THE BELOW INFORMATION IS NOT LEGAL ADVICE. PLEASE CONSULT AN ACTUAL LAWYER FOR ADVICE ON YOUR INDIVIDUAL SITUATION.
1) Should I File Under Chapter 7 or Chapter 13? You must ultimately decide for yourself whether filing bankruptcy
is the proper action to take, and if so, which Chapter is better for
you. Some of the factors to consider are as follows:
Chapter 7 has the advantage of wiping the slate clean and enabling
you to embark on your “fresh start” immediately. With a Chapter 13 you
will be making payments for three to five years, during which time you
will be on a "financial treadmill," unable to borrow without court
If you have a particular asset that you want to keep and that is
valued above the allowable exemption, then Chapter 13 may be the only
alternative. For example, if you own a house with significantly more
than $25,000.00 in equity and you don't want to lose it, Chapter 7
probably will not work.
If you are trying to ward off a repossession or a foreclosure,
Chapter 7 will not help you, and you will need to file a Chapter 13.
If your debts are primarily consumer debts, and if your budget
reveals that after filing bankruptcy your income substantially exceeds
your expenses, it is possible that the United States Trustee could file a
motion to dismiss the Chapter 7 case for “substantial abuse.” In such a
case Chapter 13 may be the better alternative.
2) Can I File Under Chapter 7?
Under the new law (after October 2005) a person who wishes to file
a Chapter 7 case must financially “qualify”, so to speak. The analysis
that is involved usually is referred to as the “means test.” The first
step in this process is to compile your income for the six month period
prior to the date of filing. For example, if the date of filing is
during the month of September, the income that must be compiled is what
has been received during the months of March through August. “Income” is
very broadly defined, and includes such items as wages, dividends,
gifts and contributions from other persons in your household. Indeed,
the only exclusions mentioned in the Bankruptcy Code are Social Security
payments and certain payments made because you have been the victim of
certain crimes. The total “income” then is divided by six in order to
arrive at what is referred to as the “current monthly income.” If this
current monthly income is under the state median income, taking into
account how many people there are in your household, then you have
“passed” the means test, and you are eligible to file Chapter 7. If your
income is over the median income, you still might be able to file, but
it is then necessary to examine your expenses in order to see if they
are sufficient to bring your net income below the threshold amount. Some
of these expenses are not your actual expenses, but instead involve
national or state standards. Needless to say, the analysis can become
extremely complicated and detailed.
3) Are All Debts Eliminated in Chapter 7?
The chief advantage and principal goal of a Chapter 7 bankruptcy
is that after the discharge you will not owe any debts. However, there
are important exceptions to the discharge:
Income taxes. Unless income tax liability is old enough, it is
not dischargeable. Generally, in order to be dischargeable, this kind of
debt must be for a taxable year for which the return was due more than
three years go, with the return being filed over two years ago, and with
the date of assessment being more than 240 days ago. There are some
things that can increase this time, for example, offers in compromise
and previous bankruptcies. In order to determine whether a tax is
dischargeable, detailed analysis must usually be made.
Student loan debt. This kind of debt, if it was made or
guaranteed by a governmental agency or a nonprofit institution, is not
dischargeable unless you can show “undue hardship”. To prove undue
hardship you have to prove 1 that you cannot maintain, based on current
income and expenses, even a “minimal” standard of living for yourself
and your dependents if forced to repay the loans; AND 2 that this state
of affairs is likely to persist for a significant portion of the
repayment period of the student loans; AND 3 that you made good faith
effort to repay the loans. It is extremely hard to meet this burden of
Debts incurred by false representation or fraud. One frequently
litigated issue in this area concerns credit card debt. Commonly, the
situation is that the debtor has made sizable charges on the card
shortly before filing the bankruptcy petition, suggesting that the
debtor has “loaded up”, knowing that he or she is going to file the
bankruptcy petition. Normally, the burden of proof lies with the
creditor, meaning that the creditor must prove that the debtor has
committed fraud. However, the Bankruptcy Code provides that any credit
card debt aggregating more than $500.00 from any single creditor for
nonessential, “luxury” goods incurred within 90 days prior to filing the
bankruptcy, or cash advances totaling over $750.00 on a credit card,
taken within 70 days prior to filing, are presumed to be
non-dischargeable. The effect is that the burden shifts to the debtor to
show that the charges were not fraudulent. This particular provision of
the Bankruptcy Code simply sets forth a presumption of fraud. It does
not mean that if you wait more than 70 or 90 days, as the case may be,
you are automatically free from an objection to discharge. Therefore, do
not use your credit cards for anything other than food, clothing and
other essentials during the applicable time periods.
Alimony and Child Support. This kind of debt cannot be
discharged under any circumstance. Also, if a debt has been incurred in
the course of a divorce, even if it is not alimony or child support,
under the changes in the law, it is not dischargeable now. For example,
if you have agreed to pay a certain debt in a property settlement
agreement, that debt is not dischargeable!
Injury caused by an intoxicated debtor's operation of a motor
vehicle. The Bankruptcy Code provides that not dischargeable is a debt
“for death or personal injury caused by the debtor's operation of a
motor vehicle, vessel, or aircraft if such operation was unlawful
because the debtor was intoxicated from using alcohol, a drug, or
4) Do I Have To List All Debts?
Yes, you do, the Bankruptcy Code requires that all debts be listed.
This does not necessarily mean that the relationship with the creditor
will be damaged. If the creditor has a security interest in some
property, such as your home or vehicle, usually the creditor and debtor
enter into a “reaffirmation agreement.” This is a special document which
is also signed by your attorney and is filed with the court. The effect
of the reaffirmation agreement is to again make the debtor legally
responsible for the debt. The creditor usually is very happy to enter
into this agreement. After all, the creditor would much rather have you
pay the debt than to go to the expense and hassle of seizing and selling
the collateral, usually at a loss. If the debt is an “unsecured” debt,
meaning that there has been no property pledged to “secure” the debt, it
almost always is not advisable to reaffirm the debt. The reason for
this is that there is no benefit such as retention by the debtor of
secured property to justify the reaffirmation of the debt. To reaffirm
the debt, and consequently to be obligated to repay it, prevents a true
"fresh start", which, after all, is the purpose of filing a Chapter 7
bankruptcy. Having said that, however, the Bankruptcy Code allows you to
pay any debt on a voluntary basis, if you wish to do so. Whether this
is advisable is questionable and is an issue to be discussed with your
5) Can I Lose Property In A Chapter 7?
As is true under any Chapter of the Bankruptcy Code, you are
required to list all of your assets (and, as mentioned above, all of
your debts) in the “schedules” filed with the court. An asset is any
property you own or may have a right to own in the future. It could be
“tangible”, such as a vehicle, or “intangible”, such as a legal claim or
the right to receive a tax refund. Your assets become the property of
the bankruptcy estate. In general, any property acquired after the date
of filing the bankruptcy petition that you were not entitled to receive
prior to filing is not included in the bankruptcy estate. One notable
exception to this rule is inheritance rights; if you inherit property
within 180 days of filing, that inherited property is considered part of
the bankruptcy estate.
In a Chapter 7 bankruptcy, the trustee, who is a person appointed to
take charge of the bankruptcy estate, can, if necessary, sell the
property which is not exempt from seizure, and then pay creditors with
the proceeds. It is very important, then, to identify in the schedules
what property is protected as exempt. At least some, and perhaps most,
of your assets will be exempt. In Louisiana, state law, not federal law,
governs which property is exempt. It is not possible to fully cover all
of these exemptions here; however, some important exemptions include
Homestead. This important exemption protects up to $25,000 of equity in
your home. It is not available if you co-own the property with someone
who is not your spouse.
Household goods. Most of the items in our home that we use for our
support and maintenance are included in this category. Examples are
clothing, furniture and appliances.
Retirement funds. There are actually two layers of protection
when it comes to retirement funds. Retirement funds that are "ERISA
approved", meaning basically that they cannot be transferred to another
person, are not even included in the bankruptcy estate. Thus, they
cannot be administered by a trustee. The second layer of protection is a
Louisiana state law that exempts 401K plans, Individual Retirement
Accounts (IRA) and similar plans from seizure, to the extent of
contributions made more than one year prior to the filing of the
Tools of the Trade. This exemption covers property which we need
to use in our work A carpenter's tools, for example, are exempt from
administration by the trustee.
Motor Vehicles. Frequently, the question arises whether motor
vehicles are exempt. In Louisiana, we are entitled to a $7,500 exemption
for one motor vehicle per household. Additionally, there is a $7,500
exemption available per household for a vehicle that has been
substantially modified, equipped, or fitted for the purposes of adapting
its use to the physical disability of the debtor or his family and is
used by the debtor or his family for the transporting of such disabled
person for any use.
Wedding or engagement rings. So long as the value of the ring(s) does not exceed $5,000, it is exempt.
Federal earned income tax credit. This is totally exempt, except
for seizure by the Louisiana Department of Revenue or for child support
One final note regarding exemptions: Even though you now live
in Louisiana, if you have recently moved from another state you cannot
use Louisiana exemptions and you must use another state's law, usually
the state from which you moved to Louisiana. This analysis can become
6) What Are The Disadvantages Of Filing Chapter 7?
One is that the bankruptcy filing will be included in your credit
record for up to 10 years. But because any prospective creditors know
you won't be able to file another Chapter 7 bankruptcy for at least 8
years, and the debts that you were burdened with prior to filing will be
discharged, you might be more attractive to a prospective creditor than
you would think. You may not get as high a credit limit as you once
had, or be able to borrow large sums of money, but getting some credit
(such as a secured or even an unsecured credit card) shouldn't be that
difficult, and you can rebuild your credit over time. What you will
likely face for some time are higher interest rates and higher down
payments. Some people do have difficulty rebuilding their credit, but it
is usually due to other factors besides bankruptcy, such as their
employment record, other credit problems, etc.
As mentioned above, you are not able to file a Chapter 7 if you
have filed a previous Chapter 7 within eight years, and received a
discharge in that previous case. Therefore, you should not file a
bankruptcy if you need the option of doing it again in the next eight
years. (This eight year rule does not apply if the second filing is a
7) What is a Chapter 13 Bankruptcy?
Chapter 13 allows individuals in financial difficulty to pay their
creditors over time, while remaining under the protection of the
Bankruptcy Stay. As with a Chapter 7 (excepting repeat fillers), the
Bankruptcy Court issues an order, preventing creditors from taking any
action against you.
8) How does a Chapter 13 Bankruptcy work?
The debtor makes monthly payments to a Chapter 13 trustee, who,
then, pays the debtor’s creditors according to their legal rank. In a
Chapter 13, the debtor is required to devote all disposable income to
the plan in the form of monthly payments to the trustee. Additionally,
in a Chapter 13 all interest may stop on many unsecured debts. (In
certain situations unsecured creditors receive 6% to 10% interest.). To
make these monthly payments, the debtor must have some source of income
that is regular, such as employment income or rental income. Debtor is
required to pay all “disposable income.” to the Trustee for 36 months or
more. The Trustee will pay some creditors in full. These include
secured creditors and creditors who hold “priority debts”, such as most
tax debt. Unsecured debts may not have to be paid in full, at the end of
the plan, the balance of these debts is discharged. (There are some
exceptions, for example, student loans). You do not lose any property in
a Chapter 13, unless your plan proposes surrender of this property.
While in a Chapter 13 plan, you cannot borrow money without first
obtaining court approval.
9) Why would I File Chapter 13 instead of filing a Chapter 7?
While this determination involves detailed analysis into your
particular financial situation and the type of debts you have and should
only be made in consultation with an experienced attorney, some factors
suggesting a Chapter 13 filing, other than having too high an income
during the preceding six months prior to filing, which might rule out a
Chapter 7 entirely, are: Is there a pending foreclosure or seizure of
property? If your home mortgage-lender has filed a foreclosure action or
your vehicle has been seized AND you want to save the property, you
will likely wish to file a Chapter 13.In the Chapter 13 plan, you will be able to catch up on the past due
amount ("cure the arrears") over an extended period of time under the
protection of the Bankruptcy Court, and you will not lose the property. Do you own property that would be lost in a Chapter 7? As
explained in the previously, the job of the Chapter 7 trustee is to
"liquidate" (sell) property, and then distribute the net proceeds to
creditors by legal rank. If you have property at risk in a Chapter 7,
AND you want to keep it, then you might want to consider a Chapter 13
filing. Are your non-dischargeable debts large relative to your
dischargeable debts? If a great deal of your debt is non-dischargeable
debt, such as student loans or most taxes or for some other reason, and
you need protection from your creditors, a Chapter 7 may not be the best
choice. Though the automatic stay will protect you through the time
that the Chapter 7 discharge is obtained, once the discharge is
obtained, a creditor with a non-dischargeable debt is free to start up
collection efforts again. What to do? File a Chapter 13, if possible, to
pay a pro-rata portion of all your debts while under the protection of
the Bankruptcy Court. If you have substantial amounts of such debts, you
might only have to pay a percentage of all your debts and at the end of
the Chapter 13 plan, the remainder would be discharged. There are other kinds of debts that are not dischargeable in a
Chapter 7 that may be dischargeable in a Chapter 13: Debts incurred by
fraud or false representations, Debts incurred by willful injury to
another person or their property. If you have such debts, you might wish
to file a Chapter 13 and pay only a portion of your debts and at the
end of the Chapter 13 plan, any remainder will usually be discharged.
10) Who May File a Chapter 13?
Only an individual with regular income who owes less than
$336,900 in unsecured debt and $1,010,650 in secured debt. These debts
must also be reasonably non-contingent and liquidated, meaning that they
must be for a reasonably certain, fixed amount and not subject to any
conditions or bona fide disputes.
11) How Much Do I Pay Per Month And For How Long?
You are required to pay all of your “disposable income”, which is
defined as income that is not reasonably necessary for the maintenance
and support of you or your dependents, during the “applicable commitment
period”. Pursuant to the required "means test", the amount of your
monthly income is equal to your average monthly income received during
the previous six months, and not actual income at the time of filing.
This can sometimes be beneficial. For example, a debtor who during the
last six months had a comparatively low income (received unemployment
benefits) but who now has started a new job with a high income would not
have to use that higher income in calculating disposable income.
Bankruptcy courts have struggled to attempt to reconcile the disposable
income as determined by the means test with the amount left after
deducting actual expenses from actual income. Various solutions have
been arrived at. For example, a court might allow the lower disposable
income amount calculated by subtracting actual expenses (rather than the
IRS figures) from actual income, but require some interest to be paid
to unsecured creditors.As mentioned above, when determining “disposable income”, you are
allowed to deduct “reasonable” expenses. If your income is above the
state median for a household of your size, then these “reasonable”
expenses are not necessarily the expenses you actually incur. Some of
these expenses are based on national or regional IRS standards,
irrespective of what you actually spend. Needless to say, it can require
involved and detailed analysis to determine the amount you will pay in a
Chapter 13 plan.
12) How long does a Chapter 13 plan last?
Typically, a Chapter 13 plan lasts from between 36 months to 60
months. If the six month average gross income is over the state median
you will be forced into a 60 month plan (unless you can pay 100% of your
unsecured debt within a shorter period of time.). The length of the
plan depends on several factors: the monthly amount of your disposable
income, the amount and kind of debt that you have, and the value of your
nonexempt property. Finally, creditors in a Chapter 13 must be paid at
least as much as they would be paid if the debtor filed a Chapter 7. Other Important Things To Know About Filing Bankruptcy:
This is serious business, the new law strongly discourages repeat
filings. If you miss your 341 hearing, your case will be dismissed by
the Court. (In a Ch13) If you miss payments that are due under your
Plan, your case will be dismissed by the Court. If you even can obtain
new counsel to do a re-file, that new counsel will have to notice and
set a hearing within 30 days to convince the judge why “the stay” should
continue after the 30 days run and this must be “for good cause shown.”
This is not easy. Otherwise you are back in the same condition as you
were in prior to filing – at the mercy of your creditors. You will lose
the protection of the Court, and your creditors will again be free to
pursue collections, foreclosure, etc.
13) What Should I Bring To The Interview?
Driver’s license, social security card,
Two years' filed tax returns (most currently filed return and last return filed prior to that),
Six months of previous payroll and pay stubs,
Six months of bank statements prior to visiting our office, to include every bank/investment statement you have any interest in,
Tax assessment of your real property,
All of your bills – medical bills, credit card bills, etc.,
Judgments and pending lawsuits against you,
Any information of lawsuits you are pursuing,
Vehicle information and proof of insurance;
Please run complete credit checks on yourself and spouse.
Bernard V Davis Law Offices 3009 Lime Street, Suite A, New Orleans, LA 70006 (504) 888-1817