Credit card settlement – the best way to get out of debt!

Are you deep into debt and searching for a way out? We are going to explore some options which may help you make the right decision. Needless to say, credit card settlement could be the best financial option for you – it is cheaper, easier and faster than any other alternative that you have.

How to know if this article is for you:

  1.    Have trouble paying your bills
  2.    Get scary and/ or annoying calls from your creditors
  3.    Worried you might lose your home
  4.    There is an actual possibility that your car could be taken away from you
  5.    Find yourself unable to support your family needs
  6.    Have most/all your accounts already turned to debt collectors

You are not alone in your financial troubles. Many people have money problems at some stage in their lives. The good thing is, you can overcome them. You just need to take action while it is still possible. Don’t let your financial situation get worse!

There are many reasons that could have led you to this point, from family problems, loss of a job to overspending. Whatever it is, your financial woes can be put to an end even though it may seem overwhelming at first.

The main factors that land you in your current financial state could be the types and amounts of debt you have, your level of motivation and ability to deal with the problem and your current and possible future situation. Take a look at some of the methods which could help you reduce or resolve your debt here.

What are the ways to get out of debt?

You might have thought there is only one way to get out of debt – to pay what you owe your creditors. However, sometimes debts could reach such unimaginable amounts that it seems impossible for you to pay them all off in this lifetime. What you need to know is that you have several financial options to solve the problem at hand.

  1.  Credit card settlement
     Credit card debt settlement

    Credit card debt settlement

    Credit card settlement is an established method to deal with your debt. The good thing about it that you do not deal with your creditors – the credit card debts settlement company does that on your behalf. In addition, their job is to make your debt go away for less than it actually is. Meaning that they will negotiate with your creditors and reach an agreement for a smaller amount. At the end of the process, you can be debt-free which sounds like a dream but it is a real possibility as that is what happens to a lot of people. On our website, you can find detailed information on how the procedure goes step by steps and the risks involved and how you can easily overcome them. Credit card debt settlement is probably by far the best method to get rid of your debt.

  1.    Self- help
Self help

Self- help

Actually, every step you take to resolve your financial situation is a self-help. This means you do everything on your own and do not get any professional help. It will take a lot of organization, devotion and planning on your own. One of the most important things is to stay realistic and be honest with yourself whether you able to do it on your own. If you believe in yourself, here is how to get yourself out of debt without seeking professional help:

–    Develop a budget

You should always start with having a very clear and realistic idea of how much you have and can earn against how much you spend. The best way to do that is to make a list of all the payments you have to make every month such as insurance, car payments, mortgages and others. The good thing about this is they are all fixed amounts and are easy to calculate. Then you have to also list expenses that are unavoidable, such as food, clothes or entertainment. Follow your spending habits to find your weak spots. Do not forget to include all your sources of income. The goal is to be able to make ends meet and pay all your debts.

–    Try to negotiate with your creditors

Try to negotiate with your creditors

Try to negotiate with your creditors

When you start really having trouble with repayments, it is advisable that you contact your creditors straight away. They might be willing to consider your situation and offer a modified repayment plan. The sooner you do that, the better it is.

Once your accounts have been turned to a debt collector, it might be too late. Your creditors might be unwilling to negotiate with you. In those cases, it is better when you get a debt settlement company which has more experience than you and may have established relations with some of your creditors. They may also be able to settle your debt for less.

–    Deal with your debt collectors

An important thing you should know is that federal law actually regulates when your creditors may contact you and they definitely cannot contact you during 9p.m. and 8a.m. In addition, they are obliged to respect your will if you have made a written request not to be contacted anymore. There are many other bans imposed on debt collectors as well – they cannot lie or use unfair practice when trying to collect their debt from you. Do not let yourself be bullied.

–    Manage your loans

Manage your loans

Manage your loans

There are two kinds of debt – secured and unsecured. Although unsecured debt is harder to go away, it does not mean you should not worry about your secured debt. Secured debt is normally tied to something you owe such as your car or your house. It is called secured loan because if you stop making repayments, your creditors can repossess your property.

Most automobile finance agreements have a clause to do it by default. Meaning they do not even have to give you notice in advance. It is almost the same with your mortgage. The difference is that you are facing foreclosure. Contact your creditors and check what options they are willing to give you. Make sure you ask if there are additional fees to pay.

Credit card debt is unsecured debt. So are medical debt and signature loans. They are not tied to an asset and have a higher risk for the borrower. Therefore, your creditors on those types of debt would be more eager to receive your payments and are more unwilling to negotiate with you.

  1.    Debt relief service
Debt relief service

Debt relief service

Debt relief services may be used as a general term relating to both credit counseling and debt settlement. Credit counseling is a not very good alternative to debt settlement. Although they seem alike in many ways and share certain similar steps, credit counseling has more pitfalls and does not offer the same end result as debt settlement.

In credit counseling, you merely get advice on how to deal with your financial situation by credit counseling organization. They offer their services through local offices, online or by phone. Trained professionals will look at your whole financial situation and work with you on a personal plan which will help resolve your financial issues. There is no saying how this may end – will you be left with more debt or be debt-free? Will you have a higher or lower credit card score? How will it affect your credit report? The question you really need to ask yourself is how much can you trust the advice you have received from those organizations.

Many say it is an advantage that those services are provided by non-profit organizations compared to credit card debt settlement companies which are pro-profit. However, what they do not tell you is that this does not mean their services are free. In fact, in many cases, they have very high fees or even request you to make donations to the organization.

  1.    Debt consolidation
 Debt consolidation

Debt consolidation

It is a somehow complex method of debt refinancing. It involves you taking up yet another loan to pay off many other. You might be able to achieve it through a second mortgage or a home equity line of credit.

A second mortgage, as the name suggests, occurs when the first one is still in effect. It will receive payments only after the first has been paid off. Therefore, its interest rate tends to be higher. Naturally, the amounts borrowed would be lower than with the first one. It can also last from one to twenty years but the shorter the period, the higher the monthly payments. It also comes with lending fees.

Another thing is that those loans require you to put up your home as collateral. It is how the borrower secures the repayment of your debt. It serves them as a protection if you do not pay. For you, that means that if you cannot make the repayments or in some cases, you are late with your repayments, you can lose your home.

A line of credit is a flexible loan from a bank. The bank will offer you a limited amount of money you can access as needed (in your case to repay your debts). However, you have to repay the bank – either immediately or over a specified period of time. It is something banks have started doing recently and it might not really work for you. You have to be very careful. Plan everything in advance on your own and pray for the best.

Debt consolidation is very hard to achieve and is not recommended. Even after this procedure, you will still be in debts. It is meant to only settle a fraction of your debts. It may leave you in a slightly better financial position, but you will not be debt-free and will still have a lot of payments to deal with, not to mention you credit report situation.

  1.    Bankruptcy
people who file for bankruptcy sometimes pay less

people who file for bankruptcy sometimes pay less

You don’t want to go there. Although bankruptcy can be an option, it has effects that will last long and are far-reaching. Bankruptcy information goes on your credit record and stays there for ten years. It is true that people who file for bankruptcy sometimes pay less because the court order may say they do not have to pay some debts. However, it can cause you many problems, for example, when you are trying to buy a home or life insurance.

In some cases, bankruptcy may even prevent you from getting a really good job because your future employers would want to see your credit record and a bankruptcy case is always a red sign. The thing with bankruptcy is that it is a legal procedure – it is the legal way to do it. Not to say that other options are illegal, but filing bankruptcy is what you are supposed to do when you have too many debts you can’t repay. Needless to say, it comes with many negative consequences as well.

There are two main types of personal bankruptcy. They are dealt with in Chapters 7 and 13 of the Bankruptcy code. You should not forget that these are very expensive legal procedures. Both types of bankruptcy must be filed in special federal bankruptcy courts. Meaning you will need an attorney to represent you. Filing fees are several hundreds of dollars and attorney fees vary depending on who you choose.

What is the difference between Chapter 7 and Chapter 13?

What is the difference between Chapter 7 and Chapter 13?

What is the difference between Chapter 7 and Chapter 13?

Simply put, one is straight bankruptcy (Chapter 7) and the other is not (Chapter 13). With straight bankruptcy, all your assets are going to be sold and the money gathered would be used for repayment of your debts. When we say all, you should know for the purposes of bankruptcy, certain assets are exempted. The state makes sure that you have enough left to sustain a minimum standard of living.

For example, your only home (if its cost is up to a certain amount. If it is too expensive, it may be sold and you can get a fraction of the proceeds to get a cheaper place to live in), some work-related tools in your profession or basic household furnishings (again depending on their value) can be exempt. Your property will be sold either by an appointed court official or turned over to your creditors.

There are also eligibility requirements for both Chapters you need to make sure you cover. In some cases, you will not be allowed to file under a certain chapter. That is because  an individual filing under Chapter 7 will get a discharge on debts and will no longer be liable for them. For example, before filing under Chapter 7, you need to satisfy a “means test”. However, bear in mind that the right to a discharge is not an absolute anyway (some types of debt are not discharged, such as student loans or alimony and child support) and you might not even get it.

What does Chapter 13 offer then?

Chapter 13 offers a more lengthy proceeding to give you a chance to keep some of your assets. In this case, the court approves a repayment plan which allows you to use your future income to pay back your debts. This plan usually varies between three and five years. You get to keep things you may otherwise lose such as your house that has a mortgage or your car. You don’t have to surrender any property under Chapter 13. After the procedure ended and you have made all the repayments under the court-approved plan, your debts will be discharged. However, do not forget there are eligibility conditions here too.

You still need to hire an attorney and pay them, pay for the procedure and court fees. Plus, you have to be paying constantly over five years. That takes a lot of financial commitment. Chapter 13 bankruptcy is unlike what you will get with debt settlement where the procedure is much faster, easier and cheaper. With debt settlement, you will have to make regular payments for only a couple of months.

Important things to remember
Important things to remember

Important things to remember

A very important detail about bankruptcy procedure is that you must get credit counseling. It must be with a government- approved organization and must be conducted within six months before you file for bankruptcy relief. You can find a list of such organizations at the U.S. Trustee

Are there any options you most definitely do not want to try?

When you are very much in debt, everything becomes a problem. At some point, all your options sound bad. Most of them come with many risks (sometimes avoidable, sometimes not) and uncertainty. However, there are scam options which you want to stay away from.

–    Credit repair

This is a service usually offered to people who have a really poor credit history. A so-called credit clinic claims that they can clean your credit report. Of course, this service is provided at a fee. First of all, be aware that there are federal and state laws forbidding any company dealing with debts to request payment of a fee before it has performed any kind of service to the client.

Secondly, it is impossible for them to legally do what they had promised. Some of them could falsify documents (an actual crime) and they can be sued under the Crime code. No one will take that risk for you for the fee you are paying them. The truth is, in most cases, they will request an advance payment from you and you will never hear from them again. Make an honest effort to repay your debts and improve your credit report.

Stay away from credit clinics – they have nothing to offer you. The things they can actually do, you can do them yourself for free. Contact a debt settlement company and get your debts settled soon.

–    Advance free loans

The companies who offer this service require you to pay them in advance. It is illegal for them to request for payment before they have rendered any service. You must be wary of those loan guarantees. However, some creditors offer an extension of credit through different means such as telemarketing. They require an application or appraisal fee in advance. While what they do is legal but they can never guarantee you will get a loan. The truth is no one can promise you that.

The legitimate service will not even claim that you receiving a loan is likely to happen (to be honest, if it was, you would not have to use their service, to begin with). In some cases, the fees these scam companies require vary from  a hundred to several hundreds of dollars. Do you want to lose your money over nothing? We guess not.

In conclusion

We tried to give you a complete overview of what lies ahead of you, downfalls and how to avoid them. We believe debt settlement could be the best option you have because it is efficient, fast and relatively affordable. As any other scenario, it comes with some risks but they can be easily solved. Stay informed and be careful when choosing your financial options.

Chapter 13 bankruptcy repayment plan

To begin a Chapter 13 bankruptcy, you will need to fill out a packet of bankruptcy forms – mostly the same forms as you would use in a Chapter 7 bankruptcy. they include listing your income, expenses, property and debts. You will need to file these forms and paperwork with a nearby bankruptcy court. You must also file a workable payment plan proposing how you plan on handling your debts over the payment plan period. You must also file your tax return for the previous year which is proof that you’ve filed your tax returns for the last four years, and a certificate showing that you’ve completed credit counseling with an agency approved by the United States Trustee.

Chapter 13 plan

Chapter 13 plan

Under a Chapter 13 plan, you usually make monthly payments to the bankruptcy trustee, an official appointed by the bankruptcy court to oversee your case. The trustee in turn pays your creditors and collects a commission based on the amounts paid out under your plan. You must make all of your payments to successfully complete your plan and get a discharge of your remaining debts.

Amount you’ll have to pay

Some creditors are entitled to receive 100% of what you owe them, while others may receive a much smaller percentage or even nothing at all. Usually, must provide for:

Administrative claims will be paid 100%, which includes:

1. your filing fee

2. the trustee’s commission (3% to 10% of each monthly payment)

3. attorney’s fees, if you hire a bankruptcy lawyer for help with your Chapter 13 bankruptcy

Priority debts will be paid 100% which includes:

 back alimony and child support

back alimony and child support

1. back alimony and child support

2. wages, salaries or commissions you owe to employees

3. most tax debts (including state and federal income taxes)

4. contributions you owe to an employee benefit fund

Mortgage defaults will be paid 100%

if you want to keep your house

Other secured debt defaults will be paid 100%

if you want to keep the property. Missed car payments fall into this category.

Unsecured debts

They will be paid anywhere from 0% to 100% of what you owe. The exact amount depends on:

1. the total value of your nonexempt property

2. the amount of disposable income you have each month to put towards your debts

3. how long your plan lasts

Disposable Income

In your payment plan, you must commit to paying any leftover disposable income (your income less certain allowed expenses and payments on secured loans, such as a mortgage or car loan) towards your unsecured debts, such as credit card debts and medical bills.

Length of payment plan

Length of payment plan

Length of payment plan

The length of your payment plan depends on your income level. If your “current monthly income” (meaning your average income over the six months prior to filing) exceeds the median monthly income for a household of your size in your state, your plan must last five years. You can propose a three-year plan, even if your unsecured creditors cannot be fully repaid during that time, as long as your income is less than the median.

Your current monthly income could be out of date. That’s because your current monthly income is an average, it may well be more than your actual monthly income at the time you file. For example, if you were laid off unexpectedly three months before filing, your monthly income when you file may be quite low, compared to your average income over the last six months which would have to include three months of your salary.

The confirmation hearing

The bankruptcy judge must hold a confirmation hearing no later than 45 days after the meeting of creditors and decide whether the plan is feasible and meets the standards for confirmation set forth in the Bankruptcy Code. After receiving 25 days notice of the hearing the creditors may object to confirmation. While a variety of objections can be made, the most frequent ones are that payments offered under the plan are less than what the creditors would receive if the debtor’s assets were liquidated or that the debtor’s plan doesn’t commit all of the debtor’s projected disposable income for the three or five year applicable commitment period.

If the court confirms the plan, the Chapter 13 trustee will distribute funds received under the plan “as soon as it is practicable.” If the court declines confirmation of the plan, the debtor may file a modified plan. The debtor can also convert the case to a liquidation case under Chapter 7 (a fee of $15 is charged for converting a case under Chapter 13 bankruptcy to a case under Chapter 7 bankruptcy). If the court declines to confirm the plan or the modified plan and instead decides to dismiss the case, the court may authorize the trustee to keep some funds for costs. However, the trustee must return all remaining funds to the debtor.

On some occasions, a change in circumstances may compromise the debtor’s ability to make plan payments. For instance, a creditor may object or threaten to object to a plan, or the debtor may inadvertently failed to list all creditors. In such cases, the plan may be modified either before or after confirmation. Modification after confirmation is not limited to an initiative by the debtor, but may be at the request of the trustee or an unsecured creditor.

Administrative fees and interest charges

Administrative fees & interest charges

Administrative fees & interest charges

Chapter 13 trustees get paid by taking a percentage of all amounts they distribute to creditors through your repayment plan. This percentage varies depending on where you live but can be up to about 10%. In addition, you typically have to pay interest on secured claims you are paying off through your plan. The required interest rate can vary depending on the type of claim and the rules in your jurisdiction. However in general, you can expect to pay the national prime rate plus 1% to 3%.

Making regular monthly payments on loans

Keep in mind that if you want to keep your home, car or other secured debts, you’ll have to keep making your regular monthly payments during your plan period (unless the court requires you to pay off the entire balance through your plan). Some courts might require you to make these monthly payments through your plan.

No surrender of property

If you file for Chapter 13 bankruptcy, you don’t need to hand over any of your property. Instead, you repay your debts out of your income. In exchange for getting to keep your property, your plan will have to pay your creditors at least the value of your non-exempt property. In Chapter 7 bankruptcy, you must surrender your non-exempt property to the trustee who can sell it and distribute the proceeds to your creditors. You do get to keep property that is exempt.

If you need help, consult a bankruptcy lawyer

Proposing and calculating a feasible Chapter 13 repayment plan is a complicated process. To obtain more specific plan payment information, talk to a knowledgeable bankruptcy attorney familiar with the rules in your particular jurisdiction.

Chapter 13 bankruptcy rules

Filing for Chapter 13 bankruptcy can provide you with a structured plan for paying down your debt and stop creditor harassment, runaway interest rates and fees. It’s sometimes referred to as a “re-organization” bankruptcy because it re-organizes your debts so that you can afford to pay them.

Unlike a Chapter 7 bankruptcy,  Chapter 13 bankruptcy doesn’t completely discharge your debts, but rather provides you with the structure to pay them off using your income. People who might benefit from Chapter 13 bankruptcy have regular income, but are not able to afford their debt payments and living expenses. Normally, under a Chapter 13 bankruptcy, a three to five year payment plan is established. Once all payments under the plan have been made, any remaining debt is eliminated.

One important benefit of Chapter 13 over Chapter 7 bankruptcy is that you are not forced to sell your assets. This is because debts are paid off with current income as opposed to proceeds from the sale of your assets.

Chapter 13 bankruptcy rules – Filing requirements

Filing requirements

Filing requirements

In your petition for bankruptcy, you’ll need to provide a list of all of your debts (whether you are behind on paying them or not) as well as details about your assets, income and living expenses. You will also need to create and file a plan for paying off your debts over a specified period of time. You must have regular income and also document that income over the past several years to support your ability to make debt payments.

While there are no limits to how much debt you can have to file for Chapter 7 bankruptcy, there are limits for Chapter 13 bankruptcy for both secured and unsecured debt. These limits increase each year due to inflation, so you have to research the current levels before filing your application. They are put into place to make it more likely that you can pay off debt via a payment plan rather than let you off the hook for significant amounts of debt.

Also, you must complete a course on financial counseling to help you prepare for your bankruptcy petition and to discuss bankruptcy alternatives. Counseling also tries to help you understand what behavior created your difficult situation in the first place, and how to modify your behavior in the future.

Payment plan

Payment plan

Payment plan

Your payment plan must accomplish at least one of the following:

1. Pay off all your debts within the appropriate time frame

2. Commit all your disposable income within the time frame to paying off debts

3. Be accepted by your creditors if the plan doesn’t meet either one of the above conditions

Adding to that, your payment plan must pay down at least the same amount or more of your debt than if you had filed a Chapter 7 bankruptcy and had to sell your assets. If you have a lot of assets but low income, you may not be able to accomplish this. In other words, even if you file for Chapter 13 you may be forced to sell some assets.


Depending on your income, you will either have three or five years to complete your payment plan. Generally, you will be subject to the payment plan for only three years if you have less than the median income for your area (i.e. have passed the “means test”) or five years if you did not pass the “means test.” Either way, you are required to put all your disposable income, as defined below, towards the payment plan.

The payment plan will also make provisions for you to continue full monthly payments on secured debt, such as a mortgage or a car loan, during and after the payment plan is complete if the payment term on those debts extends that long. However, whatever unsecured debt is left after the payment plan is complete will be forgiven.

Priority debts

Priority debts

Priority debts

Your payment plan must prioritize certain debts to pay them in full during its course. These are referred to as “priority debts” and include:

1. Bankruptcy filing fees paid to the bankruptcy court, if you haven’t paid them in full when filing.

2. Attorney’s fees for filing bankruptcy.

3. Back alimony and child support debts.

4. Any back payments due on your mortgage, auto loan or other secured debt and any fees or penalties that resulted from missing payments. These are considered priority only if you wish to keep the house, car or other secured debt the collateral is attached to.

5. Most tax debts although some old income tax debts can be forgiven.

Reaffirmed debts are also paid in full each month under the payment plan. However, they don’t have to be paid off in full by the end of the payment plan as long as the reaffirmed debt’s payment schedule is kept.

Disposable income

Disposable income

Disposable income

Disposable income, as defined by federal bankruptcy laws, refers to the income left over after paying several expenses in full each month. These expenses include:

1. Living expenses, including food, rent or mortgage, transportation, utilities, medical bills and any current alimony or child support bills.

2. Current payments for secured debts, such as your car or home, that you would like to keep.

To determine your disposable income, subtract your living expenses and secured debt payments from your monthly income. After that, subtract your monthly payments for priority debts which you will need to spread out across the three or five years required for your plan. The amount left over is your monthly disposable income and will be the amount on which the trustee’s commission is calculated.

Your bankruptcy trustee should be able to provide their current commission level (normally between 3% and 11%). Divide whatever is left after taking out the trustee’s commission among your other debts, proportional to their size. While you are expected to pay down as much as you can, it is also expected that you won’t be able to pay down all of your debts.

Any non-priority debt amounts left over after your plan concludes will be discharged or wiped out.

Unlike Chapter 7 bankruptcy, a Chapter 13 bankruptcy allows you to pay debt using current income instead of liquidating your assets. Creditors, however, can object to a payment plan if your assets are sufficient to pay off your debt and you claim little disposable income. That is, if you have a lot of assets but little income. This means your payment plan will repay just a fraction of your debt and creditors may ask the court to force you to sell some of your assets as well.

Treatment of property with loans

Unless a modification to the loan is approved by the creditor, loans secured by property must be paid in full each month  to keep it. If the monthly payments for a secured debt are not paid in full during the course of the payment plan or there are still missed payments that were not made up after the payment plan has been completed, the creditor has the right to seize the property or foreclose on it. Missed payments are considered a priority debt with regards to your payment plan and must be paid back to successfully complete the plan.

One thing to keep in mind is that while payments must be made, the loan does not need to be paid in full by the end of the payment plan if the loan term is longer than the payment plan, such as with a home mortgage.

Automatic stay

Automatic stay

Automatic stay

If you’re considering bankruptcy, you’ve probably received a lot of unwanted attention from your creditors and foreclosure proceedings may have already begun on your home. Once you file for bankruptcy, an “automatic stay” measure is activated which requires all creditors to immediately stop their collection attempts until the court determines how to proceed.

Creditors, however,  can appeal to proceed with a foreclosure in some cases, such as if one was already in progress. However, they must do so with the permission of the bankruptcy court.


Chapter 13 bankruptcy is an opportunity for those with a regular income to pay down their debts over a few years at low or no interest rates while keeping their assets. However, since almost every cent that is not used for living expenses will be directed towards debt payment, it is by no means an easy way to get out of debt and will have long-standing repercussions on your credit. If you are considering bankruptcy,  you should explore all your options and understand the effects bankruptcy will have on your quality of life during and after the process.

Chapter 13 bankruptcy eligibility

Filing bankruptcy should be considered only as a last resort by a person with financial troubles. For many debtors, Chapter 13 bankruptcy is a good option. However, not everyone is eligible for it. Let’s look at what Chapter 13 is, how to file bankruptcy and the requirements for Chapter 13 bankruptcy eligibility.

What is Chapter 13 bankruptcy

Under this chapter, debtors propose a repayment plan

Under this chapter, debtors propose a repayment plan

Chapter 13 bankruptcy is also called a wage earner’s plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period. If the debtor’s current monthly income is greater than the applicable state median, the plan must generally be for five years. In no case may a plan provide for payments over a period longer than five years. During this time the law forbids creditors from starting or continuing collection efforts.

Chapter 13 bankruptcy eligibility

In order to file for Chapter 13 bankruptcy, every debtor must meet the requirements under this Chapter. With Chapter 13, unlike Chapter 7 bankruptcy which allows the debtor to discharge some debts in exchange for the sale of a non-exempt property to pay creditors, Chapter 13 allows the debtor to keep their property and repay creditors in a three or five year court-approved repayment plan.

According to Chapter 13 bankruptcy eligibility requirements under the bankruptcy code, a debtor must meet the following criteria to qualify:

You are not a business entity

Only individuals & those filing jointly file for Chapter 13 bankruptcy

Only individuals & those filing jointly file for Chapter 13 bankruptcy

A business, even a sole proprietorship, cannot file for Chapter 13 bankruptcy in the name of that business. Businesses are steered toward Chapter 11 bankruptcy when they need help re-organizing their debts.

Only individuals and those filing jointly as husband and wife can file for Chapter 13 bankruptcy. A business owner may not file in the name of the business, if, however, ownership is as a sole proprietor or with a partner, the debtor can file in their name for the debts they are personally liable for. However, stockbrokers and commodity brokers are not eligible for Chapter 13.

You are not barred by a prior bankruptcy

If a debtor had discharged any debt in a Chapter 13 bankruptcy within the last two years or in a Chapter 7 bankruptcy within the last four years, he is not eligible for a Chapter 13 discharge until the required time has elapsed.

A previous bankruptcy case wasn’t dismissed within the previous 180 days

A debtor cannot file for Chapter 13 or Chapter 7 if a prior bankruptcy petition was dismissed during the preceding 180 days for either of the following reasons:

1. The debtor wilfully violated a court order or failed to appear before the court; or

2. The debtor requested that the court dismisses the case after a creditor asked the court to lift an automatic stay.

You have fulfilled the credit counseling requirement

A Chapter 13 debtor must file with the bankruptcy court a certificate of proof establishing that an approved credit counseling agency provided debt counseling in at least 180 days prior to filing for Chapter 13. If the credit counseling agency created a debt management plan, it must provide a copy of it to the court. The debtor must file the certificate with the initial paperwork or must provide it within 15 days after filing for bankruptcy.

Your debts aren’t too high

Your debts aren’t too high

Your debts aren’t too high

Chapter 13 requirements impose a limit on the amount of a filer’s debt. Chapter 13 is available to debtors with less than $336,900 in unsecured debt (these are debts, not secured by property, such as credit card debt and medical bills) and less than $1,010,650 in secured debt (in which a creditor can take the property securing the debt if it’s not paid). Debt limits are adjusted for inflation every three years.

You have filed your income tax returns

To meet Chapter 13 requirements, a debtor must provide proof of filing state and federal income tax returns for the previous four years. The debtor must provide the trustee with a copy or a transcript of the most recent federal tax return filed with the IRS at least seven days before the first meeting of creditors.

The plan you proposed repays all required debts

Under Chapter 13, bankruptcy law requires the repayment of some debts in full. Debts in this category include:

Priority debts

Unsecured debts, such as child support, alimony or support payments and non-dischargeable taxes.

Secured debts that survive the repayment plan

Secured debts such as a mortgage or a vehicle loan must remain current during the repayment plan.

Other secured debts

Secured debts like judicial and tax liens must be paid in full during the repayment time.

You can repay a certain amount to unsecured creditors

You can repay a certain amount to unsecured creditors

You can repay a certain amount to unsecured creditors

Non-priority, unsecured creditors may also be entitled to repayment. Because a debtor may keep non-exempt property under Chapter 13 bankruptcy, a debtor must repay non-priority, unsecured creditors at least the amount equal in value to their non-exempt property over the life of the repayment plan. Non-exempt property usually includes household appliances and furniture, inexpensive jewelry and a certain amount of equity in a home or a motor vehicle.

You have sufficient income to repay debt

After deducting allowable expenses, a debtor must have enough income for all debt obligations. A debtor may include income from a working spouse even if the spouse has not filed jointly for bankruptcy, self-employment income, wages and salary, Social Security benefits and unemployment benefits. To qualify for Chapter 13, the debtor must have enough income for expenses for mandatory payments to priority and unsecured creditors, and for payments to unsecured creditors in an amount at least equal in value to the debtor’s non-exempt property. Based on a percentage of all payments made in the plan, the debtor must pay the trustee a commission.

Chapter 7 vs Chapter 13 bankruptcy

In general, most debtors prefer to file for Chapter 7 because it eliminates most unsecured debt and is easier. However, not every debtor qualifies for Chapter 7. In some cases, repaying debt over time in a court-approved Chapter 13 repayment plan provides benefits that are unavailable in Chapter 7. Sometimes things can get quite complicated, so it is important to seek help in the face of a bankruptcy attorney. First, let’s understand the main differences between Chapter 7 and Chapter 13. We’ll look at the advantages and disadvantages of both and help you determine which one suits your case better.

Chapter 7 vs Chapter 13 bankruptcy

Chapter 7 vs Chapter 13 bankruptcy

Chapter 7 vs Chapter 13

What is Chapter 7 bankruptcy

Chapter 7 is a liquidation bankruptcy designed to wipe out your general unsecured debts such as credit cards and medical bills. To qualify for Chapter 7 bankruptcy, you must have little or no disposable income. If you make too much money, you may be required to file a Chapter 13 bankruptcy instead.

When you file for Chapter 7 bankruptcy, a trustee will be appointed to administer your case. In addition to reviewing your bankruptcy papers and supporting documents, the Chapter 7 trustee’s job is to sell your non-exempt property to pay back your creditors. If you don’t have any non-exempt assets, your creditors will receive nothing. As a result, Chapter 7 bankruptcy is typically for low income debtors with little or no assets who want to get rid of their unsecured debts.

What is Chapter 13 bankruptcy

Chapter 13 is a re-organization bankruptcy designed for debtors with regular income who can pay back at least some portion of their debts through a repayment plan. If you make too much money to qualify for Chapter 7 bankruptcy, you may be left with no choice but to file a Chapter 13 case. Many debtors, however, choose to file for Chapter 13 bankruptcy because it offers many benefits that Chapter 7 bankruptcy does not (such as the ability to catch up on missed mortgage payments or strip wholly unsecured junior liens from your house).

In Chapter 13 bankruptcy, you get to keep all your property (including non-exempt assets). In exchange, you pay back all or a portion of your debts through a repayment plan (the amount you must pay back depends on your income, expenses and types of debt). For this reason, Chapter 13 is frequently referred to as a re-organization bankruptcy. Usually, Chapter 13 bankruptcy is for debtors who can afford to make monthly payments for missed mortgage or car payments or pay off non-dischargeable debts such as alimony or child support arrears.

Chapter 7 advantages

Chapter 7 advantages

Chapter 7 advantages

1. Unpaid balances due after assets are distributed are erased (“discharged” in bankruptcy language).

2. The amount of debt you can erase is not limited.

3. Wages you earn and property you acquire (except for inheritances) after the bankruptcy filing date are yours.

4. Your case is often over in about 3-6 months, enabling you to get rid of the burden of debt quicker.

5. There is no minimum amount of debt required.

Chapter 13 advantages

1. You keep all your property, whether they are exempt or non-exempt.

2. The debts not canceled in a Chapter 7 discharge can be reduced in a Chapter 13 payment.

3. You have a longer period of time to pay the debt.

4. You have protection against creditor’s collection efforts and wage garnishment.

5. You have protection against foreclosure by your lender of your home.

6. Any co-signers are immune from the creditor’s efforts as long as the Chapter 13 plan provides for full payment.

7. You can file repeatedly.

8. You can file a Chapter 13 after your Chapter 7 discharge to pay off any remaining liens.

9. You can separate your creditors by class. Different classes of creditors receive different percentages of payment. This enables you to treat debts where there is a co-debtor involved on a different basis from debts incurred on your own.

Chapter 7 disadvantages

Chapter 7 disadvantages

Chapter 7 disadvantages

1. You lose your non-exempt property which is sold by the trustee.

2. If facing foreclosure on your home, lender’s efforts are only temporarily stalled by filing.

3. Some debts survive and can be collected after your case is closed (e.g., mortgage liens).

4. Co-signors of a loan can be stuck with your debt unless they file for similar protection.

5. Bankruptcy damages your credit rating.

6. You can file this type of bankruptcy only once every eight years.

7. It is difficult to withdraw a Chapter 7 filing.

Chapter 13 disadvantages

1. You pay your debts out of your disposable (post-bankruptcy) income. This ties up your cash over the repayment period.

2. Legal fees are higher since a Chapter 13 filing is more complex.

3. Some debts will survive after your bankruptcy case is closed and you must continue paying.

4. Your debt must be under $1,532,700 (e.g., unsecured debts are less than $383,175 and secured debts less than $1,149,525).  These amounts are adjusted every three years.

5. Stockbrokers and commodity brokers cannot file a Chapter 13 bankruptcy petition.

6. Your debt can linger for years, burdening future income.

Chapter 13 bankruptcy – all you need to know

This chapter of the Bankruptcy Code provides for adjustment of debts for an individual with regular income. Chapter 13 allows a debtor to keep his property and pay debts over time, usually  in between three and five years.  Let’s look at Chapter 13 bankruptcy definition and explore what it can offer.

What is bankruptcy (chapter 13)

A chapter 13 bankruptcy, also called a wage earner’s plan, enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors in over three to five years. If the debtor’s current monthly income is less than the applicable state median, it will be a three-year plan unless the court approves a longer period “for cause.” If the debtor’s current monthly income is greater than the applicable state median, the plan must be for five years generally. In no case may a plan provide for payments over a period longer than five years. During this time, the law forbids creditors from starting or continuing collection efforts.

Advantages of Chapter 13 bankruptcy

Advantages of Chapter 13 bankruptcy

Advantages of Chapter 13 bankruptcy

Chapter 13 offers individuals a number of advantages over liquidation under Chapter 7.

The most significant is perhaps the opportunity Chapter 13 offers individuals to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they still must make all mortgage payments that are due during the Chapter 13 plan on time.

Another advantage of Chapter 13 bankruptcy is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the Chapter 13 bankruptcy plan.  By doing this, you may lower the payments. Chapter 13 also has a special provision that protects third parties who are liable with the debtor on “consumer debts.” This provision may protect co-signers. Lastly, Chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a Chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under Chapter 13 protection.

Chapter 13 eligibility

Any individual, including self-employed or operating an unincorporated business, is eligible for Chapter 13 relief as long as the individual’s unsecured debts are less than $383,175 and secured debts are less than $1,149,525. These amounts are adjusted periodically to reflect changes in the consumer price index. A corporation or partnership may not be a Chapter 13 bankruptcy debtor.

An individual cannot file under Chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor’s wilful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. In addition to that, no individual may be a debtor under Chapter 13 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing. However, there are exceptions in emergency situations or where the U.S. trustee (or bankruptcy administrator) has determined that there are insufficient approved agencies to provide the required counseling. If a debt management plan is developed during the required credit counseling, it must be filed with the court.

How it works

How it works

How it works

A Chapter 13 bankruptcy case begins with filing a petition with the bankruptcy court serving the area where the debtor has a domicile or residence. Unless the court orders otherwise, the debtor must also file with the court the following:

1. schedules of assets and liabilities

2. a schedule of current income and expenditures

3. a schedule of executory contracts and unexpired leases

4. a statement of financial affairs

The debtor must also file a certificate of credit counseling, a copy of any debt repayment plan developed through credit counseling, evidence of payment from employers (if any) received 60 days before filing, a statement of monthly net income and any anticipated increase in income or expenses after filing, plus a record of any interest the debtor has in federal or state qualified education or tuition accounts. The debtor must provide the Chapter 13 case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began). A husband and wife may file a joint or individual petitions.

The courts must charge a $235 case filing fee and a $75 miscellaneous administrative fee. Usually, the fees must be paid to the clerk of the court upon filing. However,  with the court’s permission, they may be paid in installments. The number of installments is limited to four, and the debtor must make the final installment no later than 120 days after filing the petition.

For cause shown, the court may extend the time of any installment as long as the last installment is paid no later than 180 days after filing the petition. The debtor may also pay the $75 administrative fee in installments. Only one filing fee and one administrative fee are charged If a joint petition is filed. Debtors should be aware that failure to pay these fees may result in case dismissal.
To complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs and schedules, the debtor must compile the following information:

1. A list of all creditors and the amounts and nature of their claims

2. The source, amount, and frequency of the debtor’s income

3. A list of all of the debtor’s property

4. A detailed list of the debtor’s monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc

Married individuals must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files, the income and expenses of the non-filing spouse is required so that the court, the trustee and creditors can evaluate the household’s financial position.

 When an individual files a Chapter 13 petition

When an individual files a Chapter 13 petition

When an individual files a Chapter 13 bankruptcy petition, an impartial trustee is appointed to administer the case. In some districts, the U.S. trustee or bankruptcy administrator appoints a standing trustee to serve in all Chapter 13 cases. The Chapter 13 trustee evaluates the case as well as serves as a disbursing agent, collecting payments from the debtor and making distributions to creditors.

Filing the petition under Chapter 13 “automatically stays” (stops) most collection actions against the debtor or the debtor’s property. However, filing the petition does not stay certain types of actions and the stay may be effective only for a short time in some situations. The stay arises by operation of law and requires no judicial action. Creditors generally may not initiate or continue lawsuits, wage garnishments or even make telephone calls demanding payments as long as the stay is in effect. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.

Chapter 13 also contains a special automatic stay provision that protects co-debtors. A creditor may not seek to collect a “consumer debt” from any individual who is liable along with the debtor, unless the bankruptcy court authorizes otherwise. Consumer debts are those incurred by an individual primarily for a personal, family or household purpose.

Individuals may use a Chapter 13 bankruptcy proceeding to save their home from foreclosure. The automatic stay stops the foreclosure proceeding as soon as the individual files the Chapter 13 petition. The individual may then bring the past-due payments current over a reasonable period of time. Nevertheless, the debtor may still lose the home if the mortgage company completes the foreclosure sale under state law before the debtor files the petition. The debtor may also lose the home if he or she fails to make the regular mortgage payments that come due after the Chapter 13 filing.

Creditors meeting

Between 21 and 50 days after the debtor files the Chapter 13 petition, the Chapter 13 trustee will hold a meeting of creditors. If the U.S. trustee or bankruptcy administrator schedules the meeting at a place that does not have regular U.S. trustee or bankruptcy administrator staffing, the meeting may be held no more than 60 days after the debtor files. During this meeting, the trustee places the debtor under oath and both the trustee and creditors may ask questions. The debtor must attend the meeting and answer questions regarding his or her financial affairs and the proposed terms of the plan.

If a husband and wife filed a joint petition, they both must attend the creditors’ meeting and answer questions. To preserve their independent judgment, bankruptcy judges are prohibited from attending the creditors’ meeting. The parties normally resolve problems concerning the plan either during or shortly after the creditors’ meeting. Generally, the debtor can avoid problems by consulting with the trustee prior to the meeting and by making sure that the petition and plan are complete and accurate.

In a Chapter 13 bankruptcy case, to participate in distributions from the bankruptcy estate, unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors. However, a governmental unit has 180 days from the date the case is filed a proof of claim.

After the meeting of creditors, the debtor, the Chapter 13 trustee and those creditors who wish to attend will come to court for a hearing on the debtor’s Chapter 13 repayment plan.

Chapter 13 bankruptcy plan and conformation hearing

Unless the court grants an extension, the debtor must file a repayment plan with the petition or within 14 days after the petition is filed. A plan must be submitted for court approval and must provide for payments of fixed amounts to the trustee on a regular basis, typically weekly or monthly. The trustee then distributes the funds to creditors according to the terms of the plan which may offer creditors less than full payment on their claims.

types of claims

types of claims

There are three types of claims: priority, secured, and unsecured.

1. Priority claims are those granted special status by the bankruptcy law, such as most taxes and the costs of bankruptcy proceeding.

2. Secured claims are those for which the creditor has the right to take back certain property (i.e., the collateral) if the debtor does not pay the underlying debt.

3. In contrast to secured claims, unsecured claims are generally those for which the creditor has no special rights to collect against particular property owned by the debtor.

If the debtor wants to keep the collateral securing a particular claim, the plan must provide that the holder of the secured claim receive the value of the collateral at least. If the obligation underlying the secured claim was used to buy the collateral (e.g., a car loan) and the debt was incurred within certain time frames before the bankruptcy filing, the plan must provide for full payment of the debt, not just the value of the collateral.

Making the plan work

The provisions of a confirmed plan bind the debtor and each creditor. Once the plan is confirmed by the court, the debtor must make the plan work. The debtor must make regular payments to the trustee either directly or through payroll deduction which will require adjustment to living on a fixed budget for a prolonged period. Furthermore, while confirmation of the plan entitles the debtor to retain property as long as payments are being made, the debtor may not incur new debt without consulting the trustee. This is because additional debt may compromise the debtor’s ability to complete the plan.

A debtor may make plan payments through payroll deductions. This practice increases the likelihood that payments will be made on time and that the debtor will complete the plan. In the event that the debtor fails to make the payments due under the confirmed plan, the court may dismiss the case or convert it to a liquidation case under Chapter 7 of the Bankruptcy Code. The court may also dismiss or convert the debtor’s case if the debtor fails to pay any post-filing domestic support obligations (i.e., child support, alimony) or fails to make required tax filings during the case.

Chapter 13 discharge

Chapter 13 discharge

Chapter 13 discharge

The bankruptcy law regarding the scope of Chapter 13 discharge is complex and has undergone major changes. This means that debtors should consult a competent legal counsel regarding the scope of the Chapter 13 discharge prior to filing.
A Chapter 13 debtor is entitled to a discharge upon completion of all payments under the Chapter 13 plan as long as the debtor:

1. certifies (if applicable) that all domestic support obligations that came due prior to making such certification have been paid

2. has not received a discharge in a prior case filed within a certain time frame (two years for prior Chapter 13 cases and four years for prior Chapter 7, 11 and 12 cases)

3. has completed an approved course in financial management (if the U.S. trustee or bankruptcy administrator for the debtor’s district has determined that such courses are available to the debtor).

However, the court will not enter the discharge until it determines, after notice and a hearing, that there is no reason to believe that there is any pending proceeding that might give rise to a limitation on the debtor’s homestead exemption.

The discharge releases the debtor from all debts provided for by the plan or disallows with limited exceptions. Creditors provided for in full or in part under the Chapter 13 plan may no longer initiate or continue any legal or other action against the debtor to collect the discharged obligations.

As a general rule, the discharge releases the debtor from all debts provided for by the plan or disallows with few exceptions. Debts not discharged in Chapter 13 include certain long-term obligations (such as a home mortgage), debts for alimony or child support, certain taxes, debts for most government funded or guaranteed educational loans or benefit overpayments, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine included in a sentence on the debtor’s conviction of a crime.

To the extent that they are not fully paid under the Chapter 13 plan, the debtor will still be responsible for these debts after the bankruptcy case has concluded. Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for restitution or damages awarded in a civil case for willful or malicious actions by the debtor that cause personal injury or death to a person will be discharged unless a creditor timely files and prevails in an action to have such debts declared nondischargeable.

The discharge in a Chapter 13 case is somewhat broader compared to a Chapter 7 case. Debts dischargeable in Chapter 13 but not in Chapter 7 include debts for wilful and malicious injury to property (as opposed to a person), debts incurred to pay non-dischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings.

Chapter 13 bankruptcy hardship discharge

After confirmation of a plan, circumstances may arise that prevent debtors from completing their plans. In such situations, the debtor may ask the court to grant a “hardship discharge.” Generally, such a discharge is available only if:

1. the debtor’s failure to complete plan payments is due to circumstances beyond the debtor’s control and through no fault of the debtor

2. creditors have received at least as much as they would have received in a Chapter 7 liquidation case

3. modification of the plan is not possible

Injury or illness that precludes employment sufficient to fund even a modified plan may serve as the basis for a hardship discharge. The hardship discharge is more limited than the discharge described above and does not apply to any debts that are nondischargeable in a Chapter 7 case.

2005 Bankruptcy law revision

Bankruptcy laws by definition are a series of federal laws enacted to allow people to be relieved from their debts and start over with a clean slate. The laws have changed in 2005, known as 2005 bankruptcy law revision, making it more complicated to get a fresh start, so it is important to know bankruptcy definition, what is chapter 7 bankruptcy, as well as the laws under which it exists.

What is the 2005 bankruptcy law

This refers to legislation enacted by President George W. Bush in 2005 that revised the bankruptcy code for cases filed on or after October 17, 2005. The act created a means test that determines whether individuals filing bankruptcy can file for Chapter 7 bankruptcy, which discharges many debts in full), or whether they must opt for Chapter 13 bankruptcy ( which requires at least partial repayment of debts). Furthermore, the act increased the waiting period from when an individual last filed Chapter 7 bankruptcy to when they may file again.

What’s its purpose

Essentially, the purpose of the act was to make it more difficult to qualify for Chapter 7 bankruptcy by closely examining the filer’s ability to repay their debts more closely. The means test compares the debtor’s monthly income to the median income in his or her state of residence and provides an allowance for assumed monthly expenses at rates determined by the IRS as well as an allowance for actual monthly expenses. If the individual exceeds the median income and has too much money left over after accounting for living expenses, he or she will usually not qualify for Chapter 7 bankruptcy.

The means test

The means test

The means test

The bankruptcy “means test” determines whether your income is low enough for you to file for Chapter 7 bankruptcy. It’s a formula designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy. High income filers who fail the means test may use Chapter 13 bankruptcy to repay a portion of their debts, but may not use Chapter 7 bankruptcy to wipe out their debts altogether.

However, having to take the Chapter 7 means test doesn’t mean that you must be completely penniless in order to use Chapter 7 bankruptcy. You can earn significant monthly income and still qualify for Chapter 7 bankruptcy if you have a lot of expenses such as high mortgage and car loan payments, taxes and other expenses.

How does the means test work?

The means test was designed to limit the use of Chapter 7 bankruptcy to those who truly can’t pay their debts. It does this by deducting specific monthly expenses from your “current monthly income” (your average income over the six calendar months before you file for bankruptcy) to arrive at your monthly “disposable income.” The higher your disposable income, the less likely you’ll be allowed to use Chapter 7 bankruptcy.

Only bankruptcy filers with primarily consumer debts, not business debts, need to take the means test. To take the means test, you must first determine whether your income is more or less than the median income in your state. If you earn more than the median, you must figure out whether you would have enough left over after subtracting certain expenses to repay some of your debt.

Is your income more than the median?

Is your income more than the median?

Is your income more than the median?

The first step is simple. If your current monthly income is less than the median income for a household of your size in your state, you passed the means test. There’s no need for you to complete the rest of the means test. You can file for Chapter 7.

Do you have enough disposable income to repay some of your debts?

For those whose household income exceeds the state median, the means test computations get significantly more complex. You must determine whether you have enough income left (disposable income) after paying your “allowed” monthly expenses to pay off at least some of your unsecured debts (such as credit card bills). If your disposable income adds up to more than a certain amount, you fail the means test and cannot file for Chapter 7 bankruptcy.

Median income levels vary by state and household size, and each county and metropolitan region has different allowed amounts for categories of expenses: basic necessities, housing, and transportation.

What happens if you pass the means test?

What happens if you don’t pass the means test?Just because you qualify under the means test does not necessarily mean you should file for Chapter 7 bankruptcy. It only means that you can if you want to. Any decision to file for Chapter 7 bankruptcy should be made only after considering alternatives and other factors.

If you don’t pass the means test, you are limited to using Chapter 13 bankruptcy which requires you to make monthly payments over a three- to five-year period according to a strict budget monitored by the US bankruptcy court. Most people who file for bankruptcy prefer Chapter 7 which requires no repayment. However, Chapter 13 bankruptcy is still the best way to handle specific types of problems like curing a default on a mortgage.

Credit counseling and money management

Under provisions of the 2005 bankruptcy law, you must meet with an approved credit counselor in your judicial district for a 90-minute session in the six months prior to applying for bankruptcy. Before your debts are discharged, you must attend money management classes at your own expense.

Applicability of exemptions

Applicability of exemptions

Applicability of exemptions

Under the old law, when you declared bankruptcy, the amount of your home equity that was protected from creditors was determined by the state where you filed. In Florida, for instance, your home would have been entirely exempt even if you bought it soon before filing.
The new act of 2005, however, is more stringent about the homestead exemption. For instance, if filers haven’t lived in a state for at least two years, they may only take the state exemption of the state where they lived for the majority of the time for the 180 days before the two-year period. And if their home was acquired less than 40 months before filing or if the filer has violated securities laws or been found guilty of certain criminal conduct, filers may only exempt up to $125,000, regardless of a state’s exemption allowance.

Lien avoidance

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 limited the types and quantities of exempt household goods on which debtors could avoid certain liens. Part of the motivation for these changes was a perception that debtors were using their household goods as collateral to obtain loans that they never intended to repay. The Executive Office for U.S. bankruptcy trustees asked the corporations to analyze the similarities and differences in the amounts and types of loans secured by debtors’ household goods reported in bankruptcy cases filed before and after BAPCPA. They found no changes in debtor or creditor behavior due to the new definition of household goods. Some participants interviewed noted that it may be too early to tell whether debtors are changing their practices related to this issue.

Lawyer liability

Under the 2005 act, if information about a client’s case is found to be inaccurate, the bankruptcy attorney may be subject to various fees and fines. What that means for consumers is that it will be harder to find a bankruptcy lawyer willing to file because of the liability and the additional work required to verify a client’s information. Attorneys will be charging considerably more. Under the old law, a consumer might have paid between $1,500 and $3,500 to file for bankruptcy, but under the 2005 bankruptcy law, attorneys have increased their fees by between 75%and 100%.

Filing for bankruptcy

Bankruptcy laws are a series of federal laws enacted to allow people to be relieved from their debts and start over with a clean slate. The laws changed in 2005, making the road to a new beginning more complicated o it is important to know what is bankruptcy, understand completely its benefits and downsides before you decide on whether or not to declare bankruptcy. We’ll look at what you need to know to determine if you should file bankruptcy, the different types of bankruptcy and the procedure for filing.

Filing for Chapter 7 bankruptcy

What is Chapter 7 bankruptcy? Chapter 7 bankruptcy is a liquidation proceeding in which the debtor’s non-exempt assets, if any, are sold by the Chapter 7 trustee and the proceeds distributed to creditors according to the priorities established in the Code.

Consider hiring a bankruptcy attorney

Consider hiring a bankruptcy attorney

Consider hiring a bankruptcy attorney

Hiring an attorney is not a requirement, but it is recommended. Filing for bankruptcy is a very complicated process and is rarely successful without the help of an attorney. Free legal services are available for those who cannot afford a bankruptcy lawyer.

1. Filing for bankruptcy without an attorney is called filing pro se. If you do decide to file pro se, the court may allow non-attorney preparers to help you. They can only help you with the paperwork but they can’t answer legal questions or provide any legal advice. They cannot sign anything on your behalf or receive payment for court feessince they don’t represent you.

2. The United States has 90 bankruptcy districts, each with one bankruptcy court. Every state has at least one or more districts.

Find out if you qualify

In order to file for Chapter 7 bankruptcy, your income must be below a certain level. If you have any income left over after paying your monthly expenses, then you must file for Chapter 13 and make arrangements to repay your creditors. Take the “means test” to find out if you qualify for Chapter 7. Complete a series of three forms to take the means test.

Find out if you qualify

Find out if you qualify

1. There may be no need to fill out all the forms. Your answers in the first form determine whether or not you have to fill out the others.

2. Download form 22A-1 from the U.S. Court’s website. The form takes you through the steps of calculating your income and comparing it with the median income in your state for the same household size. If your income is below the state median, then you qualify for Chapter 7. Otherwise, you proceed to form 22A-2.

3. Download form 22A-2 from the U.S. Court’s website. The form takes you through further analysis of your income to determine if you qualify for Chapter 7.

4. Fill out form 22A-1Supp to determine if you are exempt from the means test because most of your debts are from business expenses or you have recent military service.

Fill out the bankruptcy forms

The bankruptcy forms list all of your property, debt, income and expenses for the court. You must complete a large packet of forms. These forms include the bankruptcy petition, a series of schedules and various other forms. You can download the forms from the U.S Court’s website.

All debts need to be listed to be discharged. Failure to list a debt may mean it continues after the bankruptcy.

File the bankruptcy forms

Filing the forms is where your case officially begins. If you are using an attorney, he or she will file the forms for you. If you are representing yourself, then you can take them to the bankruptcy court yourself.

A bankruptcy trustee

bankruptcy trustee

bankruptcy trustee

The US bankruptcy court will assign you a chapter 7 trustee when you file the forms. The trustee works on behalf of your creditors. This person is responsible for verifying the information in your bankruptcy documents. The trustee also looks at the property you own and determines how much of it you can keep. Each state has rules of its own about what property is exempt from liquidation in a Chapter 7 bankruptcy. The trustee determines this for your case and liquidates any non-exempt property.

A bankruptcy judge presides over the bankruptcy court. The bankruptcy judge rules on matters such as eligibility and discharges. A debtor rarely has to appear in court before the bankruptcy judge. Much of the process is administrative and is carried out by the trustee away from the courthouse.

Get credit counseling

Any individual filing for bankruptcy is required to receive credit counseling and debtor education. Credit counseling is done before filing for bankruptcy. Debtor education happens after bankruptcy. Certificates of completion must be presented to the court before debts can be discharged. Organizations providing these services must by approved the U.S. Trustee Program.

To find a list of approved credit counseling agencies and debtor education courses, consult the Department of Justice.

Attend the 341 meeting

You will have to attend a formal meeting of creditors, which usually takes place at the offices of your trustee. This meeting with creditors is known as the 341 meeting, referring to section 341 of the Bankruptcy code. This requires debtors to face creditors so they can answer questions about their debts and property. The meeting will happen approximately one month after you file. During the meeting, the trustee will ask you questions about your debt and why you are filing for bankruptcy. Arrangements for selling your non-exempt property are made. Also, arrangements are made for property pledged as collateral in secured loans.

Attend the 341 meeting

Attend the 341 meeting

Filing for chapter 13

Eligibility for chapter 13 bankruptcy

Businesses cannot file for Chapter 13 even if you are a sole proprietor. You must have a certain amount of disposable income. Your debts cannot be too high. You do not qualify for Chapter 13 bankruptcy if your secured debts exceed $1,149,525. Also you must be current on your income taxes. You must prove that you have filed your federal and state income taxes for the past four tax years.

Fill out the bankruptcy forms

List all of your financial data. Indicate your income, value your property and enter your repayment plan. The forms for Chapter 13 are the same as the forms of Chapter 7. Download the forms from the U.S Court’s website.

Filing for bankruptcy

A trustee will be appointed for your case by the court. However, note that the trustee represents your creditors and not you. This person’s job is to verify your information, look for fraud and administer the bankruptcy procedures. If you feel you need representation, you should hire an attorney. However, you are not required to have one.

Attend two hearings

Within approximately one month of filing for bankruptcy, you will attend a meeting with your creditors. The trustee will arrange this meeting during you will answer questions about your debt and negotiate the terms of your repayment plan. Shortly after that, you will attend a confirmation hearing with a bankruptcy judge who will confirm your repayment plan.

Getting a discharge

What is a discharge

If you are awarded a bankruptcy discharge, you are no longer legally required to repay some kinds of debts. This is a permanent order. Creditors can take no further action against you to collect the debt. They cannot communicate with you about the debt or take any legal action against you.

Unless there are objections to the discharge, it is usually granted automatically. Creditors, debtors and their attorneys all receive copies of the order of discharge.

When to expect the discharge to occur

When to expect the discharge to occur

When to expect the discharge to occur

The amount of time required to get a discharge varies depending on the type of bankruptcy which you filed for. If the petitioner does not complete the required credit counseling and debt education courses, the court can deny a discharge. Exemptions from this requirement can be granted in some cases if the debtor is disabled or on active military duty.

1. In a Chapter 7 case, the discharge may occur within 60 days of the first 341 meeting, which is usually approximately four months from the date the debtor files for bankruptcy. It might take longer if a creditor files a complaint objecting to the discharge or a motion to dismiss the case.

2. In Chapter 13 cases, after the debtor completes all agreed-upon payments,the court grants a discharge. Since these payment plans last between three and five years, it could take several years for the discharge to be granted.

Prepare for non-dischargable debts

The kinds of debts that can be discharged vary depending on the kind of bankruptcy that’s filed. The Congress determines the kinds of debts that cannot be discharged. These decisions are based on public policies. However, debtors must still repay those debts that cannot be discharged.

1. The debt that cannot be discharged include some taxes, spouse or child support, student loans, debts for personal injury and debts owed for driving under the influence.

2. Under Chapter 13, some debts can be discharged that would not be dischargeable under other chapters. These include some taxes, some personal injury debts and debts from property settlements during a divorce. Petitioners can also file a hardship discharge if they are unable to complete the planned payments due to circumstances beyond their control.

Discharge is not a confirmed thing

Creditors can object to and block a discharge by filing a complaint in the bankruptcy court. This is known as an adversary proceeding. The court can deny a discharge if you delay or hinder the proceedings. For instance, you will not receive a discharge if you do not supply the proper documents, fail to complete the required educational courses, wilfully conceal or destroy records or property or perjure yourself.

A discharge can be revoked if it is determined that it was obtained fraudulently. This typically occurs within one year of the discharge.

Consider repaying some discharged debts

You may choose to repay some debts that have been discharged. Discharged debts cannot be legally enforced, but you can voluntarily repay them. For instance, if you owe a family member some money, you may choose to repay that debt. Also, you may want to repay a debt to someone whose opinion is important to you. An example would be debts for medical treatment from a family doctor.

Keep copies of the discharge court papers

Keep all discharge court papers and decisions for your records. They will help you prove the debts have been discharged in the event creditors attempt to collect old debts. Creditors may claim that debts were discharged dishonestly, so having the papers to prove the court’s decision can be quite useful.

Chapter 7 bankruptcy for individuals

What is Chapter 7 bankruptcy?

In Chapter 7 bankruptcy, the bankruptcy trustee cancels many (or all) of your debts. At the same time, the trustee might also sell (liquidate) some of your property to repay your creditors. Chapter 7 bankruptcy, also called “straight” or “liquidation” bankruptcy, is so named because the law is contained in Chapter 7 of the federal Bankruptcy Code. Here’s an overview of Chapter 7 bankruptcy for individuals – who can file, the forms you’ll need, how the process works, and what happens to your property and debts.

Chapter 7 bankruptcy for individuals
The automatic stay

The automatic stay

The whole Chapter 7 bankruptcy process takes about four to six months, costs $335 in filing and administrative fees and commonly requires only one trip to the US bankruptcy courthouse.

The debtor should consult a bankruptcy attorney before taking any action.You must complete credit counseling with a bankruptcy lawyer or agency approved by the United States Trustee.

Chapter 7 bankruptcy liability

Filing for bankruptcy won’t be possible if you had already received a bankruptcy discharge in the last six to eight years (depending on which type of bankruptcy you had filed for) or if, based on your income, expenses and debt burden, you could feasibly complete a Chapter 13 repayment plan.

Bankruptcy forms

To file for Chapter 7 bankruptcy for individuals, you fill out a petition and a number of other forms and file them with the bankruptcy court in your area. The forms will ask you to describe:

1. your property

2. your debts

3. your current income and monthly living expenses

4. property you claim the law allows you to keep through the Chapter 7 bankruptcy process (called “exempt property”). Most states let you keep some equity in your home, clothing, household furnishings, Social Security payments you haven’t spent and other necessities such as a car and the tools of your trade

5. property you owned and money you spent during the last two years

6. property you sold or gave away during the last two years.

The automatic stay

Filing for Chapter 7 bankruptcy puts into effect something called the “automatic stay.” The automatic stay immediately stops most creditors from trying to collect what you owe them. So, at least for the time being, creditors won’t be able to legally grab (“garnish”) your wages, empty your bank account, go after your car, house or other property, or cut off your utility service.

Bankruptcy court control over your financial affairs

By filing for Chapter 7 bankruptcy, you are technically placing the property you own and your debts in the hands of the US bankruptcy court. You can’t sell or give away any of the property you own when you file or pay off your pre-filing debts without the court’s consent. However, with a few exceptions, you can do what you wish with the property you acquire and income you earn after you file for bankruptcy.

Chapter 7 bankruptcy trustee

The court exercises its control through a court-appointed person called a bankruptcy trustee. The trustee’s primary duty is to see that your creditors are paid as much as possible of what you owe them. The more assets the trustee recovers for creditors, the more the trustee is paid.

The trustee (or the trustee’s staff) will examine your papers to make sure that they are complete and look for nonexempt property to sell for the benefit of creditors. The trustee will also look at your financial transactions during the previous year to see if any can be undone to free up assets to distribute to your creditors. In most Chapter 7 bankruptcy cases, the trustee finds nothing of value to sell.

The creditors meeting

A week or two after you file, you (and all the creditors you list in your bankruptcy papers) will receive a notice that a “creditors meeting” has been scheduled. The bankruptcy trustee runs the meeting and, after swearing you in, may ask you questions about your bankruptcy and the papers you filed. In most Chapter 7 bankruptcies, this is the debtor’s only visit to the courthouse.

creditors meeting

creditors meeting

Property situation

After the creditors meeting, if the trustee determines that you have some nonexempt property, you may be required to either surrender that property or provide the trustee with its equivalent value in cash. If the property isn’t worth very much or would be cumbersome for the trustee to sell, the trustee may “abandon” the property. This means that you get to keep it, even though it is nonexempt. However, which property is exempt varies by state.

Most property owned by Chapter 7 debtors is either exempt or is essentially worthless for purposes of raising money for the creditors. As a result, few debtors end up having to surrender any property, unless it is collateral for a secured debt.

Your secured debts
Your secured debts

Your secured debts


If you’ve pledged property as collateral for a loan, the loan is called a secured debt. The most common examples of collateral are automobiles and houses. If you’re behind on any of your payments, the creditor can ask to have the automatic stay lifted in order to repossess or foreclose on the property. However, if you are current on your payments, you can keep the property and keep making payments as before, that is unless you have enough equity in the property to justify it’s sale by the trustee.

If a creditor has recorded a lien against your property because of a debt you haven’t paid (for example, because the creditor obtained a court judgment against you), that debt is also secured. You might be able to wipe out the lien in Chapter 7 bankruptcy.

Chapter 7 bankruptcy discharge

A discharge releases individual debtors from personal liability for most debts and prevents the creditors from taking any collection action against the debtor. Because a Chapter 7 discharge is subject to many exceptions, debtors should consult a bankruptcy lawyer before filing to discuss the scope of the discharge. Generally, excluding cases that are dismissed or converted, individual debtors receive a discharge in more than 99% of Chapter 7 cases. In most cases, unless a party in interest files a complaint objecting to the discharge or a motion to extend the time to object, the bankruptcy court will issue a discharge order relatively early in the case – generally, 60 to 90 days after the date first set for the meeting of creditors.



Chapter 7 bankruptcy for businesses

When a business is near failing or so far in debt that it cannot continue to operate, its owners may need to file a Chapter 7 bankruptcy claim. Let’s look at Chapter 7 bankruptcy and what it can do for small businesses, corporations and LLCs.

  • What is Chapter 7 bankruptcy?

Chapter 7 is a liquidation bankruptcy designed to wipe out your general unsecured debts such as credit cards and medical bills. To qualify for Chapter 7 bankruptcy, you must have little or no disposable income. If you make too much money, you may be required to file a Chapter 13 bankruptcy.

When you file for Chapter 7 bankruptcy, a trustee is appointed to administer your case. In addition to reviewing your bankruptcy papers and supporting documents, the Chapter 7 trustee’s job is to sell your nonexempt property to pay back your creditors. If you don’t have any nonexempt assets, your creditors receive nothing. As a result, Chapter 7 bankruptcy is typically for low- income debtors with little or no assets who want to get rid of their unsecured debts.

  • How does it work?

How does it work?

How does it work?

The case begins by filing the official petition, schedules and statement of financial affairs. These forms prompt you to list all of your assets and all of your debts, along with some recent financial history. Keep in mind that this is the most important and most time- consuming part of a bankruptcy filing

It is important that every creditor is listed in the schedules with an accurate mailing address.  You must list all of your debts, even if you intend to reaffirm the debt, or if the debt is nondischargeable.

The schedules also list your property, any debts secured by that property, and the sale value of the property.  “Property” here means “assets” or “possessions”, not just real estate. Your choice of exemptions is made on one of the schedules.  

The schedules are signed by the debtor under penalty of perjury. The schedules are filed with the bankruptcy clerk in the district in which you live, or have lived for the greater part of the last 180 days. For most purposes, the rights of the debtor and the creditors are those that exist on the day that the case is filed.  All of the proceedings in bankruptcy after the filing relate to the situation as it was on the day the case was filed.

  • Chapter 7 bankruptcy for businesses

If you are a small business owner struggling to keep things together, filing for Chapter 7 bankruptcy for business may help save your company or provide a simple way to liquidate it. A personal Chapter 7 bankruptcy can also help you get rid of your personal liability for company debts.

  • Liability for small business debts

It depends largely on the structure of your business. If you are the only owner of the business and you did not form a specific business entity, you are probably a sole proprietor. A sole proprietorship is not a separate legal entity, which means you are personally responsible for all business debts and when you file for bankruptcy, you are actually filing a personal bankruptcy.

  • How does Chapter 7 bankruptcy work for small businesses?

When filing bankruptcy, an automatic stay goes into effect and prohibits most collection activities. A Chapter 7 bankruptcy trustee is appointed and charged with selling off the debtor’s non-exempt assets to pay off its creditors according to their priority.
In a personal bankruptcy, all dischargeable debts are wiped out so the debtor is no longer required to pay them.  In a business bankruptcy, there is no discharge and no exemptions.  As a result, all business assets are sold and the proceeds are distributed among creditors.

  • How can Chapter 7 bankruptcy help small business owners?

How can Chapter 7 bankruptcy help small business owners?

How can Chapter 7 bankruptcy help small business owners?

The answer depends on the business structure.

  • Sole proprietorship

A sole proprietorship is not a separate legal entity, so it cannot file a Chapter 7 bankruptcy on its own.  When a sole proprietor files a personal Chapter 7 bankruptcy, the business also files bankruptcy as a result. All business debts are treated as personal debts and get wiped out by the discharge. By using your exemptions, you can protect the assets of the business. So with a Chapter 7, you can wipe out your debts and continue operating the business.

  • Partnership

A partnership is a separate legal entity and can file a Chapter 7 bankruptcy for businesses. As discussed earlier, there is no discharge or exemption in a business bankruptcy. So if your partnership files a Chapter 7 bankruptcy, the trustee will close and liquidate the business by selling all its assets to pay creditors.



The partnership’s bankruptcy does not affect the personal liability of its partners.  If there weren’t enough assets to pay off all creditors, they can go after your personal assets if you were personally liable for the debt.  The trustee can also sue the general partners to pay any remaining creditors.  So if you were on the hook for the partnership’s debts, you may have to file a personal Chapter 7 bankruptcy to discharge your obligations.

  • Chapter 7 bankruptcy for LLCs and corporations

Filing for Chapter 7 bankruptcy is a good option for corporations and limited liability companies (LLCs) that are going out of business.

  • Corporations and LLC basics

In order to form a corporation or an LLC, you must file certain documents with the secretary of state and pay registration fees. When you incorporate your business or form an LLC, it becomes a separate legal entity.  As an owner, you are considered a shareholder of the corporation or a member of the LLC.  This means that the company has its own assets and debts that are separate from those of its owners.

  • Liability for corporate and LLC debts

Corporations and LLCs are both liable for their own debts since they are separate legal entities. Usually, the owners of the company are not personally on the hook for the obligations of the business.  As a result, forming a corporation or an LLC is a common way to shield your personal assets from business debts.

However, you may still be held liable for corporate or LLC debts under certain circumstances.  You can voluntarily make yourself responsible for business debts by cosigning or personally guaranteeing the loan or by providing your personal assets as collateral. Alternatively, a creditor can go after personal assets by proving that the corporation or LLC was a sham or an alter ego of its owners.  This is known as piercing the corporate veil.

  • How is chapter 7 bankruptcy can help a corporation or LLC?

Corporations and LLCs don’t receive a discharge by filing Chapter 7 bankruptcy. A business Chapter 7 is designed to liquidate the company’s assets and pay its obligations. Since exemptions are not available in a business bankruptcy, all assets of the corporation or LLC are sold and the proceeds distributed among its creditors according to priority.  

The benefit of a Chapter 7 bankruptcy is the easy and orderly liquidation of the business.  When the corporation or LLC files for Chapter 7, it becomes the duty of the bankruptcy trustee to sell off its assets and pay its creditors. This means that the owners don’t have to go through the hassle of settling debts with the company’s creditors.

  • What if you were personally liable for corporate or LLC debts?

Your corporation or LLC’s Chapter 7 bankruptcy doesn’t change your obligation to pay the debts you were personally on the hook for. If a business debt you were liable for did not get paid off in the bankruptcy, that creditor can now look to your personal assets to satisfy the obligation.

Usually, the simplest solution to this problem is to file a personal Chapter 7 bankruptcy yourself. Since you can discharge your debts in a Chapter 7 personal bankruptcy (unlike a business bankruptcy), your personal liability for business debts will be wiped out by the bankruptcy.

  • Disadvantages of Chapter 7 bankruptcy for corporations and LLCs



Filing a Chapter 7 basically, means the end of the business. You will no longer be able to operate it or negotiate its sale to a third party under more favorable terms. Further, you can usually sell your company’s assets at a better price than the bankruptcy trustee. So if you were personally liable for the company’s debts, you may be left with a larger personal liability than if you had negotiated with the creditors and sold the assets yourself.