The following is an overview of some of the issues relating to consumer or small business Chapter 7 and Chapter 13 bankruptcies. It is solely for the purpose of giving the reader generalized information as to what most consumer bankruptcies are like and what is required of each individual filing bankruptcy.
If you are making an appointment for an initial consultation, please either complete or at least review the questionnaire which we use in our office to draft a debtor’s bankruptcy. While it is not necessary that it be completed before you come in, the more you complete the better our office can advise you regarding your personal financial situation. While I can readily provide you with answers to your questions about bankruptcy in general, specific questions about your individual situation cannot be answered without the information about you contained in the questionnaire. Complete our online questionnaire for a case evaluation, or you may pick up a copy of our questionnaire at the office or one can be mailed to you.
Chapter 7 vs Chapter 13
The purpose of a Chapter 7 bankruptcy is to eliminate or discharge debt which you owed prior to filing. Some debts are not discharged in a bankruptcy and you still owe them even after filing bankruptcy and receiving a discharge. Secured debts, such as mortgages or car payments, have to be paid even after the filing of a Chapter 7 if you intend to keep the property which secures the debt. Student loans are not discharged in bankruptcy unless a difficult hardship standard is satisfied and must be paid after the case is closed. (review Student Loan Information). Not every consumer qualifies for Chapter 7 bankruptcy. A Chapter 13 bankruptcy is essentially a supervised repayment plan; you make payments to a trustee who forwards them to your creditors in amounts specified in your Chapter 13 plan. A Chapter 13 plan requires you to pay your creditors all or a portion of their claims within 36 to 60 months under court supervision. Once the plan is completed, dischargeable debts are eliminated, even if you did not pay all your creditors in full. Chapter 13 bankruptcies are often filed instead of a Chapter 7 when you are behind on home loans or car payments, when you need to pay non-dischargeable debts such as taxes, child support or other domestic support obligations, or when you have a temporary debt problem and you need time for your income to improve or to sell assets to pay your debts. With the 2005 changes to the bankruptcy law, some debtors no longer qualify for Chapter 7 and must file a Chapter 13. Every situation is different and it can change over time, so please see an attorney before deciding whether to file a Chapter 7 or a Chapter 13. Chapter 7 bankruptcy may not be available if your debts are primarily consumer debts and the court finds that granting relief would be an abuse of the bankruptcy laws. The US Trustee’s office monitors bankruptcy cases where high income and excessive budgeted expenses suggest that a debtor could make substantial payments to the creditors through a Chapter 13 plan. In such a case, the US Trustee will file a motion to dismiss the bankruptcy and will usually give the Debtor an option to convert to a Chapter 13 proceeding.
In the great majority of the consumer bankruptcies, all or most of your property is protected by exemptions under state or federal law. In bankruptcy, you are allowed to keep exempt property. Exemptions in Oregon are governed, to a substantial degree, by state law. However, some federal laws protect assets or even exclude them from the bankruptcy estate. However, to use Oregon exemptions, you must have lived in the state for two years before the bankruptcy is filed. Under a Chapter 13 bankruptcy, you may be allowed to retain assets that are not exempt, such as equity in your home in excess of the $40,000 homestead exemption for an individual or $50,000 exemption for a married couple. Other important exemptions are an automobile to the value of $3,000 (for each debtor if a joint filing), child and spousal support, criminal restitution, personal injury settlements to the amount of $10,000, social security benefits, disability benefits, unemployment compensation, tools of the debtor’s trade to the value of $5,000, and qualified retirement plans. You can see a more detailed exemption list here.
For any type of bankruptcy you must file truthful and complete schedules of assets and liabilities, current income and expenses and a statement of financial affairs. There are no exceptions to this requirement. If you intentionally leave any requested information out of your documents you file with the court, you may lose your discharge of a specific debt or even be denied a discharge of any of your debts. Worse yet, you are subject to felony criminal prosecution. There is simply no valid reason to leave out any debt.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added some additional requirements for individual debtors. Before filing a petition in bankruptcy, an individual debtor must have completed an approved credit counseling briefing. It must have been completed within six months prior to the date of filing and a certificate of completion must be filed with the court. In order to get a discharge in a bankruptcy proceeding, it is also necessary for an individual to complete an approved financial management course. Again, a certificate proving completion must be file or the case could be closed without the entry of a discharge order.
The debtor in bankruptcy has new disclosure requirements and must make many types of financial information, including personal income tax returns, available to the trustee and any creditors who have properly requested a copy.
Types Of Debt
Certain types of debts are not dischargeable in bankruptcy. Recently due or ‘trust fund’ taxes, domestic support obligations (alimony, child support), and virtually all student loans are not dischargeable. These debts pass through the bankruptcy as if it had not occurred. People considering bankruptcy as an option should not make any attempt to determine for themselves which debts are dischargeable as even many taxes and other supposedly non-dischargeable debts are dischargeable under certain circumstances.
There are other types of debts which may only be discharged if the creditor to whom the debt is owed fails to commence litigation in order to determine the dischargeability of a debt. Debts incurred through fraud, embezzlement, theft or assault come under that heading. If a particular creditor holding such a claim files suit in the bankruptcy court within the time prescribed by the law, a trial will be held to determine whether or not the debt should be discharged. Student loans are never dischargeable unless a relatively extreme or ‘undue hardship’ is proven in trial by the person owing the student loan. Under Chapter 13, you may be able to discharge certain debts which would be non-dischargeable in Chapter 7. In many ways a Chapter 13 is more powerful than a Chapter 7.
A debt is ‘secure