BANKRUPTCY FAQ’S

The Orwellian titled Bankruptcy Reform and Consumer Protection Act of 2005 has imposed certain eligibility requirements for debtors seeking Chapter 7 relief. Your eligibility is determined by the means test. The means test looks at your gross income for the past 6 months prior to filing. If your income is below the median, then you are eligible for Chapter 7. If your income is above the median, then you must complete the means test. The means test deducts various expenditures from your gross income to determine your “disposable monthly income”. If your disposable monthly income is more than $166.66 or is more than $100 and this amount would repay at least 25% of your unsecured creditors, you will be ineligible for Chapter 7 without showing special circumstances.

In California the median incomes effective 11/1/2011 are as follows:

• Household Size 1 – $47,683 Annually, $3974 Monthly
• Household Size 2 – $61,539 Annually, $5128 Monthly
• Household Size 3 – $66,050 Annually, $5504 Monthly
• Household Size 4 – $74,806 Annually, $6234 Monthly

When a Chapter 7 Bankruptcy petition is filed an “automatic stay” which prohibits any further collection efforts is imposed upon all creditors. This will stop collection agencies from calling you and will stay any court proceeding to collect money from you. There are certain exceptions to the automatic stay including criminal actions, actions to enforce or modify a domestic support order and IRS Tax Audits.

Further, a secured creditor may motion the court to lift the automatic stay if the debtor has no equity in the asset or if the secured creditor is not “adequately protected”. The automatic stay in Chapter 7 remains in place until it is lifted by the court, the debtor is discharged or the property is no longer part of the estate. If a creditor violates the automatic stay, said creditor may be sanctioned by the Bankruptcy Court.

In California the median incomes effective 11/1/2011 are as follows:

• Household Size 1 – $47,683 Annually, $3974 Monthly
• Household Size 2 – $61,539 Annually, $5128 Monthly
• Household Size 3 – $66,050 Annually, $5504 Monthly
• Household Size 4 – $74,806 Annually, $6234 Monthly

California and Federal law have various exemptions which will allow you to retain a good amount of your property after the conclusion of your Chapter 7 case. California allows a debtor to retain up to $23,250 of miscellaneous property (“wild card” exemption), which for many debtors encompasses everything they own.

If you own your home, California will allow you to keep up to $75,000 in equity if you are single and $100,000 in equity if you are married. If you select the California homestead exemption as authorized, you will not be able to use the wild card exemption for other property. If your equity exceeds the exemptible amounts, Chapter 13 may be a better option for you if you wish to retain your home. Additionally, most pension plans, private retirement plans and IRAs are exempt in their entirety. For a complete summary of California exemption rules click here.

Chapter 13 Bankruptcy is officially titled “Readjustment of Debts for Individuals with Regular Income”. Chapter 13 debtor’s are usually individuals who are either ineligible for Chapter 7 because of the means test, have received a Chapter 7 discharge within the last 8 years prior to the petition or have non-exempt assets they desire to retain. A Chapter 13 debtor must be an individual with regular income and with unsecured debts less than $360,475 and secured debts less than $1,081,400.

A Chapter 13 debtor enters into a payment plan over which he or she pays back a portion of his or her debts. After completing the plan, the Debtor is discharged from any remaining liability with some exceptions including amounts acquired by fraud, student loans, and domestic support obligations. In a Chapter 13 plan, all priority creditors unless consenting otherwise must be paid in full.

A debtor can use a Chapter 13 plan to pay back arrerages on a home mortgage while retaining ownership of the home. Likewise a debtor can use a Chapter 13 plan to pay back arrearages on a vehicle (or any other secured debt) while retaining ownership of it. The arrearage payment will be in addition to the debtor’s regular monthly payment.

This depends on several factors. First, general unsecured creditors must receive an amount equal to or greater than the amount they would receive under hypothetical Chapter 7 liquidation. For example, a Chapter 13 debtor with $25,000 in non-exempt assets, must pay the creditors at least $25,000 in present value terms over the duration of the plan. Second, the debtor must commit all of his or her disposable income to the plan for the duration of the plan.

Disposable income is computed in a similar manner to method used to determine Chapter 7 eligibility. There are other requirements such as that the plan must be presented in good faith and, as mentioned previously, that all priority creditors must be paid in full.

No. The U. S. Bankruptcy Law specifically prohibits discrimination based upon a debtor filing for protection under the bankruptcy laws.

If you want to keep your vehicle, it will be necessary for you to continue making the monthly payments. In a Chapter 7, you have the right to return the vehicle to the finance company if you do not want to keep your car.

The bankruptcy will be the first step in re-establishing your credit. Typically, the debtor’s credit is ruined, or about to be ruined, at the time the debtor seeks legal advice. The Chapter 7 bankruptcy will discharge all outstanding debt and the credit reports will reflect that the outstanding debt is reduced to $0.00. The average debtor is typically able to re-establish good credit within 18 to 30 months.