NEW BANKRUPTCY LAWS TOOK EFFECT OCTOBER 17, 2005 WHICH REQUIRE
CREDIT COUNSELING, INCREASE THE TIME DEBTORS MUST WAIT BETWEEN
FILINGS, AND SUBJECT DEBTORS TO A “MEANS TEST” TO SEE IF THEY QUALIFY
FOR A CHAPTER 7 CASE.
FILING BANKRUPTCY
There are four types of bankruptcy: Chapter 7; Chapter 11; Chapter 12; and Chapter 13. Businesses file
Chapter 11 bankruptcies to reorganize their assets and pay their creditors over time. Farm families file Chapter 12
or 13 bankruptcies if they plan to keep farming. The object of any bankruptcy is to protect income and assets, and
discharge (prohibit collection of) debts. I do not file Chapter 11 or 12 and have very little information available
on these topics. There is also a Chapter 128 proceeding; a state court Adebtor amortization,@ which requires all
debts included be paid in full in three years. That is similar to a 100% Chapter 13, but secured creditors (e.g.
mortgages and car loans) and taxes cannot be included without their consent. I represent debtors in Chapter 128s.
WHAT IS A CHAPTER 7 BANKRUPTCY?
A Chapter 7 bankruptcy can be filed by individuals on their personal consumer debts or by individuals or
businesses on debts incurred by them while operating a business. The debtor files a petition with the Bankruptcy
Court, listing all debts and all property. Consumer debtors keep property that is exempt under state or federal
bankruptcy laws. Most people have no non-exempt assets, so the debtor keeps all her/his property. If a debtor has
assets worth more than the law allows them to keep, the court may sell some of them to pay her/his creditors. A
discharge occurs about three months after the case is filed.
New AMeans Test@@ for Chapter 7. People with incomes over the state Amedian@ income for the household
($42,800 for one person; $57,600 for two people, $67,100 for three, etc.), may be denied a Chapter 7 discharge if
their Anet monthly income@ after deducting specified expenses is over a certain amount They can file a Chapter 13
and discharge some of their debts, however. You can try out the test at www.means-test-calculator.com.
WHAT IS A CHAPTER 13 BANKRUPTCY?
Under Chapter 13, the debtor arranges to pay part or all of her/his debts over a period of time under the
protection of the court. She/He must pay 100% of secured debts (if retaining the house/car), tax debts less than
three years old, and support debts, but may pay as little as 1% on other debts. The main requirements are that:
1)
The debtor's plan must pay all of her/his disposable income to the trustee for distribution to creditors.
Disposable income is defined as current income minus current living expenses. In order to file a Chapter
13, you must have some disposable income.
2)
The debtor's plan must last at least three years; unless it proposes to pay debts in full, and can last no
more than five years.
3)
The debtor's payments must be sufficient to pay the claims that must be paid in full (secured car loan,
mortgage arrears, taxes and support owed to parent or child) in a reasonable time (three to five years)
with interest on secured claims.
Someone may elect to file a Chapter 13 rather than a Chapter 7 for a variety of reasons. Debtors with
income in excess of the AMeans Test (see above)@@ and more than $100 in monthly disposable income or able
to pay 25% of unsecured debt (after deducting living expenses and payments on secured and priority
debts) per month will have to file under Chapter 13 to obtain any discharge. Other reasons people file
Chapter 13 include to: catch up on secured debts such as mortgages or car loans, avoid foreclosure or having the
vehicle repossessed; having a co-signer to protect, or having filed Chapter 7 bankruptcy within the last eight
years. The discharge occurs after plan payments are complete.
EXEMPT PROPERTY (You get to keep!) In Wisconsin, you may elect to use either the state or federal
exemptions (must have lived in the state for two years to utilize the state exemptions). Most people use the
federal exemptions, which allow the debtor to protect and thus keep:
Equity in your home up to $20,200 (debtor must live there); State exemption is $40,000.00;
Disability benefits and retirement or 401K benefits and plans necessary for future support;
Personal property, including clothing, appliances, and furnishings up to a total of 10,775;
Jewelry to $1,350;
One motor vehicle up to $3,225 in value (minus any loans);
Tools of the trade up to $2,025;
A wild-card exemption of $1,075.00 to cover any property not listed above, as well as an
additional wild-card exemption of up to $10,125 of unused homestead exemption.
If you are filing a joint petition with your spouse, the exemptions can be doubled. This is true
whether you use the state or federal exemptions (except for state homestead exemption, which is $40,000.00).
TAX FILING/REPORTING and SUPPORT PAYMENTS All debtors will have to provide copies of last
year's tax returns or transcripts to the Trustee, and Chapter 13 debtors must keep current on support obligations
during the Chapter 13.
REPEAT FILING LIMITS There are also limitations on how often you can file. You can only file a Chapter 7
once every eight years; you can file Chapter 13 more often, even if you've filed a Chapter 7 within the past eight
years (you will only get a discharge if it has been four years since filing Chapter 7 or two years between
Chapter 13 filings). Generally, you should not consider filing unless you are several thousand dollars in debt.
ALL OF YOUR DEBTS MUST BE LISTED ON WHATEVER BANKRUPTCY YOU FILE, including
debts to family members and friends. You can repay any of the debts you wish after the bankruptcy is concluded,
however.
There is a $274 court filing fee for a Chapter 13 and a $299 court filing fee for a Chapter 7. The
fee may be waived if the debtor's income is below 150% of the federal poverty line ($14,355 for one person).
CREDIT COUNSELING AGENCIES AND FINANCIAL MANAGEMENT COURSE
All Chapter 7 and 13 debtors will have to certify that they have had a credit counseling briefing before
filing, and complete financial education courses prior to getting a discharge. Local agencies approved to provide
the pre-filing briefing and pre-discharge financial education course are Greenpath in Madison (in person, via
internet and phone: (866) 648-8117 or www.greenpathbk.com, Cricket Debt Counseling offers internet
counseling (www.cricketdebt.com) and phone counseling ((866) 719-0400, and InCharge Education Foundation
offers internet (www.PersonalFinanceEducation.com) and phone counseling (866) 729-0049 . They charge
between $30.00 to $50.00 for the certificates, but the fee may be waived if you cannot afford it.
CREDIT REPORTS A bankruptcy can be listed on your credit report for 10 years from the date of filing,
as can judgments against you. Most other information must be removed after 7 years pursuant to the Fair Credit
Reporting Act. Consumer advocates recommend checking your credit report at least once or twice per year. You can
obtain one free report from each of the three national agencies each year. Order your free annual credit report online
at www.annualcreditreport.com, or by calling 877-322-8228. If you are not eligible for the free report, call
TransUnion at (800-888-4213) or go to their website; www.transunion.com. Credit reporting agencies are regulated
by the Federal Trade Commission, and must investigate and correct any errors you bring to their attention.
WHAT HAPPENS TO MY DEBTS WHEN I FILE BANKRUPTCY?
What happens when you file bankruptcy depends on the type of debts and the type of bankruptcy you file.
Medical/Hospital Bills:
These are dischargeable under either Chapter 7 or Chapter 13. However, if you continue to go to the
same medical providers, you may be asked to pay copays or other costs insurance won=t cover at the time of each
visit.
Charge Cards:
Generally all credit card charges are dischargeable under either chapter. If many large charges, cash
advances or balance transfers (e.g. more than $750 within 70 days prior to filing) are made shortly before filing,
the creditor may bring a fraud complaint to keep that debt from being discharged.
Utility/Phone Bills:
These are dischargeable under either chapter. However, you may be asked to pay a deposit and will have
to pay any reconnection charges if service has been suspended. Generally the deposit is the total of your two
highest consecutive months' service and therefore may be a substantial amount.
Student Loans:
Student loans are dischargeable only if you can demonstrate that repayment would be an undue hardship
through an adversary proceeding. These are difficult to discharge and you must have exhausted all other options
(e.g. income-contingent consolidation program or William Ford program through the U.S. Dept. of Education)
first.
Child Support and Alimony:
Filing bankruptcy has no effect on child support or alimony obligations. In a Chapter 13 you will have to
pay arrearages owed to a parent in full over the length of your plan.
Taxes:
In general, tax debts are not dischargeable under bankruptcy and you will continue to be obligated to pay
them, unless the return was due over three years ago and the return was filed on time.
If you file a Chapter 7, you will have to work out an installment agreement or offer in compromise with
the taxing authority on the recent taxes. If you file a Chapter 13, you may pay them over time, must pay the full
amount of recent taxes owed, but without additional penalties and interest.
Co-signed or Joint Debts:
Debts which are co-signed or guaranteed by another person, or which are jointly held with
another person, must be paid in full or creditors can seek payment from the other party. In Chapter 13, you can
pay the debt in full or in part through the plan to fully or partially protect the other debtor.
Uninsured Accident:
You may avoid liability for damages from an uninsured accident and keep your driver's license by filing
bankruptcy. If you file after your license has been suspended, you will have to pay a reinstatement fee and provide
proof of insurance (SR-22 form). If you were under the influence of alcohol or drugs, you will still owe the debt
if you caused death or personal injury.
Secured Debt - Real Estate:
It is possible to file bankruptcy and keep your home. You will have to continue paying the mortgage
payments though. If your equity (value minus mortgages) does not exceed $40,000, and you are current with your
payments, Chapter 7 will work well, depending on your other debts. Other circumstances (e.g. foreclosure,
delinquent property taxes) are usually best dealt with by filing a Chapter 13 to cure the arrears.
Foreclosure-Mortgage Modifications
Increasingly, homeowners are having difficulty making mortgage payments and may discover that their
homes are no longer worth what is owed on the mortgage(s). There are mortgage modification programs to
reduce your mortgage payments to allow you to keep your home, even if you are behind on payments. You can
find out more at www.makinghomeaffordable.gov or by calling Greenpath Debt Solutions which is the local HUDcertified housing counseling agency (888) 776-6735. The general idea is that your first mortgage payment and
insurance, property taxes and condominium association dues should not exceed 31% of your gross income. Since
the U.S. Senate chose not to pass the Helping Homeowners Keep Their Homes in Bankruptcy Act earlier this year
to permit bankruptcy judges to modify mortgages (e.g. reduce the balance to what the house is worth), the only
option through bankruptcy is to catch up the arrears through Chapter 13 or stall for time to get a mortgage
modification. Foreclosure on owner-occupied property in Wisconsin takes at least seven to eight months from
when you are served with court papers; usually longer. You can remain in the house during that time without
making payments, but may be responsible for utilities and condo association dues.
Secured Debt - Automobile:
It is possible to file bankruptcy and keep your car, even if you are still paying on it. If you are current
with your payments, you can reaffirm the debt in Chapter 7, continue making the payments and keep the car. You
may also surrender the car to the creditor and owe nothing. If you are behind in payments, you may still be able to
keep the car. Under a Chapter 13, you can pay the loan (if purchased in last 2.5 years) or car's current market
value through the plan over three to five years (plus interest). There is also a redemption option for cars that are
newer (six years old or less) with mileage under 100,000 miles that may reduce your payments in Chapter 7.
Other concerns; Recent payments to creditors:
If you paid more than $600.00 to any creditor in the 90 days before filing, or to a friend or
relative/creditor in the year before filing, the bankruptcy Trustee may recover that money from them in Chapter 7.
This is called a “preference,” and may be a reason to file under Chapter 13 (to protect the recipient).
COLLECTION REGULATIONS Federal and state laws regulate collection agencies (The federal Fair Debt
Collection Practices Act) and creditors (Wisconsin Consumer Act). You can notify a collection agency to cease
communications or that you refuse to pay (write a letter), and they cannot contact you except to let you know that
they are going to take specific action to collect. Collection agencies should not contact you at work, if they know it
is prohibited. Creditors collecting their own debts are subject to some, though not as many, regulations under
state law. In general, no collection agency or creditor can call you at unreasonable hours or with unreasonable
frequency, or notify your employer or relatives that you owe a debt, use obscene or harassing language, simulate
legal process or threaten to do what cannot be done (e.g. garnish social security payments or unemployment
compensation) legally. If you are sued for a debt you can still stop the case by filing bankruptcy, and discharge a
judgment, but don’t delay, or your wages (if sufficient) may be garnished or your car repossessed by the bank
holding the loan)!! 8/09