Bankruptcy

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Bankruptcy is a formal legal proceeding for dealing with one’s creditors.   The primary purpose is to allow you to get a “fresh start” for your financial future.   A bankruptcy discharge will permanently wipe out the debts that you owe so that you will not have to repay them.

When a bankruptcy is filed, creditors must immediately stop trying to collect on the debts that you owe them.   They are no longer allowed to send you letters or call you about the debt.    If they have started a lawsuit against you, they must stop the proceedings.   If they have started to garnish your paycheck, bank account or income taxes, they must stop any further garnishment.    You can even stop a home foreclosure (provided that there has not yet been a sheriff’s sale) or a vehicle repossession (provided that the vehicle has not been sold at auction).

Bankruptcy cases are filed in the United States Bankruptcy Court, utilizing one of the various chapters.    A chapter is simply the section of the Bankruptcy Code that describes the type of bankruptcy that is being filed.   For example, most individuals file bankruptcy under either Chapter 7 or Chapter 13.   Businesses file bankruptcy under either Chapter 7 or Chapter 11.

Most debts can be discharged in bankruptcy.   This would include credit cards, gas cards, medical bills, utility bills, car and home debts (if you decide to surrender the car or home), and even some (but not all) income tax debts.

Some debts, however, are not allowed to be discharged by bankruptcy.    This would include student loans, child support, spousal support (alimony), and debts related to fraud.

Many individuals who file bankruptcy are able to keep their houses and cars.    At Nichols & Eberth, P.C., we can advise you as to whether you would be able to do so.

Chapter 7 Bankruptcy

A Chapter 7 bankruptcy is one where you are simply discharging your debts.    It is sometimes called a “straight” bankruptcy.    To qualify to file Chapter 7 bankruptcy, you must pass the “means test”.   There is a two-step analysis involved in this process.

First, you must show that your annual gross income is less than the average annual gross income for a similarly-sized family unit in Michigan.   For example, if you have a four-member household, the bankruptcy court compares your income to that of the average four-member household in Michigan.   If your annual gross income is less than the average, then you have passed the first part of the test.   (In 2012, the average four-member household in Michigan had an annual gross income of $72,366.00).

Second, you must show that your monthly net income minus your monthly household expenses leaves you with less than $200 per month to repay your creditors.   If this is also true, then you can file a Chapter 7 bankruptcy.

Since Chapter 7 debtors do not have the income to repay their creditors, the bankruptcy trustee looks to see if there are any non-exempt (unprotected) assets to sell.    Since most Chapter 7 debtors do not have assets of significant monetary value, they are usually able to fully exempt (protect) them from being sold to repay their creditors.    At Nichols & Eberth, P.C., we can advise you as to what assets can be protected, and the dollar limits for protecting them.

Chapter 13 Bankruptcy

A Chapter 13 bankruptcy is one where you enter into a structured repayment plan to repay all or a portion of your debts.   It is available to individuals who do not qualify for Chapter 7 because their income is too high or because they have more than $200 leftover each month after paying their regular household expenses.

In a Chapter 13, the bankruptcy court asks that your payment be your “best effort” at repaying the debt.  This means that you only have to pay what you can afford to pay.   The payments are made to a court-appointed trustee who then pays your creditors.    At the conclusion of the repayment plan, you will receive a discharge.

There are some unique provisions that distinguish Chapter 13 from Chapter 7.   For example, a second mortgage (sometimes called a home equity loan) on a primary personal residence can sometimes be converted from a secured lien to an unsecured debt and discharged.     At Nichols & Eberth, P.C.,  we can advise you as to whether you would be able to do so.

Conclusion

Bankruptcy law is a complex area requiring the services of a professional.    At Nichols & Eberth, P.C., we can help guide you through the process from filing to discharge.   We offer a free initial consultation.   Please call us today at (313) 561-5700.

We are a debt relief agency.  We help people file for bankruptcy relief under the Bankruptcy Code.