The Easiest Way to Pass the Chapter 7 “Means Test”

Most people considering Chapter 7 “straight bankruptcy” have low enough income to qualify.  Find out if you do.

 

The “Means” Part of the “Means Test”

When Congress passed the last major set of changes to the bankruptcy laws nine years ago, it explicitly said that wanted to make it harder for some people to file Chapter 7.  The idea was that those who have the means to pay a significant amount of their debts should do so. Specifically, those who can pay a certain amount to their creditors within a three-to-five-year Chapter 13 payment plan ought to do so, instead of just being able to write off all their debts in a Chapter 7 case.

How the Law Determines Whether You Have Too Much “Means”

The “means test” measures people’s “means” in a peculiar, two-part way, the first part based on income, the second part based on expenses.

The income part is relatively straightforward; the expense part involves an amazingly complicated formula of allowed expenses.

The good news is that if your income is low enough on the income part of the “means test,” then you’re done: you’ve passed the test and can skip the rest of the test. The other good news is that most people who want to file a Chapter 7 case DO have low enough income so that they do pass the “means test” based simply on their income.

Is YOUR Income Low Enough to Pass the “Means Test”?

Your income is low enough if it is no higher than the published “median income” for a household of your size in your state. You can look at your “median income” on this website (for bankruptcy cases filed on or after April 1, 2014).

A Peculiar Definition of “Income”

Here’s what you need to know to compare your “income” (as used for this purpose) to the “median income” applicable to your state and family size:

1. Determine the exact amount of “income” you received during the SIX FULL calendar months before your bankruptcy case is filed. It’s easiest to explain this by example: if your Chapter 7 case is filed on March 25, 2014, count every dollar you received during the six-month period from September1, 2013 through February 28, 2014. After coming up with that six-month total, divide it by six for the monthly average.

2.When adding up your “income” include all that you’ve acquired from all sources during that six-month period of time, including unconventional sources like child and spousal support payments, insurance settlements, unemployment benefits, and bonuses. But EXCLUDE any income from Social Security.

3. Multiply your six-month average monthly income by 12 for your annual income. Compare that amount to the published median income for your state and your size of family in the link provided above. (Make sure you’re using the current table.)

Conclusion

If your “income”—calculated in the precise way detailed here—is no more than the median income for your state and family size, then you have passed the “means test” and can file a Chapter 7 case.

But if your income is higher than that, you may still be able to pass the “means test” and file a Chapter 7 case. That’s covered in the next blog post.  

 

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Why You Should or Should Not Worry about Creditors Objecting in Your Bankruptcy Case

FACT: In bankruptcy, creditors seldom fight the write-off of their debts. Why not? And when DO they tend to fight?

 

Debts That Creditors Must Object To

This blog post is NOT about the kinds of debts that simply can’t be discharged (legally written off), and don’t need the creditor to object for that to happen. Examples of those are child and spousal support obligations, recent income taxes debts, and criminal fines. Those survive bankruptcy without any effect on them.

Instead this is about ordinary debts and the ability of any creditor to raise certain limited kinds of objections to the discharge of its debt.

Your Fears

As you consider whether or not to file bankruptcy, you might be wondering whether doing so would be effective—whether you will succeed in discharging your debts so you no longer have to pay them. And you might also wonder whether it would be emotionally difficult—whether the creditors would give you a bad time and try to make you feel guilty for not paying your debts.

As indicated at the beginning of this blog post, creditors will very seldom raise objections to discharging their debts. So your bankruptcy case will likely result in the discharge of all the debts you expect to discharge, usually without even hearing from most or all of your creditors about it. So your bankruptcy will in most cases be effective and not contentious.

Why Objections Aren’t Usually Raised

But if creditors have a right to object, why don’t they do so? If they can make trouble for you, why don’t they?

Simply because doing so is very seldom worth their trouble.

Why not?

1. Creditors seldom have the factual basis on which to object.

The legal grounds for creditors to object to the discharge of their debts are quite narrow. They need to present evidence that you incurred the debt through fraud or misrepresentation, by theft or embezzlement, by your intentional injury to a person’s body or property, or through some other similar bad act. The biggest reason that creditors don’t raise objections to the discharge of their debts is that they seldom have grounds to do so.

2. It takes money for creditors to object, money they may well not recoup.

Creditors sometimes do have factual grounds to object, for example in relatively common situations such as bounced checks or the use of credit without the intent to repay (just before filing bankruptcy). But even in these situations, creditors often don’t object because they decide it’s not worth the risk that they would just spend more money on objecting without doing any good. They often don’t want to risk spending more money to pay for their staff and for attorney fees only to have the bankruptcy judge decide that the required grounds for objection have not been met.

3. The risk that the creditor would have to pay your attorney fees.

One of the reasons why sensible creditors decide not to object unless they are very confident that they have the grounds to do so is that they risk being ordered to pay your attorney’s fees for defending against their objection. That would happen if the judge decided that “the position of the creditor was not substantially justified.” So if creditors are not very confident of their argument, they could be dissuaded further by the risk of having to pay your costs fighting the objection.

So that’s why most creditors just write off the debt and you hear nothing from them during your bankruptcy case.

When Creditors Tend to Object

Creditors do object sometimes, often involving one of the following two situations:

1. Using leverage against you.

If a creditor thinks it has a sensible case against you, it could raise an objection knowing that you are not willing or able to pay a lot of attorney fees to fight it. The creditor knows that even if you have a good defense to its accusations so that you could well win if the matter went all the way to trial, it would cost you a lot to get to that point. So they raise the objection in hopes of inducing you to enter into a settlement quickly.

2. A Personal Grudge

If a creditor is very angry at you for some reason, he, she, or it might be looking for an excuse to harm you or cause you problems. Ex-spouses and ex-business partners are the most common creditors of this sort, but sometimes more conventional creditors find some reason to pick on you. Irrationality is unpredictable, so it sometime drives an objection even when there are little or no factual grounds for it.

The Creditors’ Firm Deadline to Object

Creditors have a very limited time to raise objections: their deadline is only 60 days after the Meeting of Creditors (so around 3 months after your bankruptcy case is filed).

So, talk with your attorney if you have any concerns along these lines. And then if whatever assurances he or she gives you doesn’t stop you from worrying about this, you’ll at least know that you won’t have long to worry before the creditors’ right to object expires. 

 

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When Chapter 7 “Straight Bankruptcy” is Not So Straightforward

How can you tell if your Chapter 7 case will be straightforward? Avoid 4 problems.

 

Most Chapter 7 cases ARE straightforward. Your bankruptcy documents are prepared by your attorney and filed at court, about a month later you go to a simple 10-minute hearing with your attorney, and then two more months later your debts are discharged—written off. There’s a lot going on behind the scenes but that’s usually the gist of it.

But some cases ARE more complicated. How can you tell if your case will likely be straightforward or instead will be one of the relatively few more complicated ones?

The four main problem areas are: 1) income, 2) assets, 3) creditor challenges, and 4) trustee challenges.

1) Income

Most people filing under Chapter 7 have less income than the median income amounts for their state and family size. That enables them to easily pass the “means test.” But if instead you made or received too much money during the precise period of 6 full calendar months before your case is filed, you can be disqualified from Chapter 7. Or you may have to jump through some more complicated steps to establish that you are not “abusing” Chapter 7. Otherwise you could be forced into a 3-to-5 year Chapter 13 case or your case could be dismissed—thrown out of court. These results can sometimes be avoided with careful timing of your case, or even by making change to your income before filing.

2) Assets

Under Chapter 7 if you have an asset which is not protected (“exempt”), the Chapter 7 trustee can take and sell that asset, and pay the proceeds to the creditors. You may be willing to surrender a particular asset you don’t need in return for the discharge of your debts. That could especially be true if the trustee would use those proceeds in part to pay a debt that you want and need to be paid anyway, such as back payments of child support or income taxes. Or you may want to pay off the trustee through monthly payments in return for the privilege of keeping that asset. In these “asset” scenarios, there are complications not present in the more common “no asset” cases.

3) Creditor Challenges to the Dischargeability of a Debt

Creditors have a limited right to raise objections to the discharge of their individual debts. This is limited to grounds such as fraud, misrepresentation, theft, intentional injury to person or property, and similar bad acts. With most of these, the creditor must raise such objections to dischargeability within about three months of the filing of your Chapter 7 case—precisely 60 days after your “Meeting of Creditors.” Once that deadline passes your creditors can no longer complain, assuming that they received notice of your bankruptcy case.

4) Trustee Challenges to the Discharge of All Debts

In rare circumstances, such as if you do not disclose all your assets or fail to answer other questions accurately, either in writing or orally at the trustee’s Meeting of Creditors, or if you don’t cooperate with the trustee’s review of your financial circumstances, you could possibly lose the right to discharge any of your debts. The bankruptcy system largely relies on the honesty and accuracy of debtors. So it is quite harsh towards those who abuse the system through deceit.

No Surprises

Most of the time, Chapter 7s are straightforward. The most important thing you can do towards that end is to be completely honest and thorough with your attorney during your meetings and through the information and documents you provide. That way you will find out if there are likely to be any complications, and if so whether they can be avoided, or, if not, how they can be addressed in the best way possible. 

 

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Major Advantages of Chapter 13 “Adjustment of Debts”

Chapter 7 “straight bankruptcy” is quick and often gives you what you need. But in many situations, Chapter 13 gives you SO much more.

 

The last blog post showed how a simple Chapter 13 case works. That example illustrated one of the special advantages you get with Chapter 13: if you have a debt which can’t be discharged (legally written off) in a regular Chapter 7 case—such as a recent IRS income tax debt or back child support—these kinds of special debts can be conveniently paid over time through a Chapter 13 payment plan. The crucial advantage here is that throughout the 3-to-5-year plan such creditors can’t take any collection action against you or your assets.

That’s just the first major way that Chapter 13 buys time and protection that Chapter 7 simply cannot provide. Here are some of the other main advantages of Chapter 13:

1. You can keep your possessions that are not protected by property “exemptions,” preventing a Chapter 7 trustee from taking them from you. Thus you retain much more control over the process of saving your assets, avoiding the unknowns of negotiating payment terms with a Chapter 7 trustee in order to keep your non-exempt possessions. Also, in a Chapter 13 case, you have 3 to 5 years to pay to protect such possessions, instead of the few months that Chapter 7 trustees generally allow.

2. Similarly, if you fell behind in payments on your home’s first mortgage, you have the length of your plan—the same 3 to 5 years–to catch up. That’s in contrast to the few months of payments that a mortgage lender would generally allow if you negotiated directly with it after filing a Chapter 7 case.

3. You may be able to “strip” a second (or third) mortgage from your home’s title, and avoid paying all or most of that mortgage. This can happen if the value of your home is less than the balance of your first mortgage. Mortgage “stripping” may save you hundreds of dollars per month and potentially many tens of thousands of dollars over time. This is completely unavailable in a Chapter 7 case.

4. You may be eligible for “cramdown” of your vehicle loan. If you purchased and financed your vehicle more than two and a half years before filing your Chapter 13 case, and the vehicle is worth less than the balance on the loan, your monthly payments and the total amount you pay for your vehicle can be significantly reduced. This could enable you to keep a car or truck that you couldn’t otherwise. In contrast, in a Chapter 7 straight bankruptcy case you are usually almost always stuck with the monthly payment and loan balance dictated by the vehicle loan contract.

5. In that same situation, if you are behind on the vehicle loan payments you don’t have to catch up those back payments. In a Chapter 7 case, almost always you must quickly pay off any arrearage if you want to keep the vehicle.

6. If you owe an ex-spouse non-support obligations, you can discharge (write-off) them under Chapter 13—not under Chapter 7. Non-support obligations include requirements in a divorce decree to pay off a joint marital debt or to pay the ex-spouse in return for getting more of the marital property. Discharging such debts can make a huge difference, often making Chapter 13 well worthwhile.

7. If you have any student loans, under Chapter 13 you could likely delay paying on them for three years or more. That can be especially helpful if you have some other debts that are essential to pay off during your case (like child support arrearage or recent income taxes). Also, if you have a worsening medical condition, you may be better situated to qualify for a “hardship discharge” of your student loans if you wait until later in your Chapter 13 case.

People often assume they need and want a regular Chapter 7 bankruptcy, and it’s often exactly what they do need. But the above short list gives you some idea of the benefits of Chapter 13 that may make it a much better option. That’s one of the reasons you should talk with an experienced bankruptcy attorney, and do so with an open mind. That’s because sometimes Chapter 13 can give you a huge unexpected advantage, or a series of smaller advantages, which may swing your decision in that direction. 

 

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What a Simple Chapter 13 Case Looks Like

The most common reason for a Chapter 13 “adjustment of debts” is if you have debts that can’t be written off in a “straight” Chapter 7 case.

 

When Chapter 7 Does Not Discharge Your Debts

My last blog post was about the discharge (legal write-off) of debts under Chapter 7. I concluded with the comment that if you have debts that Chapter 7 doesn’t discharge, Chapter 13 may be the way to go. It provides what is often the safest and most convenient method to deal with debts that you have to pay, while also discharging those debts that would be discharged under Chapter 7. The much longer time that Chapter 13 takes—3 to 5 years instead of as short as 3 to 4 months for most Chapter 7 cases—can be highly worthwhile under the right circumstances.

An Example

Let’s show you one example of the right circumstances. Imagine someone owing $7,000 in IRS debt for 2011 and 2012, $3,000 in back child support, $20,000 in credit cards, and $5,000 in medical bills. The person lost his or her job in late 2010 and used the situation to try to run a one-person business during 2011 and 2012. It made a little money but only barely enough to pay living expenses. There was absolutely no money available to set aside for income taxes. During that period the person also fell behind on child support payments. Then this person found a new job a few months ago that pays less than the one lost in 2010, but at least enough to pay ongoing taxes and support, in addition to living expenses. But the person’s budget leaves only about $400 to pay ALL debts, not nearly enough to pay the minimum amounts on the credit cards, much less anything towards the rest of the debts including the taxes and back support.

What Chapter 7 Would and Would NOT Accomplish

A regular Chapter 7 case would likely discharge the $20,000 in credit cards and the $5,000 in medical bills, but would leave owing the $7,000 to the IRS and the $3,000 in back support. Although discharging $25,000, the person would come out of bankruptcy still $10,000 in debt, owed to two creditors who can be extremely aggressive—the IRS and your ex-spouse or the local support enforcement agency.

Although the IRS might be willing to accept payments of $400 per month, there’s a good chance that your ex-spouse or the support enforcement agency would be able to garnish your wages for the back support, and that would negate any possible arrangement with the IRS. Plus the last thing this person would want at his or her new job is for the payroll office to get a garnishment order for back child support. A previously filed Chapter 7 case would have no power to stop that kind of garnishment.

What Chapter 13 Would Accomplish

In contrast Chapter 13 would be able to stop your ex-spouse or support agency from garnishing for back support—as well as from any action the IRS or any state taxing entity, or virtually any other creditor, could take.

So the person in our example would file a Chapter 13 case, start or continue paying any ongoing monthly child support payments, and would also be sure to have withheld an adequate amount for ongoing income taxes. Then his or her attorney would put together a plan to pay the Chapter 13 trustee $400 per month (based on what is available in his or her budget) for 36 months.

During that period of time neither the IRS, nor the support agency or ex-spouse, nor any other creditors would be able to take any action against the person or any of his or her assets as long as he or she complied with the Chapter 13 plan. That means that he or she kept up the $400 plan payments, and kept current on ongoing tax and support obligations (as provided for in the budget).

Over those three years the trustee would be paid $14,400 ($400 X 36 months), which would pay all the $3,000 in back support and the $7,000 in taxes—usually without any additional interest or penalties from the date of the filing of the Chapter 13 case. The Chapter 13 trustee would also get paid, usually about 5-to-10% of what is being paid into the plan, as would any attorney fees that weren’t paid to the attorney at the beginning of your case.  If there would be any money left over (little or none in this example), that would be divided pro rata among the credit card and medical debts. After the 36 months of payments, any remaining balances on those debts would be discharged. That would leave the person at the end of the Chapter 13 case owing nothing to anyone. The back taxes and support would have been paid off, and he or she would be current on any ongoing income taxes and child support.

So that’s what a simple Chapter 13 case would accomplish and would look like. 

 

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Discharge of Your Debts: THE Goal of Bankruptcy

Most debts are “discharged”—written off—in bankruptcy. But some may not be. Can we know in advance which will and will not be discharged?

 

 

Bankruptcy is about Discharge

The point of bankruptcy is to get you a fresh financial start through the legal discharge of your debts.

Both kinds of consumer bankruptcy—Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts”—can discharge debts. But most Chapter 13s tend to have other purposes as well, and the discharge usually occurs only 3 to 5 years after the case is filed.

In contrast, most Chapter 7 cases are filed for the single, or at least primary, purpose of discharging debts. Furthermore, in most Chapter 7 cases all debts that the debtors want to discharge are in fact discharged, and this happens within just three months or so after the case is filed.

This blog post focuses on Chapter 7 discharge of debts.

What Debts Get Discharged?

Is there a simple way of knowing what debts will and will not be discharged in a Chapter 7 case?

Yes and no.

We CAN give you a list of the categories of debts that can’t, or might not, be discharged (see below). But some of those categories are not always clear which situations they include and which they don’t. Sometimes whether a debt is discharged or not depends on whether the creditor challenges the discharge of the debt, on how hard it fights for this, and then on how a judge might rule.

Why Can’t It Be Simpler?

Laws in general are often not straightforward, both because life can get complicated and because laws are usually compromises between competing interests. Bankruptcy laws, and those about which debts can be discharged, are the result of a constant political tug of war between creditors and debtors over the last few centuries. There have been lots of compromises, which has resulted in a bunch of hair-splitting laws. 

To give some perspective, believe it or not the original bankruptcy laws in England—from which our bankruptcy laws came—did not include ANY discharge of debts. Bankruptcy was originally designed as a procedure to help creditors collect from debtors, not at all as a legal means of protecting debtors from creditors. So there was no perceived need for a discharge of debts—the creditors could just continue chasing their debtors after the bankruptcy procedure was done!

But Let’s Get Practical

The present reality is much more positive, and usually pretty straightforward:

#1:  All debts are discharged, EXCEPT those that fit within a specified exception.

#2:  There are quite a few of exceptions, and they may sound like they exclude many kinds of debts from being discharged. It may also seem like it’s hard to know if you will be able to discharge all your debts. But it’s almost always much easier than all that. As long as you are thorough and candid with your attorney, he or she will almost always be able to tell you whether you have any debts that will not, or may not, be discharged. Most of the time there are no surprises.

#3:  Some types of debts are never discharged. Examples are child or spousal support, criminal fines and fees, and withholding taxes.

#4:  Some other types of debts are never discharged, but only if the debt at issue fits certain conditions. An example is income tax, with the discharge of a particular tax debt depending on conditions like how long ago those taxes were due and when its tax return was received by the taxing authority.

#5:  Some debts are discharged, unless timely challenged by the creditor, followed by a judge’s ruling that the debt met certain conditions involving fraud, misrepresentation, larceny, embezzlement, or intentional injury to person or property.

#6:  A few debts can’t be discharged in Chapter 7, BUT can be in Chapter 13. An example is an obligation arising out of a divorce other than support (which  can never be discharged).

The Bottom Line

#1: For most people the debts they want to discharge WILL be discharged. #2: An experienced bankruptcy attorney will usually be able to predict whether all of your debts will be discharged. #3: If you have debts that can’t be discharged, Chapter 13 is often a decent way to keep those under control. More about that in my next blog post about Chapter 13.

 

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Automatic and Immediate Protection from Your Creditors

How does bankruptcy stop garnishments, foreclosures, and repossessions?

 

Filing a bankruptcy case gets immediate protection for you, for your paycheck, for your home, and for all your possessions. This “automatic stay” provides this kind of protection for you and your property the moment either a Chapter 7 “straight bankruptcy” case or a Chapter 13 “adjustment of debts” case is filed. Virtually all efforts by all your creditors against you or anything you own comes to an immediate stop.

“Automatic Stay” = Immediate Stop

“Stay” is simply a legal word meaning “stop” or “freeze.”

“Automatic” means that this “stay” goes into effect immediately upon the filing of your bankruptcy petition. That filing itself, according to the federal Bankruptcy Code, “operates as a stay” of virtually all creditors’ actions to pursue a debt or take possession of collateral. Since the filing of your case itself imposes the stay, there is no delay or doubt about whether a judge will sign an order to impose the “stay” against your creditors.

Creditors Need to Be Informed, Sometimes Directly

Although the protection of the “automatic stay” is imposed instantaneous, practically speaking your creditors need to be informed about the filing of your case so that they are made aware that they must comply with it. If your creditors are all listed in your bankruptcy case documents, they should all get informed by the bankruptcy court within about a week or so after your case is filed. This doesn’t take any additional action by either you or your attorney (beyond making sure all of your creditors are listed in the schedule of creditors filed at the bankruptcy court). If you have no reason to expect any action against you by any of your creditors before that, just letting them all be informed by the court is usually all that’s needed.

However, if you are expecting some action by any of your creditors quicker than a week or so after filing the case, be sure to talk with your attorney about it. That way any such creditor can be directly informed by about your bankruptcy filing to stop whatever collection action it was contemplating. Make sure you and your attorney are clear which of you is informing that creditor and in what way.

Creditor Action Taken Unexpectedly

But what if a creditor has not yet been informed of your bankruptcy filing when it takes some action against you or your property in the days after your bankruptcy filing but before it finds out about it?

If this happens, the “automatic stay” is so powerful that in most circumstances such a creditor must undo whatever action it took against you after your bankruptcy was filed, even if this creditor honestly did not yet know about your filing. For example, if after your bankruptcy is filed a creditor files a lawsuit against you or gets a judgment on a lawsuit that it had filed earlier, the creditor must dismiss (throw out) its lawsuit or vacate (erase) the judgment.

 

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Saving Your Home Through Chapter 7 and Chapter 13 in Three Scenarios

Here are 3 common scenarios. When is Chapter 7 “straight bankruptcy” enough, and when do you need Chapter 13 “adjustment of debts”? 

 

Assuming that your most important goal is saving your home, here’s how each kind of bankruptcy helps with that goal.

Scenario #1: Current on Your Home Mortgage(s), Behind on Other Debts

Chapter 7:  Would likely discharge (legally write off) most if not all of your other debts, freeing up cash flow so that you can make your house payments. Stops those other debts from turning into judgments and liens against your home. May also allow you not to fall behind on other obligations—income taxes, support payment, utility bills—which could also otherwise turn into liens against your home.

Chapter 13:  Same benefits as Chapter 7, plus often a better way to deal with many other special debts, such as income taxes, back support payments, and vehicle loans. May be able to “strip” (permanently get rid of) a 2nd or 3rd mortgage, so that you would not have to make that monthly payment, and paying little or nothing on the balance during the case and then discharging any remaining balance at the successful completion of your case.  Is better at protecting assets than Chapter 7, if you either have more equity in your home than your homestead exemption allows or have any other asset(s) not protected by other property exemptions.

Scenario #2. Not Current on Home Mortgage(s) But Only a Few Payments Behind & No Pending Foreclosure

Chapter 7:  May buy you enough time to get current on your mortgage, if you’ve slipped only two or three payments behind. Most mortgage companies and their servicers (the people you actually interact with) will agree to give you several months—generally up to a year—to catch up on your mortgage arrearage. Generally called a “forbearance agreement”—lender agrees to “forbear” from foreclosing as long as you make the agreed payments. Works only if you have an unusual source of money (a generous relative or a pending legal settlement that’s exempt from the other creditors), or if filing Chapter 7 will stop enough money going to other creditors so you will have enough monthly cash flow to pay off the mortgage arrearage quickly.

Chapter 13:  Even if only a few thousand dollars behind on your mortgage, you may not have enough extra money each month after filing a Chapter 7 case to catch up quickly on that mortgage arrearage.  Lenders seldom voluntarily give you more than about a year to catch up, but if you file a Chapter 13 case that forces them to accept a much longer period to do so—three to five years. That greatly reduces what you need to pay towards the arrears every month, often making it affordable.  

Scenario #3. Many Payments Behind on Your Mortgage(s):

Chapter 7:  Not helpful here unless you have some extraordinary means for paying off the large mortgage arrears. Buys only a few weeks of time, or at most three months or so (if the mortgage lender chooses to do nothing while your bankruptcy case is pending). Also, no possibility of “stripping”a 2nd or 3rd mortgage.

Chapter 13:  As stated above, gives you up to five years to pay off the mortgage arrearage, all of which time your home is protected from foreclosure as long as you maintain the agreed Chapter 13 Plan payments. Assumes that you can at least make the regular mortgage payment consistently, along with the arrearage catch-up payment. Does not enable you to reduce the first mortgage payment amount, although in some situations you may be able to “strip” your 2nd or 3rd mortgage.

 

CAUTION: these are just the very basic advantages and disadvantages. There are lots of other twists and turns which will likely apply to your unique scenario. Be sure to meet with an attorney for the best game plan for you to meet your goals. 

 

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Keeping a Vehicle with a Debt under Chapter 7 “Straight Bankruptcy”

If you owe a debt on a vehicle, Chapter 7 gives you a narrow choice: keep it and pay on the contract, or surrender it and owe nothing.

 

The Bankruptcy Trustee Only Cares about Equity Beyond Any Exemption

In a Chapter 7 case you have two people besides you who could be interested in your vehicle. The bankruptcy trustee could care about any equity you have in the vehicle (the value over the amount you owe on it), but only if that amount is more than what would be protected under the vehicle exemption. There is seldom too much equity if you owe on a vehicle, but check with your attorney to make sure this is not an issue in your case.

Surrendering a Vehicle to the Lender

You may not want to keep your vehicle because you simply cannot afford to keep making the payments or doing so is just not worthwhile considering your alternatives. Or you may be a couple payments behind, and filed your Chapter 7 case quickly to stop your vehicle from being repossessed, but now realize that hanging on to the vehicle is not feasible for you.

You likely know that if you just surrendered your vehicle without a bankruptcy, you’ll very likely owe and be sued for the “deficiency balance” (the amount you would owe after your vehicle is sold, its sale price is credited to your account, and all the repo and other costs are added). That deficiency balance is often much higher than you expect. The Chapter 7 bankruptcy will almost always write off that deficiency balance. Indeed, that is a common purpose for filing bankruptcy.

Keeping Your Vehicle

 If you want to keep your vehicle, generally you must be either current on your loan or able to get current within about 30 to 60 days after filing the Chapter 7 case. You will almost for sure be required to sign a reaffirmation agreement, which legally excludes the vehicle loan from the discharge (the legal write-off) of the rest of your debts. You have to sign that reaffirmation agreement and have it filed at the bankruptcy court within a short period of time—usually within 60 days after your bankruptcy hearing, meaning you have to be current usually a few weeks before that. Then you have to stay current if you want to keep the car, just as if you had not filed a bankruptcy. And also just as if you had not filed bankruptcy, if that vehicle later gets repossessed or surrendered, there is a good chance that you would owe a deficiency balance. So talk to your attorney and think carefully about the risks before reaffirming your vehicle loan.

The Lack of Other Alternative Usually

Almost always—especially with conventional, national vehicle loan creditors—you are stuck with the terms of your original loan contract if you want to keep your vehicle. You can’t reduce the balance of the loan, the interest rate, or the monthly payment. If you’re behind, almost always you must pay the arrearage and be current within a month or two. There can be exceptions, especially with local finance companies and such who would rather minimize their losses by being flexible. So be sure to ask your attorney whether your vehicle creditor has such as history. And if you do need more flexibility—if you must keep your vehicle, and owe more than it is worth, and you can’t afford the payments—ask about Chapter 13 as a possible better solution.

Conclusion

Usually “straight bankruptcy”—Chapter 7—is the best way to go if your vehicle situation is pretty straightforward: you either want to surrender a vehicle, or else you want to hang onto it and are current or can get current within a month or two of your bankruptcy filing.

 

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Keeping All that You Own by Filing a Chapter 13 Case

How does a Chapter 13 “adjustment of debts” protect what you may otherwise lose in a Chapter 7 “straight bankruptcy”?

 

Chapter 13 is often an excellent way to keep possessions that are not “exempt”—which are worth too much or have too much equity so that their value exceeds the allowed exemption, or that simply don’t fit within any available exemption.

Options Other Than Chapter 13

If you want to protect possessions which are not exempt, you may have some choices besides Chapter 13.

You could just go ahead and file a Chapter 7 case and surrender the non-exempt asset to the trustee. This may be a sensible choice if that asset is something you don’t really need, such as equipment or inventory from a business that you’ve closed.  Surrendering an asset under Chapter 7 may also make sense if you have “priority” debts that you want and need to be paid—such as recent income taxes or back child support—which the Chapter 7 trustee would pay with the proceeds of sale of your surrendered asset(s), ahead of the other debts.

There are also asset protection techniques—such as selling or encumbering those assets before filing the bankruptcy, or negotiating payment terms with the Chapter 7 trustee —which are delicate procedures beyond the scope of this blog post.

Chapter 13 Non-Exempt Asset Protection

If you have an asset that is not protected by an exemption which you really need or simply want to keep, by filing under Chapter 13 you can keep that asset by paying over time for the privilege of keeping it.  Your attorney simply calculates your Chapter 13 plan so that your creditors receive as much as they would have received if you would have surrendered that asset to a Chapter 7 trustee.

For example, if you own a free and clear vehicle worth $3,000 more than the applicable exemption, you would pay that amount into your plan (in addition to amounts being paid to secured creditors such as back payments on your mortgage). You would have 3 to 5 years—the usual span of a Chapter 13 case—throughout which time you’d be protected from your creditors. Your asset-protection payments are spread out over this length of time, making it relatively easy and predictable to pay.

This is in contrast to negotiating with a Chapter 7 trustee to pay to keep an asset, in which you would usually have less time to pay it and less predictability as to how much you’d have to pay.

Chapter 7 vs. Chapter 13 Asset Protection

Whether the asset(s) that you are protecting is worth the additional time and expense of a Chapter 13 case depends on the importance of that asset, and other factors.

First note that people with assets to protect have other reasons to be in a Chapter 13 case, and the asset protection feature is just one more benefit.

Furthermore, in some Chapter 13s you can retain your non-exempt assets without paying anything more to your creditors than if you did not have any assets to protect. If you owe recent income taxes and/or back support payments (or any other special “priority” debts which must be paid in full in a Chapter 13 case), you can use these debts to your advantage. Since in a Chapter 7 case such “priority” debts would be paid in full before other creditors would receive any proceeds of the sale of any surrendered assets, if the amount of such “priority” debts are more than the asset value you are seeking to protect, you may well only need to pay enough into your Chapter 13 case to pay off these “priority” debts.

This way you would get an immediate solution—your assets protected right away and the IRS or other “priority” debt creditor off your back. And you’d have a long-term solution, too—your assets would be protected throughout the Chapter 13 case, and the IRS and/or other “priority” creditor would get paid off. Once your case is completed, you would be debt-free. 

 

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