What is bankruptcy?

Bankruptcy is a way for people or businesses who owe more money than they can pay right now (a “debtor”) to either work out a plan to repay the money over time under Chapter 11, 12 or 13, or for most of the bills to be wiped out (“discharged”), as in a chapter 7 case. While the debtor is either working out the plan or the trustee is gathering the available assets to sell, the Bankruptcy Code provides that creditors must stop all collection efforts against the debtor. When the bankruptcy petition is filed, you are immediately protected from your creditors.

What is a joint petition?

A joint petition is the filing of a single petition by an individual and the individual’s spouse. Only people who are married on the filing date may file a joint petition. Unmarried persons, corporations and partnerships must each file a separate case. If you are an individual and have a business which is not a partnership, corporation, or business trust that is a registered entity in a state or foreign country, you should list the business as a “dba” (doing business as) on your petition. However, yours will not be considered a joint petition because the business is not an independently-recognized legal entity.

What is a bankruptcy trustee?

In all chapter 7, 12, 13 and in some chapter 11 cases, a case trustee is assigned by the court to administer the bankruptcy proceedings.

Who is the United States Trustee? What is the function of the U.S. Trustee?

The Office of the U.S. Trustee is an Executive Branch agency that is part of the Department of Justice. The U.S. Trustee is responsible for appointing trustees to administer bankruptcy cases and setting the First Meeting of Creditors (§341 Meetings) dates and times. The staff also monitors the bankruptcy cases to see if bankruptcy fraud has occurred. They are prohibited from providing legal advice.

What is a Creditor’s meeting (§341 meeting)? What can I expect to happen there?

Debtors have a duty to appear and testify under oath and to be questioned by the trustee at the §341(a) meeting. This meeting is presided over by the trustee assigned to the case and is held approximately 40 days after the new petition is filed. Failure to appear may result in dismissal of the case. If a continuance of the meeting date is sought, contact the trustee assigned to the case.

What is a discharge?

The discharge order is issued by the court and permanently prohibits creditors from taking action to collect dischargeable debts against the debtor personally. This does not prevent secured creditors from seizing collateral if payments are not kept up or other creditors from pursuing property of the estate. The following information is intended as a summary only. You are strongly encouraged to consult with an attorney in order to determine the rights and obligations that apply to your individual situation. Some debts are not dischargeable, and others may be found to be non-dischargeable depending on particular circumstances.

In a chapter 7 case, the bankruptcy court will order that the debtor be discharged of all dischargeable debts once the time for filing complaints objecting to discharge has expired unless:

a. the debtor is not an individual;
b. a complaint objecting to the debtor’s discharge has been filed; or
c. the debtor has filed a waiver of discharge.

In chapter 11 cases, the confirmation of a plan of reorganization discharges the debtor from dischargeable debts that arose before the date of the order of relief unless:

a. the plan or order confirming the plan provide otherwise; or
b. the plan is a liquidating plan and the debtor would be denied a discharge in a chapter 7 case under 11 United States Code § 727.

In chapter 12 and chapter 13 cases, the court will order that the debtor is discharged of dischargeable debts after the debtor has completed all payments under the plan, or prior to plan completion, after notice and hearing, if the requirements of 11 United States Code §§ 1228(b) or 1328(b) have been met.

The granting of a discharge does not automatically result in the closing of a case. All contested matters, adversary proceedings, and appeals must be resolved and the appointed trustee or debtor-in-possession must file a final report and account and request entry of a final decree before the Clerk’s Office will close the case.

What is a reaffirmation agreement?

A reaffirmation agreement is an agreement by which a bankruptcy debtor becomes legally obligated to pay all or a portion of an otherwise dischargeable debt. Such an agreement must generally be filed within sixty (60) days after the first date set for the meeting of creditors.

If the reaffirming debtor is represented by an attorney, the agreement is filed with an affidavit of the attorney which complies with 11 United States Code § 524(c)(3) and no hearing for approval of such an agreement is necessary. If the reaffirming debtor is not represented by an attorney, the court will schedule a hearing. You must appear in person at the hearing. The judge will ask questions to determine whether the reaffirmation agreement imposes an undue burden on you or your dependants and whether it is in your best interests. Since reaffirmed debts are not discharged, the bankruptcy court will normally only reaffirm secured debts where the collateral is important to your daily activities.

Reaffirmation agreements are strictly voluntary. They are not required by the Bankruptcy Code or other state or federal law.

What are claims? How are claims filed?

In the broadest sense, a claim is any right to payment held by a person or company against the debtor(s) and the debtor’s bankruptcy estate. A claim does not have to be a past due amount but can include an anticipated sum of money which will come due in the future. The written statement filed in a bankruptcy case setting forth a creditor’s claim is called a proof of claim. The proof of claim should include a copy of the obligation giving rise to the claim as well as evidence of the secured status of the debt if the debt is secured. Under the Federal Rules of Bankruptcy Procedure, with limited exceptions, claims filed by creditors, except governmental units, in chapter 7, 12 and 13 cases must be filed within ninety (90) days after the first date set for the meeting of creditors. Claims of governmental units must be filed within one hundred eighty (180) days of the date the petition was filed.

What can I do if a creditor keeps trying to collect money after I have filed bankruptcy?

If a creditor continues to attempt to collect a debt after the bankruptcy is filed in violation of the automatic stay, you should immediately notify the creditor in writing that you have filed bankruptcy. Provide them with either the case name, number, and filing date, or a copy of the petition that shows it was filed. If the creditor still continues to attempt to collect, the debtor may be entitled to take legal action against the creditor to obtain a specific order from the court prohibiting the creditor from taking further collection action, and if the creditor is willfully violating the automatic stay, the court can hold the creditor in contempt of court and punish the creditor by fine or incarceration. Any such legal action brought against the creditor will be complex and will normally require representation by a qualified bankruptcy attorney.

Who Can File for Chapter 7 Bankruptcy?

Learn about eligibility rules for Chapter 7 — including the new “means test.” Filing for Chapter 7 bankruptcy can be a powerful tool for dealing with overwhelming debt. But it isn’t available to everyone. Here are some situations in which you will not be allowed to file for Chapter 7.

You Can Afford a Chapter 13 Plan

Under the old bankruptcy rules, the bankruptcy judge had the power to dismiss a Chapter 7 case if he or she thought the debtor had sufficient disposable income to fund a Chapter 13 repayment plan. There were no hard and fast rules dictating when a judge should dismiss a case on these grounds — it depended on the facts of the case and the attitude of the judge.

Now that the new bankruptcy law has gone into effect, however, there are clear criteria that dictate who will be allowed to stay in Chapter 7 — and who will be forced to use Chapter 13, if they choose to file for bankruptcy. Disabled veterans whose debts were incurred during active duty and people whose debts come primarily from the operation of a business get a fast pass to Chapter 7. All others must meet the requirements set out below.

How High is Your Income?

Under the new rules, the first step in figuring out whether you can file for Chapter 7 is to measure your “current monthly income” against the median income for a family of your size in your state. Your “current monthly income” is not your income at the time you file, however: It is your average income over the last six months before you file. (You don’t have to include Social Security retirement and disability payments.) For many people, particularly those who are filing for bankruptcy because they recently lost a job, their “current monthly income” according to these rules will be much more than they take in each month by the time they file for bankruptcy. Once you’ve calculated your income, compare it to the median income for your state. (You can find median income tables, by state and family size, at the website of the United States Trustee, www.usdoj.gov/ust; click “Means Testing Information.”)

If your income is less than or equal to the median, you can file for Chapter 7. If it is more than the median, however, you must pass “the means test” — another requirement of the new law — in order to file for Chapter 7.

Can You Pass the Means Test?

The purpose of the means test is to figure out whether you have enough disposable income, after subtracting certain allowed expenses and required debt payments, to repay at least a portion of your unsecured debts over a five-year repayment period.

To find out whether you pass the means test, you start with your “current monthly income,” calculated as described above. From that amount, you subtract both of the following:

  • certain allowed expenses, in amounts set by the IRS. Generally, you cannot subtract what you actually spend for things like transportation, food, clothing, and so on; instead, you have to use the limits the IRS imposes, which may be lower than the cost of living in your area.
  • monthly payments you will have to make on secured and priority debts. Secured debts are those for which the creditor is entitled to seize property if you don’t pay (such as a mortgage or car loan); priority debts are obligations that the law deems to be so important that they are entitled to jump to the head of the repayment line. Typical priority debts include child support, alimony, tax debts, and wages owed to employees.

If your total monthly disposable income after subtracting these amounts is less than $100, you pass the means test, and will be allowed to file for Chapter 7. If your total remaining monthly disposable income is more than $166.66, you have flunked the means test, and will be prohibited from using Chapter 7, with one exception: If you can prove to the court that you’re facing special circumstances that aren’t reflected in the calculations above, and that effectively decrease your income or increase your expenses to bring your disposable income below the $166.66 figure, you will be allowed to use Chapter 7.

So what about those in the middle? They have to do some more math. If your remaining monthly disposable income is between $100 and $166.66, you must figure out whether what you have left over is enough to pay more than 25% of your unsecured, nonpriority debts (such as credit card bills, student loans, medical bills, and so on) over a five-year period. If so, you flunk the means test, and Chapter 7 won’t be available to you. (Again, if you are facing special circumstances that alter these figures, you may be able to convince the court to allow you to use Chapter 7.) If not, you pass the means test, and Chapter 7 remains an option.

You Previously Received a Bankruptcy Discharge

You cannot file for Chapter 7 bankruptcy if you obtained a discharge of your debts in a Chapter 7 case within the last eight years, or a Chapter 13 case within the last six years.

A Previous Bankruptcy Was Dismissed Within the Previous 180 Days

You cannot file for Chapter 7 bankruptcy if a previous Chapter 7 or Chapter 13 case was dismissed within the past 180 days because:

you violated a court order
the court ruled that your filing was fraudulent or constituted an abuse of the bankruptcy system, or
you requested the dismissal after a creditor asked for relief from the automatic stay.

You Defrauded Your Creditors

A bankruptcy court may dismiss your case if it thinks you have tried to cheat your creditors or concealed assets so you can keep them for yourself. Certain activities are red flags to the courts and trustees. If you have engaged in any of them during the past year, your bankruptcy case may be dismissed. These no-nos include:

unloading assets to your friends or relatives to hide them from creditors or from the bankruptcy court
running up debts for luxury items when you were clearly broke and had no way to pay them off
concealing property or money from your spouse during a divorce proceeding, or

lying about your income or debts on a credit application.

In addition, you must sign your bankruptcy papers under “penalty of perjury” swearing thateverything in them is true. If you deliberately fail to disclose property, omit material information about your financial affairs, or use a false Social Security number (to hide your identity as a prior filer), and the court discovers your action, your case will be dismissed and you may be prosecuted for fraud.