“Sometimes bad things happen to good people”
Here are a few reasons why good people like you that I have seen recently have had to seek relief under the bankruptcy law:
- Desperately want to save your house but your adjustable rate mortgage loan reset and now you can’t make the new mortgage payment
- House seriously “underwater” and you are paying far more than it is worth and can’t get mortgage company to modify your mortgage
- High medical bills – no medical insurance!
- Desperately want to pay your bills but no longer have sufficient money available to even make minimum payments
- Mail box full of threatening collection letters and Creditors aggressively calling and threatening to call your neighbors, relatives or employers
- Were employed in an industry seriously impacted by the economic crisis, such as construction, real estate, mortgage industry, or your small business can’t survive the downturn
- Tried to cover a period of low income with credit cards thinking your income would soon improve
- Withdrew your IRA or 401k try to keep up with payments but now that’s gone
- House was foreclosed and now you are getting the tax bill from IRS on the first mortgage and/or the second mortgage is suing you on its promissory note
- Did short sale and now second mortgage is suing you for the balance of its promissory note
- Injured or sick and can’t work
- Threaten with lawsuit or got hit from big tax bill
- Death in family or had divorce
- Somebody you cosigned for has defaulted on the loan and now the creditor is calling you
- Elderly parents can’t pay their medical and other bills on their limited income
- Student who received credit cards in college now, in this economy, can’t find a job to pay them
There are two types of bankruptcy that individuals and families generally use: Chapter 7 and Chapter 13. The bankruptcy for businesses is called Chapter 11. There are many more details and legal provisions that must be considered with each type of bankruptcy, in addition to the unique circumstances of your own case.
Chapter 7 Bankruptcy
The purpose of a Chapter 7 is to give a person a financial “fresh start.” In fact, the Supreme Court of the United States said it this way:
[Chapter 7] gives to the honest but unfortunate debtor … a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt. Local Loan Co. V. Hunt, 292 U.S. 234, 244 (1934).
This fresh start is accomplished by the bankruptcy “discharge” which is the goal of every Chapter 7. The discharge relieves you from personal liability from certain debts and forever prohibits creditors taking any action against you to collect the debt. However, not all debts can be discharged in bankruptcy. For example, student loans, traffic fines, recent tax debts, or debts incurred without the intent to repay them may not be discharged. As an experienced bankruptcy lawyer, I can determine if any of your debts are not dischargeable.
Secured debts, that is debts secured by your house, car or other personal property, can be discharged, but generally you may not keep the property (which is the collateral for the debt) unless you promise to pay for it after the bankruptcy is over.
The 2005 amendments to the bankruptcy code limited some people from filing Chapter 7 by what is called the “means test.” Basically the law requires every person filing Chapter 7 to provide proof of the total gross income from any source and then compares that to mean (average) income for the same family size for the state of California (for our clients). If the person is over that average after all computations are done, then they are unable to file Chapter 7 and may only file another type of bankruptcy, usually Chapter 13. The means test is quite complicated but I will be able to do the mean test calculations based on your financial circumstances and determine if you are eligible for Chapter 7.
Although, in theory Chapter 7 is a liquidation of a person’s assets and distributing them among creditors, it only applies to “non exempt” assets. Exemptions are a numerous federal and state laws that protect certain items and certain dollar amounts from being liquidated in bankruptcy to pay creditors. When you file a bankruptcy I will take a list of all your property and search among the exemption laws to find the right one to protect each item of your property. In most normal consumer cases, as your bankruptcy lawyer, I will be able to exempt all of your property and convince the court that your case is a “no asset” case so you do not end up losing anything in Chapter 7, but instead just discharge your debts. Having an experienced attorney to perform this critical function is essential to protect your property.
There is at least one required court hearing called a 341(a) hearing or “first meeting of creditors” where Chapter 7 filers are examined under oath by the Chapter 7 Trustee. The primary purpose it to be sure you have complied with all the bankruptcy rules in filing your petition and to inquire about the nature and location of your assets. I have prepared and guided over a thousand of my clients through their 341(a) hearings. Creditors rarely attend the hearing.
Chapter 13 Bankruptcy
“A plan to reorganize an individual’s debts”
A Chapter 13 plan is a Court approved repayment procedure which allows a person with fairly regular income to reorganize his or her finances, (for example, lower the payments) in order to repay debts based on the amount the person is able to pay. And the person gets court protection from creditors while repaying their debts, so that the creditors are prohibited from calling, suing, or otherwise attempting to collect the debt while the person is in the plan. Upon completion of the plan, any debts that the person was unable to pay off during the plan are forgiven or discharged.
Advantages of Chapter 13
Chapter 13 may be able to help a home owner save his or her home from foreclosure. It may also permit a person to lower his or her car payment by stretching the balance out over a longer term and reducing the interest. Stripping off an underwater second mortgage or equity line may be possible. Chapter 13 can stop interest on credit cards. Also a person can stop interest and penalties on overdue taxes as well as stop wage garnishments, even garnishments by the IRS. Further, a person can protect cosigners in a chapter 13.
How does Chapter 13 work?
Basically, you make a monthly payment to a chapter 13 trustee (assigned by the court) who in turn pays the your creditors according to the terms of the chapter 13 plan. Your attorney actually prepares the plan based on your income and expense situation. The court must approve the plan. Most chapter 13 plans last 3 to 5 years. The trustee keeps track of the payments and when the total payments that you has proposed to pay in your plan is completed, the trustee advises the Judge who gives you a “discharge” of any debts that were not repaid in the plan. Those unpaid amounts are forgiven and will never have to be repaid. Most people emerge debt free from Chapter 13 (except from long term mortgages on which payments continue for the term of the loan unless stripped off in the chapter 13).
What if the income you are relying on stops while you are in the chapter 13?
In that case you may be able to convert into chapter 7 to discharge your debts or if a new source of income is obtained the Chapter plan may need to be modified with a different payment amount based on your changed circumstances.
Which is better on my credit report
Both reflect a financial difficulty and cause a negative mark on any credit report, but Chapter 7 stays on a credit report for 10 years. Chapter 13, on the other hand, is normally maintained on a credit report for only 7 years as a policy adopted by the three major credit reporting agencies. So most people agree that Chapter 13 looks better because it is an attempt to repay as much of your debt as you are able.
Chapter 11 Bankruptcy: For Businesses
Although individuals can file a Chapter 11 bankruptcy, it’s usually used by businesses (e.g., corporations and partnerships) as a way to “stay afloat” despite going bankrupt. It’s a reorganization of the business that will allow the business to keep operating while creditors get paid.
Find Out More about Bankruptcy Options
There are many more details and provisions of bankruptcy law to discuss when you are considering the possibility of filing a bankruptcy in San Diego County. Contact our office for a private, no-commitment office consultation about bankruptcy.