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Bankruptcy Basics: Handout 1—Answers to Common Bankruptcy Questions

A decision to file for bankruptcy should be made only after determining that bankruptcy is the best way to deal with your financial problems. This brochure cannot explain every aspect of the bankruptcy process. If you still have questions after reading it, you should speak with an attorney familiar with bankruptcy.

What Is Bankruptcy?

Bankruptcy Basics: Handout 3—Using Credit Wisely After Bankruptcy

Beware of Credit Offers Aimed at Recent Bankruptcy Filers

“Disguised” Reaffirmation Agreement

Carefully read any credit card or other credit offer from a company that claims to represent a lender you listed in your bankruptcy or own a debt you discharged. This offer may be from a debt collection company that is trying to trick you into reaffirming a debt. The fine print of the credit offer or agreement will likely say that you will get new credit, but only if some or all of the balance from the discharged debt is added to the new account.

Bankruptcy Basics: Property of the Estate

The commencement of a bankruptcy case creates an “estate.” 11 U.S.C. § 541. Based on the broad definition of “property of the estate” found in section 541, virtually all assets and property interests of the debtor as of the time the case is filed come into the bankruptcy estate and are subject to being administered for the benefit of creditors if not exempt (as discussed below). Such property includes intangible, contingent, and future property interests, such as any interest a debtor has in any pending lawsuit or potential cause of action, or any anticipated tax refund.

Bankruptcy Basics: Overview.

While there are six types of bankruptcy cases provided for under the Bankruptcy Code, the choice for most consumers will be between filing under chapter 7 or chapter 13. An overview of these two chapters most used by consumers is provided later in this Chapter. What is provided here is a short description of the various chapters that will assist the attorney in satisfying the certification on the bankruptcy petition (Official Form 101).

Bankruptcy Basics: Chapter 7.

A case filed under chapter 7 is often called a “liquidation.” In a chapter 7 case, the debtor’s assets are examined by a court-appointed trustee to determine if anything is available to be sold or recovered for the benefit of creditors. Certain property cannot be liquidated by the trustee because it is “exempt.” In most consumer bankruptcy cases virtually all of the debtor’s assets are exempt.

Bankruptcy Basics: Chapter 13.

A case filed under chapter 13 is often called a “reorganization” because it provides for the “adjustment of debts.” Chapter 13 cases work very differently than chapter 7 liquidations and provide the debtor with the opportunity to adjust their financial affairs without needing to liquidate assets. In a chapter 13 case the debtor submits a plan to repay creditors all or part of the money owed them over a three to five year period, usually funded from future income.

Bankruptcy Basics: Chapter 11.

Chapter 11 is designed for the reorganization of a business but is also available to individual consumer debtors. However, because its provisions are complicated and of questionable benefit for low- and moderate-income debtors, and there are additional expenses, the filing of a chapter 11 petition by a consumer debtor is generally not advisable.

Bankruptcy Basics: Chapter 12.

Chapter 12 is designed to permit family farmers and fishermen to repay their debts over a period of time in a manner similar to chapter 13, usually from future earnings. Based on the eligibility requirements, use of chapter 12 is generally limited to those whose income comes primarily from a family-owned farm or commercial fishing operation.

Bankruptcy Basics: Chapter 15.

Chapter 15 provides a mechanism for dealing with cross-border insolvency cases that involve debtors, assets, claimants, and other parties in interest located in more than one country.

Bankruptcy Basics: In General

Chapter 7 bankruptcy cases are usually straightforward. Occasionally complications arise if, for example, creditors take aggressive action, if the trustee thinks that the debtor is hiding assets or can repay creditors, or if the debtor wants to challenge creditors’ claims.

Bankruptcy Basics: Safe Harbor for Most Debtors.

If the debtor’s income is below the median family income for the debtor’s state of residence, sections 707(b)(6) and (7) provide that only the United States trustee, bankruptcy administrator, or bankruptcy judge may file a motion under section 707(b) claiming general abuse and that no party may file a motion seeking to apply the means test. Although the median income figure for the relevant specific state must be used, the national average median family income for a family of four in 2021 was approximately $94,738, which gives some sense of who may be protected by this provision.

Bankruptcy Basics: Current Monthly Income.

The first step in determining whether the debtor falls within the safe harbor’s protection is to calculate the debtor’s “current monthly income.” Section 101(10A) defines current monthly income as the monthly average of all income (whether or not taxable) received by the debtor during the six-month period ending on the last day of the calendar month preceding the bankruptcy filing. In addition to the debtor’s gross wages, salary, and commissions, current monthly income includes amounts paid to the debtor on a regular basis for household expenses of the debtor or the debtor’s dependents.

Bankruptcy Basics: Means Test Formula.

Debtors whose income exceeds the state’s median family income must fill out Official Form 122A-2—Chapter 7 Means Test Calculation, reporting detailed information about their income and expenses, to determine whether a presumption of abuse exists under the means-test formula. The debtor’s “current monthly income” is used once again on the formula’s income side. Section 707(b)(2)(A) specifies which of the debtor’s allowed expenses are deemed reasonable for purposes of the abuse analysis.

Bankruptcy Basics: Rebutting the Presumption: Special Circumstances.

To rebut the presumption of abuse if a motion to dismiss or convert is filed, section 707(b)(2)(B)(i) states that the debtor must demonstrate that “special circumstances” exist which would cause the debtor to fall below the presumed abuse tolerances set by the means test formula.

Bankruptcy Basics: General Abuse

If the presumption of abuse does not arise by application of the means test the debtor may still be subject to the general abuse provision of section 707(b)(1), which permits the court to dismiss a chapter 7 case (or convert the case to chapter 11 or 13 with the debtor’s consent) if granting relief under chapter 7 would be “an abuse.” Creditors and other parties in interest, including panel trustees, are permitted to file dismissal motions under section 707(b)(1), but only if the debtor’s income exceeds the state’s applicable median family income.

Bankruptcy Basics: Repeat Bankruptcy Filings

Even though a debtor may be eligible to file under chapter 7, they may not be eligible to receive a chapter 7 discharge. If the debtor was granted a prior chapter 7 bankruptcy discharge the debtor is disqualified from receiving a discharge in another chapter 7 case for a period of eight years. The time is measured from the filing date of the petition in the earlier case.

Bankruptcy Basics: First Steps

The first step in a chapter 7 case is the completion of the bankruptcy forms. These include a nine-page initial “petition” which includes a statement of compliance with the credit counseling requirement, and a mailing list including all of the debtor’s creditors. A number of other forms must also be filed either at the same time as the petition or shortly afterwards (generally fourteen days after filing the petition).

Bankruptcy Basics: Chapter 7 Trustee

After the debtor files a bankruptcy case, a trustee is appointed as the representative of the debtor’s bankruptcy estate, which generally includes all property interests of the debtor on the date of filing. The trustee is selected from a “panel” of private trustees established by the Executive Office of the United States Trustee. 11 U.S.C. § 707(a)(1). The panel trustee’s name and address is listed on the notice of the meeting of creditors.

Bankruptcy Basics: Retention of Exempt Property

Unless there is a timely objection to the exemptions the debtor has claimed, the debtor is permitted to keep the property listed as exempt in the schedules. A party in interest that wishes to file an objection to the debtor’s exemptions must do so within thirty days after the conclusion of the meeting of creditors. Bankruptcy Rule 4003(b). If the trustee or parties in interest do not file a timely objection to an exemption, it is deemed allowed. See Taylor v. Freeland & Krontz, 503 U.S. 638 (1992).

Bankruptcy Basics: What About Reaffirming a Home Mortgage?

For mortgage debt, debtors most commonly elect to retain the home and pay on the debt without reaffirming, which is sometimes referred to as the “keep and pay” option. Section 524(j) expressly contemplates this option for debts secured by the debtor’s principal residence by creating a limited exception to the discharge injunction. This provision permits the mortgage creditor to seek and accept payments on the mortgage, rather than pursue in rem relief to enforce the lien, without violating the discharge injunction.

Bankruptcy Basics: Must the Reaffirmation Be Approved by the Court?

In some cases, yes. If the debtor’s attorney does not sign the reaffirmation agreement and the debt is not secured by real property, the court must approve the reaffirmation. 11 U.S.C. § 524(c)(6). As discussed below, if it is presumed that the reaffirmation will impose an “undue hardship” based on the income and expense figures listed on the agreement, the court is required to review the reaffirmation (except when the creditor is a credit union). 11 U.S.C. § 524(m)(1).

Bankruptcy Basics: Right to Rescind Reaffirmation.

Debtors should be advised that a reaffirmation agreement may be canceled at any time before the entry of the discharge order, or sixty days after the agreement is filed with the court, whichever occurs later. 11 U.S.C. § 524(c)(4). No reason is required for canceling a reaffirmation agreement, but notice of the cancellation must be given to the creditor.

Bankruptcy Basics: Debts Excepted from Discharge Only If Timely Action Brought.

Another group of debts may be nondischargeable under section 523(a), but only if the particular creditor seeks a determination from the bankruptcy court by filing an adversary complaint within a strict time limit (sixty days after the date first set for the meeting of creditors) and proves that the debt should not be discharged. 11 U.S.C. § 523(c); Bankruptcy Rule 4007(c). These types of debts include: