Tag Archives: Chapter 13

Chapter 11 bankruptcy What do I need to know?

Recently on our bankruptcy forum a user asked, “I started a restaurant five years ago with a partner. Unfortunately, with competition and growing expenses we’re having trouble paying our bills. I need more information about filing Chapter 11 bankruptcy. I would love to keep the restaurant open, if possible.”

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Steps to avoid a filing a second bankruptcy

Recently on our legal forum a user asked, “I have filed bankruptcy in the past. I am sorry to say, however, that I seem to have gotten myself in another financial crisis. I don’t want to have to file a second bankruptcy, but I am at a loss as to my next steps. Do you have any advice for me to avoid filing bankruptcy a second time?”

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How do I stop a creditor lawsuit before it’s filed?

Recently on our legal forum a user asked, “I am in a bit of a bind. I got very sick and could not work. I had to stay in the hospital for several weeks without insurance. We scrapped together a bit of money but most of the charges ended up on our credit card. Now, the credit card company and hospital are threatening to file a creditor lawsuit against me. I still cannot work. What are my options?”

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What Happens to Your Credit Report During a Chapter 13?

Credit Scores

Credit Scores (Photo credit: Casey Serin)

With credit being so important in being able to rent, travel, or buy necessities like automobiles, your credit report is important to the average person even if that person has recently filed bankruptcy. So, what happens to your credit report during a Chapter 13 bankruptcy?

This question was recently asked by a blogger who was in the middle of a Chapter 13 plan. He wrote, “I filed Ch 13 in 2010. And I must say its the best thing that’s happened to me. I just checked my credit reports after all of that time and had a couple questions. What happens to the accounts/creditors that didn’t file a proof of claim with the attorney? Is there something I need to send to them? My fear is, even after the bankruptcy, I’d show owing them and they cause negative reporting on my reports. Any help appreciated!”

It doesn’t really matter what bankruptcy you file, you will be required to list all creditors you owe. Even in a Chapter 13, the creditors failing to file a claim to be a part of your pay back plan will have their debt discharged if they have been listed on the creditor’s list.

Technically speaking, the creditors who have discharged debts should not be allowed to report anything to the credit reporting agencies about the debt. The credit reporting agencies will be notified of the bankruptcy discharge and should place the information on the credit reports as such. There may or may not be any score ramifications on the report depending when the reports were first made. Your credit scores will not continue to take hits over the bankruptcy once the initial reports have been scored.

During a Chapter 13 plan, your credit score normally slowly increases as you pay your regular bills on time. The key words are on time. You should never be late on paying your bills if you want the credit scores to go up, and your bills should be paid in full each payment period.

If you do not trust the bankruptcy court and credit reporting systems to properly handle the credit reporting matters, you can always send a copy of your creditor lists from the bankruptcy court records that show where the creditor failed to file a claim, but they were included on the creditor’s list. Normally, the credit reporting agency will take it from there.

In the event this doesn’t work, and the creditor continues to file reports, you should have your bankruptcy lawyer notify the offending creditor of their mistake. These types of actions by creditors can appear to a bankruptcy court that they are actively trying to collect a debt against the automatic stay. A letter sent by your lawyer pointing the fact the creditor might be in violation of the automatic stay will usually correct the problem. Carbon copying the letter to the credit reporting agencies will also most likely help.

Theoretically, your credit score should slowly rise during a Chapter 13 plan, if you are paying your bills in full and on time. Should things be different, it is always good to consult with your bankruptcy attorney about such matters.


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Reverse Mortgage and Bankruptcy

As a larger percentage of the population closes in on retirement age, many are realizing the only significant asset they have for retirement is the equity in their home.  This means a reverse mortgage is becoming more common as a way to make ends meet.  But because of the increasing expenses associated with aging, such as higher insurance premiums and increasing costs of medical care, even those with a reverse mortgage may have to consider bankruptcy–whether it is  Chapter 7 or Chapter 13–to alleviate their situation.

What is a reverse mortgage?

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A reverse mortgage is a loan to a person who is 62 years old or older that is based on the equity in that person’s home.  The reverse mortgage loan may allow the person to access their home equity by receiving a lump sum, a monthly stream of payments, or a combination of both.  A reverse mortgage loan is structured such that the homeowner does not have to repay the money until one or more of the following happens:

  • The homeowner dies,
  • The homeowner sells the home,
  • The homeowner does not live in the home for one year, as they have moved into an assisted care facility or other location, or
  • The homeowner otherwise breaches the requirements of the loan, which are generally structured to ensure the home value is not impaired because of disrepair of the home or a failure to maintain insurance to protect against damage to the home.

In a reverse mortgage loan, the homeowner is not typically required to make any payment on an amount borrowed unless one of the above conditions occurs, as even interest on the amount borrowed is simply added to the amount of the loan owed.  This means that over time the balance due on a reverse mortgage grows, assuming the homeowner is not repaying the borrowed amount.

What happens to a reverse mortgage in bankruptcy?

If you have a reverse mortgage, you do still have the option of declaring either Chapter 7 or Chapter 13.  The reverse mortgage lien holder simply has a secured interest in your home as would be the case with a traditional mortgage or home equity line of credit.  This typically means that the reverse mortgage cannot be eliminated by the bankruptcy.

This means you as the homeowner need to consider several implications of reverse mortgages when declaring Chapter 7 or Chapter 13, including but not limited to the following:

Home Equity Amount

If you are attempting to keep your home after the bankruptcy, whether you can will depend in part on how much equity there is in your home.  The amount of equity you can protect in your primary residence in Chapter 7 varies from state to state.  If the equity in your home after considering the balance of the reverse mortgage is above the threshold for your state, then the bankruptcy trustee may attempt to liquidate your home in order to use that money to satisfy your creditors.

However, if you have little to no equity in your home, the bankruptcy trustee has no reason to liquidate your home, so will likely be able to keep it.

Reverse Mortgage Distributions

If you are receiving a monthly distribution from your reverse mortgage that you count on to cover living expenses, remember that the lien holder may cease sending you those payments during the bankruptcy.  How the lien holder will treat distributions during a bankruptcy will be based on the wording in your individual reverse mortgage agreement.  Likewise, being able to receive future distributions from your reverse mortgage after a bankruptcy may vary based on the wording of the agreement.

Should I seek legal counsel?

The information above is general in nature and should not be considered legal advice.  Therefore, if you have a reverse mortgage and you are considering filing Chapter 7 or Chapter 13, you should speak with a bankruptcy attorney.  A bankruptcy attorney will be able to evaluate your specific situation in light of the applicable bankruptcy laws, the wording of your reverse mortgage agreement, and the amount of home equity protected from bankruptcy in your state to give you a definitive answer on the impact declaring bankruptcy will have for you.

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Separation in marriage and declaring bankruptcy

How does a marriage separation affect your bankruptcy?

If you are separated and are considering bankruptcy, you should know that the separation definitely adds additional considerations to declaring Chapter 7 and Chapter 13 bankruptcy.

The first distinction that needs to be considered is whether your separation is legal.  People may claim that they are “separated” from their spouse just because they are no longer living together and are considering a divorce.  However, 45 states—all states except for Delaware, Florida, Georgia, Mississippi, and Pennsylvania—have a legal process by which they recognize separation of a couple in preparation for a divorce.  Separation can play a role as to whether you qualify for Chapter 7 bankruptcy.

Chapter 7 bankruptcy is often considered the most desirable form of bankruptcy, as it liquidates your assets that have value with the goal of repaying as many debts as is possible.  The remaining qualified debts that cannot be repaid through liquidation of your assets are forgiven entirely.  One debt that is not forgiven as a part of a Chapter 7 bankruptcy is a mortgage attached to a home, as this is considered a secured debt.  Therefore, in a Chapter 7 bankruptcy, the mortgage company will take your home to satisfy the mortgage, unless someone continues to make the mortgage payments.

For someone to file for Chapter 7 bankruptcy, they must pass what is known as the means test.  The means test is a measurement as to whether you have income available to pay for some of your debts (and therefore you should consider a Chapter 13 bankruptcy) or if you are in such a dire financial situation that you need the greater relief offered by Chapter 7 bankruptcy.  The means test uses your income, certain allowable expenses, and the average income for your family size in your state.  Therefore, since family size plays a role in qualifying for a Chapter 7 bankruptcy, it makes a difference as to whether you have a legal separation and are therefore an individual or are still considered part of a larger family.  Whether you have children or not and who is supporting the children also plays a role in calculating the means test.

Chapter 13 bankruptcy reorganizes many of your debts rather than simply eliminating them, allowing you to submit a payment plan based on your income to address your past due debts over up to a five-year period.  Some of your debt may be forgiven or re-valued in a Chapter 13 bankruptcy to allow you to make an affordable payment based on your income.  But as with Chapter 7, a Chapter 13 bankruptcy will not eliminate the mortgage on your home, since it is secured debt, and someone will need to continue to make the mortgage payment in order to keep the home.

Since a mortgage is still secured by your home under either a Chapter 7 or Chapter 13 bankruptcy, and regardless of whether you are legally separated from your spouse or not, if you want to keep your home, someone has to continue to make the mortgage payments.  That can be either you or your spouse (or both of you).

If you declare bankruptcy and the mortgage is in the name of both you and your spouse, then the mortgage company will still seek payment of the mortgage from your spouse; your bankruptcy will not protect your spouse from being pursued to make the mortgage payment.  If the mortgage payments are not made, then the mortgage company will foreclose on the home, which will appear on the credit report of all people who are on the mortgage.

Please remember that the information above is general in nature and may not consider all facets of your individual situation.  Therefore, you should speak with a bankruptcy attorney who is familiar with the bankruptcy laws of your state and legal separation to determine what options you have available.

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How will filing bankruptcy affect my spouse?

If you are considering filing bankruptcy and you are married, you should know that you do not both have to file bankruptcy.  One or both of you may file bankruptcy, depending on the nature of the debt issues you are attempting to address through the bankruptcy.  The information that follows applies whether you are filing a Chapter 7 or a Chapter 13 bankruptcy, except where specifically noted.

If you file a bankruptcy and your spouse does not, the bankruptcy will have the following impact.

Filing process

In general, only the individuals who are filing the bankruptcy have to supply information related to the filing.  Therefore, if you file individually, your spouse’s information does not have to be supplied.

One exception to this is the means test used to determine if someone qualifies for a Chapter 7 bankruptcy.  Even if only an individual is filing for a Chapter 7 bankruptcy, the income of both the individual and the spouse is used in calculating the means test.

Debts.

The impact bankruptcy has on debt will depend on if it is individual or joint debt.  Joint debt is:

– Debt that was obtained because both spouses applied for the debt, or

– Any debt that was obtained by one spouse after the marriage while living in a community property state.

Common examples of joint debt between two people are a home or credit card where both spouses applied for the loan or a tax return that was filed jointly.

With a Chapter 7 bankruptcy, the bankruptcy will only discharge the debts of the person filing the bankruptcy, not the debts of the filer’s spouse.  If a debt is held jointly by the filer and the filer’s spouse, the creditor may still be able to pursue the spouse for payment of the debt.

With a Chapter 13 bankruptcy, if the filer submits a plan that will address all of the joint debt, the creditor cannot pursue the spouse for payment of the debt during the restructuring payment period (which generally runs for up to five years).

Assets.

As with debt, the impact bankruptcy has on an asset will depend on if it is an individual or a joint asset.  A joint asset is:

– An asset that was obtained because both spouses applied for the debt used to obtain the asset, or

– Most assets that were obtained by one spouse after the marriage while living in a community property state.

Common examples of a joint asset are a home where both spouses applied for the loan or a joint checking account.  Examples of separate property include property owned by one individual before marriage, property gifted to or inherited by only one spouse, or recoveries from personal injury to one spouse.

The assets of the individual will be reviewed and possibly liquidated in order to satisfy debts as a part of a bankruptcy proceeding.  In addition, if the filer has joint assets with a spouse, such as a bank account or a home, the entire asset can be liquidated by the bankruptcy court in order to satisfy the creditors of the individual, even if only the individual is filing bankruptcy, depending on the laws of the state where you live.

Credit.

The bankruptcy will appear on the filer’s credit report and the filer’s credit score will be impacted.  The spouse’s credit score should not from a legal standpoint reflect the bankruptcy if the bankruptcy is only for individual debt.  However, if the bankruptcy is for joint debt, the bankruptcy will be noted on the spouse’s credit report as well.

It is not unheard of for the credit bureaus to inadvertently report an individual bankruptcy on the credit report of the spouse as well.  Therefore, even when only an individual is filing for bankruptcy, it is wise for the spouse to review their credit report with all three credit reporting agencies to confirm the bankruptcy is not reflected there as well.

After the bankruptcy, also know that while the filer’s spouse’s credit may not be directly impacted, if credit is applied for jointly, the credit score of both spouse’s will be considered in determining if the application is approved.

Keep in mind that the information above is general in nature.  You should speak with a bankruptcy attorney who is familiar with the laws of your state to confirm the information above applies to your specific situation.

In addition, remember that creditors may not always follow the law when it comes to collecting debt.  Creditors can attempt to convince a spouse that the spouse is liable for a debt even if the spouse is not legally liable.  Therefore, it is important to work with a bankruptcy attorney to fully understand the rights and obligations of you and your spouse when only you as an individual are filing bankruptcy.

Steps to file Chapter 13 Bankruptcy?

Chapter 13 Bankruptcy or wage earners’ plan allows individuals with a regular income to create a 3 to 5 year bankruptcy repayment plan to repay all or part of their debts. The laws governing Chapter 13 bankruptcy can be found in Chapter 13 of the bankruptcy code also know as Title 11 of the United States code.

Chapter 13 Bankruptcy is available to all U.S. citizens; however, certain eligibility requirements must be met. A debtor’s outstanding unsecured debts must be less than $307,675 and secured debts must be less than $922,975. Credit counseling must also be completed within 180 days prior to filing Chapter 13 Bankruptcy.

Filing Chapter 13 Bankruptcy

The first step in the Chapter 13 Bankruptcy process is to file the petition in the bankruptcy court services the area where the debtor lives. In addition to the bankruptcy petition, the debtor must also file the following schedules:

  1. Schedules of assets and liabilities
  2. Schedule of current income and expenditures
  3. Schedule of executory contracts and unexpired leases
  4. Statement of financial affairs
  5. Certificate of credit counseling
  6. Debt repayment plan
  7. Payment from employers received 60 days before filing
  8. Information about the debtor’s monthly net income and any anticipated increase in income or expenses after filing
  9. Information concerning any interest the debtor has in federal or state qualified education or tuition accounts
  10. Copies of the debtor’s tax returns for the most recent tax years and the tax returns filed during the case must be given to the trustee.

Information that should be gathered to file Chapter 13 Bankruptcy

One of the most time consuming aspects of filing Chapter 13 Bankruptcy will be gathering all of the information and paperwork necessary to complete the petition and the bankruptcy schedules. To complete the bankruptcy paperwork (petition, statement of financial affairs, and schedules) the debtor must gather the following information:

1. Information about the debtor’s income, including the source and frequency of payment
2. A list of the debtor’s creditors, including the nature of the debt and the payment amount
3. Detailed list of the debtor’s property
4. Detailed list of the debtor’s monthly expenses. This can include their utility costs, taxes, transportation costs, medical costs, clothing expenses and food.

Spouses filing individually must also provide this information about their spouses. The income and expenses of the non-filing spouse is required so the bankruptcy court, the trustee and creditors can evaluate the household’s current financial situation.

The Automatic Stay

After the debtor files the Chapter 13 Bankruptcy petition the court initiates an automatic stay which will stop most collection actions. Under some conditions the stay may only be temporary.

During the automatic stay creditors cannot continue lawsuits, wage garnishments, repossessions, bank account levies or phone calls. The automatic stay may also stop a home foreclosure, allowing the debtor time to make past-due payments current.  The debtor must continue to make regular mortgage payments or the home may be eventually lost.

Hiring a Bankruptcy Lawyer

Although it is possible to file for Chapter 13 Bankruptcy without the assistance of a bankruptcy lawyer, most debtors will find it helpful to consult with a lawyer to ensure they are making the right decision.