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Bankruptcy Solutions
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Bankruptcy Solutions Print E-mail

Bankruptcy

Financial difficulty often can be solved by bankruptcy, yet it is not for everyone.  A free
consultation is available, call 816 461-5100.

 

Automatic Stay

In both chapters of bankruptcy, filing the petition for bankruptcy results in an ‘automatic stay’
which simply means that all creditors are stopped immediately without any other steps being
taken from filing suit or continuing a law suit, garnishing, levying or taking any steps in
collection including contacting the debtors. The prohibition against all creditors, including
mortgage companies, finance companies and tax collectors (including the IRS) occurs upon
filing for all first-time bankruptcy filers. For people refiling a bankruptcy, other rules apply.
Always tell your bankruptcy attorney about previous bankruptcy filings.

 

Chapter 7 and/or Chapter 13

Let’s begin a closer look at bankruptcy. For most individuals there are two types that can be
used – Chapter 7 and Chapter 13. Chapter 7 results in a discharge of debt without payments
being made to creditors through the trustee, while in Chapter 13 some debts are paid over a 3
to 5 year period to the Chapter 13 trustee for the benefit of creditors. There are four main
reasons to choose a Chapter 13:
• behind on mortgage or car payments;
• Chapter 7 bankruptcy discharge within 9 years;
• income over the Means Test amount;
• problem with obtaining discharge in Chapter 7 (example, creditor alleges fraud)

 

What Chapter 7 Does

Chapter 7 will stop garnishes, levies, seizures and provides you with a discharge from most
debts such as:
• credit card debt (do not use credit cards right up to the time you file,
particularly for what can be characterized as luxury items)
• medical debt
• executions upon law suit judgments
• civil claims against you
• income taxes (generally taxes must have been filed and assessed more than 3
years prior to the bankruptcy filing)
• claims after repossession of autos
• collection accounts
Exemptions provide the debtor the ability to keep reasonable amounts of property in order to
begin over after the bankruptcy. Federal law provides that states may use either the federal
exemption schedule or may ‘opt-out’ and use their own exemption schedule. Both Missouri
and Kansas have utilized the ‘opt-out’ provision. The exemptions vary substantially state to
state, but generally allow the debtor to keep household items, clothing, etc. With respect to
real property Kansas allows most debtors to keep all their equity in their home, while Missouri
limits the exemption to $15,000.

 

Requirements for Chapter 7 Bankruptcy Relief

• Complete credit counseling at least 1 day prior to filing; another credit counseling
class is required and must be completed prior to receiving a discharge.
• Approve and sign all bankruptcy schedules, statements and related documents
that are filed in opening your bankruptcy case.
• Satisfy the Means Test, that is, have gross income below the limits provided by
statute for your state and family size. Current Means Test median income by
state can be found at

 

Beginning Your Bankruptcy Case

• Conference with attorney, in which you are provided notices required by law
and discuss your financial circumstances. (Consultation is free.)
• Complete financial questionnaire covering –
  • personal information
  • assets
  • creditors – MUST HAVE CREDITOR NAME, ADDRESS, ACCOUNTNUMBER, ACCOUNT BALANCE – failure to timely provide the name, address, account number and balance will delay the bankruptcy filing – credit reports usually will have creditor information which has been reported to the credit bureaus and the report can be generated by your attorney without cost when you are present to verify your identify via internet (provided you have not received a free credit report within the prior 12 months)
  • income – past income for the prior 2 years (bring past 2 years tax returns); income for the past 7 months (bring pay-stubs)
  • income – future income
  • expenses – projected expenses
  • financial transactions for the past 2 years
  • law suits, repossessions, foreclosures
  • receipts such as unemployment, distributions from pensions
  • provide copies of auto purchase agreements, promissory notes and deeds of trusts (for real estate)

 

Filing Your Case

Bankruptcy cases are filed electronically, but must be approved and signed by the
debtor prior to filing. A ‘341 Hearing’ is held approximately 30 days after the filing in which the
debtor must appear and be questioned under oath by the trustee. The trustee will ask to see 2
pieces of identification: 1) your social security card, and 2) an official ID with your picture. You
MUST have the 2 pieces of ID. If there is any problem with the IDs, discuss the matter with your
attorney.

 

Chapter 13


Eligibility for Chapter 13

• Complete credit counseling at least 1 day prior to filing bankruptcy petition
• Sufficient income using monthly living expenses allowed by law and be able to
make a plan payment
• Have less than $360,475 (both figures indexed as of April 2, 2010) unsecured
debt and less than $1,081,400 of secured debt
• Not be a corporation, partnership, stockbroker or commodity broker.
• To receive a discharge: have not received a discharge in a Chapter 7, 11 or 12 in
the last 4 years or have received a discharge in a Chapter 13 in the last 2 years.

 

Means Test

          The Means Test is completed for both Chapter 7 and Chapter 13 as part of your
bankruptcy filing with the court. If the debtor’s gross income exceeds the median income limits
state and family size.), the bankruptcy filer must file a Chapter 13 and the period in
bankruptcy is 5 years. If a debtor files a Chapter 13 for other reasons than his or her income
exceeds the limits, then the period for Chapter 13 is 3 years.
         The Means Test uses the debtors income for the preceding 6 months. For example, Mr.
Smith has the following monthly income for 2011 and will file his bankruptcy case in August:

Month   Gross Income   
January

$3,000

February

$2,000

March

$2,500

April

$4,000

May

$4,000

June

$4,000

July

$4,000

August

No Income

 

The gross income for the 6 preceding months are added together. August is not counted
because it is the month in which the bankruptcy is filed, but the 6 preceding months are – the
total gross income is added for February through July, which totals $20,500. The total is then
divided by 6 or $3,416.66. To obtain the total for the year, $3,416.66 is multiplied by 12 which is
$40,999.92. For a family of one in Missouri, the limit for August 2011 is $39,332 and Kansas is
$41,654. Mr. Smith would be eligible to file a Chapter 7 in Kansas, but not Missouri. His gross
income exceeds the limit of $39,332 in Missouri. However, if Mr. Smith is on social security, none of his social security income is counted in his gross income for the Means Test. (There is no exclusion for income received from railroad retirement equivalent of social security.)

 

Chapter 13 Plan

          BAPCPA, the 2005 bankruptcy act, introduced credit counseling, the Means Test and
complicated the already complex problems in devising a Chapter 13 Plan. A Chapter 13 Plan
must satisfy the following requirements:
  • pay secured debts – payment must cover your regular payments for secured items you want to keep such as house payment, car payment, or a Nebraska Furniture bill, for example cover trustee fees – trustee fees are about 7% of the amount the trustee handles, so if the payment would be $1000, the trustee’s fee will add another $70 or 7%
  •  attorney’s fees – while some portion of the attorney’s fees and the court cost are paid up-front, much of the attorney’s fees are paid out through the course of the bankruptcy
  •  generally, the plan payment must exceed or be equal to: 1) the disposable monthly income (DMI) – which is calculated mechanically in the Means Test as deductions are taken, and 2) the difference between the projected future income and expenses as found on Schedules I and J
  •  generally, the Plan must provide a better deal for creditors than a liquidation (Chapter 7)
          The first payment must be made on time. Some trustees take the position that failure
to provide either the current tax return or make the first payment, each on time and before
the 341 hearing, are grounds to ask the Court to dismiss your bankruptcy.

         Plan feasibility is reviewed by the Chapter 13 trustee, who as well as creditors, can object to the Plan. Objections can be satisfied by changes to the Plan, or the objections can be overruled by the Court. Once the Plan satisfies the objecting parties or the Court, the Plan is confirmed by the Court and is binding on creditors who must accept payments as proposed in the Plan. The exception to this rule, is home mortgages. Because mortgage payments may change due to language in the original mortgage agreement, and because escrow amounts may change, the Plan may need to be revised from time to time.

 

Tax Refunds

Tax refunds which you have a right to receive at the time of filing, are an asset of the
bankruptcy estate, that is, the trustee has the right to keep the refund and pay over such
amounts to creditors.

 

Your Duty as Debtor in a Chapter 13 Plan

  • Do not incur debt without of approval; discuss first with your attorney.
  • Do not fall behind on tax obligations. Make sure your W-4 for withholding on wages is adequate to avoid a payment to the IRS when you file your return. Pay property taxes timely, if you are required to make the payment.
  • Take the required second credit counseling course early.
  • Keep insurance current on secured property.
  • Provide your attorney with information about changes in income and your annual tax return
  • as requested.