Bankruptcy Overview

 

The Bankruptcy Process

1. How much property can I keep after filing?

Chapter 7

Every state has “exemption” laws that allow you to keep some assets, free from creditors’ claims, even if you do not pay your creditors. The idea is that it would do little good to take all of your assets because you would not have a place to live, clothes to wear or a way to get to work. Most exemptions allow you to keep clothes, household goods, a car of some limited value, tools of trade, as well as other property. Some exemptions allow you to keep some equity in a house.

In addition, bankruptcy law contains federal exemptions, which you can use when you are in bankruptcy, at least in some states. Those laws list the type and amount of property you can keep. These federal exemptions are available if you live in Arkansas, Connecticut, the District of Columbia, Hawaii, Massachusetts, Michigan, Minnesota, New Jersey, New Mexico, Pennsylvania, Rhode Island, Texas, Vermont, Washington or Wisconsin. If you live in one of these states, you can essentially choose to use either the state or the federal exemptions, based upon your particular circumstances. One scheme may be great for one person, but horrible for another. An experienced bankruptcy attorney will be able to help you choose the appropriate exemptions.

As we described above, you must give all your non-exempt assets (the ones that do not fit within the exemptions) to the bankruptcy trustee. However, many people do not have property in excess of the allowed amount of exempt property, and if that is the case, you do not need to surrender any property. Despite the exemptions, you always need to pay debts owed to secured creditors in order to keep the collateral securing the debt. Your exemptions do not affect their claims.

Chapter 13

Under chapter 13, you enter into a payment plan in exchange for keeping even non-exempt property. Again, you must still pay for secured property in order to keep it. You may not have to pay the full amount of the debt in some circumstances, however. Also, it is possible that a bankruptcy judge may not allow you to keep and pay for certain secured property, such as an unnecessary luxury good.

You may use a chapter 13 to save your home from foreclosure.  The automatic stay stops the foreclosure proceeding as soon as you file bankruptcy. Chapter 13 allows you to catch up on overdue pre-petition payments over time, while keeping up with current payments.

2. What is the difference between secured creditors and unsecured creditors?

A “secured creditor” is a creditor that has a lien on property. A lien is an interest in property that a creditor can use to satisfy a debt. Some liens are voluntary, for example a mortgage or a security interest in a car. Other liens are involuntary, for example a lien on property resulting from unpaid taxes or a judgment.

An “unsecured creditor” is a creditor who has no interest in any of your particular property. Outside of bankruptcy, there are only two ways an unsecured creditor can get paid. First, you can pay the debt voluntarily. This is the way most debts are paid. The other way unsecured creditors get paid is much harder. They must sue you, get a judgment against you, and ask the sheriff to seize your particular property and sell it to satisfy the creditor’s claim.

Even in bankruptcy, the secured creditor has greater protection because its lien on your property is usually honored. The bankruptcy does not remove it.

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3. Does a bankruptcy case automatically remove liens—such as mortgages—against my property?

No, not at all. Secured creditors get extraordinary rights in a bankruptcy case. Bankruptcy may temporarily delay secured creditors, but most voluntary liens (those granted by agreement on houses, cars and household goods) have to be satisfied one way or another.

However, you have some opportunities to remove or avoid involuntary liens and a small category of voluntary liens. “Avoid” is the term used in the Bankruptcy Code for removing liens.

Chapter 7

You can avoid some involuntary liens (except for liens securing alimony or support obligations) that are on property that you could exempt. You can also avoid some voluntary liens on property that you could exempt. For these voluntary liens, you can only remove liens on certain household goods, “tools of the trade” and professionally prescribed health aids. Moreover, the term “household goods” includes only certain types of items (for example, clothing, one radio, one television, one VCR).

Chapter 13

If you file chapter 13, you have the additional ability to remove liens by completing payments under the plan. In some cases, the plan will reduce the amount that you must pay or change the time period over which you must pay the debt. In the case of homes and cars, the ability to change the payment terms is very limited.

 

4. How does the automatic stay work to stop foreclosures, repossessions or other collection efforts from taking place?

Just by filing a bankruptcy petition, an “automatic stay” against all collection efforts is put in place. This is a powerful tool of bankruptcy and one of the law’s primary protections for debtors. Most creditors have to stop all efforts to collect from you. Creditors must stop making calls to you, stop sending letters, stop all lawsuits to collect, etc.

The automatic stay also stops foreclosures, repossessions or sales of property from going forward. If you don’t pay your house payments, however, the creditor will have the right to continue the foreclosure once the dust settles. Thus, the benefits of the automatic stay may be temporary when the creditor is a secured creditor.

There are a number of exceptions to the automatic stay. For example, attempts to establish or collect alimony or support obligations are not stayed, nor are criminal suits or suits by governmental agencies to protect the public.

Moreover, the automatic stay does not arise if you are filing a case within a year of filing two other bankruptcy cases that were dismissed because you did not file all the paperwork or otherwise follow through in your cases. If this happens, the stay is not automatic, but you can still request the protection of a stay.

Just remember that as to secured creditors, the automatic stay is temporary. It means only that creditors must ask the court before taking action. No bankruptcy filing allows you to keep property that is security for a loan without making payments on the loan. If you are behind on the payments and the property is of insufficient value to satisfy the debt, or there is risk of loss of the property, a secured creditor may obtain court permission to seize and sell the property.

In addition, in a chapter 7 case, as soon as the bankruptcy case is closed, the automatic stay terminates, and the creditor can proceed with foreclosure or repossession if you are behind on the payments.

If you have problems with secured debt, you may be better off filing a chapter 13 case than a chapter 7 case because the chapter 13 will allow you to pay off the past-due secured debt over time.

In chapter 13, the automatic stay also protects people other than you who are “co-debtors.” Co-debtors are people who also have an obligation to pay the same consumer debt as you do. That includes people who have guaranteed the debt for you.

5. What must I do to prevent foreclosures and repossessions?

Chapter 7

Soon after filing the petition, you must declare whether you will return the property, purchase the property or enter into a reaffirmation agreement with the creditor. However, if you do not do one of these things, the stay will terminate and the creditor may take the property.

Chapter 13

Depending upon the plan, you may be able to keep property despite secured claims. You can modify some obligations, for example by stretching out payments and reducing interest rates (where interest rates have fallen since you created the obligation).

6. How does a chapter 13 case help me with my secured debts?

Generally, in a chapter 13 you must pay in full all loans secured by your residence. The good thing is that the case gives you time to pay this off during the term of the plan, unlike a chapter 7. But, while overdue payments must be repaid over the course of the plan, regular monthly payments must still be made on time. Practically speaking, this means that if you were behind on the mortgage payment, you will be making a larger mortgage payment to make up for the past due debt.

Cars purchased for your personal use within 910 days (approximately 2 years) prior to the filing of the bankruptcy are required to be paid in full through the bankruptcy. You also must pay in full the debt for any other secured property of value that you purchased in the year before filing. However, you still may be able to reduce the interest rate on these secured debts.

7. What happens if I fall behind in payments after filing a chapter 13 case?

The terms of a confirmed plan bind you and each creditor. If you have an unexpected financial problem during your chapter 13 case, you should immediately consult with your attorney. It is often possible to deal with changed circumstances by amending the chapter 13 plan. Also, it is sometimes possible to add debts that you incurred after filing chapter 13 to the plan, so that they will be discharged with other debts at the completion of the plan.

8. What is a reaffirmation agreement and how does it work?

A reaffirmation agreement is an agreement providing that you will pay a creditor’s debt even though the debt would otherwise be discharged in bankruptcy. In theory, the debt can be renegotiated, but most reaffirmation agreements simply require you to pay the debt as originally agreed.

While unsecured debts can be reaffirmed, this is usually not a good idea. Thus, most reaffirmation agreements deal with secured debts, and debtors enter them to keep the creditor from repossessing or foreclosing on the property securing the debt. A valid reaffirmation agreement puts you under a legal obligation to repay the otherwise dischargeable debt. If you default on the payments required under the reaffirmation agreement, the creditor can repossess or foreclose on the property and seek a personal judgment against you.

In order for a reaffirmation to be valid, the parties must sign the agreement and file it with the court before you receive a discharge. In addition, either your attorney or the court must determine that the agreement does not impose an “undue hardship” on your family. There are other requirements as well, including extensive disclosures to you.

If the parties do not comply with all the requirements for a reaffirmation, the agreement may not be binding. In that event, you would have no personal obligation to make payments under the agreement.

As a rule, you should think very carefully about whether to reaffirm debt, as this limits your bankruptcy discharge.

9. Can I make payments on a discharged debt without a reaffirmation agreement?

Yes. You can make a voluntary payment of the debt. This often happens, for example, with debts to family members or friends. However, the key to this kind of payment is that it must be entirely voluntary; you have no legal obligation to pay a discharged debt, and the creditors can take no action to pressure or persuade you into making the payments.

10. Can I obtain bankruptcy protection again if I have filed a bankruptcy in the past and am now falling behind in payments again?

You may not be able file a bankruptcy petition if a prior case was dismissed because of your failure to abide by a court order. In addition, you cannot file again if, within the last six months, you requested dismissal of the prior case after a creditor sought relief from the automatic stay. The law in effect after October 17, 2005 also imposes the following rules if you have filed prior bankruptcy cases:

Chapter 7

You can file another chapter 7 case, but there might not be a right to discharge. If the prior bankruptcy was in chapter 7 and you filed the case less than eight years ago (six years before October 17, 2005) and obtained a discharge, you cannot obtain a discharge in a case filed today.

Finally, having filed a recent previous bankruptcy may affect the automatic stay. This is true in some situations where the prior case had been dismissed or a creditor had obtained relief from the automatic stay.

Chapter 13

You can file another chapter 13 case, but there might not be a right to discharge. On or after October 17, 2005, if the prior bankruptcy was in chapter 7 and you filed less than four years ago and obtained a discharge, you cannot obtain a discharge in a chapter 13 filed today. If the prior bankruptcy was in chapter 13 and you filed the petition less than two years ago and obtained a discharge, you cannot obtain a discharge in a chapter 13 filed today.

Finally, having filed a recent previous bankruptcy may affect the automatic stay. This is true in some situations where the prior case had been dismissed or a creditor had obtained relief from the automatic stay.

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Walter Metzen-Michigan Bankruptcy Lawyer-(313) 962-4656-Suite 3156 Penobscot Building, Detroit Michigan 48226-Serving the Entire Metro Detroit Area and Southeast Michigan for since 1993

 

 Contact me, bankruptcy attorney Walter Metzen to learn more about how I can help you get a Fresh Financial Start!.

 Be sure to Obtain a copy of your Credit Report after your Michigan Bankruptcy Filing and check it for Mistakes.

Contact me, bankruptcy attorney Walter Metzen to learn more about how the new Chapter 7 bankruptcy law may affect your case. I offer a free initial consultation so we can discuss your case personally.

We are a Debt Relief Agency helping people file for bankruptcy relief under the Bankruptcy Code. Let us help you decide if bankruptcy is right for you.

Bankruptcy attorney Walter Metzen represents clients throughout Southeast Michigan, including the communities of Detroit, Southfield, Warren, Roseville, Farmington Hills, Ann Arbor, Belleville, Canton, Clinton Township, Dearborn, Dearborn Heights, Hamtramck, Highland Park, Holland, Howell, Lincoln Park, Livonia, Macomb, Northville, Plymouth, Port Huron, Redford, Rochester, Saginaw, Southfield, Sterling Heights, Taylor, Trenton, Troy, Westland, Wyandotte, Ypsilanti, Mount Clemens, Howell, Oakland County, Macomb County, Wayne County, Washtenaw County, Livingston County, and all of the surrounding areas.