After many years of filing, I’ve compiled the most often asked questions by clients and potential clients. I hope these are helpful to you. These are not meant to be legal advice, just general information, so please contact me if you have more questions!
Q: What is the difference between Chapter 7 and Chapter 13 bankruptcy?
A: Chapter 7 bankruptcy, also known as ‘liquidation’ bankruptcy, is a roughly 4 month process where you discharge your unsecured debts such as credit cards, medical bills, cash advance debts and deficiency balances on repossessed vehicles. In some cases you can discharge tax debts, and very rarely, student loan debt. You have to qualify for a Chapter 7: your income has to be low enough, not just for the 6 months prior to filing, but going forward. Also, if you have assets, which can include but is not limited to money in a bank account, personal injury lawsuit awards, a lot of equity in your house, you could lose them by filing. Chapter 7 is on your credit report for 10 (ten) years, and it’s terrible for your credit, but after filing your debt to income ratio should improve markedly since your debt will be gone.
Chapter 13, also known as the ‘wage earner’s’ bankruptcy, is a type of reorganization of your debt. You would file this if you do not qualify for a Chapter 7, your income is too high or you have assets you want to protect. Some people may qualify for Chapter 7 but may want to file chapter 13 to stop student loan garnishments, get caught up on house or car payments, or handle tax debt. In most Chapter 13 cases, unsecured creditors are not paid 100%. Chapter 13 cases are on your credit for 7 years.
Q: How is a Chapter 13 plan payment determined?
A: The general calculation for a Chapter 13 plan payment that pays just unsecured creditors is net income minus reasonable, actual and necessary expenses. However, if a house or car payment is included, that payment can be different. There are a lot of different ways Chapter 13 payments are calculated, and it just depends on what’s included.
Q: How do Chapter 7 fees work?
A: In general, fees must be paid up front. For a Chapter 7 case, the cost is $950 total, which includes attorney fees and court costs, with $615 due prior to filing.
Q: How do Chapter 13 fees work?
A: It’s complicated! At Sweeney Law Offices, your attorney fees are almost always included in your monthly payment. There are two ways to be paid:
- Straight hourly, so we bill from the time we spend on the case for the entire case.
- Flat fee at confirmation of the case, then hourly for the remainder of the case.
We do not take attorney fees up front in most of our cases, only the filing fee, which is $310.
Q: Will attorney fees affect my monthly payment?
A: In some cases yes, in some cases no. If you’re paying zero to unsecured creditors and paying for a mortgage and car payment through the plan, attorney fees will be ‘stacked’ on top of those. If you’re paying a percentage to unsecured creditors less than 100%, in most of those cases the attorney fees come out of what unsecured creditors would receive. So if your payment is $300 per month and that would pay unsecured creditors 25 cents on the dollar, attorney fees may reduce what the creditor receives. In other words, in that type of case, your payment is not affected by attorney fees, but creditors feel the pain.
A: Yes! The filing of either bankruptcy case will stop a garnishment, but not immediately. Here’s why. If a garnishment is in effect, we have to send notice to the attorney who filed the lawsuit against you. That attorney will then have to send an administrative stay to your local district court to stop the garnishment, then that court has to mail the garnishment to your employer. The entire process can take up to 4 weeks but (a) you’ll receive all the money back that was taken after filing and (b) if more than $600 was taken within 90 days of filing, you’ll get those funds back as well!
Q: Can I keep my car if you file bankruptcy?
A: It depends. If you’re behind on your car payment and you file a Chapter 7, you may lose the car eventually to repossession unless you can get current. If you’re behind on your car and you file a Chapter 13, you can generally get it caught up in your bankruptcy case.
Q: How do I pay less for my vehicle than I owe? How do a do a ‘cram down’?
A: If you purchased (not leased) your car over 910 days ago, and it’s worth less than you owe based on the clean retail valuation at www.nada.com, you can set up a plan to pay 100% of the value in a Chapter 13, and a percentage of the remainder, which then becomes unsecured. If your plan pays less than 100% to unsecured creditors, this can provide a substantial savings to you!
Q: This sounds amazing! How do I get started to determine if I qualify?
A: We can set up a meeting, but the fastest way to get started is to email me the following documents as a secure/encrypted PDF :
- Tax returns for the past 2 years.
- Proof of income from all sources for the past 6 months measured from the last full month (so if it’s October, you would send April 1 to Sept 30.
- A free credit report from annualcreditreport.com from a PC or laptop.
Q: I filed a bankruptcy and it was dismissed. Can I file another one?
A: Yes you can, but you may not qualify for an ‘automatic stay’ – or the legal protections of bankruptcy, unless your financial situations has improved. If you file a Chapter 13 after one case was dismissed within a year prior to filing, you’ll have an automatic stay for 30 days, but if more than 1 case was filed in the past year, there is no automatic stay. A motion must be filed in both situations to make sure that you have an automatic stay – that’s the ‘force field’ or wall that protects you from creditor collections!
Q: I filed a Chapter 7 in the past. Can I file another Chapter 7 or 13?
A: You can file a Chapter 13 at any time AFTER a Chapter 7 has been discharged or dismissed. However, if you file a Chapter 13 within 4 years of the filing of a Chapter 7, your unsecured debts won’t be discharged. In that case, you can wait for 4 years or file a case for protection now, then file another Chapter 13 once the 4 years has passed. You can file another Chapter 7 once 8 years has passed since the filing of your Chapter 7. So
Q: Can I buy a house after filing bankruptcy?
A: You can generally buy a house or refinance 2 years after a Chapter 7 discharge, and one year after Chapter 13 plan confirmation, so long as your payments have been current for at least 12 months. These guidelines are subject to change, so check with a loan officer for the most up to date information!
Q: Can Chapter 13 save my house from foreclosure?
A: Absolutely. The question is whether you can afford the payments. Generally, if you were current today and could make the payments with more than enough money to pay for your ongoing expenses each month, you can afford the payment plan. Your monthly Chapter 13 payment will include your ongoing monthly mortgage payment, what you’re behind divided by 36 to 60 (depending on how long the case goes), trustee and attorney fees, and recent tax debt, if any. If you cannot afford to pay anything more, your unsecured creditors will usually be paid 0%. That’s right – most Chapter 13 cases can entirely eliminate unsecured debt.
Q: Can I pay my Chapter 13 case off early?
A: You can, but you might not want to do that. In cases where you’re paying less than 100% to unsecured creditors, paying your case off early means that you would have to pay all of your debt back. If you’re paying 100% already and you earn additional income, you may want to do this, but you should speak to me first!
Q: How do student loans work in bankruptcy?
A: In most cases they are NOT discharged, but let’s take a look at how they work in each type of case. In Chapter 7, student loans aren’t paid anything, but they cannot collect against you until your case is discharged. You can then make arrangements to pay them. In extremely rare cases, you can file a separate (and often expensive) lawsuit for a ‘hardship discharge’ from your student loans, but it’s a steep climb to show that you cannot pay them back! In Chapter 13, your student loans cannot collect against you, but they do accrue interest to the extent they aren’t paid. In most cases they are lumped in with other unsecured creditors, and receive a pro-rata share of whatever percentage you are paying into the case. For example, if your unsecured creditors are getting $100 per month, and your student loans are 80% of your unsecured debt, they will receive $80 per month out of that $100. Depending on how much you’re paying each month, this can result in negative amortization for your student loans – in other words, the amount you owe increases as your case goes on. For some people this can be a problem so we may want to do everything we can to pay more into your case. For others, who will never see the day that their loans are paid in full (for example, someone in their 60s with a five-figure student loan debt), a higher balance does not make a difference – they just want the relief that a bankruptcy can bring.