There is no magic formula for deciding when bankruptcy is the right choice. It is an option you might consider if you:
- Are paying only minimum amounts on your bills
- Can't budget yourself out of debt within five years
- Are getting notices that your mortgage or loans are being foreclosed
- Have had a severe financial setback, such as losing your job or a major client, a divorce or a costly illness
Bankruptcy does not get rid of all debts. You are still responsible for:
- Child support
- Most recent back taxes
- Most student loans
- Recent large purchases of more than $550 for luxury goods bought
within 90 days of filing
- Fines or penalties of government agencies
- Fraudulent debts
- Cash advances of $825 within 70 days of filing
As a consumer, you can file for bankruptcy in Michigan under either:
- Chapter 7 (Straight Bankruptcy) to wipe out all debts except those listed and get an immediate fresh start or
- Chapter 13 (Wage Earner Bankruptcy) to set up a repayment plan to pay back your debts over several years' time.
Bankruptcy Abuse Prevention and Consumer Protection Act
On April 20, 2005, the President signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act, which limits individual access to US bankruptcy courts. Some of the changes, which were effective October 17, 2005, included:
- New bans on Chapter 7
- Increased Chapter 13 payments
- New presumptions against debtors with increased penalties
- The reduction of judicial discretion to balance competing interests
Chapter 7 Bankruptcy
Chapter 7, otherwise known as "liquidation," is generally the simplest and quickest form of bankruptcy and is available to individuals, married couples, corporations and partnerships. A trustee (appointed by the court) gathers and sells your non-exempt property and uses the proceeds from the sale to pay your creditors.
Most chapter 7 cases are "no-asset' case, which simply means that you do not have any non-exempt property for the trustee to sell.
Federal bankruptcy laws provide for a "means test" which will determine whether you are eligible to file of Chapter 7 bankruptcy. If your income is below the median income for families in Michigan, based on Census Bureau statistics, you will be eligible. If you make more than the median income for families in Michigan, your income over the past six months is considered, along with mortgage and car payments, back taxes and child support due, and school expenses up to $1,500 per year. You won't be eligible for a Chapter 7 bankruptcy if, after deducting these amounts, and the living expenses provided in the Internal Revenue Service's national collection standards, you can still pay at least $6,000 ($100/month) to unsecured creditors over five years. If you don't qualify for a Chapter 7 bankruptcy, your only option would be a Chapter 13 bankruptcy.
The U.S. Trustee Program will apply the median family income data to all cases filed on or after February 1, 2008. This median family income data will be adjusted again shortly after the Census Bureau updates the data.
For Michigan, for cases filed after February 1, 2008, the median income for a single wage earner is $43,123; for a family of two, it is $51,878; for three, $61,796; and for four, $74,658. Add $6,900 for each individual in excess of 4.
Also beginning October 17, 2005, you must obtain approved credit counseling before you can file bankruptcy.
Another new federal bankruptcy requirement is that you must file any overdue tax returns within weeks of filing a Chapter 7 bankruptcy.
Filing Chapter 7
A bankruptcy starts with the filing of the official petition, schedules and a "statement of financial affairs" with the bankruptcy court. In order to complete the Bankruptcy Forms, you must provide a list of all of your creditors and the amount and type of their claim; the source, amount, and the frequency of your income; a list of all of your property; and a detailed list of your monthly living expenses. The filing fee for chapter 7 is $299.
As soon as you file for bankruptcy, your creditors are prevented from trying to collect on your debts through what's called an "automatic stay." The stay is designed to preserve your property and to give you a break from litigation.
Anyone you owe - or anyone who wants to continue collection proceedings during the bankruptcy process - must show the bankruptcy judge, after a hearing, that there is "cause" to be allowed to continue with collection action (for instance, by showing that the property might deteriorate in value during the bankruptcy process).
The trustee takes control of any property you do not get to keep. From the sale of your property, the trustee pays the expenses of the administration of the case, and then gives any remaining money to creditors with allowed claims, according to the priority of the claims (with claims that are "secured" by property being paid first). Any wages you earn after you file the case are yours, beyond the reach of creditors who had claims on the date you filed for bankruptcy.
Usually between 20 and 40 days after you file your petition, the trustee will hold the "first meeting of creditors" (also called a "341" meeting ).You must be present for that meeting. The trustee can ask you questions under oath about your property and debts. Creditors can also question you on those subjects, but seldom do.
Generally, the only responsibilities you have with respect to the bankruptcy after the 341 meeting is to cooperate with the trustee in providing any requested information.
Creditors have 60 days after the 341 meeting to convince the bankruptcy court you shouldn't be allowed to jettison your debts.
What Can I Keep?
You can choose one of two "exemption schemes" in Michigan, whichever best suits your circumstances.
Under the first exemption scheme, from federal bankruptcy laws, you can keep:
- Your home, including co-op or mobile home, to $20,200
- Life insurance payments for person you depended on, needed for support
- Life insurance policy with loan value, in accrued dividends or interest to $10,775
- Unmatured life insurance contract, except credit insurance policy
- Alimony, child support needed for support
- Pensions and Retirement Benefits, ERISA - qualified benefits needed for support
- $525 per item in any household goods up to a total of $10,775
- Health Aids
- Jewelry to $1,350
- Lost earnings payments
- Your motor vehicle to $3,225
- Personal injury compensation payments to $20,200, wrongful death payments, crime victims' compensation, public assistance, social security, unemployment compensation, and veterans' benefits
- Tools of trade up to $20,200
- Wild Card - $1,075 of any property plus up to $10,125 of any amount of unused homestead exemption
Married couples may double the amount of the federal exemptions.
If you choose the second exemption scheme, under Michigan bankruptcy laws, you can keep:
- Your home, if you do not have more than $3,500 in equity in the house (today's value less costs of sale less payoff balances on all liens and mortgages)
- Family pictures and clothing
- Food and fuel to last six months
- Household goods, furniture, appliances, utensils, books, up to $1,000 total
- Burial plots; church pew, slip, seat
- 10 sheep, two cows, five swine, 100 hens, five roosters, and hay and grain to last six months
- Arms and accoutrements you're required by law to keep
- Tools of trade and farm equipment, up to $1,000 in value
- Building and loan shares to $1,000 par value if you did not claim a homestead exemption
- Disability, mutual life and/or health benefits; fraternal benefit society benefits; and life, endowment or annuity proceeds if a clause in the policy prohibits the proceeds from being used to pay the beneficiary's creditors
- Private retirement benefits
- ERISA-qualified pension benefits
- Public employees' pensions
- Property of a business partnership
- Alimony and child support
- Crime victim's compensation, veterans', AFDC, social welfare, worker's compensation and unemployment compensation benefits
- 60% of earned but unpaid wages (not less than $15 per week, plus $2 per week for each dependent) if you are a head of household with a family; 40% of earned but unpaid wages (not less than $10 per week) if you are not a head of household with a family
A bankruptcy does not wipe out voluntary liens, like mortgages and deeds of trust, or tax liens. So the lender still has the right to foreclose if you do not pay. If you pay, everyone is happy. Remember, the lender does not want the property; it wants you to pay regularly on the loan. Foreclosure is a last resort for the lender if it concludes it can't get the owed money any other way.
If you still owe money on the car, you can choose to reaffirm the debt to the secured lender. Under the new law, you have to reaffirm your car loan within 45 days after the "341 meeting." You no longer have the option of continuing your car payments without reaffirming the loan. Once the loan is reaffirmed, if you default on your payments and the car is repossessed, you are liable for the repossession deficiency.
You also have the option to redeem the car within 45 days of the "341 meeting" by buying it from the secured creditor in a single payment for its present value.
Chapter 13 Bankruptcy
If you are an individual or a sole proprietor, you can file a Chapter 13 bankruptcy to pay off all or part of your debts over three to five years. Rather than wiping out debts immediately, this option allows you to reorganize them so you have time to pay.
Many people who file Chapter 13 bankruptcies have:
- Mortgages or other loans they would like to bring current, so they do not lose their homes or other property
- Taxes, child support or student loans that can't be wiped out by Chapter 7 bankruptcy
- Moral convictions that debts should be paid no matter how long it takes
For a Chapter 13 bankruptcy, you will need a stable income with disposable income (income left over after you pay the bare necessities of life such as shelter, food and utilities). You must have no more than $1,010,650 in secured debt (debt involving property that your creditor might take if you do not make your payments) and $336,900 in unsecured debt.
The filing of the Chapter 13 petition must be accompanied by a proposed payment plan extending over three to five years. The proposed payment plan must provide for the payment of all "priority claims," such as taxes, in full.
The bankruptcy trustee appointed by the Bankruptcy Court must review the proposed plan for accuracy and flexibility. The proposed plan is distributed to creditors, who have the right to object to the plan if it is unreasonable. If the plan is approved, you can keep all your assets during the period of the plan. You make monthly payments to the bankruptcy trustee, who distributes the funds to the creditors according to the plan. If the plan is completed as approved, your unpaid debts are "discharged." If you do not complete the repayment plan as approved, you will have several other alternatives which a Michigan bankruptcy lawyer can explain to you.