan. However, if you need more time to pay your debts, you may ask the court to allow you to have up to 60 months. If you are above the median income, your plan will be 60 months long.
When do I make my first payment in my Chapter 13 case?
You will begin making payments right away. The first payment is due 30 days after the filing of your Chapter 13 case.
I’ve heard different kind of debts will be treated differently in a Chapter 13 case. Is this true?
Yes. In Chapter 13 Bankruptcy, certain debts are given priority over others. Generally speaking, Chapter 13 organizes debts into the following categories: 1) administrative debts (e.g. attorneys fees, trustee fees), 2) secured debts (e.g. mortgage arrears, car payment arrears, secured tax debts), 3) unsecured priority debts (e.g. taxes, domestic support obligations) and 4) unsecured debts (e.g. credit cards, retail cards, personal loans). Administrative, secured and unsecured priority debts must be paid in full in any Chapter 13 case. They also get paid in that order. Unsecured creditors are paid last. Your Bankruptcy attorney can help you understand this further and explain to you what debts you may have, if any, that must be repaid in full.
What happens if I am no longer able to afford my Chapter 13 payments?
Often times, unexpected events occur which may prevent you from making your proposed Chapter 13 plan payments. There are several options that may be available to you if you are no longer able to afford your Chapter 13 payments. You may be able to modify plan to lower your monthly payment, convert your case to a Chapter 7 case, ask the court for a hardship discharge or dismiss your case.
I am married, does my spouse have to file Bankruptcy with me?
No, just because you are married does not mean you and your spouse have to file for Bankruptcy together. However, if you are both liable for the same debts, your filing and subsequent discharge will not insulate your spouse for joint debts and he or she will remain liable. So, it may be in both of your interests to consider filing together.
Can I keep my house or my car out of my Bankruptcy?
No, you cannot pick and choose what assets you include or don’t include in your Bankruptcy. Some assets are not part of your Bankruptcy estate by law. However, the rest of your assets and any debts associated with these must be disclosed. Believe it or not, your Bankruptcy may help you keep your home or your car. So, don’t be scared about “including” your home or car. You should speak to a qualified attorney about your concerns and to make sure you understand the effect filing for Bankruptcy would have on your particular assets. Remember, every case is different.
Will I have to appear before a judge? How often do I have to go to court?
When you file for Chapter 7 Bankruptcy, you typically have one court date about 30 days after your case is filed. This is what is known as your meeting of creditors. Creditors rarely show up and the person you appear before is not a judge. This meeting is where you will meet the Trustee, who is an attorney that represents the interests of your creditors. If all goes well at your meeting of creditors, you will likely never have to go to court again. An exception to this, however, is if you decide to sign a reaffirmation agreement with respect to a particular debt such as a car loan. If the Court determines there may be a possibility that reaffirming this debt could be a hardship to you or your family, you will be required to appear before your Bankruptcy Judge who will ask you some questions to make sure you can afford this debt.
When you file for Chapter 13 Bankruptcy, you will typically go to two court dates. The first is the meeting of creditors described above. The second is your confirmation hearing where you will appear before a judge. At the confirmation hearing, you will find out if the Court will approve your Chapter 13 plan and your attorney will also discuss any other items that need to be addressed in order for your case to be confirmed. Once your plan is approved and confirmed, you will likely not have to show up in court again unless a problem comes up. In our district, you do not need to appear at any additional hearings unless specifically ordered by the court or unless you fall behind on your payments.
How long does it take to receive a discharge?
In a Chapter 7 case, assuming no objections to your discharge are made, you may obtain a discharge 60 days after the initial date of the meeting of creditors.
In a Chapter 13 case, assuming you are eligible for a discharge, you may obtain a discharge after you have successfully completed your confirmed plan, which can take 3 or 5 years.
However, these answers could be different if you filed a prior Bankruptcy case. This is because there are rules on how often you may file a Chapter 7 case or Chapter 13 case, which will affect your ability to get a discharge. If you have filed a Bankruptcy case before and are contemplating filing for Bankruptcy again, make sure to tell your Bankruptcy attorney of your prior filing!
I am a small business owner and guaranteed many of my business’s debts. Will my Bankruptcy filing and discharge also discharge my business’s liability for these debts?
No. If you own your business as anything other than a sole proprietorship, you and your business are separate entities. Therefore, you filing for Bankruptcy does not relieve your business of its liability for business debts. However, your business may not be liable for debts and a review the documents you signed for loans or other debts can help determine if the business is really liable for these debts. It is worth investing in hiring an attorney to review these documents to determine who is truly liable for your debts. This can be an important part of your Bankruptcy planning. If your business is liable for these debts and you wish for your business to be granted a discharge, you should consider discussing filing a Chapter 11 Bankruptcy for the business with a Bankruptcy attorney.
How long does a Bankruptcy filing stay on my credit report?
Credit Reporting Agencies report potentially negative information, such as missed payments and most public record items on a personal credit report for seven years. This includes Chapter 13 bankruptcies. However, an exception to this is that they may report Chapters 7, 11 and 12 bankruptcies for 10 years.
How long will it take for me to re-build my credit after filing for Bankruptcy?
Even though a Bankruptcy will stay on your credit report for 7-10 years, it won't necessarily affect your credit score the entire time. Many people start rebuilding their credit within 1-2 years after Bankruptcy discharge. You have also options such as applying for a “secured” credit card which can help you start re-building credit right away.
Can I wipe out student loans?
Student loan debt is extremely difficult to wipe out in Bankruptcy. This is because the standards for discharging student loan debt through a “harship discharge” are particularly difficult to meet for most individuals. This process is both complex and expensive and requires a separate proceeding from your Bankruptcy filing.
Is it true you can wipe out taxes in Bankruptcy?
Yes, some income taxes are dischargeable in Bankruptcy. It is a common misunderstanding that Bankruptcy cannot eliminate any tax liability. But, the longer you wait to deal with tax debts, the more difficult it may become to help you.
Whether or not income taxes are dischargeable depends on when they became due, when they were assessed as well as a variety of other factors. However, income taxes which are dischargeable are not automatically discharged as a result of you receiving a discharge. A separate proceeding to determine they are dischargeable is required.
Unfortunately, Bankruptcy cannot eliminate liability for taxes such as estate and gift taxes, sales tax or fuel taxes. Special rules also apply to trust fund taxes, which are taxes related to social security and medicare. Furthermore, if your tax debts have become “secured” by the IRS or state taxing authority filing a tax lien, this may further complicate your case and affect the dischargeability of the tax debt.
If it turns out your tax debt is not dischargeable, you can still explore if Bankruptcy would be a good way to take control of your tax debts. For example, a Chapter 13 plan may provide you with a way to repay your debts in full, at a fixed payment each month and interest free. Worrying about the IRS or state levying your bank accounts can become a worry of the past!
If you are concerned about income tax debts, you should speak with a qualified Bankruptcy attorney to determine if Bankruptcy can help you discharge these debts.
Can I wipe out child support or arrears?
Domestic support obligations, such as child support, cannot be discharged in Bankruptcy. However, you may be able to lower the amount of your monthly child support garnishment by filing for Chapter 13. This is because you are allowed to repay your child support arrears over 3-5 years in Chapter 13, which may significantly reduce the amount of funds that are garnished from your paycheck.
I only owe a small amount of debt? Can I still file Bankruptcy?
Yes. There is no minimum debt requirement to be eligible to file for Bankruptcy. Although the amount of debt you owe may seem small compared to others, the decision to file Bankruptcy is somewhat personal. If debt is affecting your life negatively and you or your loved ones are suffering from the obligation to repay debt, Bankruptcy may be appropriate for you even if your debt is not very high.
Natasha Meruelo, Esq. is located at 445 Hamilton Avenue, Suite 1102, White Plains, NY 10601.