CHAPTER 7 & 13 Bankruptcy FAQ

Bankruptcy laws were formulated to give the "honest" debtor a "fresh" start. Bankruptcy is not intended to give debtors an unfair advantage over their creditors. This requirement comes from the United States Bankruptcy Code, Title 11 of the United States Code, and it is not intended to protect the debtor who has acted in bad faith in an attempt to defraud creditors.

The United States Bankruptcy Code is divided into Chapters:

Chapter 7 bankruptcy is referred to as a liquidation. A Chapter 7 debtor is an individual or entity whose expenses exceed its income.

Chapter 11, commonly referred to as a "business reorganization", is commenced by the filing of a voluntary petition by the debtor, or the filing of an involuntary petition by creditors.

Chapter 12, a reorganization for family farmers and fisherman. 

Chapter 13, commonly known as "individual debt adjustment", "individual debt consolidation", or "repayment plan". A Chapter 13 bankruptcy can be filed only by individuals. A typical case generally involves people who have fallen behind in their mortgage payments, delinquent with their priority taxes, or have debts that are generally non-dischargeable in a Chapter 7 (student loans, child support arrears, and others). Filing a Chapter 13 plan of reorganization takes into assumption that the individual has a source of income. Such income exceeds the individual's household expenses. In essence, the individual has disposable income to be able to fund the plan of reorganization.

History affords us many instances of the ruin of states, by the prosecution of measures ill suited to the temper and genius of their people.  The ordaining of laws in favor of one part of the nation, to the prejudice and oppression of another, is certainly the most erroneous and mistaken policy. ... These measures never fail to create great and violent jealousies and animosities between the people favored and the people oppressed; whence a total separation of affections, interests, political obligations, and all manner of connections, by which the whole state is weakened." --Benjamin Franklin

Bankruptcy is a very complicated interplay of several laws and should not be undertaken without adequate representation.  Do not use document preparers or attorneys who do not practice bankruptcy law full time.  Most bankruptcy lawyers offer free or very low cost initial consultations.

"When I was a young woman we had a government that declared war on poverty. Today we have a government that has declared war on the poor. "  (author unknown, contributed by Annette Gerhardt).  The 2005 Bankruptcy Reform Act is this declaration of war.  I am proud to say that our office is in the business to help relieve people from the misfortunate of too much debt and to protect them from the outrageous actions of some heartless creditors and collection companies who refused to honor the Fair Debt Collections laws.  We do this by helping our clients file for bankruptcy relief under the Bankruptcy Code.

◙  General Information:
         ♦  What are the changes in the bankruptcy law I have been hearing about?
        ♦  Notes and Links for Bankruptcy Lawyers regarding the new law, including notes on the means test.

         ♦  "Maxed Out" a award-winning documentary describing the abuses by and little known secrets of the banks and credit card industry and their effect on our daily lives.

◙  What is Bankruptcy and how does it work?
◙  Now that you have decided Bankruptcy is the right choice, what next?

◙  Your bankruptcy has been filed with the court - now what?

◙  The Discharge

◙  Now that your bankruptcy is over...

◙  Sale of property by the Bankruptcy Trustee

◙  What do you need to do in order for Ms. Drain to help?

◙  What is Bankruptcy and how does it work?

1. What is a bankruptcy?

2. What are the different types of bankruptcy?

3. How do you determine if bankruptcy is right for you?

4. What is the means test?

5. Where can I file bankruptcy?

6. Are there alternatives to bankruptcy?

7. What about debt consolidation and consumer counseling?

8. How much does it cost to file bankruptcy?

9. How do I handle harassment by creditors and collection companies?

10. What is pre-bankruptcy planning?

11. Bankruptcy Fraud

12. Who can file bankruptcy?

13. Can I file for bankruptcy if I am not a citizen or do not have my own social security number?

14. Can both husband and wife file a joint bankruptcy petition?

15. Under what conditions should both husband and wife file bankruptcy?

16. Can I file bankruptcy if my debts are being administered by financial counselors?

17. How does filing bankruptcy affect lawsuits and attachments already filed against me?

18. How is a wage garnishment affected by bankruptcy?

19. Can my social security be garnished?

20. What about child support, alimony/maintenance and/or property settlements?

21. What can I do about defaulted student loans?

22. Will there be forgiveness of debt "income" as a result of a bankruptcy?

23. Bankruptcy and Taxes - An Accountants Viewpoint, © by Greta P. Hicks, CPA

24. What about taxes and Bankruptcy? (link to another law firm web site)

25. How do I get a copy of my credit report?

26. Who is filing bankruptcy?

◙  Now you have decided that Bankruptcy may be the right choice:

1. What should I do to prepare for filing bankruptcy?

2. What are the credit counseling and debtor education classes I have been hearing about?

3. What is involved in filing a bankruptcy?

4. What information do I need to provide in order to file a bankruptcy?

5. What are the different types of Bankruptcies?

6. What is a Chapter 7 bankruptcy?

7. Why would I choose a Chapter 13 bankruptcy?

8. Who is eligible for a Chapter 13 bankruptcy?

9. Important Deadlines and Timeline for chapter 7 and 13.

10. What is median income for Arizona? 

11. Where is my bankruptcy filed?

12. When should I file bankruptcy?

13. How long after filing the bankruptcy will the creditors stop contacting me?

14. What property do I get to keep?

15. Why is it important that all information on my bankruptcy documents be absolutely accurate

◙  Your bankruptcy has been filed - now what?

1. Who will notify the creditors that I have filed bankruptcy?

2. Will I have to go to court?

3. Who is a bankruptcy trustee?

4. What are my responsibilities to the bankruptcy trustee?

5. What is the first meeting of creditors?

6. What happens after the First Meeting of Creditors?

7. Why should I follow Ms. Drain's directions about mortgage and car payments?

◙  The Discharge:

1. What is dischargeable in bankruptcy?

2. What is a Discharge and how do I get one in a Chapter 7?

3. Can I be denied a discharge?

4. What happens after the discharge?

◙  Now that your bankruptcy is over:

1. How often can I file bankruptcy?

2. Can I pay my friends, relatives or employer back monies they lent me?

3. What are a creditor's obligations to me?

4. How long does a bankruptcy stay on my credit report?

5. How do I get information off my credit report once the 10 years have expired?

6. How Do I Survive After Filing a Chapter 7? (article written by a out-of-state paralegal)

◙  Sale of property by the Bankruptcy Trustee

1. How do I find out about property for sale by the Bankruptcy Trustee?

◙  More Information about Bankruptcy:

1. Chapter 13 FAQ

2. Chapter 7 FAQ

What is a bankruptcy?
Bankruptcy is a Constitutionally guaranteed protection designed both to help an individual or business that cannot meet its financial obligations and to protect the creditors involved. This is a very complicated process and full of traps for the unwary.  Always use experienced lawyers, who practice bankruptcy law full time.

What are the Credit Counseling and Debtor Education Classes I have been hearing about?
Every person who files Chapter 7 or 13 bankruptcy will have to take a credit counseling "briefing" within 180 days PRIOR to filing their bankruptcy and file a certificate of compliance.  There is a provision for emergency situations, but they still must prove that they tried to obtain the class within the last 5 days of filing, but they must take the class and file a certificate of compliance within 30 days after filing their bankruptcy Petition.  There is also a budget class that must be taken within 45 day s after filing your bankruptcy.  Failure to do so will result in additional fees and costs in order to get your discharge in your bankruptcy.   There will be fees charged for those classes, unless you cannot afford to pay such fees.  Ms. Drain will explain the process.

Warning about all these credit counseling companies - their information regarding bankruptcy is often  not accurate.  You must talk to a bankruptcy attorney in your State.

Before filing bankruptcy you must take one class called credit counseling: Ms. Drain recommends Institute for Financial Literacy  Their fees are reasonable.  BEWARE: YOU MUST TAKE THIS CLASS BEFORE THE ACTUAL DAY THE BANKRUPTCY IF FILED.  If you cannot afford to pay the fee then contact them for a waiver.  Bring a copy of all documents to your meeting with Ms. Drain.  Ms. Drain does not recommend GreenPath or Springboard.
   
After filing your bankruptcy you must take a class called Personal Financial Management.  Ms. Drain highly recommends Arizona Learning Connections, LLC.  This is run by a very competent attorney, who really knows her business.  DO NOT TAKE THIS CLASS BEFORE FILING YOUR BANKRUPTCY. 

Important Note: no matter who you chose to provide these classes - make sure to confirm that they are approved by the US Trustee's Office - Credit Counseling and Debtor Education.

What are the different types of bankruptcy?

There are two basic types of bankruptcies.  The first is called a liquidation (chapter 7).  In a chapter 7 an individual keeps certain items (house, furnishings, car, pension plan - see list of Arizona exemptions.  Each state has a different list of exemptions. 

The second type is a reorganization (chapter 11, 12 and 13).  Each reorganization chapter is different and used for specific purposes.  Individuals usually file a chapter 13 in order to cure the arrearages on their homes, deal with the debt on their cars, and/or manage the payments on their tax debts. Chapter 12 is for farmers or fishermen - so that they can reorganize the debt on their livelihood.   Chapter 11 is for businesses.  Chapter 11 also has two mini-chapters for (a) small businesses and (b) companies that own only a single asset.

Under the 2005 Bankruptcy Reform Act a Chapter 15 bankruptcy was created to deal with Cross-Boarder Bankruptcy cases. 

How do you determine if bankruptcy is right for you?

Bankruptcy is a legal remedy offered by our laws since 1898 (United States Constitution, Art. 1, Section 8).  Bankruptcy is a very complex set of rules.  See flow chart of even the simplest of bankruptcies.  Only an attorney, experienced in bankruptcy law, can properly advise you on the process. Often, your question is not a legal one, but one based on emotion and urban legends. My experience has been that the decision to file bankruptcy is based partially on facts, partially on emotion and partially on a person's view of their future.  The law allows any person and most entities to file a bankruptcy.  This is not the time to depend on the "advice" of friends and others. What type of bankruptcy is the important question.  We have attempted to clarify this issue in our series of questions for chapter 7 and chapter 13.

What is the means test?
The means test is used to determine whether the Debtor is eligibility for Chapter 7 or 13 bankruptcy.  The debtor's average income for the 6 months prior to filing is compared to the State Median Income. For example, as of 2/07 the median annual income for a single wage earner in Arizona is $38,703. This amount will change over time so make certain to check the current median annual income.  Ms. Drain will be able to assist you in this.  If the Debtor’s income is below the median, then Chapter 7 is an option. If the income is above the median, then step two is applied.
 

Step two in the calculation takes income, less living expenses (as set forth in the IRS standards), times 60. This represents the amount of income available over a 5-year period for repayment of the debt obligations.  If the income is $10,000 or more, a Chapter 13 will be required. In other words, anyone earning above the State Median Income, and with at least $166.67 per month of available income, will automatically be denied Chapter 7.

But that is not the end on the analysis.  Step three - if the available income is between $100 and $166.66 per month it is multiplied by 60 (5 years of payments).  If the resulting number is more than 25% of the debt owed, then the Debtor may still not be able to file a chapter 7.

Where can I file bankruptcy?
The Bankruptcy code 28 U.S.C. §1408 specifies that you can file only in the state in which you have had your domicile, residence, principal assets or principal place of business for the majority of the last 180 days.  Therefore, you can file in Arizona after you have resided here for at least 91 days.

Are there alternatives to bankruptcy? 
Yes. Sometimes payment plans can be negotiated with creditors. Obtaining loan extensions, compromises and workout agreements require negotiation skills and experience. These alternatives may alert your creditors to the existence of non-exempt property that the creditor could reach and can involve considerable expense. You also have the option of doing nothing.  In any event you should seek professional advise in dealing with most of these alternatives.  
You may call Consumer Credit Counseling Service, Inc. in your local.  BEWARE - using such services will be included in your credit report and will have the same impact as a bankruptcy.  Also, the counselors will fail to disclose that there could be serious and expensive tax consequences to paying less than that you owe (called "forgiveness of debt).  I do not recommend the use of "debt restructuring" companies.  Most, like AmeriDebt and its progeny are scams. 

What about debt consolidation and consumer counseling.  None of these companies want you to know that using their services will have the same impact on your credit as filing for bankruptcy.  For several years now my clients and many others, have been experiencing serious problems with using these services.  They are no longer free; they are not "non-profit" despite their claims; they pay themselves before paying your creditors.  They are very late on making payments to the creditors, causing more late fees to accrue, some just take the account and sell it to another "counseling service", keeping the money they have received.  What these "counseling" services do not tell their clients is that, according to creditors and credit reporting agencies, the use of their services has the same credit impact as filing bankruptcy. 

Both the IRS and the FTC have started investigations into these abuses.  Some of these problems are set forth in the Federal Governments investigation into "Profiteering in a Non-Profit Industry: Abusive Practices in Credit Counseling".  NOTE: I am not even trying to keep these updated - there are so many actions being filed that it would be impossible.

1. 2005 Bankruptcy Reform - Congress expressed that the Board of Governors of the Federal Reserve System shall conduct a study of the consumer credit industry practices of soliciting and extending credit and report within 12 months of its finds.  This was prompted by the extensive abuses suffered on the consumer by the credit industry.

2. AmeriDebt is one of the first to be sued for fraud based on these and other claims; I predict they will not be the last.

3. UTAH CREDIT COUNSELING Service shut down (3/2004).

4. Senate Report raises concerns about credit counseling companies (3/2004)

5. The Federal Trade Commission on Monday shut down National Consumer Council Inc., citing "misrepresentations and omissions" by the Santa Ana nonprofit credit-repair firm and its for-profit affiliates (5/2004).

6. NCO Financial Systems, Inc. and  NCO Portfolio Management, Inc. fined $1.5 million for violations of Fair Credit Reporting Act.

7. Florida Supreme Court sanctions "WE THE PEOPLE" for unauthorized practice of law.

What should I do to prepare for filing bankruptcy?
First, you should consult with an experienced bankruptcy attorney.  Only an attorney can help you plan for the bankruptcy, decide when to file a bankruptcy petition, or even avoid filing for bankruptcy. This is a life altering decision - if it is done wrong you will be in a worse situation than you were without the bankruptcy.  The following are some specific items that you need to keep in mind.  Please remember that the dollar amounts stated may change by operation of law.

1. If you intend to file bankruptcy you should stop using your credit cards. If you borrow money with the specific intent of discharging the debt in bankruptcy instead of paying it back, the debt is not dischargeable. In addition, (a) certain luxury purchases over $500 within 90 days of the bankruptcy filing are presumed non-dischargeable; (b) cash advances aggregating $750 taken within 70 days of the bankruptcy filing are presumed non-dischargeable (523(a)(2)(C)); and, (c) debts involving materially false financial statements are non-dischargeable under certain circumstances. 

2. Don't sell or transfer your assets to friends, family and business associates expecting to protect the assets from your creditors.  The transfer may be considered a fraudulent conveyance.  If it is, the person you sold or transferred the asset to will lose the property.   In addition, you could lose your bankruptcy discharge.

3. Don't destroy any business or financial records. You can lose your right to a bankruptcy discharge as a result. 

4. Carefully choose the creditors you pay before filing a bankruptcy.  Some creditors, such as landlords, secured creditors, and some utilities should be paid under most circumstances. If you pay a credit card debt that eventually will be discharged, you may be throwing money away. Our firm can advise you on what debts should and should not be paid while you prepare to file a bankruptcy petition.

What is involved with filing a bankruptcy?
In order to file a bankruptcy you must complete a series of documents that list all items that you own, all debts that you owe and all rights that you have.  This also includes your income and expenses.  If a business is filing, then there are a series of questions related to business issues.  Everything you own or owe must be listed.  This does not mean you cannot keep most, if not all, of those items that you list; this just means that you must be thorough in your listing all your debts and assets.  Assuming that you have lived in Arizona for the last full 2 years, then the basic living items are exempt under Arizona law.  I will review all these rules with you when we meet.  Once the documents are completed they are signed and electronically filed with the Bankruptcy Court.  At a creditor's meeting you will be asked to testify that you have reviewed all the documents filed with the Court and that they are true and accurate.  

The court has approved the forms that must be used for these documents.  They are called the petition, schedules, statement of financial affairs, statement of intentions, social security declaration, master mailing matrix, means test, employer declaration and other documents, depending on the circumstances.  These forms are used to list all of your assets, debts, along with some recent financial history.  The automatic stay goes into effect upon filing the petition.  The automatic stay is very powerful.  It stops all creditors from taking any action against you or your assets, without first obtaining a Bankruptcy order.

If you are filing a chapter 13 you must also file a Plan of Reorganization, with other documents related to the Plan.  Some chapter 13 trustee's have forms for these chapter 13 plans.  In order to have a successful chapter 13 plan there must be in-depth analysis of income, expenses, arrears and fair market value of assets; along with certain transactions that you may have made before filing.

All Debtors must appear at a §341 meeting, also called a creditors meeting.  The Trustee assigned to your case will ask you questions under oath about your assets and liabilities and other important issues.  Creditors can also question the debtor on those subjects, but seldom appear.  Normally, the creditors will contact your attorney; who will assist you in understanding your rights as to each issue the creditor raises.

If there are assets in a chapter 7 case which are not exempt, the Trustee takes control of those assets and usually, sells them at a public auction.  You and/or your family/friends have a right to bid at that auction.  From the sale of assets or the recovery of certain transfers or payments (called avoidance powers), the Trustee pays the expenses related to your case, and then distributes the remaining funds to creditors who have filed proofs of claims.   In a chapter 7 case all wages you earn after the case belong to you.  But, monies that were owed to you before your case was filed belong to your creditors, such as tax refunds, inheritances, accounts receivable, and money from any lawsuits.

Generally, the only responsibilities you have after the 341 meeting is to cooperate with the Trustee in providing any information requested and assist your attorney in addressing any assets that you want to keep, but that are secured by a creditor.

What information do I need to provide in order to file bankruptcy?
In order to file bankruptcy you must fill out several forms.  These forms will include basic information about all your debts, all your real and personal property and all significant transfers you have made in the last year.  This information has been summarized in a questionnaire that I require all my clients to fill out based on your past and current situation.  You and I will have a free telephonic discussion.  After that you will complete some educational classes; obtain a recent credit report (if you are married you will need a separate report for each spouse) and fill out more information at our web site.   Once this is done you can call to set an appointment, which is normally 2 hours in length. You are to bring the documents listed to that meeting.

All meetings are with me, not with my staff.  I do not believe in delegating the meetings to anyone else.  At the meeting you and I will complete a draft of your bankruptcy documents.  At the end of the meeting you will be given a copy of the draft documents, along with additional instructions.  You will be asked to review the draft and amend or correct the entries that you and I have highlighted during our meeting.  We then schedule another meeting to final review, edit and signing.  At that meeting you and I will determine the best time for filing your bankruptcy. 

You must list everything that you own. If you knowingly and fraudulently conceal an asset from the Court you have committed a felony and can be fined up to $5,000, imprisoned for up to five years, or both. In addition, the Court can also deny you your discharge, or dismiss or convert your bankruptcy proceeding.

Who can file bankruptcy?
Any person who resides in, does business in, or has property in this country can file bankruptcy. There is no threshold of debts versus assets required in order to file a bankruptcy. In order to file in Arizona you must live here for the greater part of the last 6 months. There are limits on certain entities in filing bankruptcy, such as banks and savings and loans.

Can I file for bankruptcy if I am not a citizen or do not have my own social security number?
Section 109 of the Bankruptcy Code: "Notwithstanding any other provision of this section, only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title".  There does not appear to be a "legal citizen requirements".  This may be changed by case law.  Use of a social security number is the "norm" with most bankruptcies, yet the law does not specifically require it.  What is required by the US Trustee's office is some type of identification which is issued by a governmental agency.  Therefore, an ITIN (Individual Taxpayer Identification Number) number should also suffice.  The problem that non-residents face is that many of them have used a false social security number to obtain credit, buy a home or car.  By doing this they have committed a crime of moral turpitude.  If these folks file for bankruptcy protection their creditors can bring an action which determines the debtors to have committed fraud.  This will have serious consequences if that debtor ever tries to apply for citizenship.  Moral - don't use someone else social security number to obtain credit.

What is a Chapter 7 bankruptcy?
Chapter 7 bankruptcy is called a liquidation bankruptcy.  It is intended to give the individual debtor a fresh start. Debts such as credit cards, medical bills and lawsuits are discharged.  The debtor keeps most of their property (exemptions) that are not considered luxuries.   A company that files a chapter 7 will be closed and its assets sold to pay its creditors.  See our link to additional FAQ for chapter 7 cases.

In most consumer cases, all the assets are exempt, and therefore there are no assets to liquidate and there is no money to be paid to creditors.  If there are assets in a chapter 7 case which are not exempt, the trustee takes control of those assets and usually, sells them at a public auction.  You and/or your family/friends have a right to bid at that auction.  From the sale of assets or the recovery of certain transfers or payments (called avoidance powers), the trustee pays the expenses related to your case, and then distributes the remaining funds to creditors who have filed proofs of claims.

What is a Discharge and how do I get one in a Chapter 7?
A discharge is the court's order stating that you do not have to pay your debts to the creditors that were listed in your bankruptcy documents, so long as the court did not entered a non-dischargeability order.  Other debts that are not discharged under the current laws include student loans, child support, alimony/maintenance, government fines or penalties, most taxes and a few others.

The effect of a discharge is that debtors are released from personal liability for all dischargeable debts, and all creditors, whose debts are discharged, are prohibited from performing any act to collect such debts from the debtors.  This is known as a permanent, federal injunction.  Only people received discharges, companies do not.

Creditors and the trustee have a 60 day period after the creditor's meeting to file a complaint indicating that they believe there is good reason why their debt should not be discharged (forgiven) or a good reason why this chapter 7 case should not be continued (Bankruptcy Code §523(a)(2), (4), (6, and (15)).  This action is called non-dischargeability complaint.  The Trustee can request that the court deny a chapter 7 discharge in some cases. 

The granting of a discharge does not stop the Debtor's involvement in their case. The Debtor is not relieved from performing the duties required under the Bankruptcy law. One example of a continuing duty is the Debtor's obligation to surrender assets or tax refunds to the Trustee after the discharge is entered.  In the event the Debtor fails to perform those duties an action may be brought to revoke the discharge.  This will mean that the Debtor went through all this hassle and ends up with no protection from their creditors garnishing wages, suing or seizing bank accounts.

Even after a discharge, generally a creditor that has a valid lien on property belonging to a debtor (such as: house, car, furniture, jewelry) may recover the property or its value.  However, if the debtor possesses certain property that is encumbered by a judicial lien or a non-purchase—money security interest, the Debtor will have to bring this issue to the Court for an order which will remove the effect of the lien.  This action is called a Motion to Avoid a Lien.

If the debtor wants to keep assets that have secured liens (such as a house or car) the debtor can either continue making the same payments as before the bankruptcy, or pay the lender one lump-sum payment equal to the fair market value of the item (redemption).  See more on reaffirmation agreements below.

What is Dischargeable in Bankruptcy?
The scope of the discharge is different in each chapter.  Under the pre-2005 Bankruptcy Reform Act a Chapter 13 discharge more encompassing, to encourage individuals to use Chapter 13 to repay a portion, if not all of their debts. A Chapter 13 discharge also offered protection in the case of some fraudulent actions that would not have been discharged in a Chapter 7.  That does not appear to be the case after the Reform Act.

Put most simply, most unsecured debts are dischargeable.  Most secured debt survives bankruptcy as a charge on the property to which it attaches unless a court order modifies the lien.

If you borrow money with the specific intent of discharging the debt in bankruptcy instead of paying it back, the debt is not dischargeable. In addition, (a) certain luxury purchases over $500 within 90 days of the bankruptcy filing are presumed non-dischargeable; (b) cash advances aggregating $750 taken within 70 days of the bankruptcy filing are presumed non-dischargeable (523(a)(2)(C) ; and, (c) debts involving materially false financial statements are non-dischargeable under certain circumstances. 

If taxes are involved, it is important to know the exact status of your obligations.  Ask your tax authority for a document called a literal transcript. This is a very complex set of facts and the mere date of your bankruptcy may lock you into a result that you did not anticipate. 

NOTE: The law changes and the following is only a synopsis of what has been deemed dischargeable.  Always consult your attorney to determine the current status of the law and its affect on your debts and assets.