Qualifying for a Discharge

Before debts will qualify for a discharge under Chapter 7, several criteria must be met:

• Debt discharges can only occur once during each nine-year period.
• According to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, individual debtors seeking discharge must enroll in and complete a personal financial management class.
• The debtor must have history of cooperation and honesty. If there were incidents such as poor record keeping before filing, fraudulent transfers, or ignoring orders made by the court after filing, the court is much more likely to deny the discharge.

When Your Discharge is Granted

Once a discharge is granted, the debtor is afforded some protections:

• Legal action cannot be taken for collection of discharged debts.
• Accordingly, any letters, phone calls or other communications related to the discharged debt must stop.

What A Discharge Does Not Do

Unfortunately, a debt still exists after it’s been discharged; the debt is not completely cancelled. Attempts to collect on the debt from the debtor who had it discharged must cease, as the debtor is no longer personally liable, but the discharge does not automatically protect any guarantor or co-debtor from continued or further liability.

A debtor filing for Chapter 7 relief must also consider any outstanding liens. Liens are not affected by bankruptcy discharge. Here’s an illustrating example: a debtor had previously secured a $6000 loan with a vehicle that was worth $2000, and the $6000 was left unpaid. The debtor files for Chapter 7 bankruptcy and is granted a discharge on the debt. In this situation, the creditor’s security interest is not eliminated with the rest of the debt; the car can still very well be repossessed. The protection provided to the debtor under the bankruptcy discharge only applies to the leftover debt that remains between the value of the car and the amount of the original loan, or $4000.

Discharges Can Be Revoked

Under certain circumstances, usually involving dishonest behavior on behalf of the debtor, discharges are revoked. A Chapter 7 discharge can be reversed by the court in these scenarios:

• A revocation is requested by a creditor or the trustee.
• The debtor misstated or omitted crucial information in connection to the audit of their case.
• The debtor acquired property and purposefully did not report that property or give it to the trustee.
• The debtor used fraudulent means to obtain the discharge.

Certain collection agencies may threaten that they will go after your spouse for payment on a debt. This is a commonly used scare tactic. In most cases, collection agencies can only pursue payment from the person who holds the debt. Your spouse cannot be held liable for a debt unless it is a joint-debt, or your spouse was a co-signor for the debt.

If you have no joint debts, then one spouse’s bankruptcy will have no effect on the other spouse’s credit score. However, due to the bankruptcy, the spouse who filed for bankruptcy may not qualify as a co-signor in the future. This means that bankruptcy can have indirect effects on your spouse in the future. If your spouse has a supplemental credit card (an additional credit card on your account), this is another situation where your spouse can be affected by your bankruptcy. If your spouse has a credit card with their name on it, and if they have used the card, then they are responsible for the entire credit card debt.

Bankruptcy can also affect your spouse in non-financial ways. The emotional and mental distress of bankruptcy can be significant. Watching a spouse lose most of their assets and go through bankruptcy can be a very emotionally draining experience. When you file a bankruptcy petition, your spouse may begin to worry about what other people will think of them. Loss of reputation and concern over social status is something that certain spouses may experience.

If you file for Chapter 13 bankruptcy, your financial life during the reorganization process can get complicated. However, child support payments are considered priority debt – meaning that they must be paid before other obligations such as credit cards, medical bills, and other unsecured debt. If you are owed child support payments by someone who is filing for bankruptcy, understand that the payment may be delayed during the Chapter 13 reorganization process; however, it will not be discharged.

In bankruptcy, you are required to file a schedule of assets, liabilities, exemptions, and statement of financial affairs. This can be very valuable information for a parent who is owed child support by the person filing for bankruptcy. If you are owed past-due child support by someone filing for bankruptcy, you can intervene in the bankruptcy proceedings without charge and contest the amount that is owed to you (the debt in arrears).

If you pay child support, there is a good chance that child support payments will be a crucial component to meeting the Chapter 13 bankruptcy repayment plan. In other words, if a bankruptcy filer fails to meet his child support obligations (both current and past due) according to the plan, the bankruptcy can be nullified.

Financial counseling makes you more aware of what past mistakes you made, and how to make better choices in the future. Counseling also gives you a better understanding of budgeting, what your expenses are, and proper credit management. Credit counseling agencies can help you establish a plan for repayment and overcome your past financial history by focusing on positive changes that you can make to eliminate debt and start building assets. The new bankruptcy laws are designed to prevent debtors from abusing the bankruptcy system as a way to avoid their creditors in an unethical manner.

While the credit counseling requirement may seem like a burden, it is really quite minimal. In fact, the credit counseling session does not have to be conducted in person. It can be conducted over the telephone or online over the internet. Credit counseling firms must have their curriculum approved by the U.S. Trustee Program of the Department of Justice before they can be considered a recommended provider for this service.

Topics covered in credit counseling include: understanding the underlying causes of financial problems, budgeting, analyzing income and expenses, understanding debt to income radios, providing guidance on debt management plans, and understanding the consequences of filing for bankruptcy. Topics covered inside the financial management counseling course include: setting short and long-term financial goals, net vs. gross income, variable vs. fixed expenses, money management, insurance, using credit wisely, understanding credit ratings, and learning about consumer laws and regulations.

1. You increased your credit card debt in the weeks and months prior to filing the bankruptcy petition, knowing that you would soon be filing for bankruptcy. Based on these actions, the credit card company can claim that you had no intention of repaying your debt.

2. You lacked a realistic basis for believing that you could repay such charges. This can be based on your existing debt, combined with not enough income at the time charges were made.

3. You knowingly submitted false financial information to obtain credit, or to increase your credit line.

The discharge of credit card debt is depending on your transactions being free of fraud. The Bankruptcy Code excludes from discharge all debts acquired by fraud, false pretenses, and misrepresentation. If you want to wipe out your credit card debt by filing bankruptcy, you will need to be sure that the credit card company cannot prove fraud. This is something a competent bankruptcy attorney can help you navigate.

Your creditors have a 60 day period (following the first meeting with creditors) to file a lawsuit to challenge the discharge of your credit card debt. If the credit card company successfully convinces the bankruptcy judge that fraud is present, then your Chapter 7 discharge will not include your credit card debt. Previously, only people filing for Chapter 7 bankruptcy had to be concerned about credit card issuers claiming fraud. However since the new bankruptcy laws were passed in 2005, credit card issuers can contest the discharge of credit card debt in a Chapter 13 bankruptcy, in addition to Chapter 7.

The percentage of your medical debt that must be repaid under Chapter 13 varies depending on a variety of factors, including monthly disposable income, non-exempt assets, and the total amount of priority debt. Some Chapter 13 filers will have to pay very little of their medical bills – while others may have to pay more.

If you have large medical bills and are considering bankruptcy, you are certainly not alone. According to a study published by the Commonwealth Fund, a research and public policy organization, 29 million Americans (14% of all adults) are in serious medical debt. Many of these individuals have put large medical bills on their credit cards, taken out second mortgages, or are negotiating a repayment plan with their hospital or medical provider.

Large medical bills are one of the leading causes of bankruptcy filings, regardless of whether or not you have insurance. According to a 2007 study conducted by Harvard University, large medical bills and healthcare costs were the main reason for up to 62% of all bankruptcies. U.S. residents filing for bankruptcy with private insurance had unpaid health care costs that averaged $17, 749. In comparison, bankruptcy filers without health care coverage had an average of $26,971 in unpaid medical bills. The study also found that bankruptcy caused by large medical bills increased 2,200 percent between 1981 and 2001. Medical bills are typically unsecured debt, and unsecured debt is usually one of the easiest types of debt to eliminate in a Chapter 7 bankruptcy.

The second step in the process of filing for bankruptcy is to file petitions, schedules, and a statement of affairs with the court.  When these documents are filed with the court (you will sign them under penalty of perjury), you will be assigned a legal case number and your bankruptcy case begins.  If you are filing Chapter 7, you will have a mandatory meeting with your bankruptcy trustee about one month after your case is filed.  If you are filing Chapter 13, you will file a plan of repayment with your creditors.  Under this plan, your creditors will receive no less than they would under a Chapter 7 filing and you will be required to pay all of your projected disposable income into the plan for a minimum of 36 months.  The length of the repayment plan depends on a wide variety of factors.  After filing your Chapter 13 repayment plan, you will then meet with the bankruptcy trustee.

The next step in the bankruptcy process is time for objections by creditors and the bankruptcy trustee.  Your creditors have 60 days (90 in Chapter 13) after the first date of your meeting with the trustee to file a complaint objecting to the discharge of their debt.  Creditors can claim fraud, false statements on a credit statement (i.e. overstated income), and request an extension to file their complaint.  If a creditor files a complaint, there will be a trial.  Typically, any complaints can be settled out of court.  If you are filing Chapter 13, you will then have a “plan confirmation hearing” to confirm the terms and conditions of your repayment plan.

The next step in both chapters of bankruptcy is to complete a required financial management course.  If you fail to complete this course, your bankruptcy will not be discharged.  If you are filing Chapter 7, you must have completed this course and submitted the certificate of completion to the court no later than 45 days after the date first set for your meeting with the trustee.  The financial management course is typically two hours long, and can be completed over the internet.  The total cost for this course ranges from $19 to $50.

The final step in the bankruptcy process is the discharge.  In Chapter 13, after you have completed all required payments under your plan, the trustee will begin to process your discharge.  In Chapter 7, if no creditors object to your discharge within the 60 day period mentioned above, then you will receive your Notice of Discharge in the mail.  It’s important to remember that you are not discharged of any debts until you receive the official discharge notice from the court.

Let’s begin by looking at secured debt.  Secured debt is debt that is linked to some type of collateral that the creditor can claim if you default.  For example, your mortgage is considered secured debt since your house is used as collateral for the loan.  If you default on your mortgage, your lender can claim your home.  Other types of secured debt include car loans, boat loans, and computer loans.  Another type of secured debt would be a lien placed against your property by a 3^rd party.  For example, if you didn’t pay your taxes, the IRS could place a lien against your property.  The lien would prevent you from selling or transferring the property without paying your tax debt first.  Contractors who are not paid by homeowners can also place a lien against your property.  This lien would also be considered secured debt.

In comparison, unsecured debts are not backed by collateral or real property.  Unsecured debts include credit card balances, student loans, attorney fees, medical bills, rent payments, utility payments, and gym memberships.  During a Chapter 7 bankruptcy, the court may place a temporary hold (called a “stay”) on your creditor’s attempts to collect on unsecured debt, while allowing creditors with secured debt to pursue collection.  This means that a secured creditor may take action such as foreclosing on your property, seizing your car, or garnishing your wages in an attempt to collect on the debt you owe.

Unsecured creditors must wait and hope that the bankruptcy trustee doles out enough money (through liquidation of your assets) to cover the amount of the debt owed to them. The rules governing which unsecured debts get paid off first are complicated.  However, priority unsecured debts typically are paid off first, before general unsecured debts.  Examples of general unsecured debts include: cash advance loans, medical bills, and unsecured credit card debt.

Other possible bankruptcy pitfalls include paying for the attorney fees, and the costs associated with mandatory financial counseling.  According to the new bankruptcy rules, all bankruptcy filers are required to undergo two separate financial counseling sessions.  The first is a credit counseling session (that you are required to pay for) through an agency approved by the U.S. Trustees Office.

After finishing this counseling program, you must submit a completion certificate to the court.  Next, you are required to undergo a “means test” if you are filing Chapter 7.  If you fail the “means test,” you will not be allowed to file Chapter 7, and must instead, file Chapter 13.  Another unexpected pitfall is a “Ticket Out” program which requires you to complete a financial management course.  These are new loopholes that you must jump through to complete a bankruptcy filing.

If you’re filing Chapter 13, another unexpected bankruptcy pitfall is having your property repossessed.  The court can come to a bankruptcy filer’s home and repossess property as a partial repayment to creditors.  Failure to make payments on time, and failure to complete the required counseling and financial management programs can cause your bankruptcy case to be dismissed.  If this happens, the bankruptcy remains on your credit report, and you have gained absolutely nothing from the process.  If you are filing bankruptcy, be sure to make payments on time (for Chapter 13), follow all guidelines, and complete the required credit counseling and financial management programs.  Talk with your bankruptcy attorney about the possible bankruptcy pitfalls and ways to avoid them.

Your bankruptcy trustee is appointed by U.S. Trustee, who is an officer of the Department of Justice.  Your trustee can object to discharging certain exemptions, collect property on behalf of your creditors, liquidate nonexempt property, and distribute the proceeds to your creditors.  Let’s look at the role of the trustee in Chapter 7 versus Chapter 13.

The trustee’s role is very minimal in a Chapter 7 bankruptcy filing.  In most Chapter 7 cases, you will not have any assets available.  However, if you do have assets, the trustee is responsible for liquidating those assets and distributing the funds to your creditors.  He will participate in creditor meetings and oversee the sale of assets.  In a Chapter 7 bankruptcy, your trustee will look at exemptions, schedules, and verify that you are following the bankruptcy plan outlined by the court.  Your trustee has the power to deny an exemption if there is evidence of fraud, or ineligibility.

In a Chapter 13 filing, the trustee’s role is much more involved.  Since there is no liquidation of assets in a Chapter 13 filing, the trustee’s role is to manage to your financial affairs to aid in paying back your creditors.  Your trustee will attend all hearings that involve property valuations, and will manage receipt of payment from you to your creditors.  He will also manage the dispersal of funds to all of your creditors.  Your bankruptcy attorney will try to understand the particular tendencies of your trustee, and work to structure the best possible outcome for your case.