Bankruptcy

The process of deciding whether to file a bankruptcy proceeding often is very difficult indeed. Nobody wants to file bankruptcy, whether it be under Chapter 7 or Chapter 13 of the Bankruptcy Code. A bankruptcy may have adverse credit effects and there can be other undesirable ramifications. Well then, why should someone take this important step? The answer to that question, in my opinion, is that you should file only after considering the various possible alternatives. If none of these alternatives is feasible or practical for you, then filing a bankruptcy petition may be the most responsible step to take.

Warning Signs. In assessing whether or not you should seek some kind of debt relief, consider the following questions:

Do you ever use one form of credit, such as a credit card or debt consolidation loan, to make payments on other debt?
Have you taken one or more cash advances greater than $500 in the past few months to pay living expenses?
Do you ever borrow to meet regular expenses, such as food and utility bills?
Can you barely make the minimum required payment on credit cards or other debts?
Are you receiving calls or letters from creditors or collection agencies?
Are you being sued, or are your creditors threatening to sue you?
Are your wages being garnished, or are your creditors threatening a garnishment?
Are your financial problems impacting your health or relationships?
Do you owe two months salary or more on your credit cards?
Are you using one-quarter or more of your take-home income to pay credit card bills and personal loans (excluding mortgage payments)?
Are your revolving credit cards charged to the limit?
Have you bounced more than one check in the past year?
Are you without cash reserves?
Are you behind on house or auto payments?
Are your creditors threatening to take your car, house, or other property?
Are you behind on your taxes or do you owe the IRS?

If you answered 'yes' to one or more of the preceding questions, you should consider seeking some form of debt relief. Bankruptcy, of course, offers very effective debt relief, but there are possible alternatives to filing bankruptcy, such as consumer credit counseling or negotiating with a single lender for reduced payments. If you are unsure about bankruptcy, you should investigate all your options.

Filing Bankruptcy

Of course, often it is not possible to satisfactorily negotiate a settlement with your creditors. Perhaps your credit card debt or other unsecured debt is overwhelming, with no reasonable prospect of ever paying it back. In this situation, the most responsible step to take for you and your family may be to obtain a financial "fresh start" through a Chapter 7 Bankruptcy. Or, if your mortgage company has started a foreclosure of your home or your vehicle has been seized, the possibility of working this out with your creditor is very slim. In this case, you will have to file a Chapter 13 Bankruptcy to save your property.

Should I File Under Chapter 7 or Chapter 13?

You must ultimately decide for yourself whether filing bankruptcy is the proper action to take, and if so, which Chapter is better for you. Some of the factors to consider are as follows:

If you are not making more money than you need for your current living expenses (you have no disposable income), Chapter 13 is not a realistic option.
Chapter 7 has the advantage of wiping the slate clean and enabling you to embark on your "fresh start" immediately. With Chapter 13 you will be making payments for three to five years.
If you have a particular asset that you want to keep and that is valued above the allowable exemption then Chapter 13 may be the only alternative. For example, if you own a house with significantly more than $25,000.00 in equity and you don't want to lose it, Chapter 7 probably will not work.
If you are trying to ward off a repossession or a foreclosure, Chapter 7 will not help you, and you will need to file a Chapter 13.
If your debts are primarily consumer debts, and if your budget reveals that after filing bankruptcy your income substantially exceeds your expenses, it is possible that the United States Trustee could file a motion to dismiss the Chapter 7 case for "substantial abuse." In such a case Chapter 13 may be the better alternative.

Bankruptcy Reform

Dismissal of a Chapter 7 Case for Abuse. Under the former law, only the US Trustee's office or the court can seek dismissal of a Chapter 7 case for "substantial abuse," and there was a presumption that the case should not be dismissed

The new law expands this to provide "any party in interest" may file such a motion for "abuse." A presumption is created that the case should be dismissed if the debtor fails the "means test" and has income above the median income in his or her state. The "means test" is a complicated test designed to determine whether someone has enough income after expenses, some of which cannot be over a certain amount, to pay off a significant amount of debt over five years. Debtors who have enough excess income will fail the test, and if they have filed under Chapter 7, their filings would be presumed to be an "abuse." This presumption, however, will apply only if the debtor's current monthly income is above the median income in his or her state. Even so, the bill requires that all the information and calculations involved in the test be submitted in every case filed under Chapter 7, regardless of the debtor's income. The information and calculations will also have to be submitted when filing for Chapter 13 if the debtor's income is above the state median. Contact our office to find the most recent State Median Income Amounts

Tax Returns are Required. Under former law, there was no particular rule regarding filing of tax returns as a condition of filing a bankruptcy petition.

The new law changes this to provide that a debtor who files under any chapter must submit to the trustee his or her tax return, or a transcript of it, for the most recent year in which they filed or should have filed one. They also must submit to the trustee copies of tax returns that they file with the IRS during the time that the bankruptcy case is pending. In order to be able to confirm a plan in Chapter 13, debtors must have filed tax returns with the IRS (if required to do so by nonbankruptcy law) during the four taxable years before filing for bankruptcy.

Credit Counseling Is Required. In the past there, was no formal requirement that a debtor participate in any credit counseling before filing a bankruptcy petition.

The new law requires that individual debtors within 180 days before filing under any chapter must receive credit counseling consisting of "an individual or group briefing (including a briefing conducted by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted that individual in performing a related budget analysis." Also, after filing for bankruptcy, in order to get a discharge, a debtor must "complete an instructional course concerning personal financial management" from an approved credit counselor.

Stricter Exemption Requirements. An item of property which is exempt is protected from seizure or administration by a bankruptcy trustee. Under the former law, a debtor was entitled to use the exemptions which were applicable in the state in which he or she had been domiciled within the 180 day period immediately before filing, or, if the debtor had lived in more than one state during that period of time, the state in which he or she resided in for the greatest period of time.

Under the new law, for a state's exemptions to apply, the debtor must have lived there for two years immediately prior to filing for bankruptcy. If the debtor did not live in any single state for those two years, the debtor must use the exemptions of the state where he or she lived during the six months (or the majority of that time) just before the two-year period.

New Rules for Luxury Items and Cash Advances. Under former law, there was a presumption that a credit car or similar debt was not dischargeable if within 60 days of the filing of the petition charges were made for "luxury goods or services" for more than $1,125 or cash advances were made for the same amount.

Under the new law, this is tightened considerably. A debt would be presumed nondischargeable if it was for luxury goods costing $250 or more and was incurred within 90 days before filing for bankruptcy, or if it was for cash advances of $750 or more obtained within 70 days of filing.

IRAs Protected. This may be the single provision that may offer more protection to the debtor than under the former law applicable in Texas. Under the law, IRAs would be exempt. This would apply even if the debtor is otherwise using state law exemptions (which is the case in Texas). The exemption would be capped at $1 million as to amounts that are not "attributable to rollover contributions" from various types of retirement plans listed in the bill.

Evictions Aren't Stayed. Under the new law, an eviction can not be stayed (stopped) in bankruptcy.

Stricter Limits On Repeat Filings. Under current law, debtors cannot file a Chapter 7 if they have received a discharge in a previous Chapter 7 case which was filed within six years or a Chapter 13 case in which less than 70% of unsecured debts were paid. There is no restriction from using Chapter 13. After obtaining a discharge under any chapter, debtors would be barred from using Chapter 7 for eight years, and Chapter 13 for five years. The bill would also restrict the granting of an automatic stay if the debtor has already had a stay, and the case was dismissed, within the past year. A hearing would be required, and the debtor would have to overcome a presumption.

Divorce Settlements are Nondischargeable in Chapter 7. Under the new law, property settlements in divorce can no longer be discharged in Chapter 7. In the past, they could be discharged if the debtor meets a "balancing of the hardships" test in the Code.
Support Obligations Have Higher Priority. Under former law, alimony and support debts were priority claims (paid before other, lower ranked claims) but were ranked seventh in the Code.

Under the new law, alimony and support claims have the highest priority - ahead even of administrative expenses, including trustee's fees. Many experts believe that in Chapter 7 cases, this will simply cause trustees to abandon any assets unless there would be enough proceeds from a sale to cover all the alimony and support debts and the expenses of selling the assets. As a result, spouses and children will probably receive less than they would under the old law.

Whatever the situation that you are struggling with, I hope that the information in my website will be helpful to you. If you wish to discuss your situation with me, I would be pleased to do so.