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In Chapter 13  the debtor, in his plan, proposes a payment to the court determined in part upon his income, and on what he proposes to do in his plan to restructure his finances.

Chapter 13 raises its own set of common questions:

  • Cross Collateralization
    Cross collateralization is a clause in a purchase contract that secures a loan which serves as collateral for all other loans made with the borrower in the past, present, and future. This type of loan is usually found at credit unions, but can sometimes be found at your typical banks. Cross collateralization most commonly occurs with car loans. When you buy a vehicle from a bank or credit union you usually sign a security agreement that secures your car to the loan. This results in the lender holding the title to your car until you pay off the loan. If you default on the loan the bank or credit union can repossess your car. Most people are aware of this kind of agreement. However there may also be a clause in the vehicle loan that ties any unsecured loans to that vehicle too. So if you later open a line of credit, a credit card account, or take out a personal loan from the same lender, those normally unsecured debts now become secured to your vehicle. If you decide to pay off your car loan to take possession of your car title, the credit union or other lending institution may not let you have the title until all your loans owed to them are satisfied. That means you could be paying much more for your car than you owe and probably more than it’s worth. This dilemma becomes particularly sticky in bankruptcy, especially if the debtor is trying to file a Chapter 7 bankruptcy. In a Chapter 7 bankruptcy you either have to surrender your vehicle or reaffirm the debt. If you reaffirm the debt and your loan is with a credit union that has secured all other debts to your car you will have to pay those debts back too before you can keep you car. Normally those other debts would have been wiped out as unsecured debt in a Chapter 7. Most people who file bankruptcy don’t have the extra cash to pay of all of their debts. One solution would be to file a Chapter 13 bankruptcy and repay your debts over a three to five year period. In a Chapter 13 bankruptcy the debtor can use the “cramdown” provision of the bankruptcy code. That allows you to pay the full amount of the value of the car and not all the other debts owed to the lender. The remaining debt is treated as unsecured debt and is discharged in bankruptcy. Another cross collateralization trap can occur when a debtor has a loan and a checking account at the same lending institution. If he or she becomes past due on the loan the lender may access his or her checking account to pay the loan or freeze the account until it becomes current.
  • I have to qualify for bankruptcy.
    False. Anyone can qualify for bankruptcy. The real question is under which chapter you qualify. Under the new law, which went into effect in October 2005, you qualify for a simpler, quicker Chapter 7 bankruptcy if your household income is below the median income for your state or if you pass a “Means Test” to see if you have minimal disposable income as determined by bankruptcy law. Otherwise, you will have to file a Chapter 13 bankruptcy in which you make some contribution of your income (based upon your ability to pay) for a period of three to five years. However, you will obtain a discharge of your debts in both chapters.
  • I will never have credit again if I file for bankruptcy.
    False. There are two aspects to the consequences of filing for a bankruptcy: 1) The amount of time it takes to rebuild your credit and, 2) The amount of time it stays on your credit report. A bankruptcy will stay on your credit report for ten years. However, the national average time to recover credit is eighteen months. The fact of bankruptcy is not a bar to obtaining credit. There is no law prohibiting a person from obtaining credit after bankruptcy. (In fact, you will probably get new applications in the mail from lenders eager for a customer with renewed debt capacity). After bankruptcy, creditors evaluate you on how you have managed your finances: Have you paid your new debts on time since the filing? How much debt do you have now after the filing? After the bankruptcy, generally you will be debt-free, so you are in a better position to handle new debt. Note, however, that you need to consider whether new credit is that important to you. If you did not manage it well the first time, going back to financing your life with debt is not the answer.
  • I will not be able to have credit for ten (or seven) years.
    False. This is commonly confused with Myth #2. People confuse the amount of time the bankruptcy is on the credit report with how long, on average, it takes to recover credit.
  • I will lose everything I own in bankruptcy, including my home and my car.
    False. There are exemptions in every state, commonly known as poor debtor’s laws that allow you to keep the bare necessities. There are also federal bankruptcy code exemptions that can be used if state law allows it. If the value of the property is less than the debt, the court-appointed administrator of your case (known as a trustee) will allow you to retain the property. In a Chapter 13 case, you may keep any property that is not protected by the exemptions so long as you pay its value in your plan.
  • I need to have a minimum amount of debt to qualify for bankruptcy.
    False. What really matters is whether you can afford to pay off the debts you have in your specific situation. A debt of $5,000 may be overwhelming if the disposable income you have available will not pay it all off in a reasonable amount of time. Take a look at the disclosures on your credit cards that have been required by the new federal credit card law and see how long it will take you to pay off your balance paying the minimum payment.
  • I am a bad person if I file for bankruptcy.
    False. Remember that bankruptcy is a form of relief and not a punishment. Filing for bankruptcy does not make you a bad person. It was passed by policy-makers as the law of the land for the specific purpose of giving people an opportunity to get a “fresh start” financially. The law does not require you to explain how you got into this situation. The law recognizes unexpected life events occur such as lay-offs, under-employment, illness or divorce.
  • If I file for bankruptcy it will affect my spouse.
    False. Under the law, you are only liable for the debts for which you signed. If your spouse did not sign on the debt, then he or she is not responsible for it. The exception to this rule is when both signed and are jointly and severally liable (that is, the creditor can hold either of you or both responsible). In that case, the other liable party should continue to pay.
  • Everyone will know I filed for bankruptcy.
    False. Bankruptcy records are public information. Unless someone specifically searches for you, it does not come to light.
  • Taxes cannot be wiped out in bankruptcy.
    False. Income taxes can be discharged under the following conditions: a. The taxes relate to a tax year more than three years old. b. Tax returns were filed by the debtor more than two years before the bankruptcy filing. c. The IRS or a state tax agency has “assessed” the tax (noted in its records that the tax debt is fixed in amount and due and payable) more than 240 days before the bankruptcy filing.
  • I need to have US citizenship to file for bankruptcy.
    False. The relevant requirement for filing for bankruptcy is that you reside, are domiciled or have your principal place of business or most of your property is located in the district of the federal court in which you file during the prior six months.
  • I can choose which debts or property I put into the bankruptcy.
    False. You have to list all of your debts. Bankruptcy is not designed to favor just the debtor. There is a balance between the rights of debtors and creditors. It would not be fair to the creditors if you got to pick and choose which debts you could list. If you purposely omit debts or property in your bankruptcy, you may face a dismissal of your case and possible criminal charges. Note that, for some debts, you may state your intention to reaffirm the debt. That is, you state your intention to maintain personal liability. The creditor, at his discretion, can usually give you a new contract where you agree to keep the debt, subject to court approval. You are always free to voluntarily re-pay if you wish. Your attorney will work with you in planning to protect your property or file under the proper bankruptcy chapter so you can retain it.
  • If I file for bankruptcy, creditors can still take my earnings even after I file my case.
    False. In a Chapter 7 bankruptcy, any wages you earn after the bankruptcy filing are yours to keep. The only exception is an inheritance you come into within six months after the filing. In a Chapter 13 bankruptcy, part of your earnings will be applied to your debts because you are entering a payment plan over a specified period of time. However, the amount applied to your debts depends on your income and must be a reasonable amount that is affordable to you.
  • I will not be able to get rid of most of my debts.
    False. Most debts are dischargeable with a few exceptions. All unsecured debt is usually dischargeable, such as credit cards, medical bills, unsecured loans, etc. There are exceptions to this, such as certain types of taxes, domestic support obligations, etc. Secured debts are also dischargeable, and you cannot be sued on them after the bankruptcy. You must either continue to pay, exercise your rights to redeem (make a lump sum payment of the value of the property to release in full the creditor’s lien), or reaffirm if the creditor requires it to keep the property. the agreement you signed giving the lender rights to the property as collateral survive the bankruptcy.
  • I will be repaying all my debts in Chapter 13.
    False. Your payment in Chapter 13 is generally based upon what you propose to do in your plan and what you can afford to pay. For example, let’s say you propose to pay your mortgage arrears of $18,000 in 60 months. Not counting the trustee’s commission for administering the plan, that would amount to a payment of at least $300/month. If you could comfortably pay $400/month given your income and expenses, then this is the amount that would be confirmed by the court. If you have $6,000 in credit card debt, the $100 excess over the $300 would pay the credit cards at 100% -- hence you would be repaying all your debts, in this example. However, if your credit card debt total is $3,000, the distribution would be only 50%. This plan still meets all the requirements for confirmation. Rarely does a plan provide for 100% payment. 100% payment occurs only when the debtor has sufficient disposable income.
  • What to Expect
    Every bankruptcy is administered by a trustee. The trustee's main task is to sell nonexempt property to repay general unsecured creditors. The trustee also looks for bankruptcy fraud, makes sure your paperwork is accurate, and conducts an investigation into your property and your finances. The trustee does much of this fact finding in the meeting of creditors (sometimes called the 341 hearing). The meeting of creditors is so named because your creditors may also appear and ask you questions, although most won't.
  • Timing and Location of the Meeting of Creditors
    The 341 meeting will be set for at least 21 days but no more than 40 days after the day you file your case. The hearing will be in a meeting room, often in a federal building, but not usually in a courtroom. There will not be a judge at the 341 meeting; the meeting is conducted by the trustee. The Trustee Will Review Your Case Before the 341 Hearing. The trustee's investigation begins as soon as you file your case, and the trustee will review your bankruptcy paperwork before your 341 meeting. The trustee will review all your debts, income, and expenses, as well as your Statement of Financial Affairs, which provides a brief history of your major financial transactions. The trustee will also review your previous federal tax returns and your pay stubs.
  • Before You Arrive
    You must bring photo identification and proof of your Social Security number to the meeting. The trustee will not conduct the meeting if you do not have these items, so if you forget them or do not have them, you will have to return at a later date for a rescheduled meeting. A good rule of thumb is to arrive early. Generally speaking, planning to arrive at the meeting 30 minutes ahead of time will allow you any extra time needed to find parking, navigate traffic or any other obstacle which might delay your meeting. You will also have time to review your documents with the attorney before appearing before the Trustee.
  • During the Meeting
    When the Chapter 7 trustee calls your case, you will sit at a table with your attorney so the trustee can question you. If any of your creditors or their attorneys are in attendance, they will sit at the table with you. Your trustee will question you first. It will begin with you being sworn in and some brief remarks by the Trustee. Your social security card and driver's license/state ID will verify your identity and the Trustee will embark upon a series of brief yes or no questions. The questions will generally cover whether or not you listed all of your assets and liabilities and if you have understood all of the information within your petition for bankruptcy. There may also be a few questions regarding your fee agreement with your attorney and if you have previously filed bankruptcy. It is important that you keep the answers to these questions to a brief yes or no. The Trustee is not looking for any long-winded explanation of each event, and long answers will likely disrupt the Trustee’s packed schedule of meetings. It is also possible that some of your creditors may attend this meeting, and they do have the right to question you on certain topics. However, this is extremely unlikely as most creditors have nothing to gain from attending the meeting and would normally ask the same questions that a Trustee would. After all of this is done, the Trustee may ask you to provide additional documents that he/she feels is necessary to confirm what has been stated in your petition and schedules. It will be your responsibility to produce these for the Trustee and your attorney as soon as possible. But when all of this is said and done, your meeting with the trustee will usually be through in about 10 minutes and you can proceed with your fresh start in life. The trustee's questions will vary depending on the local rules of your bankruptcy court and the trustee's own custom. Typical topics of questioning include: why you are filing bankruptcy whether you have listed all your property in your schedules and whether you have listed accurate values whether you have repaid any of your creditors within the three months prior to your bankruptcy whether you have repaid any relatives or close friends in the last year whether you have sold or given away any property or transferred any money in the past several years whether you own or have ever owned a business how you determined the value of your property listed in your paperwork whether your income is accurate in your schedules and on your means test whether you have dependents whether you are married, divorced, separated, or single whether you owe child support, alimony, or any other domestic support, and whether your monthly expenses are necessary and reasonable. If the trustee has no further questions and there are no creditors present, the trustee will conclude the meeting. If there are creditors present, the trustee will allow them to ask you questions.
  • Ending the Meeting and Follow-Up
    Once the trustee and creditors have finished asking you questions, the trustee will conclude the meeting. The trustee may continue the hearing at a later date if: the trustee needs more information you were missing documents, or the trustee requests that you amend your paperwork.
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