Chapter 7 Bankruptcy, also known as “liquidation”, is a legal process by which most unsecured debts can be discharged, or wiped out. Chapter 7 Bankruptcy is known as liquidation because any non-exempt assets the Debtor has may be liquidated by the trustee andsold for the benefit of creditors. Many Chapter 7 Bankruptcy Debtors do not have any non-exempt assets, in which case there would be no liquidation, and unsecured debts are simply discharged. There are, however, certain unsecured debts that are not dischargeable in Chapter 7 Bankruptcy.
To file for Chapter 7 Bankruptcy, you must qualify under the Chapter 7 means test. The means test first compares your income to the median income in your state. If your income is lower than the median income in your state, you can file for Chapter 7 Bankruptcy. However, if your income is greater than the median income in your state, other calculations regarding your income and allowable expenses are required to determine whether or not you can file for Chapter 7 Bankruptcy.
Chapter 13 Bankruptcy is a full or partial repayment plan administered by the Bankruptcy court. The Debtor submits a plan for approval and, when a plan is approved, makes monthly payments to the Bankruptcy trustee. The trustee makes payments to creditors in accordance with the terms of the plan. The repayment period may be from 3-5 years. At the end of the repayment period, if all payments have been made according to the plan, remaining unsecured, dischargeable debt may be discharged.
In one sense, it’s easier to qualify for Chapter 13 Bankruptcy than for Chapter 7 Bankruptcy. Some Debtors who cannot qualify for Chapter 7 because of the means test opt to file under Chapter 13 instead. However, Chapter 13 Bankruptcy requires a regular income that will allow you to propose a feasible plan of reorganization, and make plan payments to the Trustee for duration of the plan.
The answer to this question depends on your specific circumstances. There are many variables that go into making this very important decision. Failure to choose the right option could be very costly, which is why our experience is invaluable.
A Bankruptcy discharge releases the Debtor from personal liability for certain specified types of debts. In other words, the Debtor is no longer legally required to pay any debts that are discharged. The discharge is a permanent order prohibiting the creditors of the Debtor from taking any form of collection action on discharged debts, including legal action and communications with the Debtor, such as telephone calls, letters, and personal contacts. Although a Debtor is not personally liable for discharged debts, a valid lien (i.e., a charge upon specific property to secure payment of a debt) that has not been avoided (i.e., made unenforceable) in the Bankruptcy case will remain after the Bankruptcy case. Therefore, a secured creditor may enforce the lien to recover the property secured by the lien.
The timing of the discharge varies, depending on the chapter under which the case is filed. In a Chapter 7 case, for example, the court usually grants the discharge promptly on expiration of the time fixed for filing a complaint, approximately 60 days from the First Meeting of Creditors. Typically, this occurs about three and a half months after the date the Debtor files the petition with the Bankruptcy Court.
In individual Chapter 11 cases and Chapter 13, the court generally grants the discharge as soon as practicable after the Debtor completes all payments under the plan.
Unless there is litigation involving objections to the discharge, the Debtor automatically receives a discharge.
Not all debts are discharged. The debts discharged vary under each chapter of the Bankruptcy Code. Section 523(a) of the Code specifically exempts various categories of debts from the discharge granted to individual Debtors. The most common types of non-dischargeable debts are certain types of tax claims, , debts for spousal or child support or alimony, debts for willful and malicious injuries to person or property, debts to governmental units for fines and penalties, debts for most government funded or guaranteed educational loans or benefit overpayments, debts for personal injury caused by the Debtor’s operation of a motor vehicle while intoxicated, debts owed to certain tax-advantaged retirement plans, and debts for certain condominium or cooperative housing fees.
In Chapter 7 cases, the Debtor does not have an absolute right to a discharge. An objection to the Debtor’s discharge may be filed by a creditor, by the Chapter 7 Trustee in the case, or by the U.S. Trustee. Creditors receive a notice shortly after the case is filed that sets forth important information, including the deadline for objecting to the discharge. To object to the Debtor’s discharge, a creditor must file an Adversary Proceeding(lawsuit) in the Bankruptcy court before the deadline set out in the notice.
A Debtor may not receive a subsequent Chapter 7 discharge within 8 years of filing a previous Chapter 7 Bankruptcy where they received a discharge. A Debtor is ineligible for discharge under Chapter 13 if he or she received a prior discharge in a chapter 7, 11, or 12 case filed four years before the current case or in a chapter 13 case filed two years before the current case.
The court may revoke a discharge under certain circumstances. For example, a Chapter 7 Trustee, creditor, or the U.S. trustee may request that the Court revoke the Debtor’s discharge in a Chapter 7 case based on allegations that the Debtor: obtained the discharge fraudulently; failed to disclose the fact that he or she acquired or became entitled to acquire property that would constitute property of the Bankruptcy estate; committed one of several acts of impropriety described in section 727(a)(6) of the Bankruptcy Code; or failed to explain any misstatements discovered in an audit of the case or fails to provide documents or information requested in an audit of the case. Typically, a request to revoke the Debtor’s discharge must be filed within one year of the discharge or, in some cases, before the date that the case is closed. The court will decide whether such allegations are true and, if so, whether to revoke the discharge.
A Debtor who has received a discharge may voluntarily repay any discharged debt. A Debtor may repay a discharged debt even though it can no longer be legally enforced. Sometimes a Debtor agrees to repay a debt because it is owed to a family member or because it represents an obligation to an individual for whom the Debtor’s reputation is important, such as a family doctor.
If a creditor attempts collection efforts on a discharged debt, the Debtor can file a motion with the court, reporting the action and asking that the case be reopened to address the matter. The Bankruptcy court will often do so to ensure that the discharge is not violated. The discharge constitutes a permanent statutory injunction prohibiting creditors from taking any action, including the filing of a lawsuit, designed to collect a discharged debt. A creditor can be sanctioned by the court for violating the discharge injunction. The normal sanction for violating the discharge injunction is civil contempt, which is often punishable by a fine.
The law provides express prohibitions against discriminatory treatment of Debtors by both governmental units and private employers. A governmental unit or private employer may not discriminate against a person solely because the person was a Debtor, was insolvent before or during the case, or has not paid a debt that was discharged in the case. The law prohibits the following forms of governmental discrimination: terminating an employee; discriminating with respect to hiring; or denying, revoking, suspending, or declining to renew a license, franchise, or similar privilege. A private employer may not discriminate with respect to employment if the discrimination is based solely upon the Bankruptcy filing.
It’s important to note that rebuilding your credit and raising your score is a bit like losing weight: It takes time and there is not quick fix. In fact quick-fix efforts can backfire. The best advice is to manage credit responsibility over time. Please contact our office for detailed information on systematic approach to improve your credit history.
Educational loans guaranteed by the United States government are generally not discharged by a Chapter 7 or Chapter 13 Bankruptcy. They may be dischargeable; however, if the court finds that paying off the loan will impose an undue hardship on the Debtor and his or her dependents.
In order to qualify for a hardship discharge, the Debtor must demonstrate that he or she cannot make payments at the time the Bankruptcy is filed and will not be able to make payments in the future. The Debtor must file an adversary proceeding (lawsuit) requiring the Court to make this determination.
The filing of a Bankruptcy petition does not have any effect on the collection of alimony or child support.
This depends upon the particular circumstance of each Debtor.
In a Chapter 7 Bankruptcy Case, a Debtor, who is current on his mortgage payment, may elect whether or not to keep his home. Some Chapter 7 Debtors decide to keep their home and enter into a Reaffirmation Agreement, and other chose to keep their home without entering into a Reaffirmation Agreement. There are many benefits and detriments into entering into a Reaffirmation Agreement, which we can explain in detail.
In a Chapter 13 Bankruptcy Case, a Debtor, regardless of whether a Debtor is current on its mortgage, the Debtor may choose to keep their home and repay any arrearage to the mortgage company over the life the Chapter 13 Plan along with current monthly mortgage payments.
There are many answers to this question depending on the specific circumstance. The Debtor has many options under the Federal Exemption Statute, Michigan Exemption Statute, and Michigan Entireties Exemption to exempt a portion, if not all of their equity in their home. During the initial consultation, we advise our clients of the proper way to maximize the preservation of the equity in their home through the Bankruptcy process.
Generally, all credit items, good and bad, remain on a credit report for 8 years.
The Bankruptcy Code requires that the Debtor contribute his or her projected disposable income toward the plan payments for the duration of the plan. If the Debtor’s income has changed after the case has been filed but before the court has confirmed the plan, making it binding on the creditors, parties who have an interest in the case will closely scrutinize the Debtor’s disposable income to make sure that the payments and the income are consistent and will incorporate any necessary changes into the plan.