Personal Bankruptcy FAQs
PERSONAL BANKRUPTCY QUESTIONS
- What type of bankruptcy are individuals eligible for and what are the requirements of each?
- What are consumer debts and why are they important in personal bankruptcy cases?
- What is the "means test" for chapter 7 and why is it important?
- Will I lose all of my property if I file bankruptcy?
- Will all my debt get discharged (wiped out) in bankruptcy?
- What are the stages in an individual consumer chapter 7 case?
- How does chapter 13 work?
- What are the benefits of chapter 13 & why file chapter 13 instead of chapter 7?
- Why do I need an attorney to file bankruptcy? Can't I represent myself?
- Why do I need an attorney to file bankruptcy? Can't I just hire a paralegal for a lot less money?
- How much should it cost to hire an attorney to file bankruptcy?
PERSONAL BANKRUPTCY QUESTIONS
Individuals are eligible to file bankruptcy under chapter 7, 11, 12 or 13.
Chapter 7 -- Liquidation -- provides for the liquidation of a debtor's assets by a trustee to raise cash to pay off creditors' claims. The stages in a chapter 7 case are discussed below. Individual consumer debtors are subject to eligibility requirements, discussed below. Spouses can file a joint-case. The 2005 Amendments to the Bankruptcy Case have increased the complexity of individual consumer chapter 7 cases (discussed further below).
Chapter 11 - Reorganization - provides for reorganization of a debtor under a reorganization plan that is voted on by the debtor's creditors. Chapter 11 is typically not suitable for individual or consumer debtors unless they have a high net worth or high income. The stages in a chapter 11 case are discussed below.
Chapter 12 - Family Farmer or Fisherman Debt Adjustment - provides for adjustment of debts of a family farmer or fisherman with regular income and subject to certain debt caps.
Chapter 13 - Wage Earner Debt Adjustment - provides for adjustment of debts of an individual with regular income (spouses can file a joint-case). Total unsecured debt cannot exceed $336,900 and secured debt cannot exceed $1,010,650. Chapter 13 is discussed further below.
The Bankruptcy Code defines consumer debts as debt incurred by an individual primarily for a personal, family or household purpose. There are special provisions of the Bankruptcy Code that are only applicable to individuals having consumer debts. The "means test" (discussed below) only applies to an individual debtor in a chapter 7 case whose debts are primarily consumer debts. Debt that an individual incurred for a business, trade or profession that he or she was engaged in would not be consumer debt.
As a result of the 2005 amendments to the Bankruptcy Code a "means test" was introduced for eligibility for chapter 7. An individual who is unable to pass the means test will have his or her chapter 7 case dismissed (subject to certain exceptions), or must convert his or her case to a case under chapter 11 or chapter 13.
An individual chapter 7 debtor with primarily consumer debts will be subject to the means test if his or her "current monthly income" (based on average monthly income for 6 months prior to bankruptcy) is above the median income for a family of the same size. As of March 15, 2009 in New York this means the debtor's income on an annual basis cannot be greater than $46,523 for an individual ($57,006 for a family of 2, $67,991 for a family of 3 and $84,036 for a family of 4, plus $$6.900 for each additional dependent). As of March 15, 2009 in New Jersey the debtor's income on an annual basis cannot be greater than $57,120 for an individual ($69,853 for a family of 2, $85,397 for a family of 3 and $103.034 for a family of 4). Current monthly income includes regular contributions to household expenses from a nondebtor and includes income for the debtor's spouse if the petition is a joint petition (husband and wife both filing bankruptcy), but does not include social security income.
If the debtor's income is below the median listed above for the states listed above (each state has its own requirement), the debtor is eligible for chapter 7 bankruptcy. If the debtor's income is greater than the median income listed above, the debtor must past the "means test". The means test starts with the debtor's monthly current income (based on income for last 6 months) and subtracts (1) expenses for food, clothing, utilities, transportation and housing based on permitted monthly expenses specified by IRS standards (not the debtor's actual expenses), (2) average monthly secured debt payments, (3) average monthly priority debt payments, and (4) a few other expenses in certain limited categories, such as educational expenses of dependents of the debtor, and expenses to care and support elderly, chronically ill, or disabled household members. The remaining net amount after deducting these expenses is the debtor's "disposable income" and leads to the following results:
Disposable income of less than $109.58. If the debtor has disposable monthly income of less than $100, the debtor is eligible to file chapter 7.
Disposable income of between $109.59 - $182.50. If the debtor has disposable monthly income of between $109.59 - 182.50, we look at the total disposable income the debtor would have for five years (i.e., $6,575 - 10,950). If the $6,575 - 10,950 total disposable income for 5 years is at least 25% of the debtor's total unsecured debtor, the debtor fails to satisfy the "means test" for chapter 7 (but can file chapter 13).
Disposable income of greater than $182.50. If the debtor has disposable monthly income of more than $182.50 that would result in total disposable income for five years in excess of $10,950, the debtor fails to satisfy the "means test" for chapter 7 (but can file chapter 13).
3. If my income is above the median income for my state for a family of my size does that mean I fail the "means test" and cannot file chapter 7 bankruptcy?
If your income is below the median income for your state for a family of your size, it means you do not have to complete the "means test." If your income is above the median income for your state for a family of your size it does not mean you fail the means test. It means you have to complete the means test. The results of the means test will determine your eligibility for chapter 7 bankruptcy. This is a complicated area and required the assistance of an experienced bankruptcy attorney. At Starr & Starr, PLLC, we have invested in what we believe is the best computer software available on the market today for the purposes of calculating the means test.
When a consumer debtor files bankruptcy, he or she gets to keep certain property from the bankruptcy estate that is created by the bankruptcy filing. This property the debtor gets to keep is called "exempt" property and is based on specific laws exempting certain types of property to encourage the debtor's fresh start. The exemption laws vary from state to state and New York and New Jersey are not nearly as generous regarding exemptions as some other states. In New York there are exemptions for equity in a debtor's home ($50,000 for single debtor, $100,000 for joint debtors), life insurance, annuities, and pension plans, among others. Debtors who file bankruptcy without the assistance of a competent bankruptcy attorney risk losing property of significant value by failing to claim the exemptions to which they are entitled. Maximizing the exemptions to which you are entitled is part of what we do at Starr & Starr, PLLC when we represent you in a personal bankruptcy filing.
Certain types of debt automatically do not get discharged in bankruptcy, such as many types of taxes, student loans (unless the debtor can show undue hardship would result from failure to discharge the loans), most government fines and penalties, court restitution orders, domestic support obligations (such as alimony, child support, etc.), and debts in connection with divorce decrees, among others.
There are other types of debts that the creditor has the right to bring a lawsuit in the Bankruptcy Court (called an adversary proceeding) against the debtor to determine the dischargeability of the debt. The creditor can sue the debtor for a judgment determining that the debt will not be wiped out in bankruptcy.
Some examples of debts that can be excepted from discharge upon court order are:
Money, property, services or extension, renewal or refinancing of credit obtained by false pretenses, false representation or actual fraud
Consumer debt owed to a single creditor above the dollar limits specified in the Bankruptcy Code for luxury goods or services incurred within the time period specified in the Bankruptcy Code prior to the debtor's bankruptcy filing (the term "luxury goods" does not include goods or services reasonably necessary for the support or maintenance of the debtor or dependents of the debtor).
Cash advances above the dollar limit specified in the Bankruptcy Code incurred within the time period specified in the Bankruptcy Code.
Debts for willful and malicious injury of the debtor to another person or entity or property of another person entity.
An experienced bankruptcy attorney, such as the bankruptcy attorneys at Starr & Starr, PLLC, can analyze a consumer debtor's debts to determine if there is a risk of certain debts being automatically nondischargeable, or of potentially being found nondischargeable by the Bankruptcy Court. Pre-bankruptcy planning may facilitate the dischargeability of certain types of debt.
- Pre-Filing Stage -
Initial Meeting with You. You meet with us for a free in-person initial consultation to discuss your bankruptcy and non-bankruptcy options and determine if a chapter 7 bankruptcy filing is the right solution for you. We discuss services to be provided by Starr & Starr, PLLC and agree on the fee for such services. You sign our standard Engagement Letter and pay our fee (or make installment payment arrangements with us). We discuss our chapter 7 intake Checklist and the documentation and information that you will need to supply us, as well as your obligations as a client.
Follow-Up Meeting. We schedule an in-person follow-up meeting to complete our Bankruptcy Questionnaire and review the supporting documentation that you supply. At the follow-up meeting we will determine the exemptions that you are entitled to claim in property. We then prepare the first draft of your bankruptcy petition, schedules, statement of financial affairs, creditors' matrix and other papers required in connection with your chapter 7 case.
Credit Counseling. You must complete a mandatory pre-bankruptcy creditor counseling program with one of the credit counseling agencies approved by the U.S. Trustee's Office before we can file your bankruptcy petition. There are currently three approved providers with which we have made arrangements. The program takes approximately 2 hours and can be completed by you at your convenience prior to bankruptcy filing. Telephone, internet and live in-person programs are available. After you complete the credit counseling program, the provider electronically sends us a certificate of completion that we need for your bankruptcy filing.
Bankruptcy Petition & Schedules Signing Session. You meet again with us in person to review your petition, schedules, statement of financial affairs and creditors' matrix for accuracy. We make any final changes that may be needed. You sign your petition and other papers. If you are paying us under an installment arrangement you provide us with the unpaid balance of the total fee at this time.
- Filing & Post-Filing Stage -
Filing of Petition. We electronically file your petition, schedules, statement of financial affairs, creditor matrix and other papers required in connection with your chapter 7 case. The automatic stay goes into effect once the petition is filed and bars your creditors from further litigation or enforcement efforts (other than in the bankruptcy court), unless they obtain relief from the stay. After filing, we send to you for your records one complete set of your petition, schedules, statement of financial affairs, creditor matrix and other papers we filed in your case.
Communication with chapter 7 trustee. We provide the chapter 7 trustee appointed in your case with a copy of all documents that the debtor is required to provide to the trustee as the result of the 2005 amendments to the Bankruptcy Code. We send you a copy of any correspondence we send to the chapter 7 trustee.
Meeting of Creditors & Preparation for Meeting. After your case is filed the Meeting of Creditors will be scheduled at which the chapter 7 trustee will ask you questions concerning your financial affairs, the circumstances leading to your bankruptcy filing, and raise any questions he/she may have concerning your schedules and/or statement of financial affairs. This meeting is required to be scheduled within 20-40 days after you file your bankruptcy petition. The meeting is typically scheduled about 30 days from the date the petition is filed. Typically creditors do not attend this meeting, although they are entitled to attend and ask questions by law. If you hire Starr & Starr, PLLC, one of our attorneys will represent you at the meeting.
Shortly after your case is filed we will learn the date and time your meeting of creditors has been scheduled. We will send you a letter advising you of the date and time, along with a map and directions and some information about the type of questions most commonly asked by the chapter 7 trustee. A day or so before the meeting we will have a telephone conference with you to prepare you for the meeting of creditors and discuss any questions you may have about it.
Financial Management Course. Within 45 days of the date first scheduled for the Meeting of Creditors you are required to complete the Pre-Discharge Financial Management Course. We suggest you complete it as soon as possible after the Meeting of Creditors. The same credit counseling agency that provided you with pre-bankruptcy credit counseling can provide you with the Financial Management Course. After you complete the Financial Management Course, the provider electronically sends us a certificate of completion that we will file in your bankruptcy case.
Discharge. The goal of a personal chapter 7 bankruptcy filing is to obtain a discharge (legal elimination) of your debts. As discussed above, certain types of debts may be automatically excepted from discharge, or subject to the exception from discharge by order of the Bankruptcy Court. A discharge is supposed to be granted within 60 days after the date first set for the meeting of creditors. The one exception is if a creditor or other party in interest (such as the chapter 7 trustee) files an objection to discharge, which is uncommon.
Only an individual with regular income can file chapter 13. You can be self employed if you can show you have a regular income and only operate as a sole proprietor under your own name or under a trade name (i.e., "doing business as" or "d.b.a."), and do not have a separate business entity, such as a corporation or a limited liability company. Total unsecured debt cannot exceed $336,900 and secured debt cannot exceed $1,010,650. In chapter 13 the debtor repays creditors over time based on the money left over each month after expenses. The debtor pays the chapter 13 trustee each month who then mails checks to each of the debtor's creditors. In chapter 13 the debtor gets to keep all of his or her property. Chapter 13 is commonly used to stop a foreclosure and cure defaults over time. The typical chapter 13 plan is 3 years. However, as a result of "means testing", chapter 13 debtors with income above the state median must submit 5 year plans. Creditors do not get to vote on a debtor's chapter 13 plan, but get to object. The plan is subject to Bankruptcy Court approval at a confirmation hearing. In a chapter 13 case the chapter 13 trustee plays an important role in reviewing chapter 13 plans and raising objections to such plans.
The main benefit of chapter 13 compared to chapter 7 is that in a chapter 13 bankruptcy case the debtor gets to keeps all of his or her property and satisfies creditors claims through the chapter 13 plan. So, by way of example, if a debtor owned a house and wanted to keep living in it but is behind on mortgage payments, the debtor could cure the arrears (the payments that have fallen behind) through the plan and keep living in the house. Alternatively, in a chapter 13 case the debtor could seek to refinance or sell his or her house (subject to Bankruptcy Court approval). That is not usually possible in a chapter 7 case.
If the debtor is a renter and has fallen behind on rent payments (but an eviction order has not yet been entered), for instance, due to a period of illness or unemployment, the debtor could use a chapter 13 plan to cure the defaulted portion of rent through the plan.
Chapter 13 can also be used to keep a car where the debtor has fallen behind on payments.
In addition, in a chapter 13 case there is a co-debtor stay. So if one spouse files bankruptcy and the other does not, joint creditors cannot pursue the non-filing spouse. This can be beneficial to help preserve the credit standing of the non-filing spouse.
Chapter 13 is a complex area of bankruptcy law and requires the assistance of an experienced bankruptcy attorney.
You do not have to have an attorney to file bankruptcy. The law allows you to represent yourself. However, if you represent yourself you are still held to the same standard as if you had an attorney. You will need to be able to analyze and decide how to answer all of following questions, among others, yourself, and correctly complete and file the required documents:
- Chapter of bankruptcy to file under (chapter 7, 13, or 11, and why)?
- Which creditors to list as secured, priority, and unsecured?
- Which addresses to use for your creditors (- - & if you use the wrong address the debt will not be wiped out - -)?
- Which exemptions in property to claim and why?
- Whether you want to reaffirm any debts and if so how do you do that?
- Whether any of your debts are or may be nondischargeable and how to deal with them?
- Whether you have co-debtors and how to list them?
- Which debts to list as contingent, unliquidated or disputed on your schedules?
- How to value your personal and real property on the schedules?
The list above is not a complete list of the things that must be considered in personal bankruptcy case.
In addition, as the result of the amendments to the Bankruptcy Code in 2005 there are particular pre-filing and post-filing obligations that a debtor in bankruptcy must comply with that an attorney would usually take care of.
Finally, if you don't hire an attorney you will also have to represent yourself at the Meeting of Creditors held pursuant to Section 341(a) of the Bankruptcy Code.
There are paralegal services that claim to assist people with bankruptcy filing. They are not lawyers and not knowledgeable about bankruptcy law. By law they are not allowed to provide any legal advice. All they are allowed to do is fill out the numerous forms and schedules required to be filed with the Bankruptcy Court based on information you provide. Basically, they are just expensive "typing services" that can't advise you whether or not to file bankruptcy, what chapter of bankruptcy to file if you decide to file bankruptcy, or how to fill out the forms and schedules needed in your bankruptcy case. The United States Trustee, in the Southern District of New York and elsewhere, has filed lawsuits against paralegal services prohibiting them from engaging in the unauthorized practice of law. See, Martini, as the United States Trustee v. We the People Forms and Service Centers USA, Inc., et al. (U.S. Bankruptcy Court S.D.N.Y., Adv. Pro. # 05-01434, and Stipulated Final Judgment entered). Many debtors have had bad results from using paralegal services for bankruptcy filings, such as having their cases dismissed or losing homes that could have been saved had the debtor hired a competent bankruptcy attorney.
The filing fee charged by the Bankruptcy Court is currently $299 for a chapter 7 case and $274 for a chapter 13 case (as of 1/1/07). The fee for the mandatory pre-bankruptcy Credit Counseling program from a provider approved by the U.S. Trustee is approximately $50. The fee for the mandatory post-bankruptcy Financial Management program from a provider approved by the U.S. Trustee is also approximately $50.
The fee to hire Starr & Starr, PLLC to represent you varies depending on which chapter of bankruptcy you are filing (chapter 7 or chapter 13), how many creditors you have, your property situation and how much complexity will be involved in claiming your exemptions and completing your property schedules. Once we have this information we can quote you a binding flat fee. If you hire us we will enter into an Attorney-Client Engagement Letter with you in writing that will specify our total fee and any costs that we will collect from you and pass through (i.e., Court filing fee, two mandatory programs mentioned above) in your case.
Our fee may be paid in installments, but in a chapter 7 case it must (by law) be paid in full before we file your bankruptcy petition with the Bankruptcy Court. In a chapter 13 case we may agree to receive some part of our fee through your chapter 13 plan, depending on the circumstances of the case.
By law attorneys are required to disclose the fee they charge to represent debtors in chapter 7 and chapter 13 bankruptcy cases on disclosure forms filed in each debtor's bankruptcy case. We regularly review these filings in the Southern District of New York Bankruptcy Court (which includes New York County and Bronx County) and the Eastern District of New York Bankruptcy Court (which includes Kings County, Queens County, and Richmond County). We set our fees to be competitive with those of other experienced bankruptcy attorneys in New York City.