Interviewer: How does someone qualify to file either chapter 7 or 13 bankruptcy?
Marilyn Minger: Only individuals or married couple may file for bankruptcy under chapter 7 and expect a discharge of their debts. In order to file under chapter 7, individuals or married couples with primarily consumer debt must satisfy a “means test.” The means test is applied to the debtors’ circumstances, looking at their income for the last six months, the extent and character of their debt, their household size, their expenses, and other factors that may be considered.
Marilyn Minger: To be eligible to file a chapter 13 bankruptcy, the debtor must be an individual or married couple with regular income. Also, currently (as of April 1, 2013, and through March 31, 2016), debtors cannot have more than $360,475 in unsecured debt and $1,149,525 in secured debt.
Interviewer: Tell me more about the “means test.”
Marilyn Minger: In 2005 Congress revised the Bankruptcy Code so that individuals and married couples with the majority of their debt being classified as consumer debt (as opposed to business debt) had to file under chapter 13 and repay some of their unsecured debt, unless their income in the previous six months was such that they qualified to file a chapter 7. The means test compares income of the debtor and other members of the household for the six months before filing against household size, extent and character of the debt, and allowable expenses. Some of the allowable expenses are particular to the state and region the debtor lives in, others are not.
Marilyn Minger: So for instance, a person living in a three-person household in Oakland, can file a chapter 7 without question if the combined gross annual income of the three is less than $67,817. If it is more than that then the person’s expenses and debt also must be considered.
Interviewer: How is bankruptcy different for self-employed people vs. W-2 wage earners?
Marilyn Minger: None really. It is all in the paperwork. The simplest case obviously is when all income comes from regular paychecks. If income is irregular over the six-month income look back period for either the wage earner or self-employed person, the income needs to be averaged over that period. The self-employed person does of course also have to keep track of the expenses incurred to generate their income.
Interviewer: Once someone has decided to file, what’s next?
Marilyn Minger: In order to determine what the debtor’s options are, they will have had to provide some of their particular information. Once the decision is made to file, and under what chapter, however, more specific information is probably required. The bankruptcy petition and accompanying schedules and statement of financial affairs require that the debtor list everything they own and everything they owe, amounts of income received for the last several years and income expected to be received in the next year, expenses for the last six months and expenses expected for the next year, in addition to a variety of other information.
Marilyn Minger: Personally I provide a comprehensive questionnaire to the debtor asking for all of the information that I believe will be required to completely and accurately complete the debtor’s petition, schedules, and statement of financial affairs. I may also ask the debtor to provide me with their credit report. After I complete the petition the debtor must review it for accuracy and completeness, and then sign it under penalty of perjury.
Prior to filing, all debtors must complete a credit counseling course. It can be taken online, takes about an hour, and costs about $25. After filing, and before any discharge is given, the debtor must complete a financial management court. It also can be taken online, takes about an hour, and costs about $25. In the case of married couples filing, each spouse must take each course.
About 28 to 35 days after filing, the debtor will be required to attend a meeting of creditors (also known as a 341 meeting of creditors, based on the bankruptcy code section that requires the meeting). The 341 meeting is an administrative hearing during which the debtor is under oath and available to their creditors’ questions. As part of the deal for getting the benefits of filing bankruptcy (under either chapter 7 or 13) , the debtor must make themselves available to their creditors’ under oath. Even so, creditors only are allowed to ask certain kinds of questions – generally about things that the debtor has put into or left out of their petition, schedules and statement of financial affairs. Creditors cannot ask debtors about what they may consider the debtor’s moral failings as a bankrupt. The prospect of the 341 meeting seems to generate a lot of anxiety in debtors. It is my experience that if the petition, schedules and statement of financial affairs are complete and accurate, and the debtor has filed an appropriate bankruptcy, the 341 meeting will not be a traumatic affair. It also is my experience that generally institutional creditors, who are familiar with the bankruptcy process, do not appear at 341 meetings, especially if the petition, schedules and statement of financial affairs are complete and accurate.
Marilyn Minger: With respect to a no-asset chapter 7, where the debtor has no property that is either not exempt or worth the trustee selling, the process can be over about 90 days after filing. About 60 days after the 341 meeting, the debtor receives a letter from the court telling him or her that all of their dischargeable debts are discharged. Before even filing the bankruptcy the debtor should have determined (with their lawyer if they have one) which of their debts they can expect to be discharged in the bankruptcy.
As a point of note, the automatic stay is lifted when the debtor receives a discharge and the chapter 7 case is closed. This can be important if the debtor has filed a bankruptcy to prevent a foreclosure of their home because they were behind on their mortgage payments, or to prevent the repossession of a car in the same situation. The automatic stay may protect the debtor during the pendency of the bankruptcy, but upon its close, if there are still arrearages on secured debt, the creditor can resume recovery of the collateral property.
Marilyn Minger: With respect to a chapter 13, the 341 meeting can occur as late as 45 days after the filing. With the filing of bankruptcy under chapter 13, or shortly thereafter, the debtor must file a plan of reorganization. The plan provides a blueprint for paying the debts the debtor is required to pay through the plan. Factors that are considered in evaluating the plan are the amount of the debtor’s disposable income and the amount and character of the debtor’s debt. Plans cannot be more than five years, nor generally are they less than three. The debtor submits a plan to the court. Creditors have an opportunity to object to the plan, but once the court accepts the plan, the plan controls how the creditors get paid as long as the debtor performs under the plan.
If the debtor had too much income to file a chapter 7, but not enough income to fully pay his or her unsecured creditors through a five-year chapter 13 plan, if the plan is successfully completed, and is so written, the remaining unsecured debt is discharged upon completion.
Interviewer: Tell me more the 341 meeting of creditors.
Marilyn Minger: It’s an administrative proceeding held in a room in a federal building. It is not held in a courtroom. There generally are other debtors also having their 341 meetings of creditors, but generally there are not a lot of creditors present. The meeting is conducted by a bankruptcy trustee. The debtor must show the trustee proper identification and proof of their social security number. Then the trustee asks the debtor a series of questions about the preparation, reviewing, and signing of the petitions, and any questions that may arise from contents of the petitions, schedules and statement of financial affairs. The trustee then opens the meeting to creditors of the debtor. It is more unusual than usual for creditors to show up.
We are a debt relief agency helping people file for bankruptcy relief under the Bankruptcy Code.