The New Bankruptcy Will It Work for You? By Attorney Stephen Elias 2nd Edition Second Edition JUNE 2007 Editor LISA GU ERIN Book Design TERRI H EARSH Production SARAH HINMAN Cover Photography TONY A PERME (www.tonyaperme.com) Proofreading PAUL TYLER Index MICHA EL FERREIRA Printing DELTA P RINTING SOLUTIONS, INC. Elias, Stephen The new bankruptcy : will it work for you? / by Stephen Elias [2nd ed.] p. cm. I ncludes index. ISB N-13 978-1-4133-0633-0 (pbk.) ISBN-10 1-4133-0633-0 (pbk.) 1. Bankruptcy United States Popular works. I. Title KF1524.6.E43 2007 346.7307'8 dc22 2006039222 Copyright © 2005 and 2007 by Nolo ALL R IGHTS RESERVED. PRINTED IN THE U.S.A. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the publisher and the author. R eproduction prohibitions do not apply to the forms contained in this product when reproduced for personal use. Quantity sales: For infor mation on bulk purchases or corporate premium sales, please contact the Special Sales Department. For academic sales or textbook adoptions, ask for Academic Sales. 800-955-4775, Nolo, 950 Parker Street, Berkeley, CA 94710. Dedication To my son Rubin, who faithfully reminds me of what bankruptcy is all about. Acknowledgments Thanks to Robin Leonard, the original, superlative author of this book’s predecessor, and Lisa Guerin, Nolo editor extraordinaire, who did such a great job helping me get this book into the world in a timely manner. To immerse myself in the new law I attended two wonderful conferences sponsored by the National Association of Consumer Bankruptcy Attorneys. Thanks to Henry Sommer and the NACBA crew for doing such a great job. Many thanks to Sandy McCarthy and Herb Gura, both bankruptcy petition preparers, who read the manuscript and found that it played in Peoria. I’m perpetually grateful for my many friends at Nolo. Special kudos to Clark Miller, Nolo PR guru, whose enthusiasm for the book has translated into media gold. I couldn’t have written the book without the support and love I received from my wife, coauthor, and partner in life Catherine Elias-Jermany. Introduction e New Bankruptcy Law: A Work in Progress 1 What Is Bankruptcy? Types of Bankruptcy 5 How Bankruptcy Stops Collection Efforts 18 e Bankruptcy Trustee 21 Changes to the Bankruptcy Laws 25 2 Who Can File for Bankruptcy Credit Counseling 30 Calculating Your Income Status 33 Chapter 7 Eligibility Requirements 39 Chapter 13 Eligibility Requirements 55 3 How Bankruptcy Affects Your Debts Debts at Will Be Discharged in Bankruptcy 64 Debts at Survive Chapter 7 Bankruptcy 66 Debts at Survive Chapter 13 Bankruptcy 75 Debts Discharged Only Under Chapter 13 78 How Joint Debts Are Handled 78 4 Your Property and Bankruptcy Your Bankruptcy Estate 84 Inventory Your Property 87 Value Your Property 88 Understanding Exemptions 88 Table of Contents 5 Your Home Homeowners Filing for Bankruptcy Under Chapter 7 98 Homeowners Filing for Bankruptcy Under Chapter 13 112 Renters Filing for Bankruptcy 116 6 What Happens to Property at Secures a Loan What Are Secured Debts? 122 How Secured Debts Are Handled in Chapter 7 Bankruptcy 122 Eliminating Liens in Chapter 7 Bankruptcy 126 How Secured Debts Are Handled in Chapter 13 Bankruptcy 128 7 Your Credit Cards If Your Balance Is Zero 132 If You Owe Money but Are Current 133 If You Are in Default 134 8 Your Job, Freedom, and Self-Respect Will You Lose Your Self-Respect? 138 Will You Lose Your Job? 139 Effect of Bankruptcy on Job Applicants 140 Other Forms of Discrimination Because of Bankruptcy 141 Effect of Bankruptcy on Child Custody 142 Effect of Bankruptcy on Your Freedoms 142 9 Bankruptcy Forms and Procedures e Means Test 147 Challenges for Abuse 147 Valuation Hearings 151 Common Chapter 7 Motions and Proceedings 152 Converting From One Chapter to Another 155 Potential Problems in Chapter 13 157 Filling Out the Bankruptcy Forms 159 10 Getting Help With Your Bankruptcy Debt Relief Agencies 166 Bankruptcy Lawyers 167 Bankruptcy Petition Preparers 174 Books and Internet Resources 177 11 Alternatives to Bankruptcy Do Nothing 180 Negotiate With Your Creditors 182 Get Outside Help to Design a Repayment Plan 184 File for Chapter 11 Bankruptcy 186 File for Chapter 12 Bankruptcy 187 Glossary Appendixes A Federal and State Exemption Tables B Charts and Worksheets Median Family Income 278 Worksheet A: Current Monthly Income 281 Worksheet B: Allowable Monthly Expenses 283 Worksheet C: Monthly Disposable Income 285 Worksheet D: e Means Test 287 Worksheet E: Personal Property Checklist 289 Worksheet F: Property Value Schedule 293 C Sample Bankruptcy Forms Form 1, Voluntary Petition 298 Form 6, Summary of Schedules 301 Form 6, Statistical Summary of Certain Liabilities 302 Form 6, Schedule A—Real Property 303 Form 6, Schedule B—Personal Property 304 Form 6, Schedule C—Property Claimed as Exempt 308 Form 6, Schedule D—Creditors Holding Secured Claims 310 Form 6, Schedule E—Creditors Holding Unsecured Priority Claims 311 Form 6, Schedule F—Creditors Holding Unsecured Nonpriority Claims 314 Form 6, Schedule G—Executory Contracts and Unexpired Leases 317 Form 6, Schedule H—Codebtors 318 Form 6, Schedule I—Current Income of Individual Debtor(s) 319 Form 6, Schedule J—Current Expenditures of Individual Debtor(s) 320 Form 6, Declaration Concerning Debtor’s Schedules 322 Form 7, Statement of Financial Affairs 323 Form B22A, Statement of Current Monthly Income and Means Test Calculation 331 Form 8—Chapter 7 Individual Debtor’s Statement of Intention 337 Form 21, Statement of Social Security Number 338 Creditor Matrix Cover Sheet 339 Creditor Mailing Matrix 340 Index e New Bankruptcy Law: A Work in Progress O n October 18, 2005, a new law took effect that substantially changed the bankruptcy system. Written primarily by the banking and credit card industries, the new bankruptcy law places a number of new hurdles in the way of those who seek the “fresh start” bankruptcy traditionally offered. Among the changes enacted by the new law are provisions that make it harder to wipe out certain types of debts; force more debtors to repay a portion of their debts; require debtors to undergo credit and budget counseling; impose more obligations on bankruptcy attorneys (which has driven some attorneys out of the field and caused those who remain to raise their fees); and subject bankruptcy filers to increased scrutiny from the court and the United States Attorney General. This book explains what you can expect under the new bankruptcy law—how eligibility for Chapter 7 and Chapter 13 bankruptcy is determined, what debts are cancelled (discharged), what happens to your home, car, and other property, what complications might occur, what paperwork is involved, and where you can find help with your bankruptcy. This information will help you decide whether it makes sense to handle your debt problems through bankruptcy and, if so, which type of bankruptcy is the best choice for you. This book provides valuable guidance for consumers who are considering bankruptcy. However, it is not intended as an authoritative reference on every detail of the new bankruptcy law. Nor should it be viewed as a guide on how to handle your own bankruptcy. For that task, Nolo’s more detailed “do-it-yourself” bankruptcy books (How to File for Chapter 7 Bankruptcy and Chapter 13 Bankruptcy: Repay Your Debts) have been revised to incorporate the requirements of the new law. These resources and the debt relief agencies described in Ch. 10 can help you navigate the process, although this type of help will cost more than it used to under the old law. CAUTION e rules are changing as courts weigh in. Now that the new bankruptcy law has been in effect for a while, it is being polished by the nation’s bankruptcy courts and the federal courts of appeal that review bankruptcy court decisions. No one knows for sure exactly how each of the new rules will be interpreted, but some definite trends are emerging—and they are explained in this book. To get the very latest information, look for updates at our website, www.nolo.com. Select the “property and money” tab, then “Bankruptcy,” then select this book from the available products. From this book’s h om epage, select “Updates” to find out what’s new. ● Types of Bankruptcy 5 Chapter 7 Bankruptcy 6 Chapter 13 Bankruptcy 11 Which Type of Bankruptcy Is Right for You 16 How Bankruptcy Stops Collection Efforts 18 Credit Card Debts, Medical Debts, and Attorney Fees 19 Public Benefits 19 Domestic Relations Proceedings 19 Criminal Proceedings 20 Landlord-Tenant Proceedings 20 Tax Proceedings 20 Pension Loans 20 Foreclosures 21 Utilities 21 Special Rules for Multiple Filers 21 e Bankruptcy Trustee 21 e Trustee’s General Duties 21 e U.S. Trustee’s Office 22 Chapter 7 Trustee 22 Chapter 13 Trustee 24 Changes to the Bankruptcy Laws 25 Higher Income Filers Must File Chapter 13 25 Filings Are Scrutinized More Closely 25 Lawyers Are Harder to Find and More Expensive 26 Chapter 13 Filers Have to Live on Less 26 Credit and Budget Counseling Is Required 26 Property Must Be Valued at Replacement Cost 26 State Exemptions Aren’t Available to Recent State Residents 27 Residency Requirements for Homestead Exemptions 27 What Is Bankruptcy? 1 C H A P T E R 4 | THE NEW BANKRUPTCY: WILL IT WORK FOR YOU? I f you’ve picked up this book, you probably have more debt than you can handle. Most likely, your debt mushroomed because of circumstances beyond your control—job loss, divorce, business failure, illness, or accident. You may feel overwhelmed by your financial situation, and uncertain about what to do next. Maybe a friend, relative, or even a lawyer suggested bankruptcy, describing it as the best thing in the world for you. Someone else may have said the opposite— that bankruptcy is a huge mistake and will ruin your life. This book will help you sort through your options and choose the best strategy for dealing with your debts. It explains: • how the new bankruptcy law works • how filing for bankruptcy under Chapter 7 or Chapter 13 (the two bankruptcy options for consumers) will affect your debts, property, home, and credit • the procedures you’ll have to follow (and paperwork you’ll have to complete) to file for bankruptcy, and • some alternative ways to handle your debt problems, outside of the bankruptcy system. Armed with this information, you’ll be ready to decide whether filing for Chapter 7 or Chapter 13 bankruptcy makes sense for you. As you consider the strategies available to you, keep in mind that you’re not alone. During each of the first five years of the new millennium, more than 1.5 million Americans filed for bankruptcy. So did thousands of companies. Although filings dropped dramatically just after the new law took effect, bankruptcy remains a necessary and pervasive part of our economic system. And bankruptcy may be right for you. You may be able to stop creditor collection actions (such as foreclosures, wage garnish- ments, and bank account levies) and: • wi pe out all or most of your debts in a Chapter 7 bankruptcy while hanging on to your home, car, and other necessary items, or • use Chapter 13 bankruptcy to pay back a portion of your debts over three to five years. If your debts are overwhelming and your creditors are hounding you, bankruptcy may seem like a magic wand. But bankruptcy also has its drawbacks. And, because everyone’s situation is a little bit different, there is no one-size-fits-all formula that will tell you whether you absolutely should or should not file. For many, the need for and advantage of bankruptcy will be obvious. Others will be able to reach a decision only after closely examining their property, debts, income, and recent financial transactions—and how persistent their creditors are. For some, simple non- bankruptcy options might do the trick— these are explained in Ch. 11 of this book. This chapter provides some basic background information about the two types of bankruptcies most often filed by individuals: Chapter 7 and Chapter 13. In the chapters that follow, you’ll find more detailed information on the issues you are [...]... debts you owe them—unless the law or the bankruptcy court says they can Under the new law, however, the stay is not as automatic as it once was In some circumstances, the creditor can file an action in court to have the stay lifted (called a “Motion to Lift Stay”) In others, the creditor can simply begin collection proceedings without seeking advance permission from the court The good news is that most... a Chapter 7 bankruptcy, see Ch 3.) | The New Bankruptcy: Will it work for you? Which Property Is at Risk The sum total of your property that is subject to the bankruptcy court’s control is called your bankruptcy estate In a Chapter 7 bankruptcy, a trustee exercises legal control over your bankruptcy estate (see The Bankruptcy Trustee,” below) Your bankruptcy estate consists of all the property... cooperate with the trustee could consist of a guided tour of your home upon the trustee’s request And if you don’t voluntarily cooperate, the trustee can obtain an order from the court to force the issue The trustee is also required, under the supervision of the U.S Trustee, to assess your bankruptcy papers for accuracy and for signs of possible fraud or abuse of the bankruptcy system 24 | The New Bankruptcy: ... support, the trustee is also required to provide notices to the holder of the support claim and the state child support agency to keep them abreast of your bankruptcy and help them find you after your bankruptcy discharge Specifically, the trustee is required to provide: • the payee with information about the state child support enforcement agency and his or her rights under the bankruptcy law • the state... and disabled 28 | The New Bankruptcy: Will it work for you? Nolo Resources on Bankruptcy and Debt Nolo publishes self-help bankruptcy books that provide readers with all of the information they need to file for Chapter 7 or Chapter 13 bankruptcy, step by step Look for the latest editions of these books, which incorporate the new bankruptcy rules: • How to File for Chapter 7 Bankruptcy, by Stephen... ring is worth $1,000, the bankruptcy trustee can take the ring, sell it, give you your $500 exemption, and pay the rest to your unsecured creditors In your bankruptcy papers, you must tell the court which property you claim is exempt under the exemption laws available to you Under the new bankruptcy law, you must use the exemptions for the state where you have been living for the twoyear period prior... file another form stating how you wish to handle those debts after bankruptcy As explained in detail in Ch 6, you will have the choice of: • giving the property back to the creditor and wiping out the debt • paying the value of the property to the creditor in a lump sum and keeping the property (this is called “redemption”), or • agreeing to continue the contract and make the payments after your bankruptcy. .. owe them rather than the lesser percentage originally called for in your plan Changes to the Bankruptcy Laws As noted throughout this chapter, Congress made major changes to the bankruptcy laws effective October 17, 2005 This section describes some of the most important legal changes and the practical effects they are likely to have on those considering or filing for bankruptcy These changes and others... dismissed The court exercises its control through a person called a bankruptcy trustee, who is appointed by a branch of the federal Department of Justice called the Office of the United States Trustee The trustee’s primary duties are: • to see that your unsecured creditors are paid as much as possible on the debts you owe them, and • to make sure you comply with the bankruptcy laws 22 | The New Bankruptcy: ... reading the rest of this book to find out what effect bankruptcy will have on your life, you should figure out whether you’ll be eligible to file for bankruptcy in the first place The new bankruptcy eligibility rules are intended, in large part, to require people to pay back at least a portion of their debts if they are able—in other words, to require people to file for bankruptcy under Chapter 13 rather . industries, the new bankruptcy law places a number of new hurdles in the way of those who seek the “fresh start” bankruptcy traditionally offered. Among the changes enacted by the new law are. Elias-Jermany. Introduction e New Bankruptcy Law: A Work in Progress 1 What Is Bankruptcy? Types of Bankruptcy 5 How Bankruptcy Stops Collection Efforts 18 e Bankruptcy Trustee 21 Changes to the Bankruptcy Laws. bankruptcy books (How to File for Chapter 7 Bankruptcy and Chapter 13 Bankruptcy: Repay Your Debts) have been revised to incorporate the requirements of the new law. These resources and the