If you cannot avoid bankruptcy:
Many of our clients were burdened with overwhelming debt and considering bankruptcy but chose our debt settlement program when they understood how we can help them get out of debt and avoid bankruptcy. But if you do not qualify for our debt negotiation services and bankruptcy is the best course of action for you determined by our law firm, then one of our highly qualified bankruptcy lawyers will be able to help you in your time of need.
 | There are many different chapters of bankruptcy, but individual consumers only need be concerned with Chapter 7 or Chapter 13. The subject of when, why, and how to file for bankruptcy protection can easily be confusing to the average person with no law experience, but there is nothing to worry about if you are a client of Bay View Law Group. Our bankruptcy lawyers will be able to help you understand the different terms and be able to get you the best possible outcome. There are pros and cons to filing bankruptcy. It is important that you understand the process and the risks before taking this drastic step. To learn more about bankruptcy, you can contact us and we will refer you to a licensed bankruptcy attorney in your state that is competent on these matters. |
Bankruptcy process
To file for bankruptcy, you are generally required to:
- Under go a “means” test in which your income, assets, expenses, debts, personal background and financial information are sorted.
- Receive debt counseling from a government-approved organization within six months before filing.
- Submit a repayment plan to be approved by a bankruptcy court.
- Attend a meeting with your creditors.
Once you have filed for bankruptcy, you will likely be present at a meeting between your bankruptcy attorney and representatives of your creditors so a deal can be worked out between both parties. These representatives are usually understanding of the circumstances and will try to work with you. You will find that these meetings are very short in most cases and only meant to confirm the information that was provided to them already. If you are the debtor in one of these meetings, you will be put under oath so that your statements are assured to be true.
Bay View Law Group can help clients navigate through the complex maze of laws and regulations that constitute the Federal Bankruptcy Regulations for each state we represent. At Bay View Law Group, we believe Bankruptcy is a last resort, and we only recommend Bankruptcy in those rare situations where it truly is in the client’s best interest.
CHAPTER 7 BANKRUPTCY
If you qualify for a Chapter 7, you can “discharge” (effectively eliminate) most of your debts without having to repay anything but not everyone qualifies for a Chapter 7. Under the new bankruptcy law, all debtors must take a "means test." The bottom line is that if your income is above the average for your state, OR if you can afford to pay more than $100 per month to your creditors after all of your reasonable expenses are taken into consideration, then you will probably not be allowed to file a Chapter 7. Regardless of whether they qualify, many people want to avoid a bankruptcy for their own personal reasons.
If you are struggling to catch up on credit card debt, medical bills, payday loans and other unsecured debts and do not qualify for debt settlement, a Chapter 7 bankruptcy may be an option for you. Chapter 7 bankruptcy is often referred to as liquidation because a bankruptcy trustee can liquidate (convert to cash) your non-exempt assets to pay part of your outstanding bills.
However, in most cases, exemptions will protect most if not all of your property as many people filing Chapter 7 own only exempt property, which is property protected from liquidation. Exemptions typically include your primary residence, tools, work equipment, vehicle, certain items of personal property and numerous other categories of property.
In most cases, exemptions will protect all of your property. If not, your court-appointed bankruptcy trustee can liquidate your non-exempt assets to pay your creditors. However, a trustee will only liquidate in most cases if he or she can obtain enough money from a sale to make a significant payment to your creditors.
Chapter 7 bankruptcy cases move relatively quickly, and you may receive your discharge in just a few months. A discharge will eliminate unsecured debts like credit card debt, medical bills, most personal loan, judgments resulting from car accidents, deficiencies on repossessed vehicles, some older tax debts, payday loans, and garnishments. Certain debts are classified "non-dischargeable debts" and cannot be discharged, or can only be discharged under very specific circumstances. These include child support, most student loans, and many tax debts.
In the event that you are one of those who do not qualify for Chapter 7, filing bankruptcy may still be an option; this time in the form of Chapter 13 bankruptcy.
Chapter 13 Bankruptcy is a solution wherein you make monthly payments to a court appointed trustee for a period of 3 years if your income is below the state median, or 5 years if it is above the state median. The amount you pay is as much as you can afford to pay – meaning that your reasonable living expenses are subtracted from your income, and everything left over goes to the trustee.
A Chapter 13 may be your best option if:
- You owe large tax debts that cannot be eliminated by a Chapter 7 and you want to stop the interest and penalties by forcing the IRS to take a payment plan.
- that is being foreclosed on; or
- You don’t qualify for a Chapter 7 and you want to stop lawsuits against you.
Chapter 13 bankruptcy often provides a solution for people who have faced short-term financial setbacks like job loss, illness, or large unexpected expenses. For people who have been derailed by a crisis and fallen behind on their bills, but who have regular income and are in a position to make regular monthly payments, filing bankruptcy under a Chapter 13 plan may allow the breathing room necessary to get back on track.
Many people looking to stop foreclosure or avoid repossession choose Chapter 13 bankruptcy, because it combines the automatic stay with the ability to catch up past due payments over a period of three to five years after filing bankruptcy while keeping current payments up to date. In most cases, the court will enter an automatic stay as soon as the case is filed, prohibiting creditors from taking any further collection action while the bankruptcy case is pending, or until further order of the bankruptcy court.
CHAPTER 13 VS. DEBT SETTLEMENT
The chart below gives a comparison between a Chapter 13 Bankruptcy and a Debt Settlement Program.
| Chapter 13 | Debt Settlement | ||
| Amount you pay | Your "Best Efforts," meaning your gross income minus your reasonable expenses | What you feel you can afford. As a rule of thumb, it will be 50% of the balance on your debts divided by 36. | |
| Who decides how much you pay? | You make a proposal, which can be commented upon by the Trustee, and is subject to final approval or disapproval by the Court. | You do. | |
| Effect on Potential Lawsuits | No lawsuits are allowed while a Chapter 13 is pending, except as allowed by the Bankruptcy Court. | Debt Settlement does not force creditors to cease lawsuits. As a practical matter, very few creditors sue if one is represented by a law firm in a debt settlement program. | |
| Costs | About $2,500 to $4,000 attorney fees. 11% of your payments go to the Trustee as fees | 15% of your debts | |
| What if your income increases? |
| You are in control of your income | |
| Effect on Creditor Harassment | Creditors must stop all phone calls and collection letters when notified that you have filed a Bankruptcy. | Bill Collectors (not necessarily the original creditors) must stop phone calls when notified that you are represented by an attorney. As a practical matter, original creditors normally stop as well. | |
| Information you must provide to Creditors | You must provide full and detailed information on every aspect of your financial life when you file a Bankruptcy. You will be placed under oath and will be questioned by the Trustee, and by any creditor who wants to question you. | Your attorney will provide any creditor with only the information he deems necessary in order to settle your debt. | |
| For how long do you pay? | Three years if your income is below the state median. Five years if it is above. | Decided upon by you and your Attorney. The average plan is for three years. | |
| For how long do you pay? | Three years if your income is below the state median. Five years if it is above. | Decided upon by you and your Attorney. The average plan is for three years. |
Sometimes bankruptcy is the right option to get out of debt. However, it is a significant step and should be considered a last resort. Bankruptcy can be invasive, expensive and may affect your credit for up to 10 years.
Assuming your repayment plan is approved, you begin submitting regular monthly payments to the court-appointed trustee who is responsible for sorting the payments and sending them to your creditors. The repayment plan usually takes 3 to 5 years to complete, depending on your salary.
However, many chapter 13 bankruptcy filers do not make it through the repayment plan due to repeated unemployment or other unexpected expenses.
New bankruptcy law vs. Old bankruptcy law
Property:
Under the old law, Chapter 7 filers could value their property based on what they could sell it for in a "fire sale" or auction. This meant that used furniture, hobby items, cars, heirlooms, and other property a debtor might want to keep were typically assumed to have little value -- and, therefore, that it often fell well within the "exempt property" categories offered by most states.
Under the new law, you must value your property at what it would cost to replace it from a retail vendor, taking into account the property's age and condition. This new requirement escalates the value of property, which means more debtors will have their property taken and sold by the trustee.
Restricted Income Eligibility for Chapter 7:
Under the old law, most filers could choose the type of bankruptcy that seemed best for them -- and most chose Chapter 7 over Chapter 13. The new law will prohibit some filers with higher incomes from using Chapter 7.
The first step in figuring out whether you can file for Chapter 7 is to measure your "current monthly income" against the median income for a family of your size in your state. Your "current monthly income" is not defined as your income at the time you file, rather it is your average income over the last six months before you file.
Once your income is calculated, that number is compared to the median income for your state. (You can find median income tables by state and family size at the website of the United States Trustee, www.usdoj.gov/ust; click "Means Testing Information.")
If your income is less than or equal to the median, you can file for Chapter 7. If it is more than the median, however, you must pass "the means test" -- another requirement of the new law -- in order to file for Chapter 7.
The Means Test
The purpose of the means test is to figure out whether you have enough disposable income, after subtracting certain allowed expenses and required debt payments, to make payments on a Chapter 13 plan.
To find out whether you pass the means test, you start with your "current monthly income," calculated as described above. From that amount, you subtract both of the following:
- Certain allowed expenses, in amounts set by the IRS. Generally, you cannot subtract what you actually spend for things like transportation, food, clothing, and so on; instead, you have to use the limits the IRS imposes, which may be lower than the cost of living in your area.
- Monthly payments you will have to make on secured and priority debts. Secured debts are those for which the creditor is entitled to seize property if you don't pay (such as a mortgage or car loan); priority debts are obligations that the law deems to be so important that they are entitled to jump to the head of the repayment line. Typical priority debts include child support, alimony, tax debts, and wages owed to employees.
If your total monthly disposable income after subtracting these amounts is less than $100, you pass the means test, and will be allowed to file for Chapter 7. If your total remaining monthly disposable income is more than $166.66, you have flunked the means test, and will be prohibited from filing under Chapter 7.
Those in the middle have to do some more math. If your remaining monthly disposable income is between $100 and $166.66, you must figure out whether what you have left over is enough to pay more than 25% of your unsecured, nonpriority debts (such as credit card debt, student loans, medical bills, and so on) over a five-year period. If so, you flunk the means test, and Chapter 7 won't be available to you. If not, you pass the means test, and Chapter 7 remains an option.
Requirements Eased for Hurricane Victims
Following Hurricanes Katrina and Rita, the United States Trustee's office announced special enforcement guidelines for debtors affected by natural disasters. These guidelines are an effort to lessen the impact of the new law on filers who may be displaced from their homes and personal papers.
Among other things, these guidelines make the following changes for victims of natural disasters who file for bankruptcy:
- Debt counseling will not be required.
- Debtors who cannot provide required documents due to a natural disaster will not face enforcement actions.
- Trustees are to consider the income loss, increased expenses, and other effects of a natural disaster as "special circumstances" that may allow a debtor who doesn't otherwise pass the means test to qualify for Chapter 7.
- Trustees will provide alternate means for debtors to attend creditors' meetings, if necessary.
- For more on these rules, go to the website of the United States Trustee, www.usdoj.gov/ust, and click "Enforcement Guidelines for Debtors Affected by Natural Disasters."
State Exemptions to Recent State Residents:
Under the old bankruptcy law, the personal property debtors were allowed to keep in Chapter 7 bankruptcy was determined by the laws of the state where they lived (as long as they lived there for at least three months). Under the new law, you must live in a state for at least two years prior to filing in order to use that state's exemption laws. Otherwise, you must use the exemptions available in the state where you used to live. Similar rules apply to homestead exemptions, which determine how much equity in a home you can keep when filing for Chapter 7 bankruptcy. However, to use your new state's homestead exemption, you must live there for at least 40 months.
Because exemption amounts vary widely from state to state, these new residency requirements could make a big difference in the amount of property you get to hold on to. For example, if you recently moved from California to Nevada and you have a fairly valuable car, you might want to wait to file for Chapter 7. Once you've been in Nevada for two years, you can claim its $15,000 exemption for motor vehicles. If you have to use California's exemptions, you can keep only $2,300 worth of equity.
Bay View Law Group can Help You
Bankruptcy could be an effective way to resolve your overwhelming debt. Chapter 7 bankruptcy is a fast debt relief option and Chapter 13 bankruptcy lets you hold onto your major assets. Filing for bankruptcy also stops all collection activity from your creditors.
- Debtors can leave bankruptcy court with heavy financial obligations due to court and attorney fees.
- Assets such as homes and business may sometimes be taken for payment.
- You have to explain yourself to a judge and to some creditors, which can be invasive and embarrassing.
- Bankruptcy remains on your credit report for up to 10 years and it may be very difficult to get a loan, even after the bankruptcy is over.
At Bay View Law Group, we can explain your options and help you determine whether filing Chapter 7 or Chapter 13 bankruptcy is the right option for you. Our bankruptcy attorneys can guide you through the process, helping to ensure that all filing requirements and deadlines are met and that you have accounted for all of your allowable expenses and proposed a plan that will allow you to make payments while keeping up your regular expenses.
Filing bankruptcy - whether it is Chapter 7 or Chapter 13 - is a difficult decision that should not be undertaken lightly. However, if you are in a difficult financial situation that just keeps getting worse, filing bankruptcy may be the opportunity you need to seek broad protection against creditors, regain control of your financial life, and rebuild your credit after bankruptcy with the help of friendly lenders. Contact us here at Bay View Law Group now for a free consultation.
