BOOK SIX: BANKRUPTCY NFCC Counselor Certification 2005V1 2005 Copyright by the National Foundation for Credit Counseling. All rights reserved.
Book Six - Bankruptcy Table of Contents Page Number Counselor Notice 3 Chapter One: Introduction Why you are here 4 How to read this book 5 Certification Requirement 6 Chapter Two: Bankruptcy Overview What is bankruptcy? 7 Brief Historical Context 7 What is a Chapter 7 Bankruptcy Case? 7 What is a Chapter 13 Bankruptcy Case? 8 Recent changes 8 Frequently Asked Questions 9 Chapter Three: Chapter 7 Bankruptcy The Basics Filing a Chapter 7 Case 11 Exempt property 14 Role of the Chapter 7 Trustee 14 The 341 Meeting of Creditors 15 Tax returns 16 Reaffirmation Agreements 16 Discharge 17 Limits on Multiple Bankruptcy Discharges 19 Frequently Asked Questions 19 Notice 20 Chapter Four: Chapter 13 Bankruptcy The Basics Filing a Chapter 13 Case 21 The Chapter 13 Plan 22 Automatic Stay 23 Role of the Chapter 13 Trustee 24 Exempt property 24 The 341 Meeting of the Creditors 25 Tax returns 26 Reaffirmation Agreements 26 Discharge 27 Limits on Future Bankruptcy Discharges 28 Frequently Asked Questions 29 Notice 29 NFCC Counselor Certification 2005V1 NFCC Counselor Certification Use Only 1
Chapter Five: Consequences of Bankruptcy Bankruptcy is Not a Free Ride 30 What Bankruptcy Could Cost 30 Loss of Property 30 Impact on Credit History 31 Availability of Future Credit 31 Impact on Reputation 32 Impact on Employment 32 Impact on Housing and Mortgages 32 Impact on Availability of Utilities and Other Services 33 Impact on Future Financial Options 33 Chapter Six: Alternatives to Bankruptcy Self-administered Plans and Budgets 34 A Debt Management Plan 34 Negotiated Debt Settlement 35 Consolidate Debt and Live on a Budget 36 Home Equity and Home Refinance Loans 36 Non-Recommended Options 38 Advantages and Disadvantages of Bankruptcy Alternatives 39 Chapter Seven: My Current Budget: How Did I Get Here? Developing Sound Budgeting Skills 40 Calculating Your Net Worth 41 Income and Expenses 42 How Are You Spending Your Money? 42 Three Types of Expenses: Fixed, Variable, and Periodic 43 Assessing Your Currently Monthly Situation 45 Chapter Eight: My New Budget: Developing a Plan That Works What Are Your Goals? 46 What Factors Are Causing the Biggest Problems? 47 Ideas for Increasing Income or Reducing Expenses 48 Changing Your Financial Behavior 49 Rework Your Budget 52 Chapter Nine: Certificates What is the Budget & Credit Counseling Certificate? 54 Why Do I Need a Budget & Credit Counseling Certificate? 54 Are There Any Exceptions to the Budget & Credit Counseling Requirement? 54 What is the Personal Financial Management Course Certificate? 54 Are There Any Exceptions to the Personal Financial Management Course Requirement? 55 Appendix Glossary 56 Authors 61 NFCC Counselor Certification 2005V1 NFCC Counselor Certification Use Only 2
COUNSELOR NOTICE In 2005, the NFCC, in conjunction with a team of technical and education experts, developed the book More Than One Way Out: Personal Bankruptcy, Consequences, and Alternatives. The book is intended to serve as a guide for individuals and families considering personal bankruptcy as a solution to financial challenges. It provides information on Chapter 7 and Chapter 13 bankruptcy, as well as the consequences of and alternatives to bankruptcy. As a counselor, it is imperative that you have a solid understanding of bankruptcy in order to provide clients with quality counseling and advice. Therefore, the text of More Than One Way Out is provided as part of the NFCC s required counselor certification content. The text in it s entirety constitutes Book Six: Bankruptcy and it is included here. Certification examination questions for Book Six will be taken entirely from the text of More Than One Way Out. The following text is provided solely as a tool for counselor certification and should not be used for other purposes. 2005 Copyright by the National Foundation for Credit Counseling. All rights reserved. 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. 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. NFCC Counselor Certification 2005V1 NFCC Counselor Certification Use Only 3
CHAPTER ONE INTRODUCTION Why You Are Here Welcome. Since 2000, approximately 1.5 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. www.uscourts.gov, Calendar year bankruptcy statistics 2. www.usdoj.gov, 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, www.cato.org/pubs/regulation/reg20n4f.html How to Read This Book NFCC Counselor Certification 2005V1 NFCC Counselor Certification Use Only 4
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. Certification Requirement There is one other reason you are here. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 requires that you complete an approved session of budget and NFCC Counselor Certification 2005V1 NFCC Counselor Certification Use Only 5
credit counseling before you can file for bankruptcy. 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. NFCC Counselor Certification 2005V1 NFCC Counselor Certification Use Only 6
CHAPTER TWO 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 1978. That Act updated the first permanent bankruptcy law adopted by Congress, which was known as the Bankruptcy Act of 1898. 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 71.5 percent of the 1,563,145 cases filed by individuals who sought personal bankruptcy protection in 2004 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. 4. www.uscourts.gov; United States Bankruptcy Court statistics for calendar year ending December 31, 2004. 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 NFCC Counselor Certification 2005V1 NFCC Counselor Certification Use Only 7
Court order that releases the individual from the legal obligation to pay debts. Certain debts, such as child support and some taxes, are not covered by the discharge and are known as non-dischargeable debts. 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 plan receives a discharge. Under certain circumstances, a discharge also may be granted to Chapter 13 debtors who do not complete the payments under their plan because of circumstances beyond their control. 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 payment plan is not successful, it may be possible to convert the case and obtain a discharge under Chapter 7. Recent Changes In April 2005, President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. 5 The changes made by that Act generally apply to bankruptcy cases filed on or after October 17, 2005. 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. 5. Public Law No. 109-8, 119 State. 23 (April 20, 2005). 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; NFCC Counselor Certification 2005V1 NFCC Counselor Certification Use Only 8
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 $274. If you are 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 $189. 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. Do I need an attorney to file for bankruptcy? You are not required to be represented by an attorney, but the advice of an attorney is generally helpful in understanding your rights and the consequences of your bankruptcy case, particularly in light of the recent changes to bankruptcy law. If you decide to file a Chapter 7 or Chapter 13 bankruptcy case, the advice and assistance of an experienced bankruptcy attorney is generally a worthwhile expense. Are there less expensive alternatives to hiring an attorney? So-called bankruptcy petition preparers offer services in some areas of the country or over the Internet. Although their fees are usually lower than those of attorneys, bankruptcy petition preparers are generally not attorneys and are, therefore, not permitted to give you legal advice or represent you in court should there be problems with your case. If you are a person with very limited means, in some states or cities you may be able to obtain the services of an attorney who will represent you without charge on a pro bono basis through a legal aid bureau or local bar association. Can I keep my credit cards after filing? Whether you will continue to have and use any given credit card account is up to the issuer of the card. Some issuers may permit you to keep your account if you reaffirm payment of your debt to the issuer. There may be other alternatives available, such as secured or guaranteed payment cards that function more like debit than credit cards. Can I be fired for declaring bankruptcy? The Bankruptcy Code generally prohibits termination of employment or discrimination with respect to employment solely because an individual (1) has filed a bankruptcy case, (2) has been insolvent before the case was filed, or (3) has not paid a discharged debt. NFCC Counselor Certification 2005V1 NFCC Counselor Certification Use Only 9
CHAPTER THREE CHAPTER 7 BANKRUPTCY THE BASICS This chapter will provide you with a summary of basic procedural and other aspects of a Chapter 7 bankruptcy case, which is the most common form of personal bankruptcy. In recent years, Chapter 7 has accounted for about 70 percent of filings. Filing a Chapter 7 Case You commence a Chapter 7 bankruptcy by filing a Chapter 7 bankruptcy petition with the Clerk of the United States Bankruptcy Court. The petition must be accompanied by a filing fee of $274. Depending upon your financial circumstances, you may be able to apply for and obtain a Court order that either permits you to pay the filing fee in installments or waives payment of the filing fee. 6 At the time you file a Chapter 7 petition (or at least shortly thereafter), you must also file a Statement of Financial Affairs and a set of Schedules. You must submit the Statement of Financial Affairs and Schedules under oath (that is, under the penalty of perjury) and make a full and accurate disclosure of your financial circumstances, including a complete list of all your assets and debts and a schedule of all of your current income and current expenditures. 7 In addition, you must file copies of all payment documents (such as payroll vouchers or stubs) or other evidence of payment you received from any employer during the 60 days before your bankruptcy petition was filed. Your bankruptcy petition, Statement of Financial Affairs and Schedules, and other papers, applications and pleadings filed with the Court are a matter of public record and are available for review by your creditors and anyone else at the Clerk s office or (in most Courts) over the Internet. Eligibility: General Subject to the means test established by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 8, if you reside in or have a domicile, place of business or property in the United States, you are permitted to file a Chapter 7 bankruptcy petition. 6. If you are unable to pay the $274 filing fee at the time of filing your bankruptcy petition, you may be able to apply for and obtain an order permitting you to pay the fee in up to four installments. An Order Approving Payment of Filing Fee in Installments generally contains a provision that prohibits you from making any other payment or transfer to an attorney or other person for services in connection with the case until the filing fee is paid in full. If you are unable to pay the $274 filing fee in installments, and your income is less than 150 percent of the official poverty line applicable to your family size, you may be able to apply for and obtain an Order waiving payment of the filing fee. Such an Order generally contains a provision that provides that the waiver may be revoked at a later time if administration of the bankruptcy case demonstrates that the waiver was unwarranted. 7. Under the federal laws concerning bankruptcy crimes, the penalty for an individual who makes a false statement under oath or conceals property may include a fine of up to $250,000 or imprisonment for up to five years, or both. 8. Public Law No. 109-8, 119 Stat. 23 (April 20, 2005). There are rules that determine venue, meaning in which bankruptcy court district you may file the petition. Most individuals must file their Chapter 7 petition where they NFCC Counselor Certification 2005V1 NFCC Counselor Certification Use Only 10
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 7 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: The Means Test Under the changes made by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, your Chapter 7 case may be dismissed (or converted to a Chapter 13 if you so choose) if your current income is sufficient to repay a portion of your debts. That will be determined by a process known as the means test. The means test is complex, and if you choose to file for a Chapter 7 bankruptcy, your attorney will explain the means test and how it applies to your personal situation. However, before making a decision about bankruptcy, you should understand the basics of the means test: You will be permitted to file a Chapter 7 case if the combined current monthly income for you and your spouse is less than the median income for families in your state, as adjusted for the size of the household. If the combined, current monthly income for you and your spouse is more than the median income for families of your size in your state, you may not be eligible to file under Chapter 7. In that case, the means test will look at your income, allowable expenses and any special circumstances to determine whether you are able to at least pay $100 per month to your general, unsecured creditors. If your current monthly income minus allowable expenses leaves you with less than $100 per month, you may be eligible to file a Chapter 7 case regardless of the median income for your state. The following chart outlines the means test. Note: Your attorney will complete the means test based upon your unique situation. The chart below is in no way intended as legal advice and is provided as a general overview of the means test calculation. NFCC Counselor Certification 2005V1 NFCC Counselor Certification Use Only 11
Means Test Overview To Determine Eligibility to File a Chapter 7 Bankruptcy Again, if you decide to file for bankruptcy, you should talk with your attorney to determine whether you should file under Chapter 7 or Chapter 13 and whether the means test will affect your eligibility to file under Chapter 7. If you file a Chapter 7 bankruptcy petition, you will also be required to submit a Statement of Current Monthly Income and Means Test Calculation on a standard form specified by the Bankruptcy Court. The Automatic Stay The filing of a bankruptcy petition creates an automatic stay, which stops creditors from taking any action to collect on debts or to enforce such debts against your property. There are exceptions to the scope of the automatic stay. Filing a bankruptcy petition does not stop, among other things, criminal proceedings, enforcement of a pre-bankruptcy order for eviction from a residence, or efforts to collect debts such as alimony, maintenance, or child support. In addition, the automatic stay does not stop a creditor from collecting from other persons, such as a co-signer on your loan, who have some responsibility for your debts and who have not also filed a bankruptcy petition. If a friend or relative has co-signed a loan or guaranteed your debts, they will remain responsible for those debts even though you have filed for Chapter 7 bankruptcy. 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 NFCC Counselor Certification 2005V1 NFCC Counselor Certification Use Only 12
will consider the evidence and decide whether the automatic stay should be terminated for the creditor that filed the motion. If you have previously filed for bankruptcy within the past 12 months, the automatic stay may 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. The Bankruptcy Code gives each state the option to preclude debtors filing bankruptcy petitions in that state from claiming the federal exemptions. Many states have opted out of the federal exemptions, which means you may claim only the exemptions available under state law. These exemptions vary from state to state. Under changes made by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, you are not permitted to claim exemptions under the law of the state where you file your Chapter 7 petition unless you have lived in that state for at least two years. If you have lived in the state where your Chapter 7 petition is filed for less than two years, you are only permitted to claim exemptions under the law of the state where you lived for the greater portion of the 180-day period immediately before the two years prior to the filing of your petition. One of the Schedules that you must file with your bankruptcy petition is a claim of exempt property. The Chapter 7 Trustee and creditors have the right to object to your claim of exempt property. The deadline for filing an objection to your claim of exempt property is generally 30 days after completion of the meeting of creditors in your case. If there is an objection, the validity of the claim of exempt property is decided by the Bankruptcy Judge. The Role of the Chapter 7 Trustee In every Chapter 7 case, a Bankruptcy Trustee is appointed by the United States Trustee (an official of the United States Department of Justice). 9 The responsibility of the Chapter 7 Trustee is to protect the interests of creditors. The Chapter 7 Trustee will review all the papers filed in your case, conduct the meeting of creditors and take a position on whether you have any assets that are not exempt property. 9. In Alabama and North Carolina there is not a United States Trustee, but many of the same functions are performed by a Bankruptcy Administrator who is part of the Office of the Clerk of the Bankruptcy Court. In the text of this manual, where United States Trustee is mentioned, readers in Alabama and North Carolina should interpret that as Bankruptcy Administrator. If the Chapter 7 Trustee concludes that you do not have any non-exempt property that should be liquidated, the trustee will issue a no distribution report (also known as an NDR ). In most cases, the Chapter 7 Trustee issues a no distribution report shortly after the meeting of creditors. The role of the Chapter 7 Trustee in your case typically ends at NFCC Counselor Certification 2005V1 NFCC Counselor Certification Use Only 13
that point. However, in unusual circumstances, the Trustee may extend his role by filing an objection to your discharge. If the Chapter 7 Trustee determines that you have assets that are not exempt property, the Trustee will demand that they be surrendered. The Chapter 7 Trustee has the power to liquidate your non-exempt assets by selling them to raise cash to make payments to your creditors. The Chapter 7 Trustee also has the power to ask the Court to set aside and recover certain payments known as preferences and certain transfers known as fraudulent conveyances. Ask your attorney to explain these terms if they arise. If approved by the Court, the Trustee s request may result in the collection of additional cash for payment to creditors. Once the Chapter 7 Trustee completes liquidation of non-exempt assets, he or she will file an application with the Court for approval of a distribution to creditors. After payment of priority debts in full, general unsecured creditors are paid on a pro rata basis (that is, the trustee pays each creditor the same percentage of their claim). In rare cases, the Chapter 7 Trustee recovers more than is needed to pay the claims of all of your creditors in full with interest. In that event, the remaining funds (known as the surplus ) are returned to you. The 341 Meeting of Creditors 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, 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. NFCC Counselor Certification 2005V1 NFCC Counselor Certification Use Only 14
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. 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 agreement is in your best interests and does not impose an undue hardship on you or your dependents. If you intend to retain property pledged as collateral for a secured loan, you are required to make good on that intention by actually entering into the reaffirmation agreement. If you fail to enter into a reaffirmation within the appropriate time period, the automatic stay will terminate regarding that collateral. The Bankruptcy Code is not entirely clear on whether the required period of time is (a) 30 days after the date first set for the meeting of creditors, or (b) 45 days after the meeting is actually held. 10 To be safe, you NFCC Counselor Certification 2005V1 NFCC Counselor Certification Use Only 15
may want to enter into any reaffirmation agreement for collateral you intend to keep by not later than 30 days after the date first set for the meeting of creditors. Discharge A discharge 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 any co-signers on your loans, who have responsibility for your debts and who have not filed a bankruptcy petition. If a friend or relative has co-signed a loan or guaranteed your debts, they will remain responsible for those debts even though you have filed for bankruptcy. If your debts include loans like a home mortgage loan that are secured by collateral, a discharge does not affect the creditor s rights against the collateral. For that reason, a creditor can foreclose against and sell collateral after you receive a discharge if you are in default on such a loan unless you reinstate the loan by negotiating new payment terms (again, known as a reaffirmation agreement ). 11 You are not entitled to receive a discharge unless you complete a course of instruction in personal financial management by an approved agency and file a Certificate with the Court (see Chapter Nine of this book). Your discharge may be deferred for a number of reasons, including failure to complete payment of the filing fee in installments or entry into a reaffirmation that must be approved by the Court as not imposing an undue hardship. In addition, your discharge may be deferred or ultimately denied if a timely objection to discharge is filed in your case by the Chapter 7 Trustee, the United States Trustee or a creditor. Objection to and Denial of Discharge Shortly after your Chapter 7 petition is filed, the Court will issue and mail to you and your creditors a Notice of Chapter 7 Bankruptcy Case, Meeting of Creditors, and 10. The requirement may be that you must enter into a reaffirmation agreement with respect to all secured loans other than purchase money loans secured by personal property (such as a car) within 30 days after the date first set for the meeting of creditors, and that you have until 45 days after the meeting of creditors to enter into reaffirmation agreements on purchase money loans secured by personal property. If your meeting of creditors is postponed, you will need to pay particular attention to these rules, because the 30-day time period runs from the date first set for your meeting of creditors, not from the date of your rescheduled meeting. 11. If the collateral is tangible personal property (like a car or boat), you may have the additional option to redeem it by paying the secured creditor a lump sum payment equal to the value of the collateral. After redemption, you can keep the property free of the discharged claims of your pre-bankruptcy creditors. Deadlines That Notice will set a deadline for the filing of objections to a discharge order in your case. The deadline for objection to discharge is generally 60 days after the date first set for the meeting of creditors in your case. In order to object to your discharge, the Chapter 7 Trustee, the United States Trustee or a creditor must file a complaint in the Bankruptcy Court. The complaint must set forth grounds upon which your discharge could be denied under the Bankruptcy Code. The NFCC Counselor Certification 2005V1 NFCC Counselor Certification Use Only 16
grounds for objecting to discharge generally relate to misconduct in connection with the bankruptcy case itself, such as concealment of assets, making a knowing and fraudulent false oath in connection with the case, or failure to obey a lawful order of the Bankruptcy Court. If an objection to discharge is filed in your case, you are entitled to defend your right to receive a discharge. Ultimately, the Bankruptcy Judge will hold a trial at which the Judge will hear testimony of witnesses, consider other evidence, and decide whether the discharge should be granted. Exceptions to Discharge Certain debts are non-dischargeable, which means they are not affected by a discharge and that you are still legally obligated to repay them. The grounds for nondischargeability generally relate to the nature of a specific debt. The Bankruptcy Code includes exceptions to discharge for debts such as alimony, maintenance, child support, some taxes, and criminal restitution, and for certain claims that creditors can prove you incurred by fraud, embezzlement, or larceny, or that resulted from willful and malicious injury. Also, according to the Bankruptcy Code: In addition, debts that are incurred to pay otherwise non-dischargeable debt may not be dischargeable (for example, using a credit card to pay otherwise non-dischargeable tax liabilities). A debt of more than $500 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.) Most types of your non-dischargeable debt are automatically exempted from discharge even without any action by the creditor. However, if a creditor asserts that its claim against you 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 to determine the dischargeability of debt in the Bankruptcy Court by a deadline set by the Court. That deadline is set in the Notice of Chapter 7 Bankruptcy Case, Meeting of Creditors, and Deadlines mailed to you and your creditors by the Court. It is usually the same date as the deadline for objecting to your discharge (that is, 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. If a complaint for determination of dischargeability of debt is filed in your case, you are entitled to dispute the creditor s assertion that it holds a non-dischargeable debt. Ultimately, the Bankruptcy Judge will hold a trial at which the Judge will hear testimony of witnesses, consider other evidence, and decide whether your debt is exempted from the discharge granted in your case. Limits on Multiple Bankruptcy Discharges Once you receive a Chapter 7 discharge, you will not be eligible to receive another Chapter 7 discharge for a period of eight years. If you previously received a Chapter 13 discharge, you are not permitted to receive another discharge in a Chapter 7 case filed within six years of the filing of the earlier case NFCC Counselor Certification 2005V1 NFCC Counselor Certification Use Only 17
unless (1) your Chapter 13 plan paid the allowed claims of unsecured creditors in full, or (2) your plan paid 70 percent of such claims, was proposed in good faith and was your best effort. 12 Restrictions on Repeat or Multiple Filings 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. 12. This same limitation applies if your prior case was a Chapter 12 case. A Chapter 12 case is a type of simplified reorganization case in which a family farmer or a family fisherman is permitted to propose a payment plan similar in concept to one an individual with regular income may propose under Chapter 13. Chapter 12 cases are not discussed in this book. 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 up to $125,000 in equity. 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 NFCC Counselor Certification 2005V1 NFCC Counselor Certification Use Only 18
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. NFCC Counselor Certification 2005V1 NFCC Counselor Certification Use Only 19
CHAPTER FOUR CHAPTER 13 BANKRUPTCY THE BASICS This Chapter will provide you with an overview of basic procedural and other aspects of a Chapter 13 bankruptcy case, which may be the only type of bankruptcy case you are be eligible to file under the means test in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Filing a Chapter 13 Case A Chapter 13 bankruptcy is commenced when you file a Chapter 13 bankruptcy petition with the Clerk of the United States Bankruptcy Court. Your petition must be accompanied by a filing fee of $189. Depending upon your financial circumstances, you may be able to apply for and obtain a Court order that either permits you to pay the filing fee in installments or waives payment entirely. 13 At the time you file a Chapter 13 petition (or at the latest shortly thereafter), you must also file a Statement of Financial Affairs and a set of Schedules. You must submit the Statement of Financial Affairs and Schedules under oath (that is, under the penalty of perjury) and make a full and accurate disclosure of your financial circumstances, including a complete list of all your assets and debts and a schedule of all your current income and current expenditures. 14 In addition, you must file copies of all payment documents (such as payroll vouchers or stubs) or other evidence of income you received from any employer during the 60 days before you filed your bankruptcy petition. At the time you file your Chapter 13 petition (or shortly thereafter), you also must file a Chapter 13 Repayment Plan. As described in greater detail below, a Chapter 13 Plan is your proposal for repayment of your creditors, in whole or in part. The first payment under your Chapter 13 Plan must be made to the Chapter 13 Trustee within 30 days of when you file your case. Your bankruptcy petition, Statement of Financial Affairs and Schedules, Chapter 13 Plan and other papers, applications and pleadings filed with the Court are a matter of public record and are available for review by your creditors and anyone else at the Clerk s office or (in most Courts) over the Internet. 13. If you are unable to pay the $189 filing fee at the time of filing your bankruptcy petition, you may be able to apply for and obtain an order permitting you to pay the fee in up to four installments. An Order Approving Payment of Filing Fee in Installments generally contains a provision that prohibits you from making any other payment or transfer to an attorney or other person for services in connection with the case until the filing fee is paid in full. If you are unable to pay the $189 filing fee in installments and your income is less than 150 percent of the official poverty line applicable to your family size, you may be able to apply for and obtain an Order waiving payment of the filing fee. Such an Order generally contains a provision that provides that the waiver may be revoked at a later time if administration of the bankruptcy case demonstrates that the waiver was unwarranted. 14. Under the federal laws concerning bankruptcy crimes, the penalty for an individual who makes a false statement under oath or conceals property may include a fine of up to $250,000 or imprisonment for up to five years, or both. Eligibility: General NFCC Counselor Certification 2005V1 NFCC Counselor Certification Use Only 20