Frequently Asked Questions

The United States Trustee or the Chapter 7 trustee can seek to have a debtor’s case dismissed for “substantial abuse” if the debtor’s income is sufficient to repay a significant portion of the scheduled debts. 11 U.S.C. 707(b). The real expectation is that debtors who are challenged in this way will convert their case to Chapter 13. The law on this subject is not well developed and the attitudes of trustees and judges and the definition of what is “abusive” vary from district to district.

This concept does not apply to Chapter 7 debtors whose debts are primarily business debts, or to those filing Chapter 13.

You will be required to attend at least one meeting of creditors (the 341 meeting), in which the trustee and creditors who choose to come can ask you questions under oath about your financial affairs. During a Chapter 7 case, you may wish to enter into reaffirmation agreements with your secured creditors (house, car, jewelry). These agreements are prepared by the creditors and forwarded to your attorney at which point we will call you to come into our office to review and sign the agreement.

The discharge affects debts that existed on the date the case was filed or have their origin in facts that occurred before the case was filed.

The fact is, you no longer have the majority of your debt; you have an ability to repay (income is freed up), and you can’t declare bankruptcy (Chapter 7) again for eight years. Further, the probability of a consumer declaring bankruptcy a second time in their life is low (it does happen, but after the first filing, most people change their spending habits).

The Bankruptcy Code does not specifically define the requirements for granting a hardship discharge of a student loan. Courts have applied different standards, but they often apply a three-part test to determine eligibility:

1. Income: If the debtor is forced to pay off the student loan, the debtor will not be able to maintain a minimum standard of living for himself or herself and his or her dependents;
2. Duration: The financial circumstances that satisfy the income test in (1.) will continue for a significant portion of the repayment period; and
3. Good Faith: The debtor must have made a good-faith effort to repay the loan prior to the bankruptcy.

Although filing bankruptcy stops, or “stays,” all efforts to collect debts, the Bankruptcy Code excludes actions to collect child support or spousal maintenance from the stay unless the creditor attempts to collect from the “property of the estate.”

In a Chapter 7 proceeding, “property of the estate” includes all possessions, money, and interests the debtor owns at the time of filing. Money earned after the bankruptcy is filed, however, is not property of the estate. Since most child and spousal support is paid out of the debtor’s current income, the bankruptcy should have little impact.

A debtor under Chapter 13 must pay all domestic support obligations that fall due after the petition is filed. Failure to do so could result in dismissal of the case.

Neither a Chapter 7 nor a Chapter 13 discharge affects future child or spousal support obligations. In other words, even at the conclusion of the bankruptcy proceeding, these ongoing obligations remain.

In a Chapter 7 proceeding, the following debts are not discharged:

• Student loans
• Federal, state, and local taxes
• Child support and spousal maintenance (alimony)
• Government-imposed restitution, fines, or penalties
• Court fees
• Debts resulting from driving while intoxicated
• Debts not dischargeable in a previous bankruptcy because of the debtor’s fraud

In addition, the following debts are not discharged if the creditor files an adversary proceeding and is successful during the case. These actions result from one of the following categories:

• Debts from fraud, including certain debts for luxury goods or services incurred within ninety days before filing and certain cash advances taken within seventy days before filing
• Debts from willful and malicious acts
• Debts from embezzlement, larceny, or breach of fiduciary duty

• Motor vehicles, up to a certain value
• Reasonably necessary clothing
• Reasonably necessary household goods and furnishings
• Household appliances, up to a certain dollar value
• Jewelry, up to a certain value
• Pensions in a qualified pension program & retirement or retirement plans
• A portion of the equity in the debtor’s home, up to a certain value
• Tools of the debtor’s trade or profession, up to a certain value
• A portion of unpaid but earned wages
• Public benefits, including public assistance (welfare), Social Security, and unemployment compensation, accumulated in a bank account; and
• Damages awarded for personal injury based on bodily injury, up to a certain value.

If the debtor in a Chapter 7 liquidation bankruptcy is behind on his or her mortgage payments, the home could be lost. The mortgage lender in such cases usually asks the bankruptcy court to lift the automatic stay so that it can institute foreclosure proceedings, in which case the home will be sold and the proceeds used to pay off the debt. Generally, in a chapter 7, we recommend that you are current on your mortgage payments at the time you file a chapter 7.

Whether a debtor who is not behind on mortgage payments will lose his or her house depends on how much equity the debtor has in the property and the amount of the federal or state homestead exemption. If the amount of debt owed on the home is less than the home’s market value, the equity in the house is safe up to the amount provided in the homestead/real property exemption.

In a Chapter 13 proceeding, however, even if the debtor is behind on mortgage payments, if the wage-earner plan includes paying all current and delinquent mortgage payments, the debtor should not lose his or her home. In fact, many people who are behind on their mortgage payments file chapter 13 to save their home and pay back the past due payments over the five-year chapter 13 time-frame.

If the debtor is a renter rather than a homeowner, and is current in his or her rent payments, it is unlikely that the landlord would even become aware of the bankruptcy proceeding. If the debtor is behind, however, he or she could be evicted. Even after the automatic stay is triggered by the bankruptcy filing, the landlord is likely to ask the court to lift the stay on its behalf, and the court is likely to grant that request.

Most other credit information can be included in a consumer credit report for seven years. Civil suits, civil judgments, and arrest records, however, can be reported for at least seven years, and longer if the information is relevant for a longer time period. For example, if the civil judgment against the debtor is valid for ten years, it can be reported for credit-rating purposes for the same time period.

These time limits on reporting credit information do not apply to reports for credit transactions that involve or are reasonably expected to involve a principal amount of $150,000 or more, the underwriting of life insurance involving or reasonably expected to involve a face amount of $150,000 or more, or the employment of a person at a salary that is or is reasonably expected to be at least $75,000 annually.

Because both the Fair Credit Reporting Act, which controls what a credit reporting agency may include in a consumer’s credit report, and the bankruptcy code are federal law, the same rules apply in all states. There may be some differences, however, in relation to the more-than-seven-year information, since most of the relevant time periods or statutes of limitations are found in the individual states’ laws.

If the debtor’s income change after the case has been filed but before the court has confirmed the plan, the trustee will closely scrutinize the debtor’s disposable income to make sure that the payments and the income are consistent and will incorporate any necessary changes into the plan.

If the debtor’s income changes during the duration of the repayment plan, changes in income may not necessitate any changes in payments. The trustee may, however, ask that payments be adjusted if the debtor’s income increases significantly. The trustee does not closely monitor the debtor’s income, and it may actually be outside the scope of a trustee’s duties to do so.

The trustee will consider not only the salary increase, but also whether there has been a corresponding increase in disposable income, on which the payments are based. Disposable income is the amount of the debtor’s salary that is left after deducting all reasonable living expenses.

If the debtor’s salary increases but so do his or her expenses, there may be no increase in disposable income and therefore no change in the payment plan. If there is a significant increase in disposable income, the trustee may ask for an increase in payments. In cases in which the plan extends over more than thirty-six months, the increased payments may actually reduce the length of the plan’s term, so that the debtor has paid off the debts and receives a discharge sooner.

Reaffirmation agreements:

• Must be voluntary
• Must not place to heavy a burden on you or your family
• Must be in your best interest
• Can be canceled anytime before the Court issues your discharge or within 60 days after the agreement is filed with the Court, whichever gives you the most time.

If you are an individual and you are not represented by an attorney, the Court must hold a hearing to decide whether to approve the reaffirmation agreement. The agreement will not be legally binding until the court approves it.

If you reaffirm a debt and then fail to pay it, you owe the debt the same as though there was no bankruptcy. The debt will not be discharged and the creditor can take action to recover any property on which it has a lien or mortgage. The creditor can also take legal action to recover a judgment against you.

The best and perhaps the easiest way to find out whether a debt is a secured debt is to review the documents signed at the time the debt was incurred. If the debt is secured, the documents will say so and will describe the creditor’s security interest, which is usually in the property that is the subject of the financing.

NOTE: We do not endorse any one company and believe comparable services are available through other providers.