General information about bankruptcyThere are four (4) types of bankruptcy available for people in need of bankruptcy relief.
- Chapter 7 Bankruptcy is a liquidation of assets (if any and typically no assets are liquidated)
- Chapter 13 Bankruptcy for consumer reorganization
- Chapter 11 Bankruptcy; primarily for big businesses or consumers where Chapter 13 limits will not allow use of Chapter 13
- Chapter 12 is for farmers who are individuals who make most of their money from farming
Chapter 7 Bankruptcy
The most common type cases filed in bankruptcy are under Chapter 7 and Chapter 13. In Vermont the vast majority of cases are filed in Chapter 7. Chapter 7 is a process where the debtor voluntarily submits all of his assets to the jurisdiction of the court, and typically keeps all assets as exempt and asks for a fresh start which is granted by the court in an order called a discharge.
Chapter 13 Bankruptcy
Chapter 13 Bankruptcy is usually referred to as a consumer reorganization and involves the payment of the consumers debt into a reorganization plan for a period of time not less than three (3) years and not greater than five (5) years. In Chapter 13 you can stop a mortgage foreclosure or a repossession if you can present a plan that will repay any arrears at the time of the filing of your petition in bankruptcy.
Income tax debt is dischargeable if it meets certain criteria:
- The debtor filed a tax return more than three (3) years prior to the date of filing their petition in bankruptcy;
- The tax has not been “assessed” by the IRS within the last 240 days; and
- The tax return was not fraudulent. The taxpayer is not guilty of tax evasion.
If taxes do not meet these criteria they are considered priority debts in bankruptcy.
Discharging Student Loans
As a general rule, student loans are not dischargeable in bankruptcy. The only way you can obtain a discharge of student loans is to show an undue hardship. This is generally a difficult standard to meet. A debtor must show that they have a minimal standard of living and its unlikely that they will improve their standard of living over time.
Assets You Keep In BankruptcyUnder Vermont Law, you can keep the equity in your home up to $125,000.00 in value, all property which is owned with your spouse as tenants by the entirety, in so far as there are claims of one owner against the asset, and a percentage of your earning when there is wage garnishment.
The Role of the Trustee
In Chapter 7 the Trustee primary function is to review the petition and schedules and documents the Debtor must provide the Trustee, conduct the creditor's meeting, identify assets that may be available to the bankruptcy estate and, if necessary liquidate assets and administer the estate in making distributions of liquidated assets to unsecured creditors.
The Credit Counseling Requirement
With few exceptions, a Debtor must obtain credit counseling from an approved provider for the district in which the Debtor resides. Credit counseling is typically one half hour and may also provided on line, by telephone or in person. Provider charge fees that range from $24.00 to $50.00 for these services. A link to approved credit counselors for the State of Vermont is here: http://www.justice.gov/ust/eo/bapcpa/ccde/cc_approved.htm
The Debtor Education Requirement
With few exceptions, a Debtor, after filing for bankruptcy relief, must participate in Financial Management Education in order to obtain a Discharge of debts from the Bankruptcy Court. The approved credit counselors the district in which the Debtor resides provide the Financial Management Education course. It is typically one hour and may also provided on line, by telephone or in person. Provider charge fees that range from $24.00 to $50.00 for these services. A link to approved credit counselors for the State of Vermont is here: http://www.justice.gov/ust/eo/bapcpa/ccde/cc_approved.htm
Information About Credit Reports
Your credit reports is made up of reports from the three nationwide credit reporting companies; Experian, TransUnion and Equifax. The report contains information about where you live, how often you're late paying bills, or have ever filed for bankruptcy. Make sure the information is accurate, complete, and up-to-date, because credit reporting companies sell the information in your report to creditors, insurers, employers, and other businesses that use it to evaluate your applications for credit, insurance, employment, or renting a home.
A Reaffirmation of a Debt requires entering into an Agreement with a Creditor which allows that Creditor’s debt to survive the Chapter 7 discharge. Reaffirmation Agreements are made in Chapter 7 Bankruptcy only. A Reaffirmation Agreement must be signed by both the Debtor and the Creditor. Reaffirmation is entering into an Agreement with a Creditor to all their debt to survive the Chapter 7 discharge.
Section 722 Exhanges
In Chapter 7 you can also in some instances exempt and redeem assets. That means you can force a car lender to accept the fair market value of a car as opposed to the actual loan amount. It is common a motor vehicle to be worth several thousand dollars less than the amount of the outstanding balance of the loan. There are companies that will lend debtors in Chapter 7 money equal to the value of the collateral and give you a new loan which will be cheaper in the long run than the loan you have. These are called Section 722 Exchanges. Some 722 exchange lenders can be found at: http://www.freshstartloans.com/fslc/about.asp and http://www.chapter7carloan.com. The exchange must be done with a court order on motion.
Chapter 13 Cram Down
A feature of a chapter 13 plan can force a secured creditor to accept under the plan the current market value of the asset which is the creditor's collateral. The asset cannot be the Debtor's primary residence and if it is a vehicle loan, there may be some limits on the use of this feature. This can result in significant savings to a Debtor. The unsecured portion of the creditor's claim is paid as and unsecured claim under the plan. A cram down in chapter 13 can lead to significant savings in bankruptcy.
In both Chapter 7 and Chapter 13 you have the ability to strip liens from your property. Certain kinds of judgment liens that impair the equity in your assets can be removed by order of the bankruptcy court. A motion must be filed with the court requesting lien avoidance.
How to Rebuild Your Credit
After you are out of bankruptcy the best way to rebuild your credit is to obtain a small amount of credit and use it and pay it in full monthly. You may also benefit from paying on reaffirmed debt as these payments are reported on your future credit reports. In order to rebuild credit you must show a pattern of timely future payments.