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Bankruptcy is a federal law that is intended to provide a “fresh start” for debtors when they are no longer able to meet the demands of their creditors. This can happen due to a loss of job, injury, divorce, foreclosure, or general decline of financial markets.
Attorney John Eckelberry will be your advisor through Chapter 7 or Chapter 13 needs. Learn more about John, or contact us to schedule a 30-minute free legal consultation.
About Chapter 7 Bankruptcy
A Chapter 7 Bankruptcy is a liquidation of non-exempt assets. The court appointed trustee reviews the assets of the debtor to determine if there are any non-exempt assets that can be liquidated in order to pay back the creditors.
A debtor has the choice to retain those assets that are exempted as well as those that have secured debts associated with them. In the event a debtor chooses to surrender an asset to a secured creditor, any deficiency associated with the liquidation of the asset is discharged along with any other unsecured debts. Most Chapter 7 cases are “no asset” cases, which means there are no non-exempt assets for the trustee to liquidate in order to pay creditors.
Certain debts cannot be discharged in a Chapter 7, including most taxes, student loans, and domestic support obligations. A Chapter 7 creates the most negative credit rating possible and can remain on a credit report for ten years. In addition, a debtor cannot file for another Chapter 7 for at least eight years. Despite this negative impact, most debtors would prefer to file for a Chapter 7; however, having too much income, desire to protect non-exempt assets, and/or the discharge of those debts which are non-dischargeable under a Chapter 7 are common reasons to pursue a Chapter 13. In addition, filing for Chapter 7 doesn’t mean a debtor cannot obtain financing for 10 years. In fact, offers for credit will come to most shortly after receiving a discharge due to the long period of time in which they will not be able to file again.
About Chapter 13 Bankruptcy
A Chapter 13 is a payment plan, where the debtor will pay back a portion of his debts over the course of a three- to five-year period. A Chapter 13 differs from private debt consolidation in that the bankruptcy court has the authority to prohibit creditors from attaching or foreclosing on the debtors’ property.
The debtor prepares and submits a Plan for the payment of debts for approval by the Trustee and all creditors. Once a Plan is approved, the Trustee supervises the debtors’ successful completion of the plan and then recommends a discharge of the remaining debt.
Although a Chapter 13 can allow the discharge of certain debts which would be non-dischargeable under a Chapter 7, domestic support obligations are not one of them. In fact, a Chapter 13 Plan will require that such priority debts be paid in full. However, property division from a divorce may be discharged after a successful Chapter 13.
What a debtor must pay on a monthly basis under the plan depends on what they can reasonably afford their disposable income. The debtor’s “disposable income” for the purposes of contribution to debt is based on the IRS Local/Regional and National Standards for living expenses, not necessarily what they actually spend. Under the means test and Chapter 13 Plan, which is addressed herein below, a debtor must at least contribute approximately $124 per month for 60 months to unsecured debts. Thus, a debtor without much disposable income, but significant unsecured debt, can benefit greatly from a Chapter 13.
Because a debtor pays a portion of their debts back over the plan period, the negative impact to their credit at the end of the plan is less than that under a Chapter 7. In addition, the time frame to wait for future filing is less after a Chapter 13 discharge and may file for a Chapter 7 after only six years.
Consumer Credit Counseling
To be eligible for either a Chapter 7 or Chapter 13, a debtor must take two separate credit counseling courses. The first is geared toward determining if bankruptcy is the best option and must be taken within 180 days prior to filing. The second is more geared toward future financial planning and must be taken within 90 days after filing. For a list of approved course providers click here.
The Automatic Stay
The filing of a bankruptcy action by a consumer debtor will stay all legal proceedings intended to collect debt, including collection actions such as garnishments or foreclosures. Although most bankruptcy filings are not time sensitive, those that include foreclosures or wage garnishments must be filed quickly to protect the debtor from losing their assets.
Beginning in 2005, a new presumption of abuse was created that is used to determine the eligibility of debtors for filing a Chapter 7. The first step is to determine the income of the debtor for the six months preceding the filing and compare it to the median income in their state for a comparable household size. As of November 1, 2014, Colorado’s median income is:
|Household of 1||$51,552|
|Household of 2||$67,129|
|Household of 3||$70,827|
|Household of 4||$84,998|
|Each additional household member||$8,100|
If a debtor’s income is less than the median income, the presumption of abuse does not arise and a Chapter 7 may be filed. However, if the income is greater than the median income, the presumption of abuse does not arise and a Chapter 7 may be filed. However, if the income is greater than the median income, the additional means test must be applied to determine whether the presumption of abuse arises. The means test applies allowable expenses, determined by IRS Local/Regional and National Standards, to the debtor’s monthly income from all sources to determine if the debtor has “disposable income” to apply approximately $124 per month for 60 months to unsecured debt or 25% of their unsecured debt, whichever is greater.In addition, there are some additional necessary expenses, including life, health, and disability insurance premiums, court-ordered payments, education for employment or for a physically or mentally challenged child, childcare, health care, telecommunications services, and other miscellaneous expenses that the need must be proven to the trustee. Finally, the means test includes contribution to secured and priority debts such as mortgages, motor vehicle loans, domestic support obligations, and taxes, as these debts would be required to be paid in full under a Chapter 13 Plan anyway. Thus, it is still possible for a debtor with income significantly greater than the median income to qualify for a Chapter 7, depending on their allowable expenses under the means test calculation.
Chapter 7 Petition and Schedules
From the time of the initial consultation to the time of filing depends on how long it takes to gather the essential information to complete the Petition and Schedules. Our office can usually complete them in about 2-3 weeks once all of the information has been gathered. It is always better to provide more information than less, as failure to provide information is the most common way of having a Trustee deny discharge or dismiss a case.
Chapter 7 Meeting of the Creditors
For most filers, this is the only time they will appear at the Bankruptcy Court. This meeting occurs about 30 to 45 days after the filing date and will take place in either Denver, Colorado Springs, Pueblo, Fort Collins or Grand Junction, depending on your residence. For a list of locations based on residence go to http://cob.uscourts.gov/misc/341meetingbycounty.pdf.
The Meeting of Creditors is when the Trustee asks questions of the debtor about information on their Petition and Schedules. Although this “meeting” is under oath, it is less formal than being in court. Also, despite the name and the fact that this is the opportunity for creditors to ask questions also, very seldom do creditors actually appear.
Notice of Discharge
From the time of filing to the date of discharge in a Chapter 7 is generally about six months. The Notice of Discharge in a Chapter 13 is issued upon the successful completion of the Plan. This is the final aspect of a bankruptcy and effectively discharges all dischargeable debts, which is the goal of any bankruptcy filing.
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