- What is the difference between Chapter 7 Bankruptcy, Chapter 11 Bankruptcy, and Chapter 13 Bankruptcy?
- How soon can I purchase a home after a bankruptcy?
- Which debts are dischargeable?
- Which debts are not dischargeable?
- Will I be able to keep my property (e.g., car, house, etc.) if I file bankruptcy?
- How long does it take to get my debts discharged?
- How will the new bankruptcy law affect my ability to obtain a discharge?
- Will my creditors be able to keep calling me?
- How long do I have to wait to file for bankruptcy if I have filed before?
- How long will a bankruptcy remain on my credit?
- What happens to my secured debt?
- What is the creditors’ meeting?
- What other options do I have besides bankruptcy?
- How much will it cost?
- How can I rebuild my credit after filing for bankruptcy?
- Will I have to go to court?
- Is bankruptcy the “right” or moral thing to do? What does the Bible say about bankruptcy?
What is the difference between Chapter 7, Chapter 11, and Chapter 13?
Chapter 7 bankruptcy is generally used by individuals who have an income that is below the median income for their state, and have minimal, if any, assets. Under Chapter 7, burdensome debt can be erased usually within 3 ½ months and the debtor can keep his assets if they are below the amount allowed in his/her jurisdiction (called exemptions). If an individual files for Chapter 7 with assets above those allowed, the bankruptcy trustee will liquidate those additional assets to pay off as much of the debt as possible before discharging the balance.
Chapter 11 bankruptcy is generally used by businesses in order to reorganize the business.
Chapter 13 bankruptcy is generally used by individuals who have a regular source of income above the income amount allowed under Chapter 7 (median income) and assets above the amount allowed (exemption), but are still unable to pay their bills on a timely basis. A chapter 13 bankruptcy allows such an individual to repay all or most of his/her total debts on an extended schedule (3-5 years). Generally, the debts that are not paid off during that period are discharged at the end of the 5 years if payments are kept up during the plan.
There are also Chapter 9 bankruptcies and Chapter 12 bankruptcies for municipalities and family farmers respectively.
How soon can I purchase a home after a bankruptcy?
You can get financing for the purchase of a home as soon as 1 day after a Chapter 13 discharge and even while you are in a Chapter 13 bankruptcy. If you give yourself a year or two after discharge to rebuild your credit score and increase your savings, you will be in an even better position to get a lower rate. The goal is to take advantage of the fresh start that you gain from a bankruptcy including building equity from home ownership rather than renting.
Which debts are dischargeable?
If the bankruptcy court grants a discharge in your Chapter 7 case, you are no longer legally obligated to pay most debts such as:
- credit card balances
- deficiencies on auto repossessions
- medical bills
- and personal loans.
In order for debts to be discharged, they must exist on the date the bankruptcy case was filed and be properly listed in the bankruptcy.
In addition, creditors are prohibited from attempted to collect a debt that has been discharge. Therefore, creditors cannot contact the debtor by mail, phone, or otherwise, file or continue a lawsuit, or attach wages or other property. However, creditors may have the right to enforce valid liens, such as mortgages and security interests in automobiles, which means that the creditor can take back the secured property if you do not reaffirm and redeem the debt, or if the lien is not avoided.
Which debts are not dischargeable?
Even if the bankruptcy courts grants a discharge in your Chapter 7 case, you are still legally obligated to pay some debts such as:
- most taxes;
- debts incurred to pay nondischargeable taxes;
- domestic support obligations;
- most student loans;
- most fines, penalties, forfeitures, or criminal restitution obligations;
- debts for personal injuries or death caused by the debtor’s operation of a motor vehicle, vessel, or aircraft while intoxicated;
- debts owed to certain pension, profit sharing, stock bonus, other retirement plans, or for certain types of loans from the Thrift Savings Plan for Federal employees;
- debts the bankruptcy court has specifically decided are not discharged
- debts that have been reaffirmed
Will I be able to keep my property (e.g., car, house, etc.) if I file bankruptcy?
Yes and no. There are certain types and amounts of property that you are allowed to keep in a Chapter 7 bankruptcy depending on the state in which you file.
In Maryland , you are allowed to keep $12,000 worth of personal property (of the types specified below), plus some other types of property. Some of the Maryland exemptions, subject to some restrictions are:
- Crime victims’ compensation awards
- Fraternal benefit society benefits
- $5,000 worth of tools of trade/professio
- Miscellaneous benefits, such as sickness, accident, injury, death, etc.
- Professional prescribed health aids
- $1,000 worth of family clothes, furnishings, books, and pets (valued at replacement value, which is the price a store would charge for the property of that kind considering the age and condition of the property)
- $6,000 worth of property or cash back from attachment
- $5,000 worth of personal property
- subject to certain restrictions, $23,675 in equity in a primary residence
- Child support payable pursuant to court order or agreement, and some alimony
- Pension and retirement
- Public assistance
- Unemployment compensation
- Some wages
- Workers’ compensation
- Partnership property
In the District of Columbia , you can use the Federal exemptions or the DC exemptions. The DC exemptions , with some restrictions, allow you to keep:
- Motor vehicle valued up to $2,575
- Any item valued up to $425 or $8,625 worth of household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments
- Property valued up to $850 in value, plus up to $8,075 of any unused amount of the exemption provided for real estate
- $1,625 worth of implements, professional books, or tools of the trade
- Any unmatured life insurance contract, other than a credit life insurance contract
- Professionally prescribed health aids
- The debtor’s right to receive: a social security, veteran’s, disability, illness, or unemployment benefit alimony, support, or separate maintenance; and a payment under a stock bonus, pension, profit-sharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, unless: the plan or contract was established by or under the auspices of an insider that employed the debtor at the time the debtor’s rights under the plan or contract arose; the payment is on account of age or length of service; and the plan or contract does not qualify under sections 401(a) or 403(b) of the Internal Revenue Code of 1986
- $400 worth of family pictures and family library
- Money or other assets payable to a participant or beneficiary from a retirement plan qualified under section 401(a), 403(a), 403(b), 408, 408A, 414(d), or 414(e) of the Internal Revenue Code of 1986
- The interest of an alternate payee in a plan described in the prior item
- Provisions for 3 months support;
- $300 worth of the library, office furniture, and implements of a professional person or artist
- The debtor’s aggregate interest in real property used as the residence of the debtor or in a burial plot for the debtor or dependent of the debtor
- Unmatured life insurance;
- $300 worth of non-head of household clothes
- Public assistance; unemployment compensation; 75% of wages or 30 times minimum wage; notary’s official seal and documents; DC judges’ retirement; earnings not otherwise exempt; teacher’s retirement and disability benefits; group life policies or proceeds; worker’s compensation; partnership property; condominium escrow funds; cemetery lots held by cemetery association; $50 worth of holdings of a member of a coop association; $200 worth of non-head of household mechanics’ tools; non-head of household earnings; uninsured motorist compensation benefits; Taxicab Sinking Fund
The Federal exemptions allow you to keep:
- Up to $23,675 in real property or personal property used as a residence or a burial plot;
- Up to $3,775 in value for one motor vehicle;
- Up to $600 in value in any particular item or $12,625 in aggregate value, in household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments, that are held primarily for the personal, family, or household use;
- Up to $1,600 in jewelry;
- Up to $1,250 in value for any property, plus up to $11,850 of any unused amount of the exemption provided for the real property exemption;
- Up to $2,375 in implements, professional books, or tools, of the trade;
- Any unmatured life insurance contract owned by the debtor, other than a credit life insurance contract;
- Up to $12,625 less any amount of property of the estate transferred in the manner specified in Sec. 542(d), in any accrued dividend or interest under, or loan value of, any unmatured life insurance contract owned by the debtor under which the insured is the debtor or an individual of whom the debtor is a dependent.
- Professionally prescribed health aids for the debtor or a dependent of the debtor.
- The debtor’s right to receive a social security benefit, unemployment compensation, or a local public assistance benefit; a veterans’ benefit; a disability, illness, or unemployment benefit; alimony, support, or separate maintenance, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor; a payment under a stock bonus, pension, profit sharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor, unless—
- such plan or contract was established by or under the auspices of an insider that employed the debtor at the time the debtor’s rights under such plan or contract arose;
- such payment is on account of age or length of service;
- such plan or contract does not qualify under section 401(a), 403(a), 403(b), or 408 of the IRC of 1986
- The debtor’s right to receive, or property that is traceable to:
- an award under a crime victim’s reparation law;
- a payment on account of the wrongful death of an individual of whom the debtor was a dependent;
- a payment under a life insurance contract that insured the life of an individual of whom the debtor was a dependent on the date of such individual’s death;
- a payment, not to exceed $23,675 on account of personal bodily injury, not including pain and suffering or compensation for actual pecuniary loss, of the debtor or an individual of whom the debtor is a dependent; or
- a payment in compensation of loss of future earnings of the debtor or an individual of whom the debtor is or was a dependent
- Retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.
How long does it take to get my debts discharged?
In a Chapter 7 bankruptcy, dischargeable debts are generally discharged in approximately 3 months.
In a Chapter 13 bankruptcy, debts are generally discharged after completion of payment plan, which takes approximately 3-5 years.
How will the new bankruptcy law affect my ability to obtain a discharge?
The latest bankruptcy law prevents debtors who make above a certain income level and have a disposable income greater than approximately $175 (the means test ) from filing for Chapter 7 bankruptcy. These debtors must file under Chapter 13 instead.
The new law also requires that debtors take a credit counseling course prior to filing bankruptcy and a financial management course prior to receiving a discharge. There are also increased attorney responsibilities, higher filing fees, and increased documentation requirements.
Will my creditors be able to keep calling me?
Once you have filed for bankruptcy, an automatic stay is put in place by the bankruptcy court, which means that your creditors are not allowed to contact you. Specifically, creditors are prohibited from contacting debtors by telephone, mail, or otherwise demanding repayment; taking actions to collect money or obtain property from the debtor; repossessing the debtor’s property; starting or continuing lawsuits or foreclosures; or garnishing or deducting from the debtor’s wages.
Creditors can petition to court to lift a stay for special circumstances, such as if the creditor has a secured lien on the debtor’s property, e.g., a vehicle or house.
How long do I have to wait to file for bankruptcy if I have filed before?
You cannot file for Chapter 7 bankruptcy until after 8 years from the filing date of a prior Chapter 7 or 11 discharge. A Maryland chapter 7 lawyer can better explain which dates matter.
You cannot file for Chapter 13 bankruptcy until after 4 years from the discharge of a prior Chapter 7, 11, or 12 case or until after 2 years from the discharge of a prior Chapter 13 case.
What happens to my secured debt?
Once you filed for bankruptcy, an automatic stay (stop) is placed on further collection activity by your creditors. However, creditors can petition to court to lift a stay for special circumstances, such as if the creditor has a secured lien on the debtor’s property, e.g., a vehicle or house. Creditors may be given the right to enforce valid liens, such as mortgages and security interests in automobiles, which means that the creditor can take back the secured property if you do not reaffirm and redeem the debt, or if the lien is not avoided.
What is the creditors’ meeting?
The creditors’ meeting (also called the 341 meeting) is generally scheduled 30 days after the filing of a bankruptcy petition. The debtor (including both spouses in a joint case) must attend the meeting and is questioned under oath by creditors and the trustee assigned to the case by the bankruptcy court. Creditors are not required to attend the meeting and often do not attend.
What other options do I have besides bankruptcy?
You can contact your creditors and try to negotiate lower interest rates, a reduction in penalties, and/or reduced or delayed monthly payments. You can do this yourself or you can contact a debt consolidation company to negotiate for you. In addition, if you have equity in your home, you may qualify for a home equity loan to consolidate your debt and/or pay off high interest credit cards and other loans. If you have a lump sum, we can potentially negotiate debt settlements with your creditors.
How much will it cost?
The Maryland bankruptcy attorney’s fees for an individual Chapter 7 bankruptcy case start at $1600. The filing fee required by the bankruptcy court is $335 for Chapter 7 and $310 for Chapter 13.
How can I rebuild my credit after filing for bankruptcy?
Some of the most important ways to improve your credit are paying your outstanding bills on time and not living beyond your means. If you cannot afford to pay cash for something you want to buy, it is likely that you cannot afford it; therefore, you should not buy it. Keep this in mind when you are tempted to use a credit card to pay for consumable items such as food from restaurants, clothing, electronics equipment, etc. The best way to acquire these consumables is to save the money to purchase them in cash – this gives you time and the perspective to know whether you really need the item or not. Your credit will slowly improve over time as you pay your bills on time and keep your credit to a necessary minimum. Also, keep in mind that some debt is good. For example, student loans and a mortgage represent debts that improve your overall lifestyle by creating additional career opportunities (student loans) and providing a means to accumulate equity (mortgages). One of the fastest way to improve your credit score after the bankruptcy is to get a SMALL credit card and use it once a month for a NOMINAL purchase like getting gas once a month. Let the bill arrive, so that you are in a billing cycle, and then PAY THE BILL ON TIME. Keep doing this over and over each month. The responsible use of a high-risk debt like a credit card will increase your score in about a 1 year.
Will I have to go to court?
In a Chapter 7 bankruptcy case, you generally would not have to appear in a courtroom. Debtors are required to attend a creditors’ meeting at the Trustee’s office, during which the Trustee and creditors can ask the debtor questions regarding their finances.
In a Chapter 13 bankruptcy case, there is a plan confirmation hearing that is also required.
Is bankruptcy the “right” or moral thing to do? What does the Bible say about bankruptcy?
Deuteronomy 15: 1-6. The Year for Canceling Debts.
1. At the end of every seven years you must cancel debts.
2. This is how it is to be done: Every creditor shall cancel the loan he has made to his fellow Israelite. He shall not require payment from his fellow Israelite or brother, because the LORD’s time for canceling debts has been proclaimed.
3. You may require payment from a foreigner, but you must cancel any debt your brother owes you.
4. However, there should be no poor among you, for in the land the LORD your God is giving you to possess as your inheritance, he will richly bless you,
5. if only you fully obey the LORD your God and are careful to follow all these commands I am giving you today.
6. For the LORD your God will bless you as he has promised, and you will lend to many nations but will borrow from none. You will rule over many nations but none will rule over you. New International Version.
The above are some of the most frequently asked questions about bankruptcy, but it probably does not answer all of your questions. That is what we are here for. Please contact our Maryland bankruptcy attorney with any additional questions you may have.