Many people believe bankruptcy is for individuals that run up credit card debt then discharge the debt only to turn around and run up more credit card debt, then discharge the debt again with no repercussions. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) put an end to this abuse and created a system for individuals who truly need help and want to take the appropriate steps to satisfy their obligations. BAPCPA set new guidelines for the bankruptcy chapters available to individuals; Chapter 7 and Chapter 13.
CHAPTER 7 BANKRUPTCY
A chapter 7 Bankruptcy is an option for individuals that satisfy the Means Test. The Means Test is based on your ability to pay your debt. Obviously you wouldn’t be reading this if you felt you could pay your debt, but the Bankruptcy Court has created a different way to determine if you can pay your debt. The Means Test is based on the Median Income in California and is determined by the amount of people in your household:
1 person = $49,182 2 person = $65,097 3 person = $70,684 4 person = $79,971 | 5 person = $86,871 6 person = $93,771 7 person = $100,671 8 person = $107,571 |
Your income is determined by your 6 month average prior to filing minus qualified deductions from your gross income such as income taxes, mortgage payments, and car payments. If your CMI (Current Monthly Income) is below the median household income you will qualify for a chapter 7 Bankruptcy.
It typically takes 90 days from the day we file your case to the final discharge of a chapter 7 “No Asset” case. You will have to participate in this process.
First, you must provide all documents requested by our firm in our client questionnaire.
Second, you must take a pre-filing credit counseling course online. This program takes about an hour. Once you’ve completed the course I will receive your certificate of completion. The certificate must be filed with the bankruptcy documents.
Third, after your case is filed, a Trustee will be appointed and a 341 Meeting of Creditors will be scheduled. You will have to attend the 341 Meeting of Creditors. A 341 meeting is held in the Trustee’s Office in the Federal Building in Oakland, San Jose, San Francisco, Modesto or Sacramento depending on where you reside. It is not a court room, it is a room with a table and several chairs for the other debtors filing bankruptcy to sit and wait for their meeting. The meeting is held by the Trustee. The Trustee will ask to see your drivers’ license and your social security card. You will be asked questions about your bankruptcy filing under oath. I will be sitting at the other side of the table from you. A chapter 7 341 meeting typically takes no more than 5 minutes. Creditors have the right to attend these meetings. Most often creditors do not actually attend these meetings, but if they are in attendance they have the right to speak regarding the debts owed to them.
Fourth, similar to the pre-filing credit counseling course, you must take the Financial Management Course or post-bankruptcy class within 45 days of the date of filing. The course is required for discharge and if not timely filed, the case will be closed without a discharge.
ASSETS
As your attorney, I list all of your assets and liabilities. There are exemptions that are applied to your assets. In California we have two sets of exemptions to choose from; §703 and §704. This chart explains the exemptions under both 703 and 704
EXEMPTIONS | ||
Asset | CA CCP 703 | CA CCP 704 |
Principal Residence | $22,075 | 100,000 |
Motor Vehicle | $3,525 | $2,725 |
Household Goods & Personal Effects | Unlimited number of items each worth $550 or less | ordinary and necessary household goods-no limit |
Jewelry | $1,425 | $7,175 |
tools of trade | $2,200 | $7175 per debtor |
Residence building materials | NA | 2,875 |
life insurance (cash value) | $11,800 | $11,475 per debtor |
claim for personal injury | $22,075 | amount necessary for support |
ERISA qualified benefits | Unlimited | unlimited |
Wildcard applied to any item | $21,825 | NA |
bank accounts | NA | 2875 individual 4300 joint |
Once we determine the non-exempt assets, assets above or outside the protection of the exemptions, the Trustee seizes the assets to satisfy the debts owed. If it is determined that you have no assets, the Trustee approves a "No Asset" case and creditors will not receive anything. Pending no objections to dischargeability from creditors, your case will be discharged from liability for most unsecured debts. Certain debts are non-dischargeable such as:
· Most taxes
· Student loans
· Domestic support obligation
· Debts for most fines, penalties, forfeitures or criminal obligations
· Debts for personal injuries or death caused by the debtor's operation of a motor vehicle while intoxicated
· Debts which are not properly listed by the debtor
· Debts for which the debtor has given up the discharge protection by signing a reaffirmation agreement in compliance with the Bankruptcy Code
· Debts owed to certain retirement plans
· Debts that the bankruptcy court has ruled in this case are not discharged
CHAPTER 13 BANKRUPTCY
A chapter 13 bankruptcy is a bankruptcy payment plan that allows you to retain your property and pay back all, or a portion of your debts over a period of time. Under this chapter you and I propose a payment plan that fits your budget. Each month you will pay the Trustee the fixed budget amount over a period of three or five years. A Chapter 13 bankruptcy is most appropriate for an individual with income who does not currently have the ability to pay all of their debts in full.
Priority creditors are paid first. These creditors are the government agencies like the IRS or the EDD. Secured creditors are paid after the priority creditors. These creditors are the mortgage banks and auto loan banks, or other creditors that have a lien against property that you still own. Unsecured creditors are paid last and often are not paid at all in a Chapter 13.
The Means Test is used in a Chapter 13 to determine if you will be on a 3 year of 5 year payment plan. If you satisfy the Means Test you can choose between the 3 and 5 year plan. If you do not satisfy the Means Test you must follow the 5 year plan. You must have income to file for bankruptcy under Chapter 13 because you are paying back creditors through a payment plan. You must also have less than $360,475 in unsecured debt and less than $1,081,400 in secured debt.
Participation in a Chapter 13 is the same as in a Chapter 7 above. We must still determine your assets. Instead of liquidating your assets, the payment plan will reflect the lump sum the Trustee would receive if your assets were liquidated. For example, if you have $10,000 in non-exempt assets, your payment plan will be a monthly amount that will pay back no less than $10,000 over your 3 or 5 year payment plan.
The 341 Meeting of Creditors typically takes longer than a Chapter 7 Meeting of Creditors because the Trustee will review parts of the plan with you at the meeting. Your first payment of the payment plan will be 30 days from the filing of the bankruptcy and this is usually before the first meeting. The payment must be made via cashier’s check.
ARREARS AND LIEN STRIP
One of the benefits of filing a chapter 13 is for homeowners that are behind on their mortgage or they have a second mortgage and their home is “underwater” (worth less than their first mortgage.) A homeowner in arrears (behind on their mortgage) can make up these late payments over the 3 or 5 year payment plan. This option allows individuals who are facing foreclosure to become current on their mortgage and stay in their homes.
A “Lien Strip” is a bankruptcy tool that is filed with the court stating that the home is worth less than the first mortgage amount and the second mortgage no longer has a secured interest. This is based on the understanding that a secured debt can only be secured if the collateral has value. For example, a home worth $100,000 with a first mortgage of $125,000 and a second mortgage of $50,000 has only $100,000 in secured debt. This means that the second mortgage can be “stripped” and will be considered unsecured debt similar to a credit card. Since unsecured creditors are paid last in a Chapter 13, the second mortgage is often paid very little if anything at all through the payment plan. Once the 3 or 5 year payment plan is completed the homeowner has only the first mortgage on the property because the second mortgage has been discharged.
FREE CONSULTATION
I hope this brief summary of Bankruptcy Law has been helpful to you. If you would like to discuss your specific situation in a free consultation, please feel free to contact our office at 925.454.4460 or go to our website and click the "contact us" tab.
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