• Bankruptcy permits you to surrender property to the lender without personal liability for any “deficiency” in the amount of the loan due over and above what the property is worth;
• Bankruptcy discharges unsecured debts like credit cards;
• Filing for bankruptcy brings peace of mind and relief from harassing phone calls, letters, lawsuits, garnishments, judgments and the like.

• Chapter 7 (a liquidation-style case);
• Chapter 13 (a payment plan or “reorganization” for individuals with a regular source of income);

Both forms of bankruptcy provide for some payments to creditors, a discharge for you and supervision by a trustee.

Chapter 7 Bankruptcy

The idea that you lose all of your property in a Chapter 7 is in part a myth. Your bankruptcy attorney has an “allowance” (called exemptions), to protect some or all of your real and personal property. If you have property worth more than this allowance you have an “overage”, that is, an obligation to the court. You must satisfy this obligation by surrendering either money or property to the court. This is your part of the bargain for getting rid of your debts. Chapter 7 bankruptcies are usually finished sooner than Chapter 13 bankruptcies, but are not appropriate in all circumstances. A Chapter 7 bankruptcy may not be your best option, for example, if you own property that you wish to keep that is free and clear of any debts. The value of this property could count towards your “overage”, and you may not have enough money to repurchase this property from the court. Ari Good can explain how these factors play into your filing decision.

Chapter 13 Bankruptcy

In a chapter 13 bankruptcy, you keep your property but must commit to a three to five-year payment plan. You must make regular payments according to this plan, through which you pay a part, though usually not all, of your “unsecured” debts. Examples of unsecured debts include credit card debt, personal loans and unpaid medical bills. Creditors that have a lien against your property – generally your house or your car – are called “secured” creditors. Your bankruptcy will not necessarily discharge these secured interests, however, you can keep your home, your car, or other secured property, so long as you can continue to pay for it and it does not constitute a “luxury” item.

Chapter 7 Eligibility

Filing for Chapter 7 bankruptcy became more difficult after the Bankruptcy Abuse Prevention and Consumer Protection Act became effective on October 17, 2005. One of the changes in this law was the addition of a filing requirement known as the “means test”. The idea behind this test is to evaluate whether you are “abusing” the bankruptcy system by filing for Chapter 7 where you actually have the “means” to pay your unsecured creditors something rather than discharging these debts in their entirety.

You do not have to take this means test at all if your gross monthly household income (that is, the income for everyone in your household before taxes and other deductions) is less than the median income for the state of Florida for your household size.  You can access the figures for median household income here.  You do not have to pass the means test if you are a disabled veteran, on active military duty outside the United States, or if your debts are predominantly business debts.  It is important to note that not all types of income count toward your “income”.  Social Security and Disability income, unemployment compensation and certain types of retirement income will not count towards this figure.  You can in some cases still qualify for Chapter 7 bankruptcy if your gross monthly household income exceeds the state median, however, the calculations that determine whether you still qualify are complex and do not apply to many filers.  As a practical matter, most families whose household income exceeds the median will have to file under Chapter 13 of the bankruptcy code. 

Chapter 13 Eligibility

There are two principal requirements for filing a successful Chapter 13 bankruptcy. First, you must have some source of regular income.  For these purposes “income” can include wages or commissions, income from your trade or business, social security, disability, unemployment compensation, investment and pension income.  Second, your total debt must not exceed certain amounts. The debt limits for a Chapter 13 bankruptcy are $1,081,400.00 in secured debt (such as your home mortgage or the mortgages on investment properties), and $360,475.00 in unsecured debt.  These numbers are revised periodically.

In order to discharge your debts in a Chapter 13 bankruptcy you must, with our assistance, put together a confirmable Chapter 13 plan.  This plan requires you to make a regular monthly payment to an officer of the Bankruptcy Court called the Bankruptcy Trustee.  To be “confirmable” you must have some money left at the end of each month to cover your plan payment, that is, you must have a positive monthly budget.  You must also make all of your monthly payments on time.  At that point it is then the bankruptcy trustee’s job – not yours – to distribute that plan payment to all of your eligible creditors according to the law.

Filing for bankruptcy automatically imposes an injunction against all collection efforts by creditors.  This injunction is called the “automatic stay”.  Once the automatic stay comes into effect your creditors must stop calling you and sending you letters concerning your debts.  Any pending lawsuits or garnishment actions pending against you at that time cannot proceed, and are sometimes voluntarily dismissed by the plaintiff if they do not expect to recover much by making a claim as an unsecured creditor.  Note that a secured creditor can petition the court to lift this automatic stay and proceed with a lawsuit, such as a foreclosure action, if you do not remain current on property you are intending to keep, or if you have surrendered that property.  If you are surrendering the property, however, you are NOT necessarily liable for the unpaid debt after the property sells just because the lender lifts the automatic stay.

In most cases your bankruptcy case will be a “snapshot” of your income and expenses, assets and liabilities at the time of your filing.  There are some post-filing adjustments in Chapter 13 bankruptcies, which take between 6-8 months to be confirmed by the court.  In general, however, you keep everything you earn or acquire following your Chapter 7 filing, or the confirmation of your Chapter 13 plan. 

If a debt is discharged, you no longer have an obligation to pay the debt, and the creditor may not make any effort to compel you to repay.  However, if some other person (such as a relative, friend or spouse) also has an obligation to pay, his/her obligation may not discharged.  In addition, if you have property that is collateral for a loan, the creditor may still be able to repossess that collateral.

Not all debts are discharged in a bankruptcy, even if you have performed all your duties in your case.  Your bankruptcy case only discharges debts that you owed and scheduled at the time you filed the case, not those you incurred after filing the case.

Certain debts that are not discharged in bankruptcy include most (but not all) taxes, alimony, maintenance or child support arrearages, pre-petition fines or restitution, debts for injury or death caused by use of drugs or alcohol, and some condo or co-op fees. 

Most student loans are non-dischargeable unless you can show that repayment creates an "undue hardship".  This can be difficult to prove if you and/or your spouse are well short of retirement age and can work, even if as a practical matter these loans do present a serious economic challenge.  Anyone facing this burden, inside or outside of bankruptcy, should consider certain income-based repayment programs that could provide some relief in the form of debt forgiveness, including relief from the tax consequences that typically result from debt forgiveness.

Other debts that may not be discharged include debts you may have incurred through fraud or by willful or malicious misconduct. If the creditor does not ask the court to rule on these debts, however, they too may be discharged.