Personal (Consumer) Bankruptcy

Bankruptcy for Individuals -

What is it?

Bankruptcy is a legal process in which a person who cannot repay his debts can get a clean start. Your right to file for bankruptcy is guaranteed by Federal law. Over a million people file for bankruptcy protection last year. This allows them the extra time to get back on their feet.

How can filing bankruptcy help?

When you file for bankruptcy, creditors are prohibited from contacting you about payments for your debts. They are no longer allowed to contact you at all without written permission from your attorney. Bankruptcy can stop home foreclosure, auto repossession and lawsuits. Filing bankruptcy gives you a chance to work out a solution, so you can keep many of the possessions that you worked so hard to attain.

Is bankruptcy right for me?

To know if bankruptcy is the right choice for you, call and make a free initial consultation appointment with our firm. We will explain the bankruptcy process and evaluate your personal situation to ensure that you are on your way to new start.

What do you have to lose... other than your home, cars and way of life?

Act now. Give us a call. Your initial 30 minute consultation is free!

How can filing bankruptcy help me?

Bankruptcy is not right for everyone but it can make it possible for you to:

• Eliminate debts so that you can make a clean start;
• Allow you to keep belongings that are exempt from creditors under bankruptcy law;
• Stop foreclosure on your home;
• Prevent repossession of vehicles and other property;
• Force the return of the repossessed vehicle;
• Restore your utilities; and
• Stop debt collectors from calling and harassing you.

What Bankruptcy can NOT do -

Bankruptcy is not a cure for all financial problems. Under bankruptcy, it is usually not possible to:

• Eliminate the rights of certain “secured” creditors;
• Eliminate the loan on your vehicle. If you are behind on your payments to a secured creditor, you will have to bring the loan current when filing a bankruptcy;
  • Bankruptcy allows you to keep your vehicle without the threat of repossession;
  • You can force these secured creditors to take payments over a period of time; or
  • You may choose to surrender the vehicle and wipe out any remaining balance owed.
• The law does not allow you to discharge certain types of obligations, such as:
  • Child support;
  • Most student loans;
  • Criminal fines; and
  • Most taxes.
• Debt that arises after you file for bankruptcy.

Are there different types of Bankruptcy?

Individuals usually file for bankruptcy protection under either Chapters 7 or 13 of the Bankruptcy Code. Businesses and some high-income people in certain situations have to file under Chapter 11.

Chapter 7 -

Chapter 7 is called “liquidation” as it eliminates most of your debts. We will file a petition with the court asking that your debts be wiped out. The law typically protects most, if not all, of your property from your creditors.

Important to know, though, is that Chapter 7 works best for people who are current on their mortgage and/or auto loan, or can catch up quickly. As your house and car may be collateral for these loans, the lender can ask the court for permission to take the property back if you cannot keep current on your payments.

Chapter 13  -

Chapter 13 allows you to “reorganize” your debts so that you can pay all or a portion of your debts over a period of years using your current income. In a Chapter 13 case, you will file a “plan” with the Court to show how you can repay some of your past due and current debts over a three to five-year period. This allows you to keep property that you might otherwise lose. In the plan, you show how you will make up missed mortgage or auto payments.

Which One is the Best for You?

Most people who file for bankruptcy choose Chapter 7 bankruptcy because it is fast, effective and does not require payments over time.

Advantages of Chapter 7 Bankruptcy

A typical Chapter 7 bankruptcy is opened and closed within three to six months. You emerge debt-free except for a mortgage, car payments and certain types of debts that survive bankruptcy, such as student loans, taxes, and unpaid child support or other domestic obligations.

Although you can lose property in Chapter 7 bankruptcy, most filers do not.

Not everyone is eligible to file Chapter 7 bankruptcy. If your income is sufficient to pay back your debts after subtracting the amount of certain allowed expenses and monthly payments for child support, tax debts, secured debts (such as a mortgage or car loan), you won't be eligible to file for Chapter 7 bankruptcy.

Steps in a Chapter 7 Bankruptcy.

To begin a Chapter 7 bankruptcy, you fill out a packet of forms. You will be asked to list your income, property, expenses, and debts.

In addition, you provide the Chapter 7 Trustee with your prior 3 years tax returns, proof that you have filed your tax returns for the last four years, and a certificate showing that you have completed a credit counseling course. You will also have to provide 6 months of your most current pay stubs

Drawbacks of Chapter 13 Bankruptcy.

The main reason most people prefer Chapter 7 bankruptcy is that it does not require you to repay any portion of your debts. Chapter 13 bankruptcy does. If you file for a Chapter 13 bankruptcy, you must complete the entire three- to five-year repayment plan in order to have your remaining debts discharged. If you don’t fully complete your repayment plan, your debts will remain.

When would You choose to use Chapter 13?

You are not eligible to file for Chapter 7 bankruptcy.

You won't be allowed to file for Chapter 7 bankruptcy if you cannot meet new requirements imposed by the 2005 revisions to the bankruptcy law. Under these new rules, you cannot file for Chapter 7 if both of the following are true:

1. Your current monthly income over the six months prior to your filing date is more than the median income for a household of your size in Texas. The chart below lists median monthly incomes for the State of Texas; and
2. Your disposable income, after subtracting certain expenses and monthly payments for debts you must repay in Chapter 13, exceeds certain limits set by law. These calculations are commonly referred to as the "means test" which is based on:
    

You are behind on your mortgage or car loan, and want to make up the missed payments over time and reinstate the original loan.

You cannot do this in Chapter 7 bankruptcy. You can make up missed payments only in Chapter 13 bankruptcy.

You have a tax obligation, student loan, or other debt that cannot be discharged in Chapter 7.

You can include these debts in your Chapter 13 plan and pay them off over time.

You have nonexempt property that you want to keep.

When you file for Chapter 7 bankruptcy, you get to keep only exempt property -- property that is protected from creditors under state or federal law. In a Chapter 7, you have to give your nonexempt property to the bankruptcy trustee, who can sell it and distribute the proceeds to your creditors. In Chapter 13, you don't have to give up any property. Instead, you repay your debts out of your current income. So, if you have nonexempt property that you can't bear to part with, Chapter 13 might be the better choice.

You have a co-debtor on a personal debt.

If you file for Chapter 7 bankruptcy, your co-debtor will still be on the hook -- and your creditor will undoubtedly go after the co-debtor for payment. If you file for Chapter 13 bankruptcy, the creditor will leave your co-debtor alone, as long as you keep up with your bankruptcy plan payments.

Comparing Chapter 13 and Chapter 7 Bankruptcy

What happens if...

Steps in a Chapter 13 Bankruptcy.

To begin a Chapter 13 bankruptcy, you fill out a packet of forms — mostly the same forms as you would use in a Chapter 7 bankruptcy — listing your income, property, expenses, and debts. You also file a workable payment plan proposing how you plan to handle your debts over the payment plan period.

In addition, you file your tax return for the previous year, proof that you have filed your tax returns for the last four years, and a certificate showing that you have completed a credit counseling course.

When your Chapter 13 plan is approved by the court, you make monthly payments to the bankruptcy trustee, an official appointed by the bankruptcy court to oversee your case. The trustee in turn pays your creditors and collects a statutory commission based on the amounts paid out under your plan. You must make every payment, on time, in order to successfully complete your plan and get a discharge of your remaining debts.

How Much Will You Have to Pay?

Some creditors are entitled to receive 100% of what you owe them, while others may receive a much smaller percentage (or nothing at all). Typically, Chapter 13 bankruptcy plans must provide that:

• Administrative claims will be paid 100%. These include:
  • Your filing fee;
  • The trustee's commission (3% to 10% of each monthly payment), and
  • Attorney's fees, if you hire an attorney for help with your Chapter 13 bankruptcy.
• Priority debts will be paid 100%. These include:
  • Back alimony and child support;
  • Most tax debts (including state and federal income taxes);
  • Wages, salaries, or commissions you owe to employees and contributions you owe to an employee benefit fund;
  • Mortgage defaults will be paid 100% if you want to keep your house;
  • Other secured debt defaults will be paid 100% if you want to keep the property; and
  •  Missed car payments fall into this category.
• Unsecured debts will be paid anywhere from 0% to 100% of what you owe. The exact amount depends on:
  • The total value of your nonexempt property;
  • The amount of disposable income you have each month to put toward your debts; and
  • How long your plan lasts.

What is Disposable Income?

Your payment plan must commit to paying any leftover disposable income (your income less certain allowed expenses and payments on secured loans, such as a mortgage or car loan) towards your unsecured debts, such as credit card debts and medical bills.

Length of Payment Plan

The length of your payment plan depends on your income level. If your "current monthly income" (your average income over the six months prior to filing) exceeds the median monthly income for a household of your size in Texas, your plan must last five years. If your income is less than the median, you can propose a three-year plan, even if your unsecured creditors cannot be fully repaid during that time.

Eliminating Tax Debts

Most tax debts cannot be wiped out in bankruptcy — you'll continue to owe them at the end of a Chapter 7 bankruptcy case, or you'll have to repay them in full in a Chapter 13 bankruptcy repayment plan. If you need to discharge tax debts, Chapter 7 bankruptcy will probably be the better option — but only if your debts qualify for discharge (see below) and you are eligible for Chapter 7 bankruptcy.

When You Can Discharge a Tax Debt

You can discharge (wipe out) debts for federal income taxes in Chapter 7 bankruptcy only if all of the following conditions are true:

• The taxes are income taxes. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy;
• You did not commit fraud or willful evasion. If you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return, bankruptcy can't help;
• The debt is at least three years old. To eliminate a tax debt, the tax return must have been originally due at least three years before you filed for bankruptcy;
• You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy; and
• You pass the "240-day rule." The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet.
  This time limit may be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.

You Can't Discharge a Federal Tax Lien

If your taxes qualify for discharge in a Chapter 7 bankruptcy case, your victory may be bittersweet. This is because bankruptcy will not wipe out prior recorded tax liens. A Chapter 7 bankruptcy will wipe out your personal obligation to pay the debt, and prevent the IRS from going after your bank account or wages, but if the IRS recorded a tax lien on your property before you file for bankruptcy, the lien will remain on the property. In effect, this means you'll have to pay off the tax lien in order to sell the property.