What is Bankruptcy?
Bankruptcy is a legal process in which you ask the Bankruptcy Court to
grant you relief from your debts. In order to obtain a discharge of your
debts, you need to honest and truthful about what assets you own or may
have owned but no longer own, what debts you owe, your income and expenses
and what your past financial dealings have been like. There are several
types of Bankruptcy. The most common types are Chapter 7, 11 and 13. Most
consumers typically consider Chapter 7 or Chapter 13 Bankruptcy. But,
occasionally, individuals may find it advantageous to file for Chapter
What is Chapter 7?
Chapter 7 Bankruptcy is known as a “liquidation”. What this
means is that in return for a discharge of your personal liability for
debts such as credit cards, car loans, personal loans, retail accounts,
lines of credit and mortgage loans, you give up all non exempt assets.
In New York State, you have a choice of exemptions that you can apply
to your assets. One of the most recent changes to New York exemption laws,
for example, allows homeowners to exempt up to $150,000 ($300,000 for
married couples who are both owners) of equity in their home. In many
cases, an individual filing for Chapter 7 is able to keep all of the property
that is important to them and able to gain a fresh start without paying
any money to their creditors. If you are considering filing for Chapter
7 Bankruptcy, it is very important to speak with a qualified attorney
who can assist you with exemption planning. Remember,
only a lawyer can counsel you on how Bankruptcy exemptions apply to your property.
What is Chapter 13?
Chapter 13 Bankruptcy is a “reorganization” of your debts.
In Chapter 13 Bankruptcy, you propose a plan on how to deal with your
debts.The plan must conform to the requirements of the Bankruptcy code,
which addresses 1) how certain debts are classified and paid back, 2)
how much you must commit to a Chapter 13 plan, 3) what debts are not dischargeable
and 4) many other aspects of your Chapter 13 case. A chapter 13 plan can
last between 3-5 years. There is also a limit on the amount of debt a
person can have in a Chapter 13 plan. If you exceed this debt limit, you
are not eligible to file for Chapter 13 Bankruptcy.
The main difference between Chapter 7 and Chapter 13 is that in Chapter
13, you are making monthly payments towards your debt. Often, these monthly
payments will be much less than the amount you would normally pay just
towards credit card minimums each month. The difference is that in a Chapter
13 case, your payments actually mean something and your debt is being resolved.
However, just because you are making monthly payments does not mean you
are necessarily paying back 100% of your debt in a Chapter 13 plan. In
fact, in many cases individuals pay a very small percentage of their debt
back. However, there may be many circumstances in which it is in your
favor to pay certain debt back in full and Chapter 13 is a way to accomplish
this at a much lower cost than outside the Bankruptcy process.
I thought Chapter 11 was just for businesses. Why would I consider this option?
Chapter 11 is the only kind of Bankruptcy where a business may obtain a
discharge. However, individuals may also take advantage of Chapter 11
Bankruptcy. This may be particularly useful if you wish to reorganize
your debts and create a payment plan but your debts exceed the debt limits
in a Chapter 13 or where you cannot propose a feasible plan to pay your
debts in 5 years and need a longer repayment period.
A Chapter 11 plan is more costly than a Chapter 13 but the benefits offered
by Chapter 11 Bankruptcy may significantly outweigh the costs of a Chapter
7 liquidation or not having any Bankruptcy protection at all.
What is the difference between debt consolidation and Bankruptcy?
Often, debt consolidation companies only make your debt problems worse.
Many of these companies may not have your best interests at heart. Frequently,
clients have come to me after paying these companies hundreds of dollars
with the same or more debt than they had when they first began that process.
When you begin paying one of these companies and stop paying your bills,
some creditors decide to take matters into their own hands and may file
a lawsuit against you in your local court. If you are able to settle your
debts, you may find yourself dealing with 1099-c tax liability for any
amount of money in excess of $600.00 that was “forgiven” as
a result of the settlement. Imagine thinking you resolved one of your
debts but are now smacked with an IRS tax bill that comes straight out
of your refund, or worse, that is a bill you now owe to the IRS!
On the other hand, debts discharged in bankruptcy are not taxable income.
While it is true that filing for bankruptcy is not great for your credit,
neither is “debt consolidation”. This is because if you stop
paying your bills, creditors can report to credit reporting agencies that
you have done so or that you are delinquent. If a creditor agrees to accept
less than what you owe them, they can also report this. All of these things
can negatively affect your credit. Imagine if you could have filed for
Chapter 7 bankruptcy and not paid all this money and instead focused on
taking care of your family!
Debt consolidation often just delays the inevitable and costs you much
more money than paying for a Bankruptcy which gives you real and immediate
protection from your creditors.
Why would I file Chapter 13 over Chapter 7?
There are many advantages to filing for Chapter 13 that you may not be
aware of. Here are a few examples:
- Chapter 13 Bankruptcy can stop the foreclosure process and help you evaluate
what options you have to stay in your home including reinstating your
mortgage by resuming your monthly payments while paying back your arrears
over 36-60 months interest free.
- Chapter 13 Bankruptcy can allow you to strip a second mortgage which is
completely unsecured due to a decrease in the value of your home.
- Chapter 13 Bankruptcy can allow you to manage your tax debts and pay them
back, often times interest free and also penalty free over time.
- Chapter 13 Bankruptcy can help you lower your monthly car payments by spreading
the total balance due over 60 months or by allowing you to “cram
down” a loan to the actual value of your car.
- Chapter 13 Bankruptcy can help you stretch payment of your child support
arrears over 36-60 months which may dramatically reduce the amount of
the garnishment you are experiencing each pay period.
- Chapter 13 Bankruptcy can help you develop a realistic repayment plan that
prioritizes your most important debts and helps you regain control of
your financial life.
- Chapter 13 Bankruptcy provides for an automatic stay of collection against
any “co-signors” of consumer debts, which means the person
who helped you get a loan won’t suffer just because you filed for
How long will my Chapter 13 case last?
A Chapter 13 case will last between 3-5 years. The length of your plan
is determined by your income and how it compares to the median income
of a household of your size in your state. If you are below the median
income, you are entitled to file a 36 month plan. However, if you need
more time to pay your debts, you may ask the court to allow you to have
up to 60 months. If you are above the median income, your plan will be
60 months long.
When do I make my first payment in my Chapter 13 case?
You will begin making payments right away. The first payment is due 30
days after the filing of your Chapter 13 case.
I’ve heard different kind of debts will be treated differently in
a Chapter 13 case. Is this true?
Yes. In Chapter 13 Bankruptcy, certain debts are given priority over others.
Generally speaking, Chapter 13 organizes debts into the following categories:
1) administrative debts (e.g. attorneys fees, trustee fees), 2) secured
debts (e.g. mortgage arrears, car payment arrears, secured tax debts),
3) unsecured priority debts (e.g. taxes, domestic support obligations)
and 4) unsecured debts (e.g. credit cards, retail cards, personal loans).
Administrative, secured and unsecured priority debts must be paid in full
in any Chapter 13 case. They also get paid in that order. Unsecured creditors
are paid last. Your Bankruptcy attorney can help you understand this further
and explain to you what debts you may have, if any, that must be repaid in full.
What happens if I am no longer able to afford my Chapter 13 payments?
Often times, unexpected events occur which may prevent you from making
your proposed Chapter 13 plan payments. There are several options that
may be available to you if you are no longer able to afford your Chapter
13 payments. You may be able to modify plan to lower your monthly payment,
convert your case to a Chapter 7 case, ask the court for a hardship discharge
or dismiss your case.
I am married, does my spouse have to file Bankruptcy with me?
No, just because you are married does not mean you and your spouse have
to file for Bankruptcy together. However, if you are both liable for the
same debts, your filing and subsequent discharge will not insulate your
spouse for joint debts and he or she will remain liable. So, it may be
in both of your interests to consider filing together.
Can I keep my house or my car out of my Bankruptcy?
No, you cannot pick and choose what assets you include or don’t include
in your Bankruptcy. Some assets are not part of your Bankruptcy estate
by law. However, the rest of your assets and any debts associated with
these must be disclosed. Believe it or not, your Bankruptcy may help you
keep your home or your car. So, don’t be scared about “including”
your home or car. You should speak to a qualified attorney about your
concerns and to make sure you understand the effect filing for Bankruptcy
would have on your particular assets. Remember, every case is different.
Will I have to appear before a judge? How often do I have to go to court?
When you file for Chapter 7 Bankruptcy, you typically have one court date
about 30 days after your case is filed. This is what is known as your
meeting of creditors. Creditors rarely show up and the person you appear
before is not a judge. This meeting is where you will meet the Trustee,
who is an attorney that represents the interests of your creditors. If
all goes well at your meeting of creditors, you will likely never have
to go to court again. An exception to this, however, is if you decide
to sign a reaffirmation agreement with respect to a particular debt such
as a car loan. If the Court determines there may be a possibility that
reaffirming this debt could be a hardship to you or your family, you will
be required to appear before your Bankruptcy Judge who will ask you some
questions to make sure you can afford this debt.
When you file for Chapter 13 Bankruptcy, you will typically go to two court
dates. The first is the meeting of creditors described above. The second
is your confirmation hearing where you will appear before a judge. At
the confirmation hearing, you will find out if the Court will approve
your Chapter 13 plan and your attorney will also discuss any other items
that need to be addressed in order for your case to be confirmed. Once
your plan is approved and confirmed, you will likely not have to show
up in court again unless a problem comes up. In our district, you do not
need to appear at any additional hearings unless specifically ordered
by the court or unless you fall behind on your payments.
How long does it take to receive a discharge?
In a Chapter 7 case, assuming no objections to your discharge are made,
you may obtain a discharge 60 days after the initial date of the meeting
In a Chapter 13 case, assuming you are eligible for a discharge, you may
obtain a discharge after you have successfully completed your confirmed
plan, which can take 3 or 5 years.
However, these answers could be different if you filed a prior Bankruptcy
case. This is because there are rules on how often you may file a Chapter
7 case or Chapter 13 case, which will affect your ability to get a discharge.
If you have filed a Bankruptcy case before and are contemplating filing
for Bankruptcy again, make sure to tell your Bankruptcy attorney of your
I am a small business owner and guaranteed many of my business’s
debts. Will my Bankruptcy filing and discharge also discharge my business’s
liability for these debts?
No. If you own your business as anything other than a sole proprietorship,
you and your business are separate entities. Therefore, you filing for
Bankruptcy does not relieve your business of its liability for business
debts. However, your business may not be liable for debts and a review
the documents you signed for loans or other debts can help determine if
the business is really liable for these debts. It is worth investing in
hiring an attorney to review these documents to determine who is truly
liable for your debts. This can be an important part of your Bankruptcy
planning. If your business is liable for these debts and you wish for
your business to be granted a discharge, you should consider discussing
filing a Chapter 11 Bankruptcy for the business with a Bankruptcy attorney.
How long does a Bankruptcy filing stay on my credit report?
Credit Reporting Agencies report potentially negative information, such
as missed payments and most public record items on a personal credit report
for seven years. This includes Chapter 13 bankruptcies. However, an exception
to this is that they may report Chapters 7, 11 and 12 bankruptcies for 10 years.
How long will it take for me to re-build my credit after filing for Bankruptcy?
Even though a Bankruptcy will stay on your credit report for 7-10 years,
it won't necessarily affect your credit score the entire time. Many
people start rebuilding their credit within 1-2 years after Bankruptcy
discharge. You have also options such as applying for a “secured”
credit card which can help you start re-building credit right away.
Can I wipe out student loans?
Student loan debt is extremely difficult to wipe out in Bankruptcy. This
is because the standards for discharging student loan debt through a “harship
discharge” are particularly difficult to meet for most individuals.
This process is both complex and expensive and requires a separate proceeding
from your Bankruptcy filing.
Is it true you can wipe out taxes in Bankruptcy?
Yes, some income taxes are dischargeable in Bankruptcy. It is a common
misunderstanding that Bankruptcy cannot eliminate any tax liability. But,
the longer you wait to deal with tax debts, the more difficult it may
become to help you.
Whether or not income taxes are dischargeable depends on when they became
due, when they were assessed as well as a variety of other factors. However,
income taxes which are dischargeable are not automatically discharged
as a result of you receiving a discharge. A separate proceeding to determine
they are dischargeable is required.
Unfortunately, Bankruptcy cannot eliminate liability for taxes such as
estate and gift taxes, sales tax or fuel taxes. Special rules also apply
to trust fund taxes, which are taxes related to social security and medicare.
Furthermore, if your tax debts have become “secured” by the
IRS or state taxing authority filing a tax lien, this may further complicate
your case and affect the dischargeability of the tax debt.
If it turns out your tax debt is not dischargeable, you can still explore
if Bankruptcy would be a good way to take control of your tax debts. For
example, a Chapter 13 plan may provide you with a way to repay your debts
in full, at a fixed payment each month and interest free. Worrying about
the IRS or state levying your bank accounts can become a worry of the past!
If you are concerned about income tax debts, you should speak with a qualified
Bankruptcy attorney to determine if Bankruptcy can help you discharge
Can I wipe out child support or arrears?
Domestic support obligations, such as child support, cannot be discharged
in Bankruptcy. However, you may be able to lower the amount of your monthly
child support garnishment by filing for Chapter 13. This is because you
are allowed to repay your child support arrears over 3-5 years in Chapter
13, which may significantly reduce the amount of funds that are garnished
from your paycheck.
I only owe a small amount of debt? Can I still file Bankruptcy?
Yes. There is no minimum debt requirement to be eligible to file for Bankruptcy.
Although the amount of debt you owe may seem small compared to others,
the decision to file Bankruptcy is somewhat personal. If debt is affecting
your life negatively and you or your loved ones are suffering from the
obligation to repay debt, Bankruptcy may be appropriate for you even if
your debt is not very high.
Questions or interested in a consultation about your case? Email Natasha
Meruelo, Esq. at firstname.lastname@example.org or call me at (914) 517-7565. The
first consultation is always free of charge.
Natasha Meruelo, Esq. is located at 445 Hamilton Avenue, Suite 1102, White
Plains, NY 10601.
*Natasha Meruelo, Esq., designated as a Federal Debt Relief Agent by an
Act of Congress and the President of the United States, proudly assists
consumers seeking relief under the US Bankruptcy Code.
Prior results do not guarantee a similar outcome.