The reason why a consumer would file bankruptcy is to obtain debt relief. Such relief might take a variety of forms. It might result in total relief from all debts, or it might provide relief from a portion of the consumer’s debts with a period of years to pay the remainder. It might result in the payment of one hundred percent of the consumer’s debts, but provide a period of years to do so while stopping the accrual of punitive interest. It can also provide the consumer with the choice of either retaining or rejecting a secured loan such as a home mortgage or car loan. Thus, filing bankruptcy does not mean you have to give up your home or your minivan, if you are current and can remain current. If you are behind in your mortgage or car loan, Chapter 13 and Chapter 11 provide a method of bringing your loan current over a period of years so you can retain the asset or real estate, provided that you make the current payment in addition to making payments on the amount you are behind. Bankruptcy provides immediate relief from foreclosure, garnishment or repossession due to the “Automatic Stay” which is essentially a temporary cease and desist order requiring creditors to stop all collection actions.
Bankruptcy is intended to give consumers an opportunity to get out from under debt once it becomes so oppressive that they have no hope of ever catching up. Loss of job, medical expenses, and bad luck should not result in being crushed with debt forever. We got rid of debtors’ prisons in this country in the early 1800’s. Bankruptcy gives the consumer the opportunity to get out from under burdensome debt, and rather than facing a hopeless future, to have a fresh start in life going forward. This is good not only for the consumer but society in general, so that the consumer can go back to earning a living and contributing to the economy.
Filing bankruptcy does not mean turning over every asset to the Bankruptcy Trustee. In most instances, consumers can retain most or all of their assets. Each individual can retain the equity in their car up to $3675 (as of 2015, under Federal exemptions) unlimited interest in qualified-IRS retirement plans such as IRA’s and 401K’s, virtually all household goods and furnishings (except those of high value such as a piano, artwork, or antiques), and equity in their home up to $125,000 (under Washington law). If the consumer does not have equity in a home to protect, each individual can protect (as of 2015) about $12,500 in any asset, including cash; a married couple can protect double that amount. Also, there are other specific exemptions available as to certain assets. Thus, in most instances, a consumer can get out from under debt while retaining much or all of their property.
A. Chapter 7
Chapter 7 is what people often think of as “straight bankruptcy.” A Chapter 7 results in the discharge by the Bankruptcy Court of all unsecured debt, while giving the consumer the option to retain, or “reaffirm” secured debt. Secured debt is any debt where the lender has a security interest in an asset that the lender can repossess or foreclose. A mortgage or a car loan would be secured debt. Sometimes a secured loan involves other security, such as jewelry, tools, or stock. If the lender has the right to repossess something, it’s a secured loan.
The first requirement of Chapter 7 is an income ceiling known as the “Means Test.” To file Chapter 7, a consumer has to be below the income requirement of the Means Test. As of 2015, the Means Test in Washington is $53,234 for an individual, $66,869 for a married couple, with an adjustment for each dependent. Thus the income limit for a family of four is presently $86,161. The income requirement is adjusted every couple of years, so these numbers change. In addition, certain expenses can affect the Means Test, such as mortgage payments and significant medical expenses. Your attorney can advise you on the Means Test calculation.
For qualifying consumers, Chapter 7 can provide relief from most unsecured debts. Certain debts are non-dischargeable: taxes, student loans, child support, alimony, and criminal penalties. Credit card debt, medical debt, and most unsecured debt can be discharged. Secured debt can also be discharged, provided that the collateral (home, car, jewelry, etc.) is surrendered to the lender. Filing under any chapter provides instant protection from creditors, who can take no legal action against a consumer who has filed due to the Automatic Stay. Garnishments, lawsuits, foreclosures, repossessions, telephone calls, and legal action of any kind are immediately halted due to the Automatic Stay that protects the debtor. To proceed with further action after the bankruptcy filing, the lender has to obtain a court order from the Bankruptcy Court.
Chapter 7 thus provides instant relief from harassing calls, and more importantly, permanent discharge from debt. There is no limit on the amount of debt that may be discharged in Chapter 7: it can be $25,000 or $25,000,000. If a consumer qualifies under the Means Test and certain other criteria, all debt can be wiped out, and all or a substantial portion of the consumer’s assets will be protected.
B. Chapter 13
If a consumer does not qualify under the Means Test for Chapter 7, they are nevertheless able to file Chapter 13. Chapter 13 provides for a payment plan, ranging from three to five years, during which time the consumer is obligated to dedicate all disposable income (calculated by subtracting reasonable living expenses from the consumer’s net income) for the period of the plan. The amount of disposable income is what determines the payment, not the amount of debt. Thus, if a consumer’s disposable income leaves $750 per month available to pay creditors, that becomes the monthly payment the consumer has to make, whether the consumer’s total debt is $10,000 or $3000,000.
In some instances, it makes sense to file Chapter 13 even if the consumer could otherwise qualify for Chapter 7. Assume that the consumers have fallen six months behind on their mortgage. The only way they could keep their home in Chapter 7 would be to find a way to bring the loan current. Otherwise, they can’t keep the home. Bringing the mortgage current at filing is often not possible. In Chapter 13, however, they could include the six months of past-due payments in their payment plan and pay that amount over a period of up to five years, provided they make the current mortgage payment during that time. Thus Chapter 13 gives the consumer the opportunity to bring their mortgage current, which is not possible in Chapter 7. Moreover, if the consumer qualifies for Chapter 7 but decides to file Chapter 13, they are not obligated to pay unsecured creditors, so they can effectively get relief from a credit card or medical debt while retaining their home.
Importantly, Chapter 13 also provides consumers with the option to avoid a second mortgage. In order to strip a second mortgage, the consumer must establish that the value of their first mortgage exceeds the value of the home. If the first mortgage is in excess of the value of the home, there is no equity to secure the second mortgage; hence, it is unsecured and can be treated as unsecured debt in the Chapter 13 Plan. If a second (or third) mortgage is avoided and becomes an unsecured debt, it is paid the same as other unsecured debt. Because unsecured creditors often receive nothing in a Chapter 13, stripping the second mortgage can effectively result in discharging that debt.
Chapter 13 thus provides not only a method for consumers to pay some portion of their debts if they don’t qualify for Chapter 7, but it also provides an opportunity for homeowners who have fallen behind to save their home from foreclosure. The further advantage of stripping a second mortgage can be a lifesaver for debtors struggling to pay their debts and can permit them to keep their home.
In some instances, Chapter 13 is unavailable to consumers because their debt is too high. As of 2015, the upper limit is $1,149,525 in secured debt or about $383,175 in unsecured debt. Since secured debt includes all mortgages on all real property as well as all car loans, this limit is not all that high in this day of million dollar mortgages. If a consumer’s debts exceed these limits and he/she does not qualify for Chapter 7, their only remedy is probably Chapter 11.
C. Chapter 11
Chapter 11 is generally used by corporations for debt restructuring. General Motors filed Chapter 11 in 2009; other companies who seek protection of the bankruptcy court while restructuring also resorts to Chapter 11. Chapter 11 is also available to individuals. It is the only available avenue for individuals who have income too high to qualify for Chapter 7 under the Means Test and whose secured or unsecured debt exceeds the Chapter 13 limits. It is not necessary to have that level of debt, however, to file Chapter 11.
An advantage of Chapter 11 for individuals is that it can offer greater flexibility than Chapter 13. In Chapter 13 a trustee closely supervises the plan, its terms, and its confirmation. Under Chapter 11, however, the consumer stands in the position of the trustee, as “Debtor in Possession.” Unless one or more creditors file a motion to have a trustee appointed, the Debtor in Possession acts in the same capacity as a trustee.
Under Chapter 11 the Debtor in Possession proposes a plan of repayment, and if one class of creditors who are adversely affected by the bankruptcy votes to approve it, the plan can be confirmed by the court. We have had significant success in obtaining confirmation. After all, creditors want to be paid. Although the initial costs of a Chapter 11 can be well above the cost of a Chapter 13, very often there is a significant saving in the monthly payment. In addition, there is no limit on how long the plan can extend, whereas under Chapter 13 no plan can exceed five years.
Whether your specific circumstances make filing Chapter 7, 13, or 11 most beneficial, proper planning can help maximize the protection of your assets and minimize the amount that you end up paying to creditors. Even if you ultimately pay your creditors one hundred percent of what they are owed, it can frequently be beneficial to file under some chapter to give yourself breathing room and establish a systematic payment plan for paying your debt without having your wages garnished, your car repossessed, or your home foreclosed. A discussion and assessment of your situation will aid in determining the best approach.
At the Iwama Law Firm, we understand that you may need help beyond the filing of bankruptcy in legal matters that require litigation, including:
Creditors not only prey on your financial stress, but they also prey on your ignorance of the FDCPA and the Fair Credit Reporting Act. Our job is to educate you on the consumer laws that govern collection agencies and pursue action when rules are violated.
Many bankruptcy law firms promote their ability to file Chapter 7 and Chapter 13 bankruptcies, to provide you fast debt relief. However, there are times when fast is not always best. Many cases we handle at the Washington-based Iwama Law Firm involve complex bankruptcy litigation that involves:
Aggressive collection actions by creditors often take the form of liens and judgments on your property. The completion of a Chapter 11 or 13 bankruptcy plan over certain years may provide an avoidance of second mortgages and judgment liens.
Most of the clients who come to the Iwama Law Firm are seeking protection not only from creditors, but their mortgage lenders. Being served with a notice of foreclosure does not mean you will lose your home or other property. Contact founder Matt Iwama, an experienced Seattle foreclosure defense litigation attorney, for an effective and aggressive foreclosure defense.
A bankruptcy filing is meant to stop collection actions. Agencies that violate that automatic stay must be held accountable. Debt buyers also engage in illegal activity in violating discharge injunctions by continuing collection actions.
At the Iwama Law Firm, we provide aggressive representation in the filing of Chapter 7, 11 and Chapter 13 bankruptcy. However, our dedication to protecting the rights of our clients does not end there. Many cases we handle result in complex courtroom litigation that involves liens and judgments on second mortgages.
While bankruptcy filing is an important first step in removing a lien, judgment, or a second mortgage of an "underwater" home or property, litigation may be a necessary tactic in ensuring that your rights are completely protected. For help from an experienced attorney and litigator, contact founder Matt Iwama at (253) 520-7671.
If you are a victim of a creditor who continually violates the FDCPA, Matt Iwama, founder of the Iwama law firm, will fight to hold them accountable. Bullying collectors ignoring the rules and regulations only increases the stress of your financial struggles. Contact us at (253) 520-7671.