No. As a matter of fact, in most cases creditors will receive a small fraction of what you originally owed them. Of course, from the creditor’s perspective, that’s better than receiving nothing in chapter 7. One of the important characteristics of Chapter 13 cases is that you are only required to pay what you can afford during this repayment period of 3 to 5 years. 

Who will receive the payments under Chapter 13?

The bankruptcy trustee, who oversees your petition, is responsible for distributing your payments to creditors in most cases. In some cases, you may make payments directly to the creditors in what are called “payments outside the plan.”

How do you qualify for Chapter 13 filings? 

First of all, you have to have a regular income in order to file Chapter 13. This makes sense, of course, since you will be required to make regular payments over the next few years. It doesn’t matter where your money comes from, as long as it’s nice and legal. Your income may be in the form of self-employment wages, unemployment insurance benefits, or a helping hand from your friends and family. As long as you have some consistent money coming in, you can apply for Chapter 13 bankruptcy.

Also, there are certain limits on the kinds of debts that you can try to reorganize. Your unsecured debts (such as credit card bills) should not exceed more than $307,675, while your secured debts (where something can be repossessed — like your car) should be no more than $922,975.

We mentioned that in most cases you will end up paying only a small percentage of what you originally owed, but this does not apply to certain kinds of financial obligations known as priority claims. These priority claims must be paid off completely during your Chapter 13 repayment plan. These claims include child support obligations and taxes that you recently incurred.

How does the court make sure that I’m doing my best to pay as much as possible? 

The best interest test 

The first rule that applies in a Chapter 13 application is the best interest test, which simply means that any unsecured creditor should receive at least as much of a payment in chapter 13 as he would have received under Chapter 7. For example, let’s say you owned an investment property worth $30,000 and ended up having to file Chapter 7. Because this property was not your primary residence, it would not be protected, and the property will be sold in order to distribute the proceeds to the creditors.

If you decide to file Chapter 13 instead in order to have a chance to keep the property, creditors would still need to receive at least the same $30,000 in order to make the repayment plan worthwhile for them.

The best efforts test 

Your creditors, and the bankruptcy judge, know that there is little chance that you’ll be able to pay off your debts completely. That is, after all, why you have ended up in bankruptcy court to begin with. Nevertheless, you’re expected to make the best effort possible in order to pay as much as you can during your payment plan. In order to calculate this, the court will take into account your income and expenses and compare these to the median income in your state. Your allowable expenses will be based on the Internal Revenue Collections Financial Standards. We know that’s a mouthful, but basically what it comes down to is that everyone involved wants to make sure you’re doing your best to pay what is reasonable for you.

You should have enough income left over to get by while paying off your Chapter 13 requirements, but do expect to have a modest budget for the next few years.

Understanding Chapter 7 liquidation 

Chapter 7 is what most people think when they hear the term bankruptcy, and some people prefer to call this “straight bankruptcy.” Under this option, you don’t have to worry about establishing a repayment plan, because if your petition is successful your debts will be completely and permanently eliminated.

What about the requirement that you forfeit some of your assets? Well, technically speaking, you may be required to liquidate some of your assets in order to pay off your creditors as much as possible. However, that is only a theory. What we mean to say is that practically speaking, about 96% of Chapter 7 bankruptcies involve consumers with no real assets. In other words, most people do not own anything at all (or at least anything worth considering) in order to pay off their creditors.

The great news is that once your filing is successful, you don’t have to worry about your debts ever again, unless you wish to pay off creditors voluntarily. What happens if you suddenly improve your financial situation? You still don’t owe anything to your creditors in most cases, though there are some exceptions. For example, you may have to forfeit some of the following items if you receive them within 180 days of declaring bankruptcy: income tax refunds for pre-bankruptcy years, divorce property awards, life insurance payments, and inheritances.

For the most part, however, you are free and clear after you successfully file your case. For example, you could win the lottery and keep all the winnings without having to pay back creditors (though your conscience may dictate otherwise). Of course, you should be careful not to spend all of your money on lottery tickets when you should be getting your finances back on track.

What about the new bankruptcy law changes? 

Many people mistakenly assume that bankruptcy is no longer an option because of the changes made in the bankruptcy law in the year 2005. (In case you’re wondering, the official name of this law is the Bankruptcy Abuse Prevention And Consumer Protection Act of 2005.) The truth is that the process has become more complicated and tedious (much to the disgust of many bankruptcy lawyers), but most people who would have qualified previously will still qualify under the new bankruptcy statues.

The biggest change is something called the means test, which is simply a complicated way of determining whether you really need bankruptcy based on your income and expenses. If your income is unusually low (below the median income for your state), then you won’t even have to worry about these formalities. Otherwise, you’ll have to go through the means test and carefully document all of your income and expenses. It is a bit of a pain, but it is unlikely to keep you from qualifying if you truly are overwhelmed by your debts.

Budgeting

Let’s start with the basics. Many times, all it takes to get you back on track financially is some sound discipline combined with a careful planning of your monthly budget. We realize that many people reading this article have already gone way past the point where their financial problems can be solved with a simple budgeting plan, but we want to make sure we have not overlooked the more simple solutions.

Allowing family members to help you

Obtaining help from a family member can be a lifesaver, of course, but make sure that this is the best option for you. Your family member must be willing to do so without coercion, and he or she must be able to do so without bringing about additional financial hardship. Also, ask yourself whether receiving money from family will truly solve your problem or whether it will simply delay the inevitable and force you to declare bankruptcy anyway. Remember also that family relationships can be strained where money is involved.

Selling any non-exempt assets 

Remember that the bankruptcy laws in most states will protect certain assets as exempt from the liquidation process. These exempt assets usually include your primary residence (up to a certain value), a vehicle, and pensions.

If you own nonexempt assets, that is assets that you would lose anyway if you file Chapter 7, you might want to look into selling these items in order to pay off your creditors as much as possible.

Transferring credit card balances 

Many people are interested in transferring their credit card balances to a new account with a lower interest rate. This may be worth looking into, but this kind of balance transfer is unlikely to solve your debt problems. What you are really doing is taking out a new loan to pay off your current load of credit card debt.

You should also know that if you initiate a balance transfer but end up filing for bankruptcy anyway, the credit card companies may accuse you of fraud and try to prevent your debts from being eliminated.

Home-equity loans 

Many people look to avoid bankruptcy at all costs, and one of the most common methods they use to avoid bankruptcy is the home equity loan. At first glance, this might seem like a great bankruptcy alternative, but you must remember that your home will be on the line in the future. You are simply trading in some of your home’s equity in order to pay off your credit card balances. There are several reasons why you should be extremely careful when looking into home-equity loans.

First of all, you’re putting your home at risk when you decide to go for a home equity loan instead of filing for bankruptcy. In most cases (and assuming that you don’t own a million-dollar mansion), your house would be protected under state bankruptcy laws. If you take out this loan, however, bankruptcy will not wipe out your new obligation to the bank or mortgage company. You’ll still have to pay off your home equity loan even if other debts end up being eliminated in bankruptcy.

Think about it: your credit card debts could have been wiped away by filing Chapter 7 bankruptcy, and your home would not have been made vulnerable to creditors. Instead, choosing to go with a home loan first has now put your home in jeopardy.

Also think about the monthly payment plans. If you have trouble paying off your credit card bills each month, you’ll probably have some difficulty paying the loan as well. In addition, many people have a serious problem with disciplining their spending. If this root cause doesn’t change, you could cash out some of the equity in your home and end up accumulating credit card debt all over again!

Reverse mortgages 

Reverse mortgages are designed to give senior citizens access to the equity in their homes without having to repay any loans at all. This sounds like an incredible deal and a great alternative to declaring bankruptcy, but how exactly is it accomplished? Very simple, the loan does not have to be repaid until the owner moves or passes away. At this point, the home is turned over to the lender unless someone pays the loan!

If you’re an older homeowner and simply want to live a more comfortable life, you may want to consider the reverse mortgage, especially if you don’t have any heirs to worry about. If you do wish to leave your home to your son or daughter, someone will have to repay this loan at some point.

You also want to study the details carefully in order to make sure that the reverse mortgage will not negatively affect your Social Security benefits or other kinds of income.

Cashing in your retirement plans 

Once again, cashing in retirement funds seems like a feasible solution for a person who wants to avoid bankruptcy at all costs. However, the consequences could be far worse than those you would have faced by simply filing for bankruptcy protection! In most cases, your retirement and pension plans would be protected from creditors if you filed for Chapter 7 protection. As was the case with the home-equity loan above, you are simply putting up your hard earned assets in order to pay off unsecured credit card debts and other kinds of debt that would normally be wiped out in bankruptcy.

Even worse, many people end up filing for bankruptcy anyway. Only at this point, they no longer have the savings or retirement plans they once did. You should also consider seriously the tax consequences involved. For example, if you lose your current job, you may be required to repay any loan from your retirement plan immediately. If you don’t pay the loan back, you may have to pay a lot more in taxes.

Understanding when bankruptcy is the right option 

It’s never easy to decide whether bankruptcy is the right option for you and your family. As you can see from the options above, many of the so-called alternatives to bankruptcy end up having serious and not so obvious negative effects on your life for years to come. At the same time, you don’t want to end up in bankruptcy court filing a petition for a relatively small debt problem that could have been solved more easily.

Be sure to discuss your options carefully with a good bankruptcy attorney.

If you file Chapter 7 bankruptcy, you may be required to liquidate some of your assets in order to pay off as much of your debt as possible. Of course, most people who file Chapter 7 don’t have many assets to speak of, so this usually ends up being a mute point. In addition, your primary residence will probably be protected by a homestead exemption, but in some cases it is possible to lose your home depending on the laws in your state and how much your home is worth.

Bankruptcy is a matter of public record 

If someone wants to know about your financial history, he can probably find out that you have filed for bankruptcy. After all, so much of our information is being stored online these days, so sifting through this kind of information has become easier for anyone nosey enough to search.

Bankruptcy will damage your credit rating 

Yes, it’s true that bankruptcy will have a harsh effect on your credit rating, but so many people who have reached this point in their financial lives really couldn’t care less about their credit history (especially when you consider the fact that you can rebuild your credit over the next couple of years).

You may even become a favorite target of certain credit card companies who are eager to give you another credit card because they realize that you’re now free of debt after you have successfully filed bankruptcy. Of course, you want to be careful about accumulating a huge amount of debt all over again. Just know that you will be able to re-establish your credit rating over time, even if you’re required to pay higher interest rates for the first few years after bankruptcy.

Your friends and family may have to give back money 

If you have paid your friends or family members within the last year (even if it is a repayment on a legitimate loan), they may be forced to return this money to the bankruptcy trustee in order to pay off as many creditors as possible.

Bankruptcy may affect your reputation 

Many family members may look down on you if you decide to file bankruptcy, and this is especially true for parents from an older generation. If you live in a small town where your business is everyone else’s business, your financial history may be published and talked about and you may be left with a stigma.

Bankruptcy discrimination 

Technically, employers are not supposed to discriminate against you if they find out you have filed for bankruptcy. But of course, they may still do so in a circuitous way.

Let’s start with some scenarios where Chapter 7 is a better option, and then we’ll explain things a little bit more carefully.

Chapter 7 is probably the right move when you don’t have any non-exempt assets to liquidate, are current with your mortgage and car payments, don’t have very much money left at the end of the month to participate in a repayment plan, and have not received a bankruptcy discharge within the last eight years.

Let’s explain the above items a little bit further. Chapter 7 requires liquidation of your assets in order to pay off creditors as much as possible. Your primary residence is usually protected up to a specified amount in your particular state, but other items may have to be liquidated. So if you do have items that you would lose in bankruptcy, you need to decide whether you are willing to pay off some of your debts in order to keep these assets.

Another consideration is whether you have very much money left over at the end of the month. Chapter 7 is intended to get rid of your debts completely in exchange for liquidation of your assets (though most people don’t have many assets to speak of anyway). If you decided to go with Chapter 13 instead, you would have to establish a payment plan for the next few years, and this would require you to dedicate a portion of your income each month to pay off these debts.

Chapter 7 bankruptcy can eliminate most of your debts and protect your home from creditors, but it will not protect your home from the bank or mortgage company itself. If your primary concern is catching up on your mortgage payments and you do not want to lose your home, then Chapter 7 would not make sense for you.

Considering Chapter 13 bankruptcy

Chapter 13 establishes a repayment plan in which you will pay a small percentage of your original debts. You will pay this amount monthly for the next few years. Chapter 13 is an excellent way to catch up on your mortgage payments when you don’t want to give up your home in bankruptcy. It allows you to repay your creditors something in order to save face, and it is particularly helpful if you need help catching up with mortgage payments, child support, or income taxes.

You can also stop creditors from harassing a cosigner on your loan when you commit to a repayment plan.

The disadvantages of Chapter 13 bankruptcy

Remember that your repayment plan will last between 3 to 5 years. During this time, you’re going to have to keep a very tight budget in order to keep up with your monthly payments, and there are other requirements you have to consider as well. For example, you will likely have to surrender your income tax refunds in order to help pay off your debts, and if you happen to receive an unexpected windfall you would likely have to give this up as well. You are not allowed to take on any additional debts without permission from the bankruptcy trustee. 

Unfortunately, the majority of Chapter 13 repayment plans end up failing. You can lose your job or simply have difficulty keeping up with the payments, even though the payment plan is supposed to be reasonable for your circumstances. If your plan fails, your bankruptcy protection is gone and the creditors can be on your back once again!

Some people believe that Chapter 13 is less damaging to your credit report, but this is probably not a good reason to choose this option. It still ends up on your credit report for a number of years, and creditors will also realize that, unlike people who file chapter 7, you have not even had your debts eliminated.

What about non-bankruptcy repayment plans?

Once again, under a Chapter 13 repayment plan you typically only pay a small fraction of your original debts. A typical non-bankruptcy payment plan would expect you to pay your debts completely.

Also, Chapter 13 helps you to catch up on alimony and child support obligations, which are usually not addressed by debt settlement plans or other non-bankruptcy solutions. A credit counselor, debt consolidation, or other payment plan outside of bankruptcy would not usually cover secured debts like your house or car.

In addition, Chapter 13 allows you to take advantage of the automatic stay provision, and this prohibits creditors from contacting you without the court’s permission, thereby giving you some immediate relief.

Here are several benefits you can gain by filing Chapter 7:

• You can stop an impending lawsuit
• you can prevent creditors from garnishing your wages
• you can stop evictions as long as you file before a state court has entered a judgment
• you can stop repossessions and foreclosures
• you can keep your drivers license even if you have unpaid fines or judgment
• you can stop IRS seizures dead in their tracks

It’s important to realize, however, that there are a number of situations in which bankruptcy may not be very helpful. Bankruptcy will not stop proceedings against a friend or family member who cosigned a loan for you (unless you establish a payment plan under Chapter 13 bankruptcy). Also, you may not have your debt wiped out if your debt is primarily made up of criminal fines, overdue child support or alimony, or unpaid student loans.

Gaining relief from creditors

When you initially file your bankruptcy petition with the court, you gain a tremendous benefit called the automatic stay. Believe it or not, this procedure actually prohibits any creditor from trying to garnish your wages or repossess your property. Creditors cannot sue you, and they cannot even contact you regarding your debts. If any creditor breaks the rules and tries to contact you or collect a debt without the court’s permission, they will have to answer to the federal bankruptcy judge (and probably have to pay fines as well).

Catching up on your payments and keeping your home 

If you file Chapter 7, much, if not all, of your debt can be wiped away completely. However, you are still responsible for paying your mortgage and your car payments. If you fail to do so, your house can be foreclosed and your car can be repossessed. If you wish to keep these assets but don’t have the money to catch up on your payments immediately, you can propose a repayment plan under Chapter 13 bankruptcy. Chapter 13 allows you to catch up on your payments over the next few years. Typically, you’ll only end up paying what you can, while the rest is forgiven. 

What you can lose in bankruptcy

Obviously, you should never take this decision lightly, as filing Chapter 7 or Chapter 13 can have long-term ramifications for your financial life. Your credit rating will be greatly damaged, and your petition will become a matter of public record. Your friends and family, especially those from older generation, may disapprove and cause strain relations with your loved ones. 

Nevertheless, you should weigh the pros and cons carefully with the assistance of a good bankruptcy attorney (and perhaps a financial counselor) in order to determine whether this is the right decision for you. It’s true that there are many alternatives to bankruptcy, and you should carefully study your finances in order to find a way to pay everything off without having to declare yourself bankrupt, if at all possible.

However, at the same time many people go to great lengths to avoid bankruptcy (including cashing in their retirement accounts or obtaining a home equity loan), only to end up bankrupt in the end anyway. These individuals would have been better off filing sooner, because bankruptcy will not remove the home-equity loan nor recover retirement money that has been spent on paying off consumer debts.

You may be tempted to ask family members for a loan in order to pay off some debts and help you avoid chapter 7. However, this is an ill-advised move for a number of reasons. First of all, these kinds of financial arrangements among family members and close friends can certainly strain your relationships, and it’s probably best to avoid this except in extreme cases (like medical emergencies).

Remember this simple and wise rule handed down to us: you can’t borrow your way out of debt. Our own government may ignore this advice (to our future peril), but you should take caution to avoid making the same mistakes in your own finances. If you stop and think about it, this habit of borrowing from Peter to pay Paul may in fact be how you accumulated your financial burdens to begin with.

 2. Repaying money to relatives 

If you decide to borrow money from relatives despite our warnings (or if you already did this before reading this article), you should take care not to pay back the loan if you’re about to declare bankruptcy within the next year. Believe it or not, any amount of $600 or more can be taken from your family member by the bankruptcy trustee. The idea is simply that your family members should be able to cut you some slack and allow other creditors to be paid first.

 
3.  Not listing all of the creditors 

It is important that you list all of your creditors on your bankruptcy petition. Yes, technically you may be able to amend your petition after you file. However, this is not guaranteed and can even cause trouble if the federal bankruptcy judge suspects that you are trying to hide something. You need to be accurate and disclose all of your debts so they can be wiped out.

4. Playing games with your bankruptcy petition 

The last point mentioned the importance of listing your creditors accurately, but we were assuming that you were trying to be honest to begin with. Under this section, we simply want to emphasize the importance of playing it straight. Neither the bankruptcy judge, nor the trustee, nor your creditors are stupid. It’s simply not worth the trouble if you’re trying to hide something or deceive the court.

5. Transferring assets to protect them from creditors 

You might be thinking of clever ways to protect your assets from creditors, such as transferring them to your family members. However, the bankruptcy statutes already take this into account, and you’re not allowed to do this if you’re trying to file chapter 7  bankruptcy . In the end, you are simply asking for trouble not only for yourself but also for the family members who receive the property.

What can I gain by declaring bankruptcy?

Bankruptcy can halt foreclosures , lawsuits, and wage garnishments. It can stop you from being evicted as long as you file bankruptcy before your state court enters a judgment. Bankruptcy can also stop repossessions and IRS seizures.

What bankruptcy is not 

The United States bankruptcy laws are meant to help honest people who are overwhelmed with their debt and are not supposed to be used by anyone trying to game the system. Do not choose bankruptcy if you are trying to get back at someone or are simply trying to avoid paying child support or other financial obligations. Also, you should never threaten to declare bankruptcy if you’re not serious about it. 

Bankruptcy will not prevent you from being prosecuted for crimes. Chapter 7 will not eliminate unpaid child support or alimony, although a Chapter 13 repayment plan can help you catch up on these kinds of payments. Other obligations which are not generally eliminated in bankruptcy include student loans and criminal fines. Also, if a friend or family member cosigned your loan, he or she would still be responsible if you declare bankruptcy. You can prevent your cosigner from having any problems by filing Chapter 13 (which requires you to repay the loan over time).

Immediate relief

As soon as you file a bankruptcy petition, the automatic stay goes into effect and your creditors are prohibited from even contacting you (let alone repossessing your property or filing a lawsuit against you). A creditor must ask for permission to continue with repossessions or foreclosure proceedings. At the very least, this can give you some breathing room while you begin your bankruptcy case.

Of course, this provision is only temporary, and the outcome of your bankruptcy case will determine what exactly happens to all of the debts that you were unable to pay off previously.  Even so, the bankruptcy automatic stay provision can give you some real relief when you figure out what to do.

If your Chapter 7 bankruptcy case is successful, you may be able to discharge much or all of your debt.  If you decide to file Chapter 13 bankruptcy instead, you will be given a chance to make monthly payments through a restructuring program.  Either way, you should find it much easier to deal with repayments.

Perhaps you are among the many Americans who have unfortunately experienced a divorce and are struggling to make up for the loss of income. If we would just focus on statistics, then there is a high probability that you have been overwhelmed by credit card debt because you were simply living beyond your means and indulging in some good old-fashioned instant gratification.

You can probably identify with some, if not many, of the above descriptions. If you have reached the point of seriously considering bankruptcy, you are probably being hounded daily by bill collectors who continue to add to your financial and emotional stress. Unfortunately, this story is far too common in the United States these days, as so many people find themselves overwhelmed by credit card debt and other types of consumer debt. The stress of facing a mountain of debt can make you lose sleep and damage your health, not to mention put your marriage and family relationships under considerable strain.

There are, of course, a number of ways you can deal with your out-of-control debt problems. We don’t mean to imply that bankruptcy is the right choice in every situation. Not at all. However, if you are under severe strain, you need to at least consider this as a possibility. Too many people avoid this discussion altogether because they are embarrassed by the thought of having to declare bankruptcy, and meanwhile they continue to barely get by from month-to-month. Even worse, they may cash in their retirement funds or get a home equity loan (which puts their home in danger) to pay off their credit cards, only to end up declaring bankruptcy anyway down the road.

Before you make up your mind solely on your preconceived notions or the fear of bringing shame upon your family, let’s clear up one myth right now. Bankruptcy is not a way to rip off your creditors or to get away from your financial obligations because of laziness. True, some individuals may try to use the bankruptcy system in order to take advantage of others and avoid having to pay debts.  However, we believe that, overall, bankruptcy is a legitimate way for many Americans to get back on their feet while putting an end to debt collections, stopping foreclosures and wage garnishments, and protecting themselves from lawsuits. Besides, the federal bankruptcy code puts requirements in place to minimize illegitimate filings.

Don’t feel embarrassed because you have to visit this website or speak with a bankruptcy attorney about your options. Continue to investigate how bankruptcy may help your situation, and don’t worry about other people’s prejudices or haughty criticisms. Also, remember that there is a life after bankruptcy despite the obstacles in the short term.

You are not eligible to file a Chapter 7 if you have filed bankruptcy within the past 7 years or if your income is such that you could repay debts with a Chapter 13 repayment plan.

Court costs to file a Chapter 7 are about $300 and depending on the complexity of your bankruptcy a typical attorney’s fee will be between $1000 and $2000. Most bankruptcy attorneys will ask for the fee prior to filing your petition.

Once you file your Chapter 7 petition the court will appoint a bankruptcy trustee to see that your creditors are paid as much as possible from your non exempt assets. The trustee will review the petition and make sure the forms you filed are complete. The trustee will sell any non exempt property for the benefit of your creditors. The trustee also has the power undo certain financial transactions which occurred the previous year to free up additional assets to liquidate.

Shortly after your petition is filed a creditor’s meeting will be scheduled. All creditors and interested parties will receive notice of the meeting. At the meeting the trustee will put you under oath and ask you about your bankruptcy and the information you filed with the court to support your petition. In a typical Chapter 7 this will be your only appearance in the bankruptcy court.

You will be required to surrender your non exempt assets to the trustee or provide cash equal to the value of the assets or the trustee may abandon the property if its value is deemed insignificant or it would be difficult to liquidate. Since most debtors filing Chapter 7 have only have exempt property or property worth very little few Chapter 7 filers end up surrendering any property unless it is collateral for a secured loan.

If you are current on your payments on a secured loan and if your equity in the secured asset is less than the bankruptcy exemption you are entitled to you will likely be able to keep the asset as long as you keep the payments current. If you are behind on the payments the creditor may repossess the asset to pay off the loan.

The information provided above is a general description of the rules and proceedings associated with a Chapter 7 bankruptcy filing. You should not rely on this information without seeking the advice of a bankruptcy attorney to ensure that you understand all the advantages and disadvantages of filing a bankruptcy in your particular circumstance.