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Bankruptcy Basics

Bankruptcy is federal law, administered by Bankruptcy Courts that are technically part of the United States District Courts. This page contains a brief summary of personal bankruptcy under these headings:

• Basic Information -- A very brief overview of bankruptcy
• Fees -- How much bankruptcy costs
• Lawyers -- Whether you need a lawyer and how much a lawyer will cost
• Chapter 7 -- Information about Chapter 7 liquidations
• Chapter 12 -- Information about Chapter 12 payment plans
• Chapter 13 -- Information about Chapter 13 payment plans
• Things You Mustn't Do -- A list of dont's for people contemplating bankruptcy

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Basic Information

Bankruptcy is a way to discharge or reduce debts. To go bankrupt, you file a petition with the Bankruptcy Court. The petition includes "schedules" that contain your assets and liabilities, your income and expenses, and answers to a number of questions about your financial affairs. Most consumers file petitions under either Chapter 7 or Chapter 13. Chapter 7 is a liquidation, in which you turn over non-exempt assets to a trustee, who sells them and pays your creditors. Chapter 12 and Chapter 13 involve payment plans, in which you pay a monthly payment to a trustee who then pays your creditors.

About 30 days after you file a petition, there will be a "meeting of creditors" at which a trustee will ask you questions about your petition and your finances. Creditors seldom attend these meetings, but they can if they want to.

If you've filed under Chapter 7, a typical consumer case will be over about 3 months after you file the petition. Assuming that there are no assets for the trustee to administer, the court will enter an order discharging all the debts you had on the day you filed the petition.

Chapter 12 is for family farmers and family fishermen. It is somewhat similar to Chapter 13, but it offers additional flexibility.

A Chapter 13 case will last between three and five years. You'll file a plan with the court that outlines how much you'll pay to your creditors. Each month, you'll make payments under the plan to the Chapter 13 Trustee, who will pay your creditors in proportion to the claims they file. At the end of the case, you'll get a discharge.

The big advantage of Chapter 12 and Chapter 13 over Chapter 7 is that Chapter 12 and Chapter 13 let you catch up on missed mortgage payments over a much longer time than lenders are typically willing to allow on their own. If you are facing foreclosure, Chapter 12 or Chapter 13 may be the only way to save your home.

Chapter 11 is for consumers with too much debt for Chapter 13 and family farmers or fisherman with too much debt for Chapter 12. The Chapter 13 limits today are $336,900 in unsecured debt and $1,010,650 in secured debt. The Chapter 12 limits are $3,544,525 in aggregate debts for a family farmer and $1,642.500 in aggregate debts for a family fisherman. In Chapter 11, you propose a plan that your creditors get to vote on. Attorney fees for a Chapter 11 start at $25,000, which puts this chapter out of reach for most consumers.

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Fees

The Bankruptcy Court charges a filing fee, as follows:

• For a Chaptr 7 case, $306
• For a Chapter 11 case, $1,046
• For a Chapter 12 case, $246
• For a Chapter 13 case, $281

If you can't afford to pay the filing fee all at once, you can pay in up to 4 monthly installments. I discourage this choice because it's too easy to forget. If you miss your payments, the court will dismiss your case. You won't get a refund for what you've already paid, either.

If you can't even afford to pay in installments, you may be able to qualify for a waiver of the filing fee. To qualify, your household income must be less than 150% of the federal poverty guideline.

The law requires you to obtain a pre-filing "briefing" from an approved non-profit credit counseling agency and a post-filing debtor education course from an approved provider. Fees for the briefing and course vary, but $100 is a typical total. If you are receiving free legal assistance, your attorney can probably recommend an agency that will not charge you any fee for these services.

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Lawyers

Bankruptcy law is complex. While it is perfectly legal for you to represent yourself, you would probably be making a big mistake. The Massachusetts Bankruptcy Court has created a special guide for pro-se (latin for "for oneself") filers, which you can read by visiting http://www.mab.uscourts.gov/mab/node/64. That page also contains links to lawyer referral services and to other resources for consumers thinking about bankruptcy.

One way to find a bankruptcy attorney is through the National Association of Consumer Bankruptcy Attorneys (NACBA). Click on the Attorney Finder link and follow the instructions to locate a qualified bankruptcy attorney in your area.

There are no set fees for bankruptcy. You can expect legal fees for a Chapter 7 case to be in the range $1,000 to $2,500, and fees for a Chapter 13 to be around $4,000. If you hire a lawyer to rescue a case that you filed yourself, you should expect to pay more. Likewise, if you retain a lawyer shortly before a scheduled foreclosure sale, you should expect the fees to be higher because your lawyer will have to interrupt other work to attend to your emergency.

Most lawyers will require you to pay the legal fees for a Chapter 7 case in full prior to filing. That is because your promise to pay a fee later is dischargeable in your bankruptcy, and your lawyer would be violating the law by asking you to pay it after you file.

In a Chapter 12 case, your lawyer will be paid according to regular fee applications approved by the court. Generally speaking, you should expect the legal fees for a successful Chapter 12 case to be at least $15,000, because your lawyer will be spending substantial time on your case on an ongoing basis. You should also expect to have to pay other professional fees during the case, such as for an accountant or an expert appraiser.

Many lawyers will let you pay a portion of the legal fees for a Chapter 13 case through your plan. That is, a portion of your monthly plan payments will go to your lawyer.

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Chapter 7

A Chapter 7 bankruptcy case is a liquidation. The United States Trustee (a part of the Department of Justice) will appoint a panel trustee to administer your case. The trustee is a lawyer with considerable bankruptcy experience but is not a government or court employee. You will turn over your non-exempt assets (if you have any) to the trustee. The trustee will sell your assets and divide the proceeds amongst your creditors in proportion to the claims that they file.

To qualify for Chapter 7, you must pass a "means test" that measures your ability to repay your creditors. The means test is complicated, and there have been hundreds of cases around the country where judges have had to decide what Congress meant by the wording of the Bankruptcy Code. To grossly oversimplify the matter, the means test uses Official Form B22A and has two basic parts:

• Current Monthly Income: In the first part of the means test (Parts II-IV of the official form), you compute the average of your income from all sources except Social Security for the six months immediately preceding the filing of your case. That number is called your "Current Monthly Income" even though it's not current (it covers the preceding 6 months), it's not monthly (it's an average), and it's not income (because it includes some things that wouldn't be taxed as income and excludes others). You compare that with the median income for households of the same size as yours in your state. (Half of households earn more than the median, and half earn less.) The Census Bureau computes median incomes every so often, and you can find the current table by pressing the "Go" button at http://www.usdoj.gov/ust/eo/bapcpa/meanstesting.htm.
• Expense Allowances: You only need to complete the second part of the means test if your average income is higher than median. In the second part (Parts V-VIII of the official form), you add up your expenses and compare them to your Current Monthly Income. But you don't use your real expenses for most categories--instead, you use tables of expense allowances that the IRS has prepared. You can find the current tables by pressing the "Go" button at http://www.usdoj.gov/ust/eo/bapcpa/meanstesting.htm.

If you are above median income, you will need to complete both parts of the means test, and you will probably not do it correctly. Furthermore, the U.S. Trustee has historically made it very difficult for above-median debtors to file under Chapter 7 even when they pass the means test. For these reasons, I strongly advise you not to file pro-se if your income is above median.

Also read about these topics that are relevant to all chapters of the Bankruptcy Code:

• Exemptions
• The Automatic Stay
• Secured Debts
• Non-dischargeable Debts

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Chapter 12

A Chapter 12 bankruptcy case is a payment plan for a family farmer or fisherman.You will propose a plan, and the Bankruptcy Court will confirm it. You will make monthly payments to the Chapter 12 Trustee, who will in turn pay your creditors in proportion to the claims they file with the court.

Your Chapter 12 plan must meet most of the same requirements as a Chapter 13 plan. Refer to the Chapter 13 section immediately following this section for a detailed explanation.

To qualify for Chapter 12 as a family farmer, you and your spouse must be engaged in a farming operation and must meet three tests:

• More than 50% of your gross income for the most recent taxable year (or each of the 2d and 3d preceding taxable years) arose from the farming operation. Generally speaking, the court looks to the gross income you declared on the Schedule F you filed with your tax return. Consult a qualified tax professional if you are in doubt about how to allocate your income between farming and non-farming sources.
• At least 50% of your debt must arise from the farming operation. You can include the mortgage debt on your primary residence if the debt arises from the farming operation, such as when your residence is on the farm.
• Your aggregate debts do not exceed $3,792,650.

To qualify for Chapter 12 as a family fisherman, you and your spouse must be engaged in a commercial fishing operation and must meet three slightly different tests:

• More than 50% of your gross income for the most recent taxable year arose from your commercial fishing operation.
• At least 80% of your debt must arise from the fishing operation. You can include the mortgage debt on your primary residence if the debt arises from the fishing operation (whatever that means for a fisherman who lives on land).
• Your aggregate debts do not exceed $1,757,475.

Chapter 12 provides several advantages over Chapter 13:

• You can force your residential mortgage lender to negotiate a modification, because the court has power to change the terms of the mortgage. For example, you might be able to get a lower interest rate or change the repayment terms to match your business cycle.
• The debt ceilings are higher for a family farmer than they would be in Chapter 13.
• You have the right to recapture preferential payments from creditors who got more than $5,850 during the 90 days preceding the filing of your case.
• You can reamortize secured debt over a length of time longer than the 3-to-5 year duration of your Chapter 12 plan.
• You can file a Chapter 12 case, and eventually get a discharge, even if you've recently gotten a discharge in a case under another chapter.

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Chapter 13

A Chapter 13 bankruptcy case is a payment plan. You will propose a plan, and the Bankruptcy Court will confirm it. You will make monthly payments to a standing Chapter 13 Trustee, who will in turn pay your creditors in proportion to the claims they file with the court.

Only individuals with regular income may file under Chapter 13. In addition, the total of your noncontingent unliquidated debts much be less than these amounts:

• Unsecured debts: $360,475
• Secured debts: $1,081,400

The rules for deciding whether debts are noncontingent, or unliquidated, or unsecured can be complex. You should seek the advice of a competent bankruptcy attorney if the total amount you owe to all your creditors exceeds the unsecured debt limit.

In general, you must pay all of your disposable income to the Chapter 13 Trustee. Disposable income is what you have left over every month after paying your regular expenses. Payments that you've been making on credit cards or other unsecured debt (including student loans) don't count as expenses when calculating disposable income, though. The Chapter 13 Trustee may also object to your plan if she thinks that some of your expenses are unreasonable.

Your plan payments must also total enough to cover the following:

• The amount needed to cure defaults in your secured debts. This amount doesn't include debts secured by property you intend to surrender. See the Secured Debts topic for more information.
• The amount of legal fees you still owe your attorney.
• The amount of all priority claims. The most common priority claims in a consumer case are recent income taxes and domestic support obligations.
• A minimum payment to general unsecured creditors, who must receive at least as much as they would receive if you were filing under Chapter 7 instead of Chapter 13. This payment is essentially the value of your non-exempt assets minus the amount of your priority debts. If your Current Monthly Income is above median, however, you must compute a disposable income number on Official Form B22C. Explaining how this is done is too complicated for a basic explanation like this web page because courts around the country, and even within Massachusetts, have different opinions about how it should be done. Your general unsecured creditors must get at least that much, too. Sometimes the number computed under the first formula (non-exempt assets minus priority debts) is larger, and sometimes the B22C number is larger.
• A 10% commission for the Chapter 13 Trustee. What we actually do is add up the other components of the plan and divide by 0.90. The resulting number is just right to give your creditors what they are due after deducting the 10% commission.

If your disposable income isn't large enough to cover these five items, your plan isn't feasible and your Chapter 13 case would be dismissed. More usually, you'll work with your lawyer to identify assets that can be sold to realize cash for funding the plan and other assets that can be surrendered in order to reduce your secured debt and cure payments.

It's generally to your advantage to have any past due income taxes treated as a priority debt when you file for bankruptcy. That's because the rules require you to pay a certain minimum to all of your unsecured creditors (both priority and non-priority), and you'd rather the money go to taxes that you're going to have to pay someday no matter what. The only exception would be if you owe so much in back taxes that you can't possibly pay it all off over five years. Unless the exception applies to you, you should file all tax returns that are due before filing a bankruptcy case. Remember that you can file a return without paying the tax.

Also read about these topics that are relevant to all chapters of the Bankruptcy Code:

• Exemptions
• The Automatic Stay
• Secured Debts
• Non-dischargeable Debts

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Exemptions

The law allows you to keep the property you need in order to live. That property is "exempt". In Massachusetts, bankruptcy debtors may choose between a set of "federal exemptions" and a set of "state exemptions". The exemption laws are too complex to explain in detail. But, in general, bankruptcy attorneys will advise debtors who have significant equity in their home to record a Declaration of Homestead before filing bankruptcy and to choose the Massachusetts exemptions, and they will advise debtors who don't own a home at all to choose the federal exemptions.

Just because a particular piece of property is not exempt doesn't mean you'll lose it, however. Chapter 7 trustees would rather have cash than property that they have to sell. Consequently, you can probably "ransom" your non-exempt property by making a negotiated cash payment to the trustee. Some trustees will let you pay over a short period of time. You may be able to negotiate a ransom price that's considerably less than the replacement value of the property.

In Chapters 12 and 13, exemptions are used in the "best interest of creditors test" to make sure that your general unsecured creditors receive at least as much through the plan as they would have received in a Chapter 7 liquidation. Once again, you don't lose the property. Instead, you must pay the value of the non-exempt property into the plan somehow. You can pay out of your earnings, or you can sell the property and pay the proceeds into the plan.

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The Automatic Stay

As soon as you file a bankruptcy petition, a "stay" goes into effect automatically. The bankruptcy stay prevents everyone from attempting to collect a pre-petition debt. For example:

• A foreclosure sale can no longer happen.
• A car lender can no longer repossess your car.
• Civil lawsuits, such as ones brought by debt collectors or credit card companies, are halted.
• The Registry of Motor Vehicles must allow you to renew your driver's license even if you owe parking tickets or excise taxes.
• Garnishments of your pay must cease.

Individual creditors may petition the court for "relief" from the stay. If granted, relief allows them to foreclose, repossess, and so on.

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Secured Debts

A debt is "secured" if the lender has collateral. Home mortgages and car loans are secured debts. If you don't pay the debt, the lender can foreclose or repossess the collateral, whereupon they will sell the collateral to the highest bidder at an auction and send you a bill for the deficiency-- that is, the amount (if any) by which the sale price falls short of the payoff amount of the loan. (Of course, if the auction leaves a surplus, the lender pays you. But there's almost never a surplus in one of these sales.)

A secured lender's lien will ride through a Chapter 7 bankruptcy unchanged, but your personal obligation to pay the debt will generally be discharged. Consequently, the lender can still repossess or foreclose if you don't keep up the payments, but they cannot ask you to pay any deficiency. During your case, however, they can't repossess or foreclose unless they get permission from the court by filing a "motion for relief from stay". After the case, though, they can repossess or foreclose at any time so long as they follow state law. Chapter 7 gives you three ways to deal with secured debts. You can:

• Surrender the collateral in full satisfaction of the debt.
• Redeem the collateral by paying the lender, in cash, the current value of the collateral.
• Reaffirm the original obligation. Reaffirmation means giving up the right to discharge your personal obligation, and that's usually a bad idea. Therefore, the Bankruptcy Code places several hurdles in the way to reaffirmation. One of the hurdles is that you and your attorney will have to appear in court for a hearing to determine whether you can really afford to reaffirm each debt.

Under Massachusetts law, a motor vehicle installment purchase agreement cannot make bankruptcy by itself an event of default. Therefore, many attorneys believe that you can keep a car by continuing to make the payments that are due without electing one of these three choices. You should discuss this issue with your bankruptcy attorney before deciding to reaffirm a car loan in bankruptcy.

A secured lender's lien likewise rides through a Chapter 12 or 13 bankruptcy. If you want to keep the collateral, you must do two things: (a) continue making the regular monthly payments on the loan, and (b) "cure" the arrears by making payments through your plan that will catch you up by the end of the plan. There are two other important fine points about secured debts in Chapter 12 and Chapter 13:

• You can surrender the collateral in full satisfaction of the debt, including any deficiency claim. There are two exceptions that apply in Chapter 13 but not Chapter 12. One exception is a purchase-money loan for a car you bought within the 910 days preceding the bankruptcy filing. For this kind of loan (also called a "910 car loan"), you will still owe the full amount of the loan as an unsecured debt even after surrendering the car. There is a similar exception for a purchase-money loan for something besides a car that you bought within the year preceding the bankruptcy.
• You can modify the terms of a secured loan by, for example, reducing the interest rate or extending the payment period. In Chapter 13, however, you cannot modify the mortgage on your primary residence unless your home includes income units or unless the lender has other security for the loan. (There's no exception for your primary residence mortgage in Chapter 12.)

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Non-dischargeable Debts

The general rule is that all pre-petition debts are discharged at the end of a bankruptcy case. There are about 30 exceptions, however. The exceptions that are important to consumers are these:

• Debts for recent income taxes, or for which you didn't file a return when due, or for which you filed a fraudulent return. The complete rules for discharging taxes are very complex. But, in general, if the tax year is older than three years and you filed your return on time, the tax will be treated as a general unsecured claim and will be discharged in a case under Chapter 7, Chapter 12, or Chapter 13. Younger income taxes that were assessed pre-petition are priority claims that won't be discharged in any chapter, and that must be paid in full during a Chapter 12 or Chapter 13 case. Income taxes that aren't assessed until after you file bankruptcy are not discharged and continue to accrue interest and penalties during the case; you can't pay more than the plan percentage on these taxes, so they really hurt you at the end of your case.
• Debts incurred by fraud. There is a presumption of fraud if you (a) charged more than $600 in luxury goods or services to a single creditor within 90 days before filing, or (b) obtained cash advances aggregating more than $875 on a single credit card within 70 days before filing. You should stop using credit cards altogether as soon as you begin thinking about bankruptcy.
• Debts for student loans, unless you have a permanent and total disability resulting from a medical condition. Litigating student loan discharge will be expensive, too--on the order of $10,000 for a reasonably straightforward case.
• Debts for domestic support obligations, such as alimony or child support.

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Things You Mustn't Do

Your best thinking got you into financial trouble. Read and heed this list of things that non-lawyers do that get them into even more trouble when they file for bankruptcy.

Don't give anything away. People sometimes think they can shelter property by giving it to friends or relatives. Transfers for insufficient consideration, including gifts, sales for $1, and so on, are considered fraudulent as to creditors. Your trustee can undo them by taking the property away from the transferee. The look-back period for unwinding fraudulent transfers is four years. The law is not clear on whether you can "make it didn't happen" by taking back the property, either. And, if you do something like this within a year of filing under Chapter 7, you will be denied a discharge.

Don't pay debts to family members. People sometimes pay family debts before bankruptcy because they think that's the way to make sure the debts get repaid. Unfortunately, the exact opposite will happen. If you repay a debt to an "insider" (someone related to you in the third degree or less) within the year preceding your bankruptcy filing, the trustee can get the money back from the payee. So, instead of your relative getting the money, your creditors get it. And your relative has probably already spent the money and will have a hard time paying the trustee back.

Don't setup a trust for your real estate. Although it is now possible (and has been since April 2011) to record a Massachusetts Declaration of Homestead for property held in trust, the transfer into the trust may be considered fraudulent as to creditors.

Don't deed your house to your children. This is a variation on "don't give anything away." People sometimes deed their house to their children and reserve a life estate for themselves. That would be a fraudulent transfer if it happened within four years of filing bankruptcy, and the trustee would be able to obtain title from the children. Your life estate would still be good, but your children will lose their remainder interest. It's much better from a bankruptcy standpoint to keep title to the property and protect it with a homestead declaration.

Don't pay down your mortgage or other secured debt. If you have some cash lying around (most people don't, but you may be the exception), don't use it to make extraordinary payments on secured debts. That is evidence of bad faith and can result in your case being dismissed.

Don't file again with a year. So-called "serial" filers lose the benefit of the automatic stay. If you have been a debtor in any kind of bankruptcy case within the past year, be sure to talk to a qualified bankruptcy attorney before filing a new case.

Don't use your charge cards. If you put something on a charge card when you know you're going to be seeking a bankruptcy discharge of that debt, you've committed fraud. So don't.