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The Decision to File
Bankruptcy is not necessarily a personal, emotional decision, but rather a financial decision based on your amount of debt, your income, and your present ability to repay debts.
When the expected time period for the repayment of creditors, in full, exceeds the time it would take to rebuild credit, bankruptcy should be given serious consideration. A good bankruptcy attorney or lawyer could help out with this process. Instead of struggling with minimum payments for months or years and ending up in the same place you are today, you can use that time to rebuild credit and save money for the future.
If you are in a situation in which you have accumulated more debt than you will be able to repay in the foreseeable future, then you probably will benefit greatly from filing bankruptcy and securing a debt-free fresh start.
By filing bankruptcy with qualified attorneys, you give yourself a chance to rebuild and re-establish credit and staying in line with the law. Many people get too caught up in worrying about how they’re going to incur future debt, when the focus should be on the best way to deal with the debt they have now.
Your Property- When you file bankruptcy, your property becomes subject to administration by the bankruptcy court, referred to as your “bankruptcy estate.” However, because something is part of the bankruptcy estate does not mean you will have to give up this property. Our attorneys at Gold, Lange & Majoros, can help. The bankruptcy court’s representative, the “bankruptcy trustee” will not take from you any property which is “exempt.” For Michigan residents, the exemptions available in bankruptcy are quite generous.
Property recently given away to friends or family members is also considered property of the bankruptcy estate. People considering bankruptcy often are tempted to simply give their property away, or pay ‘favorite’ creditors to avoid going into bankruptcy with property. This technique is rarely a smart idea. Property given away shortly before filing may still be part of your bankruptcy estate, and the trustee has legal authority to recover the property. If you have already given property away, the property still needs to be listed on the bankruptcy. It is always better to deal with asset problems straightforwardly, than to hide or attempt to hide assets in bankruptcy.
Retirement accounts are often not even considered part of the bankruptcy estate. Property outside the bankruptcy estate is not subject to administration by the bankruptcy trustee. The bankruptcy court recognizes that you will someday need this money to survive, and therefore it is protected for your future retirement needs.
Exemption Information– Michigan law provides generous exemptions to both homeowners, and non-homeowners. “Exempt” property is property that the bankruptcy court protects for you. The bankruptcy trustee may not administer, or sell, exempt property. It is property which you keep, after your case is completed. The application of exemptions to property can vary greatly between cases, but certain generalizations can be made to give you an idea of what to expect. Even if you have assets that exceed the exemption limit, other options are available for you.
Homeowners Information- To claim an exemption on property, you or a dependant of yours, must live in the house as a principle residence.
Additional Exemption Information- In addition to the homestead exemptions, there are also separate exemptions for other types of property. A list of property that can qualify as exempt includes: a car, furniture, clothing, government benefits, jewelry, hobby equipment, tools used on the job, earnings on deposit, qualified retirement plans, health aids, and much more.
The Discharge- The bankruptcy discharge is very powerful; it is the legal basis for your fresh start. Once the bankruptcy court is satisfied that you have made a full disclosure of your financial affairs, a discharge will be issued relieving you of the responsibility to pay all qualified debts. The discharge comes in the mail from the bankruptcy court approximately 90 days after your meeting with the trustee. The issuance of the discharge generally concludes your bankruptcy case and begins your new post-bankruptcy liberation from debt.
Types of Bankruptcy
Chapter 7 Overview
Chapter 7 is the most common type of bankruptcy, it is sometimes referred to as “liquidation bankruptcy,” or “straight bankruptcy.” The basic purpose of chapter 7 is to provide you with a fresh start by wiping out all qualifying debts including credit cards, medical bills, repossession deficiencies, law suits as well as a variety of other debts. In chapter 7 there is no repayment required for most unsecured debts, your debts are wiped out completely and permanently. The entire process usually takes less than 4 months to complete. After the bankruptcy is over, the consumer may choose to selectively pay back debts, such as debts to family members, however repayment is not legally required.
The Chapter 7 Process
In chapter 7 the typical consumer only has one meeting with the bankruptcy trustee. The purpose of the meeting is to give creditors a chance to ask questions, although it is very rare that a creditor shows up; it is mostly handled by attorneys. The trustee may also ask you questions about particular items on your petition usually focusing on assets or income. Most meetings take only a few minutes. Some consumers feel some level of anxiety or fear leading up to the meeting with the bankruptcy trustee, but there is no reason to fear the trustee. The trustee is looking for people who are hiding assets or trying to defraud the system; they don’t want to harass or scare the common consumer. The meeting will take place in an ordinary conference room. The trustee is not a judge and the setting is informal. Once the meeting with the trustee is done, the only thing left to do is keep your address current with the court, and wait for your discharge to come in the mail.
Chapter 13 Overview
Chapter 13 provides consumers with a way to consolidate debt under federal law and repay creditors all or a portion of what is owed over time. The idea behind chapter 13 is that the consumer makes sufficient income to pay all current living expenses (rent, food, car, utilities, etc.), but not enough to pay off all debts in full or comply with creditor’s demands. In chapter 13, living expenses are paid first, then whatever is left over goes into the consolidation plan. The plan is not based on what you owe (in most cases), it is based on your ability to repay creditors. The calculation of your plan payments involves many variables, but most importantly it is based on your income and expenses. Whatever is left at the end of the month goes into the plan, even if it only pays creditors pennies on the dollar. Chapter 13 can be particularly useful for consumers with assets over the exemption amounts, defaulted mortgages or other secured debts
The Chapter 13 Process
In chapter 13, you must submit a plan in which you set out a budget detailing your take-home pay and monthly living expenses. Any excess income is paid to the bankruptcy trustee who then distributes money to creditors on a pro-rata basis. The plan lasts for 36 to 60 months, unless your debts are fully repaid in a shorter period of time. At the end of the chapter 13 plan, any amounts still owing on your unsecured debts are forgiven.
- Mortgage Problems- Another benefit of chapter 13 specifically for homeowners is back mortgage payments can be put into the chapter 13 plan and paid off over the plan period, rather than all at once. So long as you can continue to make regular post-petition mortgage payments, the bank can’t foreclose on your house.
- Tax Debt Information- Typically government debts are not dischargeable, however there are great benefits to putting tax debt into a chapter 13 plan. Chapter 13 can freeze interest and penalties on some taxes. This gives you a chance to budget out a repayment plan in real dollars, and the payments you make go directly to reduce the principle. Most people trying to repay back taxes are fighting an uphill battle with interest and penalties working against them, but in chapter 13, you may get a break from the government and pay off just what you owe on the day you filed the case.
Chapter 11 Overview
Chapter 11 works for businesses similarly to chapter 13 for individuals. One of the main differences is the business owner or president becomes the trustee in a chapter 11 called the “debtor in possession.” This carries with it many responsibilities and duties to maintain the business for the benefit of creditors. Also, in chapter 11 the United States Trustee is intimately involved in the operation of the business until the case is complete. The bankruptcy court takes debtor in possession fiduciary responsibilities very seriously. Chapter 11 is a major commitment on the part of the business owner or president, and the attorney involved. The complexities of chapter 11 can be explored with any of our bankruptcy attorneys.
Who Can File for Chapter 7 Bankruptcy?
The “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.
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 what you actually spend.
- 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.
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, non priority 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.
For more information or for help in determining whether you satisfy the Means Test, contact our office to speak with an attorney.
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 discharge may be denied. These include:
- giving away your possessions to friends or relatives in order to hide them from your 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 that everything 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, your case will be dismissed and you may be prosecuted for fraud.
If you need Bankruptcy help in Michigan, please Contact Us today at 248-350-8220.