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Chapter 7 Bankruptcy

Chapter 7 bankruptcy is also known as a liquidation bankruptcy or “discharge”.  Chapter 7 is designed to free the debtor of his unsecured consumer debt, and allow the debtor to decide whether to keep or dispose of secured debt.  It is typically referred as a “fresh start”.

Unsecured consumer debt is often credit card debt or personal loans.  The individual is typically relieved of these debts in Chapter 7 bankruptcy.

The debtor has the choice as to how to handle their secured debt.  Secured debt is debt that is tied to an asset, like a car loan. If the debtor chooses to keep the asset, then the debtor must reaffirm the debt.  When a debt is reaffirmed it is critically important that the debtor continue to make timely and consistent payments.  In the alternative, the debtor can surrender the asset and be entirely relieved of the associated debt.

Chapter 7 relieves the debtor of unsecured debt, and secured debt only if the associated asset is surrendered.  However, Chapter 7 will not remove liens against property.  So if a judgment has been secured against you, and you own real property, the lien against your property will remain.  Mechanics liens and certain types of tax liens also remain after Chapter 7.  The lien will not be removed by a Chapter 7 bankruptcy.

Can I keep my property if I file Chapter 7?

There are limits as to how much property a debtor can have and still be eligible to file Chapter 7.  In Maryland an individual can have up to $12,000 of assets.  If a couple is filing together, then the couple can have $24,000 of assets.  However, if you have a car and have a loan against the car (secured debt), the value of the car is determined by subtracting the loan from the value.  If you own a home, you can exempt up to $22,975 as a “homestead exemption.” Maryland also has a “wildcard” exemption that you can use to protect up to $6,000 in any property. You can combine the wildcard and homestead exemptions to protect up to $28,975 in your home.  There is also an exemption for “tools of the trade.”  So, if you own a landscaping business you will be able to keep your equipment.

What effect will Chapter 7 have on my credit score?

If you are going to file Chapter 7, your credit score is likely already low.  You can expect that the bankruptcy will remain part of your credit score for up to ten years.  However, you can begin to improve your credit score immediately after filing bankruptcy.  For example, if you reaffirmed your car loan, timely payments on secured debt will have a positive influence on your credit score.  The reduction in the amount of debt that you owe will also improve your credit score.

Who Is Eligible?:

Chapter 7 bankruptcy requires that you pass what is known as a “means test.”  The means test is a formula for determining if your income is low enough for you to qualify for Chapter 7.  The “means test” considers variables including income, reasonable and necessary expenses, the area of the country where the individual lives, etc.  If the test concludes that the individual’s income is less than a certain threshold, which is adjusted for by allowed expenses, then it is likely that the debtor will qualify for a Chapter 7.  While some sites give an approximation of a means test calculator, it is still best to meet with an attorney to avoid any errors.  Once you qualify, there are no restrictions or limits on the amount of debts you have, however there are some forms of debt that are not dischargeable.  These include outstanding child support payments, student loans, criminal fines, and tax debts that are less than three years old.

Advantages:

Are there debts that cannot be discharged?

In general, student loans are non-dischargeable debts.  Neither child support nor alimony debts are dischargeable.

Chapter 13 Bankruptcy

Chapter 13 is commonly referred to as a “reorganization”.  The debtor enters into a payment “plan” that is designed to pay a portion, or all of the individual’s debt.  A Chapter 13 may be preferable to a Chapter 7 in instances where the debtor wants to save their home from foreclosure.  If you have fallen behind on your mortgage payments, the mortgage arrears can be paid through the “plan”.  If the bank started foreclosure proceedings, and you file bankruptcy, the foreclosure will stop, and you will have an opportunity to work with the bank and save your house from foreclosure.

In some instances, there is a second mortgage against the house, and that mortgage is completely unsecured because the value of the house is less than the first mortgage.  In these instances, through a Chapter 13 Plan the second mortgage can be “stripped” off the house, and placed in the plan with your other unsecured debt.  The lender loses his secured status, and all of his rights to proceed against the house.

A Chapter 13 payment plan usually lasts between 3 to 5 years.  At the end of your plan, any pre-petition debt that has not been paid back will be discharged.

Who is Eligible?:

Chapter 13 requires that you use your regular income to pay the debts you owe, as opposed to liquidating secured property or assets, meaning that the first and primary requirement is that you are able to afford the payments required by Chapter 13.  This usually means a steady, reliable job with a more or less consistent paycheck.  Along with income restrictions, the courts also require that your secured debts amount to less than $1,149,525 with your unsecured debts amounting to less than $383,175.  If your debts are over those amounts, you will be unable to file for Chapter 13 bankruptcy.

Advantages:

Roles of the Trustee:

Once you begin your claim for Chapter 13 bankruptcy, you will be appointed a trustee who will oversee your case.  The roles and rights of the trustee are varied, but they include:

Choosing Between Chapter 7 and Chapter 13

It is important to note the differences between Chapter 7 and Chapter 13 bankruptcy before deciding which to use.  Chapter 13 reorganizes your debt, meaning you still pay what is owed, but over a period of time and through your regular income without giving up your assets.  Under Chapter 7, most qualified debts are waived after a liquidation of assets.  So for individuals who have a consistent income and who wish to keep their home or car, Chapter 13 may be the best option.  However Chapter 7 may be preferred for those who want to cut down significantly on their debt without the continued burden of monthly payments.  The choice largely depends on the details of your case, including the needs of yourself and your family. It is important that you do not make a decision like this without the input of an attorney.

Liens and Lien Avoidance

Contrary to what you may believe, filing for bankruptcy does not automatically erase all liens on your property. Whether or not you can avoid a lien depends primarily on what form of bankruptcy you are filing.

Liens in Chapter 7 Bankruptcy

When Filing for a Chapter 7 bankruptcy, you can remove liens if they prevent you from utilizing an exemption you are legally entitled to. The types of liens which can be removed are:

1. Judicial liens made via a judgment in court.
2. Liens made on assets such as household goods, clothing or trade tools up to $6,225.
Liens that you cannot remove in a Chapter 7 include:
1. Statutory liens, like those related to taxes.
2. Consensual liens, such as mortgages.

For liens that are dischargeable, it requires more than simply filing for bankruptcy to get rid of them. In order to challenge a lien, you must file a motion in bankruptcy court and obtain an order from a judge. This can be done by your attorney once you identify which liens you can discharge.

Liens in Chapter 13 Bankruptcy

Chapter 13 bankruptcy has two mechanisms which could affect property liens: a cramdown and lien stripping.
Cramdown:

A cramdown allows you to reduce both the principal balance and interest rate of a loan, helping you pay less towards those debts. The types of liens you can cram down include car loans, certain real estate loans, and personal property. Whether or not you will qualify depends on both the type of property you have and compliance with the time restrictions on filing.

Lien Stripping:

Lien stripping is a process which allows you to get rid of “wholly unsecured” liens attached to your property or what are known as “junior liens.” Stripping liens are often used for second mortgages when the value of the first mortgage exceeds the value of the property.
Contact an attorney to see what liens you can avoid when filing for bankruptcy. Your individual case will depend on the type of lien, the value of your property and any possible exceptions.

Credit Counseling

If you have been to see an attorney regarding a possible bankruptcy filing, you have likely been told to consult a counseling agency and arrange to take two separate online courses. The purpose of these classes is to help you find a solution to handling your debt outside of bankruptcy if possible. Your filing will not go forward without completing counseling, so it is an important, if little known, step in the process.

Requirements for Credit Counseling

To qualify for a Chapter 7 or Chapter 13 bankruptcy, you must receive counseling from an agency approved by the U.S. Trustee’s Office before and after you file for bankruptcy. You can find an agency or a course through your attorney, who will be able to provide you with a variety of options, or via the Trustee’s website.

The first counseling course must be completed within a 180-day period before you file bankruptcy. Your attorney will require proof that you took the course, along with any plans that the agency proposes. The second course must be complete within 60 days of filing a Chapter 7, or within 5 years of filing a Chapter 13.

Cost of Counseling

Credit counseling services will range from $10.00 to $50.00 per course. Your attorney can help you find the most affordable option in your area. They can be taken either on line or occasionally via telephone for individuals without reliable internet connection. If for any reason you cannot afford the fee, the counseling agency is required to provide a reduced rate based on your income level. However, most courses will be relatively low cost, and shouldn’t cause significant financial hardship.

There are exemptions to the counseling requirement, which require you to prove that:

1. You had to file for bankruptcy immediately, without taking the course due to something like a foreclosure.
2. You were unable to obtain counseling within five days after requesting it from a particular agency.
3. You have a physical disability that prevents you from completing the course.
4. You have a mental incapacity which prevents you from completing the course.
5. You are on active military duty.

If any of these apply, you may be able to waive the credit counseling requirement. But remember, it is an important and useful step, designed to help you manage your payments and find the debt repayment option which is best for you.

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