Addendum as of April 2010

Transcription

1 Addendum as of April 2010

2 2010 Copyright by the National Foundation for Credit Counseling. All rights reserved. More Than One Way Out: No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, graphic, electronic or mechanical, including photocopying, taping, or information storage and retrieval systems, without prior permission of the National Foundation for Credit Counseling. (301) No portion of this text is in any way intended as legal advice. Readers are strongly advised to consult an attorney regarding specific bankruptcy issues and questions.

3 Addendum Corresponding Pages in this Book 1 Updated Information is Noted Below, and Highlighted in Red on the Following Pages Since 2000, more than a million Americans have filed for bankruptcy each year as a way to get a fresh start with their personal finances and get relief from creditors who are seeking repayment of past-due loans. 2 During this course we will be doing an analysis of your personal finances. You will need to have some of your personal financial information at hand. Please be sure you have a current paystub, a good idea of your living expenses, and information on your current assets and liabilities. 2 There is one other reason you are here. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 requires that before you can be a debtor in bankruptcy you must complete an approved session of budget and credit counseling within 180 days before you file for bankruptcy. In some courts, individual bankruptcies filed without meeting this requirement are dismissed. Such a dismissal can have an adverse effect on any re-filing. 3 Chapter 7 bankruptcies have been the most common form of individual bankruptcy in recent times. According to the Administrative Office of the United States Courts, about 66.5 percent of the 1,074,225 cases filed by individuals who sought personal bankruptcy protection in 2008 were filed under Chapter 7. 4 Certain debts, such as child support, educational (student) loans, and some taxes, are not covered by the discharge and are known as non-dischargeable debts. 4 A Chapter 13 debtor who completes all payments provided for in the approved Chapter 13 Repayment Plan receives a discharge. Under certain circumstances, a hardship discharge may be granted to Chapter 13 debtors who do not complete the payments under their Repayment Plan because of circumstances beyond their control. Although there are very few cases where hardship discharges have been granted, most bankruptcy courts have allowed a hardship discharge only when a debtor demonstrates that he or she has suffered from catastrophic circumstances that directly cause the inability to complete plan payments. A Chapter 13 discharge may allow the discharge of certain debts that may not be discharged in Chapter 7, which may make Chapter 13 more attractive to you, depending upon your unique circumstances. If the Chapter 13 Repayment Plan is not successful, it may be possible to convert the case and obtain a discharge under Chapter 7, subject to the means test discussed in more detail below. 4 The fee paid to the United States Bankruptcy Court for filing a Chapter 7 bankruptcy case is presently $299, but is subject to change, so be sure to ask your attorney what the current filing fees are. 4 The fee paid to the United States Bankruptcy Court for filing a Chapter 13 case is presently $274, but is subject to change, so be sure to ask your attorney what the current filing fees are. 9 If you had a bankruptcy case under Chapter 7 or Chapter 13 pending but dismissed within the past 12 months, the automatic stay will be limited. The means test flow chart contains two updates: the $10,000 amount in the >25% of unsecured debt should be $11,725, and the $6,000 amount in the <25% of unsecured debt should be $7, , 19 For purposes of establishing your identity, you must bring proof of identification and Social Security number. If you enter into such an agreement, you are obligated to pay the debt even after a discharge is entered in your Chapter 7 case, since the debt you reaffirm will NOT be discharged. 14 Because homestead exemptions differ from state to state and because other federal laws can affect the amount of your exemption, you should ask your attorney for information about any homestead or other exemptions available to you.

4 Addendum continued... Corresponding Pages in this Book Updated Information is Noted Below, and Highlighted in Red on the Following Pages 16 First, in order to file a Chapter 13 petition, you must be an individual with regular income, which means that you must have income sufficiently regular and stable to enable you to make payments under a Chapter 13 repayment plan. Second, your total unsecured debts and secured debts must fall below a maximum amount. Presently, your total unsecured debts must be less than $360,475 and your total secured debts must be less than $1,081,400. Because these numbers are subject to change, you should ask your attorney for information about current debt limitations. In addition, you are required to submit all of your disposable income to the Chapter 13 Trustee to fund the plan while it is in effect. If the combined current monthly income for you and your spouse is more than the median income for families in your state, your disposable income will be calculated using criteria essentially the same as those that apply for purposes of the Chapter 7 means test that is, current monthly income minus certain expenses allowed under Internal Revenue Service standards. A consumer debt of more than $600 to any one creditor incurred within 90 days of the filing of a bankruptcy petition for luxury goods and services is also non-dischargeable. (Luxury goods and services are things not reasonably needed for the maintenance or support of the debtor or the debtor s dependents.) Because the amount of debt for luxury goods and services is subject to change, you should ask your attorney for more information about such limitations. 37 Your net income or take-home pay is what s left after all the deductions have been taken out. For the purposes of creating your budget in this book, we are going to define net income as your gross income minus withholding for: 1. Federal income taxes 2. State and local income taxes 3. Social Security 4. Medicare 5. Other deductions such as health insurance, where applicable 37 Paycheck deductions vary. Please be sure to review your paycheck to make sure all deductions are accounted for. This will help ensure that your net monthly income calculation is correct. 37 When calculating monthly income, it is important to take into consideration how often you are paid: weekly, bi-weekly (every two weeks), semi-monthly (twice a month) or monthly. If you are paid semi-monthly or monthly, calculating your monthly income is easy simply add the total of the paychecks for the month. If you are paid weekly or bi-weekly, calculating your monthly income is more complicated. Take the total yearly income whether it is 52 pay periods or 26 pay periods and divide by 12 the number of months in a year. This will give you your monthly income. 38 Table 3, Net Monthly Income is updated so that the first three entries in the first column include the language etc. For example, Net Income #1 (income less taxes, Social Security, Medicare) should read Net Income #1 (income less taxes, Social Security, Medicare, etc.) 58 Home equity: This is the difference between how much your home is worth on the market and how much you owe to a lender. If you have a $100,000 mortgage, and your home is worth $250,000, then you have $150,000 in equity. If you sold your home, you would receive $250,000, pay back the lender the $100,000 you owe, and keep $150,000 in profit your equity. It is one of your assets. 63 Table 3, Net Monthly Income is updated so that the first three entries in the first column include the language etc. For example, Net Income #1 (income less taxes, Social Security, Medicare) should read Net Income #1 (income less taxes, Social Security, Medicare, etc.)

5 Corresponding Page in Book: Page 1 C H A P T E R O N E Overview Introduction Welcome. Since 2000, more than a million Americans have filed for bankruptcy each year as a way to get a fresh start with their personal finances and get relief from creditors who are seeking repayment of past-due loans 1. If you are reading this book, you may be considering becoming a part of that group. This book is intended to serve as a guide for you and others like you who are facing difficult financial challenges and who are considering personal bankruptcy as a possible solution. The most important fact you should understand as we begin is this: you are not alone. And you may be surprised to learn that there is no typical filer. A study done in 1998, for example, found that individuals who file for Chapter 7 bankruptcy are married, divorced, or single. They are male or female in roughly the same proportion as within the U.S. population. The vast majority of those who file are employed. However, all of these groups share a significant common trait the one which distinguishes them from the general population. In virtually all categories, people who file for bankruptcy have an average level of unsecured debt which exceeds their average annual income 2. This means they have a debt-to-income ratio a comparison of their monthly debt payments to their monthly income which far exceeds their ability to make their monthly payments. The specific reasons for bankruptcy vary widely. Unexpected unemployment or large medical expenses that aren t covered by insurance can stretch household budgets beyond capacity and drive people into bankruptcy particularly when they lack an emergency fund or nest egg to fall back on. Other people simply spend beyond their means or run up large credit card bills that they cannot repay. A few years ago, a Gallup poll showed that 63 percent of individuals in bankruptcy said their problems were due to credit card bills and 50 percent cited unemployment or a cut in pay (multiple responses were allowed) as the reason for their debt. Another 37 percent said they had mismanaged their finances, while 25 percent pointed to medical bills, and 13 percent said a marital breakup had strained their finances to the breaking point. 3 You may recognize yourself in one of these categories. Or, your circumstances may be entirely different. Whatever the reason for your difficulties, you are about to make critical decisions concerning your financial future. Bankruptcy is one option. It offers benefits, but it also carries significant consequences. It may be a good choice for you, or there may be better alternatives. It is important to understand the advantages and disadvantages of the various options before deciding what to do. This book is designed to help you understand the basic facts about bankruptcy and also some of the alternatives, so that you have the information you need to make the right choice for your situation. 1 Calendar year bankruptcy statistics 2 Bankruptcy By The Numbers 1999, EOUST publication, ed. Ed Flynn and Gordon Bermant 3 Regulation: The Cato Review of Business & Government 1997, Volume 20, No. 4; Ballooning Bankruptcies by Vern McKinley, MORE THAN ONE WAY OUT 1

6 Corresponding Page in Book: Page 2 How to Read This Book The decisions you make now will affect your life for many years to come, so it is important to approach the issue of personal bankruptcy with care. This book does not provide right or wrong answers, because the solutions to your financial problems will vary with your personal circumstances. The answer that is best for one person may not work well at all for someone else. This is a workbook. Use a highlighter, write in the margins, and circle important points which raise questions related to your special situation. Then, raise these issues and ask these questions when you meet with your counselor and your attorney. Here is an overview of what we will discuss. As a first step, we provide an overview of the bankruptcy process and what it involves. You will learn the difference between a Chapter 7 bankruptcy, which may lead to the discharge of many of your debts, and a Chapter 13 bankruptcy, which may lead to a repayment plan for some portions of your debts and a discharge for other portions. A Chapter 13 bankruptcy may enable you to retain more assets than a Chapter 7 filing. The book identifies types of debts that you must pay even when you file for bankruptcy and also which of your assets are protected from liquidation or sale despite your bankruptcy status. The book discusses the consequences of bankruptcy such as the impact on your ability to obtain new credit in the future. Because bankruptcy is a matter of public record, it also touches a bit on public attitudes about bankruptcy. It introduces some possible alternatives to bankruptcy, and helps you understand both the benefits and the risks of these alternatives. For example, you may be able to negotiate a settlement with your creditors or work out some type of repayment plan without filing for bankruptcy. On the other hand, some solutions that sound good at first blush may have hidden consequences for you. Perhaps most importantly, the book presents a budget analysis that will help you logically examine your circumstances and identify your best chance to regain control of your personal finances and eliminate your debt for the long term. Indeed, our ultimate goal is to give you tools to enable you to take charge of your financial future. Even if your financial difficulties were caused by events beyond your control, the way you reacted to those events in other words, your financial decisions made a critical difference in the outcome. It is vital that you and your family understand how and why you made those choices as well as their impact on your financial circumstances. To help you in this process, we have included a glossary in the back of the book to explain terms that might not be familiar to you. If you see a word in bold italics, you may want to refer to the glossary for a definition. Remember, we are not here to decide whether your previous decisions were good or bad. Rather our goal is to help you better understand how you wound up in your current predicament, so that you can take charge of your finances for the future. During this course we will be doing an analysis of your personal finances. You will need to have some of your personal financial information at hand. Please be sure you have a current paystub, a good idea of your living expenses, and information on your current assets and liabilities. Certification Requirement There is one other reason you are here. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 requires that before you can be a debtor in bankruptcy you must complete an approved session of budget and credit counseling within 180 days before you file for bankruptcy. In some courts, individual bankruptcies filed without meeting this requirement are dismissed. Such a dismissal can have an adverse effect on any re-filing. Upon satisfactory completion of the briefing, you will receive a certificate indicating that you received the briefing. We hope, however, that you will not only satisfy the legal requirements, but also gain the necessary knowledge to restore and maintain your financial well-being. MORE THAN ONE WAY OUT 2

7 Corresponding Page in Book: Page 3 & 4 C H A P T E R T W O Bankruptcy Overview In order to help you better understand the bankruptcy process, this Chapter will provide you with an overview of bankruptcy, including brief descriptions of the most common types of bankruptcy cases filed by an individual. What is Bankruptcy? Bankruptcy is a legal proceeding filed in the United States Bankruptcy Court that permits you to obtain a discharge of your obligation to pay certain debts. The bankruptcy laws are intended to allow an honest but unfortunate debtor an opportunity to get a fresh start. Brief Historical Context The United States Constitution provides in Article One, Section Eight that Congress shall have the power to establish uniform laws on the subject of bankruptcies throughout the United States. Thus, the United States Congress has the power to adopt bankruptcy laws that have nationwide application. The current bankruptcy laws are known as The Bankruptcy Code, which is found in Title 11 of the United States Code. The Bankruptcy Code was adopted by the Congress in the Bankruptcy Reform Act of That Act updated the first permanent bankruptcy law adopted by Congress, which was known as the Bankruptcy Act of Prior to 1898, Congress enacted bankruptcy legislation in response to national financial crises, but those laws only remained in effect for limited periods of time. What is a Chapter 7 Bankruptcy Case? A Chapter 7 bankruptcy case is one in which the bankruptcy petition is filed under Chapter 7 of the Bankruptcy Code. Under Chapter 7, a Trustee is appointed to sell or liquidate any of the debtor s non-exempt assets or property in order to raise cash to make payments to creditors. As explained in the next chapter of this book, an exempt asset is property of the debtor that the law specifically allows the debtor to keep. A Chapter 7 case is sometimes referred to as a straight bankruptcy or a liquidation case. Chapter 7 bankruptcies have been the most common form of individual bankruptcy in recent times. According to the Administrative Office of the United States Courts, about 66.5 percent of the 1,074,225 cases filed by individuals who sought personal bankruptcy protection in 2008 were filed under Chapter 7. 4 The vast majority of those cases were no-asset cases in which the Trustee determined that there were no non-exempt assets that must be liquidated to pay creditors. A Chapter 7 debtor who cooperates with the Trustee and complies with all of the provisions of the Bankruptcy Code receives a discharge. A discharge is a Bankruptcy Court order that releases the individual from the legal obligation to pay debts. Certain debts, such as child support, educational (student) loans, and some taxes, are not covered by the discharge and are known as non-dischargeable debts. 4 United States Bankruptcy Court statistics for calendar year ending December 31, MORE THAN ONE WAY OUT 3 & 4

8 Corresponding Page in Book: Page 4 If you are in default on a loan that is secured by collateral, such as a home mortgage, the creditor can foreclose on the loan and sell the collateral even after you receive a discharge unless you specifically agree to remain legally liable for that loan under the original or modified payment terms. This is known as a reaffirmation agreement. What is a Chapter 13 Bankruptcy Case? In a Chapter 13 case, an individual with regular income repays all or a portion of his or her debts over a three-to-five-year period through a monthly payment plan approved by the Bankruptcy Court. For that reason, a Chapter 13 case is sometimes referred to as a wage-earner plan. The Chapter 13 Trustee does not take possession of non-exempt assets but supervises the case and administers the payments to creditors under the Chapter 13 plan. A Chapter 13 debtor who completes all payments provided for in the approved Chapter 13 Repayment Plan receives a discharge. Under certain circumstances, a hardship discharge may be granted to Chapter 13 debtors who do not complete the payments under their Repayment Plan because of circumstances beyond their control. Although there are very few cases where hardship discharges have been granted, most bankruptcy courts have allowed a hardship discharge only when a debtor demonstrates that he or she has suffered from catastrophic circumstances that directly cause the inability to complete plan payments. A Chapter 13 discharge may allow the discharge of certain debts that may not be discharged in Chapter 7, which may make Chapter 13 more attractive to you, depending upon your unique circumstances. If the Chapter 13 Repayment Plan is not successful, it may be possible to convert the case and obtain a discharge under Chapter 7, subject to the means test discussed in more detail below. Recent Changes In April 2005, President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of The changes made by that Act generally apply to bankruptcy cases filed on or after October 17, These were the most sweeping changes made to bankruptcy law since 1978, particularly for cases filed by individual debtors with consumer debts. One of the most significant changes was adoption of a means test for an individual debtor to qualify for relief under Chapter 7. Depending upon your means (that is, your income and expenses relative to local and national benchmarks as explained in greater detail in Chapter 3), you may not be eligible to file a Chapter 7 case, but you could still choose to file for a Chapter 13 payment plan. Other significant recent changes include: A mandatory requirement that debtors receive a briefing from an approved nonprofit budget and credit counseling agency before filing a Chapter 7 or Chapter 13 bankruptcy case; A mandatory requirement that debtors complete a second approved course in personal financial management before receiving a discharge; and A restriction that you may only file for Chapter 7 bankruptcy once every eight years. Previously, a debtor could file for Chapter 7 bankruptcy once every six years. Frequently Asked Questions How much does a Chapter 7 bankruptcy cost? The fee paid to the United States Bankruptcy Court for filing a Chapter 7 bankruptcy case is presently $299, but is subject to change, so be sure to ask your attorney what the current filing fees are. If you are 5 Public Law No , 119 State. 23 (April 20, 2005). MORE THAN ONE WAY OUT 4

9 Corresponding Page in Book: Page 4 represented by an attorney, you will have to pay an additional fee for legal services. The fees charged by attorneys are not uniform and vary from place to place and from attorney to attorney. How much does a Chapter 13 bankruptcy cost? The fee paid to the United States Bankruptcy Court for filing a Chapter 13 case is presently $274, but is subject to change, so be sure to ask your attorney what the current filing fees are. If you are represented by an attorney, you will have to pay an additional fee for his or her legal services. The fees charged by attorneys in Chapter 13 cases are also not uniform and vary from place to place and attorney to attorney, but they are generally higher than those charged for Chapter 7 cases. MORE THAN ONE WAY OUT 4

10 Corresponding Page in Book: Page 9 Means Test Overview Is your current monthly income greater than the median family income in your state? If Yes If No (Current monthly income minus total monthly expenses) multiplied by 60 = Amount Is the Amount Greater than 25% of unsecured debt OR $11,725 or more 25% or less of unsecured debt OR $7,025 or more You MAY NOT be eligible for Chapter 7, but... You may be eligible for Chapter 7 or Chapter 13 Chapter 13 may be an option Creditors have the right to file a motion for relief from the automatic stay, which requests the court to permit them to attempt to collect from you or to enforce their claim. Typically, such motions are filed in Chapter 7 cases by creditors that hold a mortgage on a residence or a security interest in an automobile and wish to protect their financial interest by selling the collateral. Motions for relief from the stay are required to be heard on an expedited basis, and are usually set for a hearing by the Court within thirty days. If you oppose the motion, you are entitled to appear at the hearing to present evidence on why the automatic stay should not be terminated. At the hearing, the Bankruptcy Judge will consider the evidence and decide whether the automatic stay should be terminated for the creditor that filed the motion. If you had a bankruptcy case under Chapter 7 or Chapter 13 pending but dismissed within the past 12 months, the automatic stay will be limited. Exempt Property Exempt property is property that the Bankruptcy Code protects from seizure by the Chapter 7 Trustee for liquidation. All non-exempt property must be surrendered to the Chapter 7 Trustee, who will in turn sell it and use the proceeds to make payments to creditors. Depending upon the state in which you file and the circumstances of your case, you may have the option to claim exemptions under federal or state laws, or you may be restricted to the exemption laws of a particular state. MORE THAN ONE WAY OUT 9

11 Corresponding Page in Book: Page 11 You must appear and testify, under penalty of perjury, at what is known as the meeting of creditors conducted by the Chapter 7 Trustee. It is sometimes referred to as the 341 meeting because Section 341 of the Bankruptcy Code requires that such a meeting be held. At the meeting of creditors, the Chapter 7 Trustee and any of your creditors who choose to attend may ask you questions under oath about anything related to your assets, liabilities, or business and financial affairs. The meeting of creditors is recorded, and the Chapter 7 Trustee or creditors will have access to the recording of your testimony for use in your case or in other legal proceedings. If the Chapter 7 Trustee or creditors believe that your case will be contested or that your testimony is particularly significant, they may arrange for a court reporter to transcribe your testimony and prepare a formal transcript of the meeting. The length of and manner in which meetings of creditors are conducted varies from location to location and from trustee to trustee. In routine Chapter 7 cases, however, the meeting of creditors typically lasts about 15 minutes. In unusual cases, the Chapter 7 Trustee may extend the meeting to another day to permit a longer period of time for questions. For purposes of establishing your identity, you must bring proof of identification and Social Security number. The Chapter 7 Trustee can request that you provide at the meeting an original document such as a driver s license or passport that contains your photograph. In addition, the Chapter 7 Trustee may request to see your Social Security card as proof of your Social Security number. It is important for you to be sure that the Court and your attorney (if you have one) are aware of your current mailing address so that you are notified of the date for the meeting of creditors or of any postponement. If you believe you may not be able to attend the meeting of creditors for any reason, it is important that you notify your attorney and the Chapter 7 Trustee immediately to determine whether the meeting can be rescheduled. Whether a meeting of creditors can be rescheduled varies from place to place and from trustee to trustee, and is generally a matter within the discretion of the Chapter 7 Trustee. Tax Returns You must provide a copy of your most recent federal income tax return to the Chapter 7 Trustee before the meeting of creditors. If creditors ask for a copy of the return, you must provide it to them as well. If you fail to provide a copy of your most recent federal income tax return, your case will be dismissed unless you can demonstrate to the Court that your failure to comply was due to circumstances beyond your control. Upon request, you must also file with the Court copies of all federal income tax returns, including amended returns, filed while your Chapter 7 case is pending. Taxing authorities have the right to request that your case be dismissed if you fail to file any tax return that becomes due while your Chapter 7 case is pending. If you do not file the return within 90 days after such a request, the Court may dismiss your case. Reaffirmation Agreements A reaffirmation agreement is an agreement between you and a creditor under which you agree to pay a debt that would otherwise be discharged. You might enter into such an agreement for any number of reasons, but most often reaffirmation agreements are made by debtors to retain possession of a residence or car that serves as collateral for a loan. If you enter into such an agreement, you are obligated to pay the debt even after a discharge is entered in your Chapter 7 case, since the debt you reaffirm will NOT be discharged. A reaffirmation agreement is enforceable by a creditor only if (1) it is entered into before your discharge is granted; (2) you receive certain mandatory disclosure documents before signing the reaffirmation agreement; (3) it is filed with the Court; and (4) you do not rescind the agreement during the applicable rescission period (at least 60 days). MORE THAN ONE WAY OUT 11

12 Corresponding Page in Book: Page 14 The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 adopted a number of new limitations on the automatic stay. The automatic stay terminates 30 days after your Chapter 7 case is filed if you were a debtor in a bankruptcy case that was dismissed within the one-year period prior to the petition date. The Bankruptcy Judge is permitted to continue the automatic stay only after a hearing and demonstration that you filed the later case in good faith. The automatic stay does not go into effect when you file a Chapter 7 case if you are a debtor who has been a debtor in two or more bankruptcy cases that were dismissed within the one-year period prior to the petition date. The stay can be reinstated by the Court if you make a request within 30 days after the case is filed and the Bankruptcy Judge determines that the filing of the case was in good faith regarding the creditors to be stayed. Frequently Asked Questions Will my Social Security number be made public if I file a bankruptcy petition? Although you must disclose your Social Security number when you file a bankruptcy petition, the papers made available to the general public by the Bankruptcy Court are required to contain only the last four digits of your Social Security number. Can a creditor enforce a waiver of my right to claim an exemption of property? Sometimes loan documents contain a provision in which you waive your right to claim property as exempt; that is, you agree in advance that if you default on the loan and file for bankruptcy later, you will not be entitled to protect your otherwise exempt property from liquidation by the Chapter 7 Trustee. This type of agreement is not enforceable in a Chapter 7 or any other bankruptcy case What is a homestead exemption? Many (but not all) states have laws that permit you to exempt your residence or a certain amount of real property from creditors subject to certain value or size limitations. These exemptions are known as homestead exemptions. Under certain circumstances, the Bankruptcy Code may limit the amount of homestead or other exemptions of real property because homestead exemptions differ from state to state and because other federal laws can affect the amount of your exemption, you should ask your attorney for information about any homestead or other exemptions available to you. NOTICE The material in this Chapter is intended to provide you with an outline of the Chapter 7 process so that you have a basic understanding of what to expect should you decide to file a Chapter 7 bankruptcy. Before making any decision you should meet with your attorney, who can answer questions and give you legal advice about application of the law to your individual situation. MORE THAN ONE WAY OUT 14

13 Corresponding Page in Book: Page 16 Eligibility: General If you reside in or have a domicile, a place of business, or property in the United States, you are permitted to file a Chapter 13 bankruptcy petition. Venue rules determine in which district of the Bankruptcy Court your petition may be filed. Most individuals must file their Chapter 13 petition where they currently live, or where they lived for the most number of days during the 180-day period immediately before filing the petition. Before filing a Chapter 13 bankruptcy case, you must receive a briefing from an approved nonprofit budget and credit counseling agency. Under limited circumstances, you may be able to complete the briefing requirement after filing your petition (see Chapter Nine of this book). Eligibility: Special Chapter 13 Rules In addition to the above rules (which are like those that apply in a Chapter 7 filing), there are specific eligibility criteria that govern who may file a Chapter 13 bankruptcy petition. First, in order to file a Chapter 13 petition, you must be an individual with regular income, which means that you must have income sufficiently regular and stable to enable you to make payments under a Chapter 13 repayment plan. Second, your total unsecured debts and secured debts must fall below a maximum amount. Presently, your total unsecured debts must be less than $360,475 and your total secured debts must be less than $1,081,400. Because these numbers are subject to change, you should ask your attorney for information about current debt limitations. Eligibility: Is There a Means Test in Chapter 13? Although the means test is not applicable directly to a Chapter 13 case, you will be required to supply essentially the same budget information as in the Chapter 7 means test in order to determine your current monthly income and to calculate your disposable income, both of which relate to the amount you may be required to pay under your Chapter 13 Plan. The Chapter 13 Plan A Chapter 13 Plan is a monthly payment plan that you propose as a way to repay your debts in whole or in part. If the Bankruptcy Court approves the Plan, your creditors must accept it as full settlement for your debts. 15 If you are in default on secured loans, such as mortgages on your house, Chapter 13 gives you the opportunity to put those loans back in order. As a result, in a Chapter 13 case you may be able to reinstate secured loans, resume making the regular monthly payments, and retain your property. With respect to unsecured creditors, your Chapter 13 Plan must make payments to unsecured creditors that are at least equal to what they would have received from liquidation of your non-exempt property in a Chapter 7 case. In other words, the total of your payments must, at a minimum, equal the current value of your non-exempt property. In addition, you are required to submit all of your disposable income to the Chapter 13 Trustee to fund the plan while it is in effect. If the combined current monthly income for you and your spouse is more than the median income for families in your state, your disposable income will be calculated using criteria essentially the same as those that apply for purposes of the Chapter 7 means test that is, current monthly income minus certain expenses allowed under Internal Revenue Service standards. The Plan will typically run for a minimum of three years and a maximum of five years, depending on your income. There are also two median income tests applicable in Chapter 13 cases that may affect the length of the Plan you are required to file. First, if the combined, current monthly income for you and your spouse is less than the median family income in your state (adjusted for the size of your household), your Chapter 13 Plan will likely be in place for three years. The Court has the option to extend the plan to a longer period of up to five years for cause. 15 In the language of the Bankruptcy Code, confirmation is the act of approval of a Chapter 13 Plan. For that reason, a Chapter 13 Plan that has been approved by the Court is sometimes referred to as a confirmed plan. MORE THAN ONE WAY OUT 16

14 Corresponding Page in Book: Page 19 For purposes of establishing your identity, the Chapter 13 Trustee can request that you provide, at the meeting of creditors, an original document such as a driver s license or passport that contains your photograph. In addition, the Chapter 13 Trustee may request to see your Social Security card as proof of your Social Security number. It is important for you to be sure that the Court and your attorney (if you have one) are aware of your current mailing address so that you may be notified of the date for the meeting of creditors, or any postponement. If you believe you may not be able to attend the meeting of creditors for any reason, it is important that you notify your attorney and the Chapter 13 Trustee immediately to determine whether the meeting can be rescheduled. Whether a meeting of creditors can be rescheduled varies from place to place and from trustee to trustee. This is generally a matter within the discretion of the Chapter 13 Trustee. Tax Returns Prior to the meeting of creditors in a Chapter 13 case, you must file any delinquent tax returns due for the four-year period immediately preceding the filing of your Chapter 13 petition. If you have not filed the delinquent returns by the time of the meeting of creditors, the Chapter 13 Trustee has the discretion to permit up to 120 additional days for you to file them. Ultimately, the Bankruptcy Court may dismiss or convert your case if you fail to file the delinquent returns as required. In addition to the above, the following rules (also applicable in Chapter 7 cases) apply in a Chapter 13 case. You must provide a copy of your most recent federal income tax return to the Chapter 13 Trustee before the meeting of creditors. If creditors ask for a copy of the return, you must provide it to them as well. If you fail to provide a copy of your most recent federal income tax return, your case will be dismissed unless you can demonstrate to the Court that your failure to comply was due to circumstances beyond your control. Upon request, you must also file with the Court copies of all federal income tax returns, including amended returns, filed while your Chapter 13 case is pending. Taxing authorities have the right to request that your case be dismissed if you fail to file any tax return that becomes due while your Chapter 13 case is pending. If you do not file the return within 90 days after such a request, the Court may dismiss your case. Reaffirmation Agreements Although the payments made to your creditors for secured loans covered under your Chapter 13 Plan may make reaffirmation agreements less likely to be an issue, the following rules regarding reaffirmation agreements (which are the same rules that apply in a Chapter 7 case) apply in a Chapter 13 case. A reaffirmation agreement is an agreement between you and a creditor under which you agree to pay a debt that would otherwise be discharged. You might enter into such an agreement for any number of reasons, but most often, reaffirmation agreements are made by debtors in Chapter 7 cases to retain possession of a residence or car that serves as collateral for a loan (issues that generally would be dealt with in a Chapter 13 Plan). In a Chapter 13 case, you might consider a reaffirmation agreement for a debt that will not be paid in full under your Chapter 13 Plan as a way to avoid possible enforcement of the balance against a co-signer. If you enter into such an agreement, you are obligated to pay the debt even after a discharge is entered in your Chapter 7 case, since the debt you reaffirm will NOT be discharged. A reaffirmation agreement is enforceable by a creditor only if: (1) it is entered into before your discharge is granted; (2) you receive certain mandatory disclosure documents before signing the reaffirmation agreement; (3) it is filed with the Court; and (4) you do not rescind the agreement during the applicable rescission period (at least 60 days). In addition, a reaffirmation agreement is not enforceable unless either (1) your attorney certifies that the agreement does not impose an undue hardship on you or your dependents, or (2) the Court holds a hearing at which the Bankruptcy Judge advises you of the legal effects and consequences of a reaffirmation agreement and determines that the reaffirmation agreement is in your best interests and does not impose an undue hardship on you or your dependents. MORE THAN ONE WAY OUT 19

15 Corresponding Page in Book: Page 20 Discharge As in a Chapter 7 case, a discharge in a Chapter 13 case is an Order entered by the Bankruptcy Court that prohibits creditors from taking action against you to collect your pre-bankruptcy debts. Your discharge does not stop a creditor from collecting from other persons, such as someone who has co-signed on your loans or guaranteed payment of your debts. Grant or Denial of Discharge in a Chapter 13 Case In a Chapter 13 case, you are entitled to receive a discharge if your Chapter 13 Plan is approved by the Court and you complete all payments under the Plan. You are not entitled to receive such a discharge unless you certify to the Court that you are then current on all alimony, maintenance, child support and other domestic support obligations. As in a Chapter 7 case, you are not entitled to receive a Chapter 13 discharge unless you complete an approved course of instruction on personal financial management provided by an approved agency and file a certificate with the Court (see Chapter Nine of this book). If you fail to complete payments under your Chapter 13 Plan due to circumstances for which you should not justly be held accountable, you still may be able to obtain a discharge if you can demonstrate that creditors were paid at least as much as they would have received in a Chapter 7 case and that modification of your plan is not feasible. If you fail to complete your plan payments and are unable to get this second type of Chapter 13 discharge, it is likely that your case will be converted to a Chapter 7 case or dismissed. Exceptions to Discharge As indicated earlier in this book, a Chapter 13 discharge is usually subject to fewer exceptions than the Chapter 7 discharge. 18 As a result of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, however, there will likely be little practical difference in the scope of the exceptions for your debts, which are primarily consumer debts. Many of the most common exceptions (described below) also now apply to the discharge granted in Chapter 13 cases if you complete all payments under the Plan. In addition, debts that are incurred to pay otherwise non-dischargeable debts may not be dischargeable (for example, using a credit card to pay otherwise nondischargeable tax liabilities). A consumer debt of more than $600 to any one creditor incurred on or within 90 days of the filing of a bankruptcy petition for luxury goods and services is also non-dischargeable. (Luxury goods and services are things not reasonably needed for the maintenance or support of the debtor or the debtor s dependents.) Because the amount of debt for luxury goods and services is subject to change, you should ask your attorney for more information about such limitations. Certain debts are non-dischargeable in a Chapter 13 case, which means they are not affected by a discharge and you remain legally obligated to pay them. The grounds for non-dischargeability generally relate to the nature of a specific debt. The Bankruptcy Code includes exceptions to discharge for certain debts you might have such as alimony, maintenance, child support, some taxes, and criminal restitution, and for certain claims that creditors can prove were incurred by fraud, embezzlement, or larceny, or resulted from willful and malicious injury. If a creditor asserts that its claim is one that resulted from some reason that you might dispute, such as fraud, embezzlement, or larceny, or resulted from willful and malicious injury, the creditor is required to file a complaint for determination of dischargeability of debt in the Bankruptcy Court by a deadline set by the Court. That deadline is set in the Notice of Chapter 13 Bankruptcy Case, Meeting of Creditors, and Deadlines mailed to you and your creditors by the Court and is usually 60 days after the date first set for the meeting of creditors in your case. If such a creditor does not file a complaint, its claim is discharged. MORE THAN ONE WAY OUT 20

16 Corresponding Page in Book: Page 37 Calculating Your Net Worth Before creating your monthly budget, it s always helpful to have a good sense of where you stand overall with your personal finances. Many times, families have a sense that they have a little too much on their credit cards. But this vague sense of a problem is often not enough to trigger real action. On the other hand, when families realize their net worth is minus $25,000, they begin to develop a real sense of urgency to change their financial habits. As a first step, you must list all of your assets and all of your liabilities. You will have to do this with your attorney if you file for bankruptcy. A bankruptcy is a new beginning, and we want you to have an accurate starting point. If you file for bankruptcy, portions of this exercise may not apply to you if you receive a discharge. However, you should revisit this budget periodically and, as you recover from your bankruptcy, more and more of the items will apply. Develop the habit of doing this inventory regularly at least once a month at the beginning. Soon, you will begin to have a very accurate idea of where your money is and how you are spending it. Income and Expenses Now we need to know where you stand with your monthly income and spending. To start this process, you need to figure out exactly how much actual take-home or spendable income you receive in one month. Your gross income is the total amount of money you earn or receive each month before any deductions are taken out of your pay. Deductions include money taken out for federal, state, and local income taxes, and Social Security and Medicare taxes. Deductions may also include other mandatory and voluntary payments for things such as spousal maintenance (alimony), child support, retirement plans, health care plans, union dues, and any number of other payments. Your net income or take-home pay is what s left after all the deductions have been taken out. For the purposes of creating your budget in this book, we are going to define net income as your gross income minus withholding for: 1. Federal income taxes 2. State and local income taxes 3. Social Security 4. Medicare 5. Other deductions such as health insurance, where applicable Paycheck deductions vary. Please be sure to review your paycheck to make sure all deductions are accounted for. This will help ensure that your net monthly income calculation is correct. When calculating monthly income, it is important to take into consideration how often you are paid: weekly, bi-weekly (every two weeks), semi-monthly (twice a month) or monthly. If you are paid semi-monthly or monthly, calculating your monthly income is easy simply add the total of the paychecks for the month. If you are paid weekly or bi-weekly, calculating your monthly income is more complicated. Take the total yearly income whether it is 52 pay periods or 26 pay periods and divide by 12 the number of months in a year. This will give you your monthly income. For the purposes of building your budget here, list any other deductions from your pay as separate expenses using the following three tables. Now, let s determine how much monthly income you earn. For the moment do NOT fill out the Necessary Changes and Planned Net Income sections of the table. How Are You Spending Your Money? Now that we know how much money is coming in, we need to know where and how you are spending it. For today, you will have to estimate how much you are spending for various items. However, there is no substitute for tracking your actual spending. Most of us underestimate how much we are actually spending on different items in our budget. The only way to be sure is to track everything you spend for at least two weeks a month would be better. You should begin to do this immediately. Once you ve tracked your actual spending, revise the budget you will create today so that it s more accurate. There are several ways to track your daily, weekly, and monthly spending. You might need to combine methods to find what works best for you. To figure out how you spend your money, carry a piece of paper with you and write down where every dollar goes. Total the amount at the end of the day and enter it into the following chart. Do this for at least two weeks if you can, it would be best to do it for a month. In addition, also keep track of your income on the chart. Every time you receive money, write the amount and the source in the MORE THAN ONE WAY OUT 37

17 Corresponding Page in Book: Page 38 Table 3: Net Monthly Income Monthly Income Source Current Monthly Income Necessary Changes Planned Net Income Net Income #1 (income less taxes, Social Security, Medicare, etc.) Net Income #2 (income less taxes, Social Security, Medicare, etc.) Net Income #3 (income less taxes, Social Security, Medicare, etc.) Child Support Received Spousal Support Received Military Retirement Other Retirement Social Security Received (after taxes) Other Income (list source) Total Take-Home Income income row. For example, record your paycheck amount on the day you receive it. Record any other income you receive such as gifts, dividends, or any interest payments that come directly to you. Tracking what you spend is the most important part of this record keeping. Record on your daily list what you purchase and the amount you pay for each purchase. Whenever you pay with cash, write a check, use your credit or debit card, or go online to pay a bill, be sure to record both the amount and the reason on your chart. Remember to record any payments you have automatically taken out of your checking account such as an insurance payment or a health club membership. If you have any fees connected with using online payments, debit cards, or ATM machines, be sure to record them. Remember: both you and your spouse and any other members of your family who create income or expenses which affect the family budget must do this! At the end of each day, combine each family member s amount on the chart. Keep the daily list and attach it to the chart. At the end of each week, total the amounts you have listed as income and the amounts you have spent. If you are comfortable with computers, you could set up a spreadsheet to track your spending. Three Types of Expenses: Fixed, Variable, and Periodic. Now that you have a better understanding of your overall financial picture, we will focus on your expenses. There are three categories of expenses: fixed monthly expenses, variable (or discretionary) monthly expenses, and periodic (less frequent than monthly) expenses. Every expense falls into one of these three categories. We will list all of your expenses in the following tables. A few notes before we begin are in order. It s important to look at long-term debt very closely because sometimes, simply by selling the property such as a boat or a car that created the debt, you can reduce your monthly expenses and give yourself money to pay off other debts more rapidly. Some of your long-term debts may be discharged in a bankruptcy case. Other long term debts may be reaffirmed or non-dischargeable, and you will be obligated to pay them off. Include any debts that you plan to reaffirm or which you think may be non-dischargeable in the following tables depending upon the type of debt. MORE THAN ONE WAY OUT 38

18 Corresponding Page in Book: Page 58 Debt Management Plan (DMP): 20 A DMP is a systematic way to pay down your outstanding debt through monthly deposits to an agency, which then distributes these funds to your creditors. By participating in this program, you may benefit from reduced or waived finance charges and fewer collection calls. Debtor: A person who legally owes money to someone or some entity. Deductions: Any money taken out of your income before you receive it. These can be mandatory, such as federal or state withholding taxes, Social Security, Medicare, child support or spousal maintenance (alimony), or voluntary, such as retirement contributions, union dues, savings deposits, or investments. Deductible: The amount you have to pay for a loss before your insurance company pays the remaining amount of the loss. Discharge: A court order that precludes a creditor from taking any action to collect a debt. A debtor does not need to repay a debt that has been discharged. Some debts (known as non-dischargeable debts ), however, are not discharged and must be paid after the bankruptcy. Exempt Property: In a Chapter 7 bankruptcy, exempt property is the debtor s property protected by law that cannot be seized or liquidated to pay back debt; non-exempt property can be liquidated by the Chapter 7 trustee. Depending upon the state in which you file and the circumstances of your case, you may have the option to claim exemptions under federal or state laws, or may be restricted to the exemption laws of a particular state. The Chapter 7 trustee and creditors have the right to object to the debtor s claim of exempt property. If there is an objection, the validity of the claim of exemption is decided by the Bankruptcy Judge. Foreclosure: When the bank sells your home because you failed to make your mortgage payments on time. Garnishment: When the government or a judgment creditor takes money out of your paycheck before you are paid to pay back a debt you owe or some other type of legal obligation (such as court-ordered child support). Your employer must honor the garnishment and send a check directly to the government or creditor before paying you the remainder of your wages. Gross Income: Your total income, either weekly, monthly, or annually. This is the total amount of your income before any deductions are taken out. Gross value: The total, positive value of something before you reduce it by an amount owed on that item. Home equity: This is the difference between how much your home is worth on the market and how much you owe to a lender. If you have a $100,000 mortgage, and your home is worth $250,000, then you have $150,000 in equity. If you sold your home, you would receive $250,000, pay back the lender the $100,000 you owe, and keep $150,000 in profit your equity. It is one of your assets. Home equity loan: A loan whereby a consumer borrows money and uses the collateral in their home to secure a second mortgage on their home. The loan is based on the difference between the amount the homeowner has paid off on the first mortgage and the home s current market value. Like the first mortgage, a default on the loan can enable a lender to foreclose on the home (after the first lender receives any owed amount). Fixed Monthly Expenses: Expenses that are approximately the same every month and that are fairly predictable. These would include mortgage or rent payments, utility payments, loan payments, etc MORE THAN ONE WAY OUT 58

19 Corresponding Page in Book: Page 63 Table 3: Net Monthly Income Monthly Income Source Current Monthly Income Necessary Changes Planned Net Income Net Income #1 (income less taxes, Social Security, Medicare, etc.) Net Income #2 (income less taxes, Social Security, Medicare, etc.) Net Income #3 (income less taxes, Social Security, Medicare, etc.) Child Support Received Spousal Support Received Military Retirement Other Retirement Social Security Received (after taxes) Other Income (list source) Total Take-Home Income MORE THAN ONE WAY OUT 63