Purpose
Bankruptcy laws help people who can no longer pay their creditors get a fresh start – by liquidating assets to pay their debts or by creating a repayment plan. Most cases of individual bankruptcy are filed under Chapter 7 or Chapter 13.
Credit Counseling
Any individual wanting to file for bankruptcy will have to undergo credit counseling, before filing, unless there are “exigent” (emergency) circumstances. A good example of an exigent circumstance is a pending foreclosure. The credit counselor must be on a list that has been approved by the Office of the United States Trustee in the jurisdiction where the debtor is filing. If exigent circumstances exist, the debtor will still have to undergo counseling soon after filing. Further, before receiving a discharge in the bankruptcy case, an individual will also have to undergo a session on financial education through an approved agency.
Chapter 7
Chapter 7, entitled Liquidation, contemplates an orderly, court-supervised procedure by which a trustee takes over the assets of the debtor's estate, reduces them to cash, and makes distributions to creditors, subject to the debtor's right to retain certain exempt property and the rights of secured creditors. Because there is usually little or no nonexempt property in most chapter 7 cases, there may not be an actual liquidation of the debtor's assets. These cases are called "no-asset cases."
A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court. In most Chapter 7 cases, if the debtor is an individual, he or she receives a discharge that releases him or her from personal liability for certain dischargeable debts.The debtor normally receives a discharge just a few months after the petition is filed.
Amendments to the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a "means test" to determine whether individual consumer debtors qualify for relief under Chapter 7. If such a debtor's income is in excess of certain thresholds, the debtor may not be eligible for Chapter 7 relief.
Means Testing
If an individual wants to file or files a Chapter 7 bankruptcy, “means testing” is applied to the debtor to determine if their present income, or their average income in the past 180 days, is above the median income in the state where they must file. To get general information in order to determine median income in your state you can go to https://www.census.gov/library/visualizations/2016/comm/cb16-158_median_hh_income_map.html. Debtors below the state median income will not face any problem as a result of means testing and can proceed to file a Chapter 7 bankruptcy (liquidation) if they choose to do so. Debtors above the state median income, who file a Chapter 7 bankruptcy, will have to overcome a presumption that their filing was an abuse of the new bankruptcy law and face dismissal or a decision to convert to a Chapter 13 bankruptcy. This presumption is based on the fact that the new law assumes that persons over a state’s median income can afford to repay at least a portion of their debt and therefore should either enter into a repayment plan with their creditors outside of bankruptcy or file a Chapter 13 bankruptcy.
Chapter 13
Chapter 13, entitled Adjustment of Debts of an Individual With Regular Income, is designed for an individual debtor who has a regular source of income. Chapter 13 is often preferable to Chapter 7 because it enables the debtor to keep a valuable asset, such as a house, and because it allows the debtor to propose a "plan" to repay creditors over time – usually three to five years. Chapter 13 is also used by consumer debtors who do not qualify for Chapter 7 relief under the means test. At a confirmation hearing, the court either approves or disapproves the debtor's repayment plan, depending on whether it meets the Bankruptcy Code's requirements for confirmation. Chapter 13 is very different from Chapter 7 since the Chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor's anticipated income over the life of the plan. Unlike Chapter 7, the debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is received. The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. The discharge is also somewhat broader (i.e., more debts are eliminated) under Chapter 13 than the discharge under Chapter 7.
Help for veterans prior to filng bankruptcy
Servicemembers Civil Relief Act of 2003 - The Act provides relief for termination of leases, a six percent cap on interest rates, and reopening of Default Judgments. This protection extends to car leases, car loans, and repossessions. The Federal Housing Authority (FHA) provides answers to frequently asked questions about the Servicemembers Civil Relief Act.
Chapter 7
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Chapter 13
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| When used |
You have little or no money left after paying basic expenses each month—or you're not even meeting basic expenses. |
You have regular income and can pay your living expenses, but you can't keep up the scheduled payments on your debts. | |
| Filing |
You must reside, have a domicile, a place of business or property in the United States or municipality You must not have had a bankruptcy petition dismissed for cause within the last 180 days |
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| Loss of Property | If you have property that is not exempt, the trustee may sell it to repay your creditors | Not if payments under the plan are kept current | |
| Property allowed to keep | See Maryland exemptions | You may keep all of your property by arranging to repay your debts and the liens on your property through the rep | |
| Average Time from filing to discharge | 4-6 months | 3 year plan - with extension to 5 year for good cause and be approved by the court | |
| Credit Reports | It may be listed in credit reports for up to 10 years | It may be listed in credit reports for up to 10 years | |
| Income Requirements | None – If debtor has excess income, the judge may require conversion to Chapter 13 | Must have disposable income (more income than what is needed for debtor's basic monthly expenses) | |
| Impact on Wages | None | The trustee will put in a wage garnishment for the plan amount | |
| Control by the Court of your life | The trustee will liquidate and sell non-exempt property. |
The court will set up a plan that will use a portion of future earnings to repay creditors. Once this plan is set up, debtor will again have control of the property except for the part of wages subject to the plan. Within thirty days after the filling of the plan (even if the plan has not yet been approved by the court), the debtor must start making payments to the trustee. Usually the Bankruptcy Court must approve new debt (for example, credit cards.) Most of the property will be controlled by a “bankruptcy trustee” until the plan is approved. |
Updated by Jillian Chasen and Amy Hennen, Esq., Maryland Volunteer Lawyers Service