Chapter 7 bankruptcy is often referred to as straight bankruptcy, or liquidation bankruptcy. It is known as a liquidation bankruptcy because the trustee in bankruptcy can sell any non-exempt or unprotected assets and pay the money to your creditors. In a Chapter 7 bankruptcy, most debts are wiped out, and the debtor generally loses only non-exempt property. Despite the term liquidation bankruptcy, rarely is property liquidated, because most property is protected by exemption under state law. When an asset is exempt from legal process, a bankruptcy trustee cannot take the property.
The purpose for filing a Chapter 7 bankruptcy is to discharge a debt, or to cancel some debtor obligations. A Chapter 7 petitioner does not have to make payments out of his or her future income to have debts discharged. A Chapter 7 asks the court to erase your debts forever. In exchange, you might have to give up some of your property, such as non-exempt assets. It is important to understand that some debts cannot be discharged in a Chapter 7 bankruptcy.
WHAT HAPPENS AFTER CHAPTER 7 IS FILED?
After your Chapter 7 bankruptcy has been filed you will be immediately protected against attempts by your creditors to collect the debts. Approximately one month after your case has been filed, you will have to attend a proceeding which is called “The Meeting of Creditors”. This is generally a routine matter and your attorney will be there with you. The Meeting of Creditors will be conducted by an official appointed by the court called a trustee. The Trustee will ask you a series of questions. These questions usually only take a few minutes. After you have attended this proceeding, your case will usually conclude approximately two more months after that.
CAN BANKRUPTCY AID DRIVER'S LICENSE REINSTATEMENT?
A driver's license may be suspended if an accident or fines are not paid for. Damages from intentional acts and accidents caused by drunk driving are usually not dischargeable in Chapter 7, but other damages usually are. Non-dischargeable damages and fines may be paid over time in a Chapter 13. By filing the appropriate proceeding, a suspended license may be reinstated upon the filing of a bankruptcy. Typically, it takes some time and effort to work with the licensing people to see that this occurs.
CAN TAXES BE DISCHARGED IN BANKRUPTCY?
Yes, certain taxes can be discharged in bankruptcy. Some taxes are dischargeable in bankruptcy in spite of what many accounting and legal practitioners believe and inform their clients. You cannot discharge taxes that are less than three years old in a Chapter 7 proceeding. You can only discharge these taxes in a Chapter 13 if paying them in full through the plan. You cannot discharge taxes which have been assessed within the last two hundred forty days. This same rule applies to both Chapter 7 and Chapter 13. You cannot discharge taxes if the IRS has filed a lien on property you own and there is equity in that property. Under these circumstances, they become a secured creditor and are entitled to retain their liens until paid in full. In a Chapter 7, you cannot discharge taxes for unfiled tax returns, tax returns filed late within the last two years, or for which there was any intent to evade or defeat the tax. In a Chapter 13 proceeding, these last three rules are inapplicable. You can never discharge taxes that relate to any employer's fiduciary responsibility. For example, if you owned a business and withheld FICA, federal income tax, or state income tax from your employees and failed to pay that over to the government, such will always be what is called a priority tax and will be non-dischargeable in bankruptcy. You can discharge taxes that are more than three years old, that have been assessed more than two hundred forty days ago, and for which there are no liens filed by the IRS or the Iowa Department of Revenue.
If there is a lien filed on property for which there is no equity, the taxes still may be discharged in bankruptcy. Discharge of taxes is a very complicated area of bankruptcy law. If you have tax obligations, it is critical that you consult with a bankruptcy attorney to determine whether or not the Bankruptcy Code will provide relief from tax obligations.
WHAT IS A REAFFIRMATION AGREEMENT?
A reaffirmation agreement is essentially a contract which is signed in the course of the bankruptcy proceedings where a person agrees to pay a debt which has been listed in the bankruptcy. These can be signed for any debt, however, they are typically signed for secured debts. The most common situation where a person signs a reaffirmation agreement would be in the case of a home loan, motor vehicle loan or a loan for furniture. By signing a reaffirmation agreement, a person will continue to be legally responsible for the debt after the bankruptcy.
Chapter 13 is a consolidation of debts into one repayment plan and allows an individual to reorganize debts and to pay the unsecured debt without any further interest accumulating. It also protects the debtor from creditors while the debt is being paid off. Unlike Chapter 7 bankruptcy, a Chapter 13 petition does not ask for an immediate discharge of debts. Instead, he or she offers a plan to repay at least part of those debts over a period of time, usually three to five years, depending on the debtor's disposable income. While a Chapter 13 plan is in place, the debtor is protected from lawsuits, garnishments and other creditor action. The Chapter 13 debtor's plan must be approved by the court. A person who files Chapter 13 bankruptcy remains in bankruptcy until all of the payments in the plan have been made, and the judge issues a discharge of the debts. It is critical to know that Chapter 13 does not require all your debts to be paid one hundred percent or "dollar on the dollar". As in Chapter 7, some debts cannot be discharged in Chapter 13 unless they are paid off in full. Simply stated, a Chapter 13 reorganization can help you reduce debts, eliminate interest charges and spread payments over time. If you are behind in mortgage payments, a reorganization can help you catch up on back payments over time, without losing your home. A Chapter 13 plan of reorganization may allow you to keep property that you may have been forced to liquidate, or turn over to the court, in a complete Chapter 7 liquidation bankruptcy.
WHEN IS A CHAPTER 13 PREFERABLE TO A CHAPTER 7?
Chapter 13 is usually preferable to Chapter 7 when you have debts that Chapter 13 works on, but Chapter 7 doesn't. Examples include preventing repossession of your car or foreclosure of your home and taxes. When your home is set for a foreclosure sale because you are behind in the payments, Chapter 13 can stop the foreclosure sale and help you keep the home. You can make back payments through Chapter 13 while you make the monthly mortgage payments that come due after filing the Chapter 13, and the mortgage company can be forced to accept the plan.
Another compelling reason for filing Chapter 13 is if you have debts that are non-dischargeable in a Chapter 7, and you need to force creditors into a repayment plan. For example, if you owe IRS taxes that are non-dischargeable, you can require the IRS to accept monthly payments throughout the Chapter 13 plan and avoid wage levies or seizure of your assets. Other debts that Chapter 7 doesn't work on, such as certain student loans and child support arrearages, may be dealt with similarly in Chapter 13.
Many people prefer to file a Chapter 13 when they can afford to pay a substantial amount of their debts back, if given time. Creditors often want to be the first in line to be paid, but this is often not possible on an ordinary family's budget. However, a Chapter 13 plan can allow debtors to make payments over three to five years, reorganizing their debts, and adjusting payments to a level their budget will allow.
Another obvious reason for filing Chapter 13 over Chapter 7 is that the debtor may be ineligible to file a Chapter 7. If you file a Chapter 7, you cannot file another one for six years, but you can still file a Chapter 13 during those six years. Finally, some debtors simply feel better about paying what they can afford back to their creditors, understanding that in a Chapter 13 plan, you only pay what you can afford, even if it is not enough to pay all creditors in full.
WHAT HAPPENS AFTER CHAPTER 13 IS FILED?
After your Chapter 13 bankruptcy has been filed you will be immediately protected against attempts by your creditors to collect the debts. Approximately one month after your case has been filed, you will have to attend a proceeding which is called “The Meeting of Creditors”. This is generally a routine matter and your attorney will be there with you. The Meeting of Creditors will be conducted by an official appointed by the court called a trustee. The Trustee will ask you a series of questions. These questions usually only take a few minutes. Your first monthly Chapter 13 plan payment will be due to the Trustee within thirty days after the filing of your payment plan. This will usually be at about the time of your creditor meeting. You will have the option to make your monthly plan payments by payroll deduction or cashier’s check or money order.
WHAT HAPPENS IF CIRCUMSTANCES CHANGE DURING CHAPTER 13?
Once your Chapter 13 payment plan is approved by the court, then the Trustee will begin to pay your creditors from the funds you have been paying to the Trustee. If your circumstances should change while you are making your payments then there are options available to deal with them. Some of the circumstances which could effect your ability to pay would include lengthy period of illness, loss of job, birth of another child or any other event which would significantly lower your income or increase your living expenses. Should any of these occur, then you may be able to modify your payment plan by lengthening the term or reducing the amount of the monthly payment. In certain cases, it may be appropriate to convert the case to a Chapter 7 bankruptcy and eliminate any remaining unsecured debts.
HOW CAN CHAPTER 13 SAVE MY HOME FROM FORECLOSURE?
When you get behind on your house payments, the creditor may elect to call the loan in default, accelerate the debt and begin foreclosure proceedings. When a debt is accelerated, the full balance of the note, not just the monthly payments, is due in full immediately. This is usually preceded by the creditor's refusal to accept monthly payments.
In the event a creditor begins foreclosure, you will receive a notice of the commencement of the foreclosure proceeding. Unless the creditor is willing to accept payments to reinstate the loan, you will have to either pay the full balance remaining on the loan, or file for protection in bankruptcy to stop the foreclosure sale.
The commencement of a bankruptcy case prior to the foreclosure sale date will stop the foreclosure sale from taking place unless or until the creditor receives permission from the bankruptcy court to proceed with the sale. Under a Chapter 13 plan, you can make regular monthly payments and be given a reasonable period of time to bring your loan payments current in order to save your property.
It is strongly recommended that you review your bankruptcy options as soon as you realize that you are behind on your mortgage payments.
CAN I PROTECT MY CO-SIGNERS IF I FILE BANKRUPTCY?
When you file a Chapter 7 bankruptcy, the creditor can proceed against your co-signer, according to the terms of the debt agreement. However, if you file a Chapter 13 bankruptcy, a co-signer is protected to the extent that the plan proposes to repay the debt and if the following conditions are met - the debt is a consumer debt, and is not a debt incurred pursuant to a business transaction, and the co-signer was not the sole benefactor of the debt.
As long as you are making the required payments under the Chapter 13 plan, the creditor cannot act to collect from the co-signer. The purpose of this provision of Chapter 13 is to allow you the opportunity to repay the debt without permitting the creditor to bring undue pressure on you by approaching the co-signer for repayment.
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