We’ve written a series of blog posts answering common questions regarding bankruptcy in Wisconsin, and how it can impact your finances. Call (262) 827-0375

Debts That Cannot Be Erased By Filing for Bankruptcy

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Bankruptcy discharge is a frightening process, but for all the negative connotations around that term, bankruptcy often provides individuals and businesses with a fresh financial start. Perhaps the best aspect of bankruptcy is the discharge, a court order freeing the debtor from personal liability for some debts. It is well worth knowing what a bankruptcy discharge is, how it works, and what creditors and debtors should know about its impact.

What is a Bankruptcy Discharge?

A discharge in bankruptcy is a court order freeing the debtor from legal obligation to pay specific debts. A discharged debt can never again be collected by a creditor in any manner. That is no calls, no letters, no lawsuits, or collection of any sort. The discharge is one of the valuable benefits of bankruptcy, giving debtors a chance to begin a fresh debt-free life.

But not all debt is dischargeable. Secured debt such as a car or house is collateralized by some asset. The debtor must pay if the objective is to keep the asset. Otherwise, the creditor can repossess or foreclose on the asset, even in bankruptcy.

When Does the Discharge Occur?

Any timing of a bankruptcy discharge is predicated on the chapter in which the case is filed:

Chapter 7 (Liquidation): In Chapter 7 bankruptcy, the discharge is usually issued around four months after the bankruptcy petition has been filed. This comes after the debtor has attended the 341 meeting of creditors and fulfilled all the conditions, such as attending a financial management course.

Chapter 13 (Repayment Plan): Chapter 13 bankruptcy discharge is only granted after the debtor has paid all the payments as per the accepted court repayment plan, normally three or five years. A hardship discharge may be achieved if the debtor is not able to fulfill the plan because of unforeseen circumstances that are beyond their control.

Chapter 11 and Chapter 12: Both are utilized by family farmers and businesses and provide discharges at the close of reorganization or the repayment plan. Discharge normally occurs automatically except where there is an objection from creditors or the trustee. The creditors and other individuals are notified about the discharge order by the bankruptcy court.

The decree is a warning to deter them from pursuing discharged debts. When a creditor initiates another pursuit of collection, the debtor will make it known to the court in a violation where the court may impose on the creditor a penalty in the form of fines in contempt of court. The discharge order doesn’t specify which debts are discharged.

Instead, it is a general notice to creditors that they can’t proceed and collect on the debts. Debtors should make a copy of the discharge order and use it if a creditor attempts to collect on a discharged debt.

Which Debts Are Dischargeable?

Not all debt is eliminated by bankruptcy. The Bankruptcy Code specifies special exceptions that vary depending on the chapter under which the case is filed.

Nondischargeable debt most commonly includes:

Tax Claims: Income taxes for relatively recent years typically are not discharged.

Child Support and Alimony: Obligations of family support outlast bankruptcy.

Student Loans: Most student loans insured or guaranteed by the government are nondischargeable except where the debtor can show undue hardship.

Debts for Willful or Malicious Injury: Debts for willful or malicious injury to other persons or property are generally not discharged.

Fines and Penalties: Fines and penalties due to government agencies are generally non-dischargeable.

Under Chapter 13, the discharge is broader than under Chapter 7 and allows certain of the debts otherwise not dischargeable to be discharged in the plan of repayment.

Can Creditors Object to the Discharge?

In Chapter 7 cases, creditors, the trustee, or the U.S. Trustee may object to the discharge of the debtor. Fraud, hiding assets, or failure to obey court orders are typical reasons for objection. In case the objection is successful with the court, the debtor may lose the ability to discharge in full.

Under Chapter 13, the creditors cannot object to discharge as such, but they can object to confirmation of the plan of repayment. Once the plan is confirmed and administered, discharge is usually granted.

Is a Discharge Revocable?

Discharge may be revoked under rare circumstances. It is typically done if the debtor obtained the discharge through fraud, concealment of assets, or other wrongdoing. Petition to revoke discharge must be presented within a year after the date of the discharge or before the case is closed, whichever is later.

What Happens After the Discharge?

Once a debt is discharged, the debtor legally owes nothing. However, out of their own free will, some debtors pay debts, which have been discharged, usually out of personal or moral obligation, such as to friends and family. If the creditor attempts collection on the debt discharged, the debtor may bring the bankruptcy court for an order enforcing the discharge. The court can re-open the case to correct the violation and sanction the creditor.

Protections for Debtors After Bankruptcy

The Bankruptcy Code also contains provisions for anti-discrimination protection for individuals with bankruptcy cases. Employers, government agencies, and other organizations cannot terminate an individual from employment, cancel a license, or otherwise penalize an individual because he or she had filed bankruptcy or failed to pay a debt that was discharged.

Getting a Copy of the Discharge Order

In case the debtor loses the discharge order, the debtor may request the bankruptcy clerk to obtain a copy. It might cost them some fees for record search, copying, and document certification.

Most of the courts also have computer access to the case files through different services, though with per-page fees that must be paid by the users. A discharge in bankruptcy is a potent instrument that grants debtors a second chance.

Nevertheless, it is important to understand its breadth, limitations, and the liabilities it entails. Debtors can utilize the procedure to their optimal financial advantage through the services of an experienced bankruptcy attorney. To creditors, respect for the order of discharge is essential not to incur legal penalties and ensure conformity with bankruptcy codes.

Are you disqualified from filing for bankruptcy?

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You may be considering filing for bankruptcy because you are overwhelmed with debt. Bankruptcy has helped several people get a fresh start on their financial lives, but there are matters that can disqualify you from filing Chapter 7 bankruptcy or Chapter 13 bankruptcy. We will examine those matters below:

Debts Previously Discharged in Bankruptcy

If you filed for Chapter 7 bankruptcy in the past, you cannot file again if eight years have not passed since the last time you filed. Therefore, if you can wait until eight years have passed since you filed your last bankruptcy, you will need to do so.

If you filed for Chapter 13 bankruptcy in the past, you will only need to wait two years from the date you last filed.

If you would like to file for bankruptcy because you have several high debts, these debts may not qualify. If your debts are ineligible to be discharged, you cannot file for Chapter 7 or
Chapter 13 bankruptcy.

Debts that do not qualify include the following:

Debts You Owe in a Personal Injury or Wrongful Death Lawsuit

If you were driving under the influence when you caused an accident and someone died, you will not be able to discharge this debt. These debts are not allowed because the courts want to discourage people from driving while under the influence of drugs or alcohol. They also want to make sure that the injured party receives adequate monetary compensation.
Student Loans

In most cases, you cannot discharge your student loans in bankruptcy.

Tax Debts

You can have income tax debts discharged if they meet the criteria. You must be seeking to discharge tax debts for tax returns that were filed two years previously. In addition to that, the taxes you wish to discharge must have been accruing three years before you file for bankruptcy.

If you committed tax fraud or attempted to evade your tax liability, these actions disqualify your tax debts from being discharged.

Alimony and Child Support

You cannot have child support or alimony payments discharged in bankruptcy. You are paying child support for the children you had with a partner, and you are paying alimony to a former spouse. It is your obligation to support your children and your spouse for a given period of years, so the court will not relieve you of these responsibilities.

Penalties and Fines

If the government levied fines against you or ordered you to make criminal restitution to an individual, you cannot discharge these debts in bankruptcy. These debts fall under the classification of your “debt to society,” and you cannot be relieved of these debts through bankruptcy.

Condominium or Cooperative Housing Fees

These fees can be discharged in bankruptcy, but this only applies to fees that are owed prior to filing bankruptcy. If these fees accrue after you file for bankruptcy, those fees will not be a part of the discharge. Therefore, if you continue to live in the condominium or coop, association fees will continue to accrue, and you will have the obligation to pay them to the homeowner’s association.

Debts Owed to 401(k) and IRA Retirement Plans

Retirement plans are exempt from being seized by creditors in bankruptcy, so these debts cannot be discharged. Therefore, if you took out a loan on your 401(k) or IRA retirement plan, the court will not discharge this debt in bankruptcy. Several other types of retirement plans fall under this protection, including defined-benefit plans, money purchase plans, profit-sharing plans, Keoghs, SEP and SIMPLE IRAs and 403(b)s.

Plans that do not receive this protection include stock option plans, investment accounts, savings accounts, and bank and investment account funds.

Debts Not Listed

If you do not list a debt when you file for bankruptcy, your creditors cannot review it and file an objection if they feel it is necessary. That is why a debt that you did not list will not be eligible for discharge in bankruptcy. After failing to list this debt, your creditor can continue to pursue you for the collection of that debt. The law requires that you list all debts even if the debt is not eligible for discharge. This ensures that there is transparency in this process and protects the creditor as well.

Do I Have a Right to a Discharge?

No, you do not always have a right to have your debts discharged in a Chapter 7 case. The creditor or the trustee in your case can object, but the U.S. trustee can also disagree with your plan to file for bankruptcy. After filing for bankruptcy, your creditors receive a notice that gives them a date by which they need to object to the discharge.

In a Chapter 13 bankruptcy, you will be entitled to a discharge only after you complete the payments that you agreed to make in your plan. However, you will not be entitled to a discharge if you fail to complete a personal financial management course. If you complete all of your payments according to your plan, your creditors cannot object to the discharge of your debts.

How Much Debt Do I Need To File for Chapter 7 Bankruptcy?

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If you’re struggling with a massive amount of debt, Chapter 7 bankruptcy could be a way to reduce or eliminate it and help you get back to normal life. There’s no minimum amount specified in federal bankruptcy law, but bankruptcy should be considered a last resort when all other means to pay back the debt fall short; this process has severe financial and credit consequences that take years to recover from, but it is nevertheless an option for those with no others left.

Chapter 7 Filing Eligibility

Even though there isn’t a federally-specified minimum amount of debt that Chapter 7 filers must meet, there are other eligibility requirements to be mindful of.

In all cases, prospective filers must pass a means test to determine if they are eligible to proceed. Rather than how much debt you have, your income is the key metric; if you make less than the income limits, you can file for Chapter 7 bankruptcy. Otherwise, you’ll need to take a second means test, the metrics for which are a bit more complicated.

You must also complete a credit counseling course before you file, as well as a financial management course before your debt can be discharged, effectively erasing all the debts that qualify under a Chapter 7 case. Note that you may also only file for bankruptcy once every eight years.

If you’re unable to pass either means case, you can instead file for Chapter 13 bankruptcy.

Chapter 7 vs. Chapter 13

These two chapters handle debts differently, so the process itself varies as well. Chapter 7 is better for individuals struggling with mountains of unsecured debts, such as medical bills or credit card bills. As long as you meet and complete the requirements, it takes about four to six months to fully discharge those debts.

With Chapter 13, your debts are instead reorganized so that you make monthly payments to your creditors over three to five years, which means this form of bankruptcy naturally takes much longer. Still, it may be preferable for those with secured debts or property that they don’t want to lose. To qualify, you must have enough disposable income to make the payments for the entire plan.

Another important difference is that there isn’t a limit to how much debt you can discharge under Chapter 7, which isn’t the case for Chapter 13. Its debt limits are updated every three years; most recently, Chapter 13 limits were updated in April 2022 to $465,275 for unsecured debt or $1,395,975 for secured debt.

Will Your Debts Qualify?

Most filers’ debts are unsecured, which means they don’t have any collateral locked down to secure repayment. This is generally the case for lines of credit, credit cards, and personal loans. These types of debt permanently discharge under Chapter 7 bankruptcy, so it’s potentially a great source of relief for those who don’t have other kinds of debt.

Remember, federal bankruptcy law doesn’t specify a minimum or maximum on unsecured debt that can be discharged under this chapter. In fact, the amount of debt you have isn’t part of the means test at all; only your income is.

However, if you have secured debts like a mortgage or a car loan, you won’t be able to discharge those and keep the property under this chapter. This property is a means of securing repayment of the debt, so in order to keep it, you either need to keep paying the debt as promised before, during, and after a bankruptcy case.

Alternatives to Bankruptcy

It’s easy to feel trapped when you’re under a lot of debt, but the good news is that you have several options to consider before bankruptcy:

  • Debt management: In a debt management plan, a credit counseling agency works with your creditors to negotiate a payment plan that you can afford. It only works with unsecured debts.
  • Debt consolidation: With debt consolidation, an agency combines multiple debts into a single obligation to think about. This is common for those who have multiple student loans to simplify repayment, but you can also consolidate credit card debt and other kinds of loans.
  • Debt settlement: You can sometimes settle your debt for less than what you owe by offering a lump-sum payment. This usually only works for credit cards and similar unsecured debts.

Think about how much debt you have, interest rates, and how long it would take to repay when you consider each of these options. Sometimes you won’t ever be able to repay a debt on your own without some help, but you can nevertheless try to become debt-free.

If you’re stuck under an insurmountable amount of debt with no other options left, Chapter 7 bankruptcy may be the next step for you. Remember, federal law doesn’t limit the amount of debt you can discharge in this chapter. Consider consulting with a bankruptcy attorney or credit counselor to discuss your questions.

Utility Bills & Bankruptcy

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Have you ever opened your utility bill to find an unpleasant surprise? Utility bills can sneak up on you when you least expect it.

The good news is that there are laws in place to protect you if utility bills become unaffordable. You have options like payment plans, reduced rates, or, in extreme cases, declaring bankruptcy to eliminate utility bill debt.

How Utility Bills Can Lead to Debt and Bankruptcy

Utility bills are annoying monthly expenses that can add up over time if left unpaid.
• Late fees and interest charges. Most utility companies charge late fees if not paid on time, usually within 15-30 days of the due date. These fees may average $20-$50 per bill. Unpaid balances often incur high-interest charges, sometimes over 20% APR.
• Service disruption. Failure to pay your utility bills will result in service disconnection. Having your power, water, or gas shut off due to nonpayment can be dangerous and lead to additional fees to restore services.
• Damage to your credit. Unpaid utility bills are reported to the credit bureaus and will hurt your credit score. A few missed payments can drop your score by 100 points or more. Bad credit makes qualifying for loans, credit cards, and insurance difficult.

Utility Shutoff: Know Your Rights Before Services Are Disconnected

Utility companies can disconnect your services for nonpayment, but there are laws protecting consumers. Know your rights before the lights go out.
Notice Required

Utility providers must present a written notice before disconnecting services. The information will state the reason for the utility shutoff and the earliest dates it may occur.
Exceptions Made

Specific consumers qualify for protection from immediate disconnection. This includes those with medical issues where loss of service would be life-threatening.

Knowing your rights can help avoid the headache of utility shutoffs. Don’t hesitate to ask your service providers questions about managing or disputing your bills. Protecting access to essential services is important, especially if money is tight. With communication, reasonable payment plans, and exercising your consumer rights, you can stay connected even when times are tough.
How Are Utility Bills Handled in Chapter 7?

Utility bills don’t just disappear because you’ve filed for bankruptcy. In a Chapter 7 bankruptcy, any utility bills incurred before you file are considered unsecured debts and are typically discharged – meaning you are no longer legally obligated to pay them. However, any bills for service after you file must be paid on time and in full.

Falling behind on current utility bills can cause serious problems. The utility company may require a large deposit to continue or restore services. They could even disconnect your utilities altogether for nonpayment. To avoid issues, set up payment plans with your utility providers immediately after filling for bankruptcy. Be upfront about your situation, and negotiate affordable payment terms to catch up on the past due amounts.

You’ll also want to adjust your utility usage and budget. Look for ways to cut costs by lowering thermostat, turning off lights or electronics when not in use, using fans instead of AC whenever possible, etc. See if you qualify for utility assistance programs that offer discounts for low-income households.

Some individuals fear that filing for bankruptcy may make it difficult to establish new utility services. However, utility companies cannot deny you service solely due to bankruptcy. They can, however, require a deposit for new services based on your payment history and credit score. The good news is bankruptcy will not directly affect your ability to access necessities like power, water, phone, and internet.

With some practical steps, you can ensure your utility needs are met during and after a Chapter 7 Bankruptcy. Communicate openly with your providers, reduce usage costs where possible, and utilize available assistance programs. While bankruptcy eliminates responsibility for past debts, staying current on ongoing bills and maintaining good payment habits after filing will help make the transition to a fresh financial start as smooth as possible.
How Are Utility Bills in Chapter 13 Bankruptcy Handled?

When you file for Chapter 13 Bankruptcy, your utility bills are handled differently than other debts. Utility companies provide essential services, so they are given special treatment under Chapter 13.
How Utility Bills Are Paid

Your utility bills, like gas, electricity, water, and phone services, are considered “priority debts.” This means that you must continue paying them during the bankruptcy. Your Chapter 13 plan will specify the amounts you must pay each month. If you fall behind, the utility company will request permission from the court to disconnect your service.

To ensure uninterrupted utility service:
1. Contact your providers as soon as you file for bankruptcy.
2. Explain that you’ve filed for Chapter 13 and will continue making payments as part of your repayment plan.
3. Provide details about the amounts and due dates specified in your plan.
Most companies will work with you as long as you make the payments you agreed to.

Some utility companies may require a deposit to continue or restore services. Your bankruptcy trustee can request a waiver or reduction of the deposit as part of your repayment plan.
Budgeting for Essential Bills

When creating your Chapter 13 plan, make enough budget to cover all priority debts, including utilities, in full and on time. If payments cannot be made, contact trustee and utility providers immediately to request an adjustment to prevent disconnection.

Keeping your utility services connected during bankruptcy is critical. By communicating with your providers, paying as agreed in the plan, and making adjustments when necessary, you can ensure uninterrupted essential services while you repay creditors through your Chapter 13 plan.
Strategies to Avoid Bankruptcy When Facing Utility Debt

When facing mounting utility bills debt, bankruptcy is the only option. However, there are several strategies you can try first to avoid bankruptcy.
Payment Plans

Contact your utility providers and request payment plans to repay the debt over time. They would rather work with you than cut off the service or force bankruptcy. Ask if they offer budget billing to even out payments or if they waive late fees as you pay down the balance.
Reduce Usage

The less you use, the lower your bills will be. Turn off lights and electronics when not in use, wash only loads of dishes and laundry, unplug devices like gaming consoles, and lower thermostats in winter.
Assistance Programs

Utility companies offer assistance programs for those having trouble paying bills. They provide grants, bill payment plans, and ways to improve energy efficiency.
Filing for Bankruptcy

When utility bills start piling and you cannot pay them, bankruptcy may seem the only option. Filing for bankruptcy can provide relief from utility bills and other unsecured debts. However, it’s not a decision to take lightly and will have consequences.

Filing for bankruptcy should be an absolute last resort. While it can eliminate utility bill debts and provide relief, it will damage your credit for up to 10 years, making it difficult to open new accounts or borrow money. Bankruptcy should only be considered if you have financial hardship you can’t overcome.
Final Thoughts

High utility bills are no joke and can quickly become unmanageable, severely damaging households. While bankruptcy may seem like an easy way out, it should be the last resort. Ensure you’ve explored all your other options, like reducing usage, payment plans, subsidiaries, or loans. Your finances and credit are too essential to make this decision lightly.

What Debts are Exempt from Filing For Bankruptcy?

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In times of financial distress, bankruptcy can help people regain control of their finances. However, you should know that not all debts can be discharged in bankruptcy proceedings. This guide examines the debts exempt from bankruptcy under Chapters 7 and 13, shedding light on the limitations and nuances of each chapter.

I. Chapter 7 Bankruptcy: A Fresh Start through Liquidation

Chapter 7 bankruptcy is a legal process that allows people to rebuild their lives by liquidating non-exempt assets to repay creditors. Also known as “liquidation bankruptcy” because the debtor’s non-exempt assets are sold, and the proceeds are divided among the creditors. This chapter of bankruptcy benefits many debtors by allowing them to eliminate their overwhelming debts and regain financial stability.

However, it is important to note that not all debts are discharged through Chapter 7 bankruptcy. Certain debts are typically exempted from discharge, meaning that the debtor remains responsible for repaying them even after the bankruptcy process is completed. These non-dischargeable debts are carefully defined by bankruptcy laws to protect creditors’ rights and maintain fairness in the overall process.

Student Loans
A student loan is one of the debts, generally non-dischargeable under Chapter 7 bankruptcy. Student loans are often substantial and can create a significant financial burden for individuals. Unfortunately, discharging student loans through bankruptcy is challenging and requires proving an “undue hardship.” This standard is very stringent and typically requires demonstrating that repaying student loans would cause extreme financial hardship that persists over an extended period.

Child Support and Alimony
Debts related to child support and alimony obligations are also non-dischargeable. These debts hold priority status, ensuring that children and former spouses receive the necessary financial support.

Taxes
Most tax debts are not dischargeable under Chapter 7 bankruptcy. This includes income taxes, property taxes, and certain other tax-related obligations. The rationale behind this exemption is to maintain the tax system’s integrity and prevent individuals from using bankruptcy to avoid their tax responsibilities. However, there are exceptions to this rule based on specific circumstances, such as the age of the tax debt and compliance with tax filing requirements.

Debts Incurred through Fraud or Misrepresentation
Debts that result from fraudulent activities, embezzlement, or pretences are generally non-dischargeable in bankruptcy. This provision ensures that individuals cannot abuse the bankruptcy process to avoid debts obtained through dishonest or deceptive practices. Bankruptcy laws aim to uphold the principles of fairness and prevent the misuse of the system.

II.A Repayment Plan for Financial Rehabilitation

Chapter 13 bankruptcy, a “repayment plan” or “wage earner’s plan,” offers people a structured path to financial recovery. Unlike Chapter 7 bankruptcy, which involves liquidating assets, this chapter allows debtors to create a realistic repayment plan over three to five years to pay off their debts.

This form of bankruptcy is often suitable for individuals who have a steady income and want to retain their assets while repaying their debts in an organized manner. It provides more flexibility compared to Chapter 7, allowing debtors to keep their homes and other valuable possessions while addressing their financial obligations responsibly.

However, it is important to note that certain debts are still considered non-dischargeable under Chapter 13 bankruptcy. This means that even with the repayment plan, the debtor remains responsible for these obligations. Let’s explore these non-dischargeable debts to gain a deeper understanding:

Debts from Willful and Malicious Injury
Chapter 13 bankruptcy does not discharge debts resulting from intentional acts of harm or property damage. This provision ensures that individuals who have caused harm to others through willful and malicious actions remain accountable for their actions. Victims have the right to seek compensation for their injuries or damages.

Certain Tax Debts
While Chapter 13 bankruptcy allows for the inclusion of certain tax debts in the repayment plan, not all tax obligations can be discharged. Recent income taxes, for instance, typically must be paid in full. However, older tax debts or tax penalties may be eligible for inclusion in the repayment plan, allowing debtors to gradually catch up on these obligations.

Debts Not Listed in the Bankruptcy Filing
Debtors must list all their debts in the bankruptcy filing accurately. Failure to disclose a debt can result in it being excluded from the discharge. It is essential to be diligent and thorough in providing a comprehensive account of all debts to ensure a fair resolution for the debtor and the creditors.

Debts Arising After Filing
Debts incurred after the bankruptcy petition has been filed are generally not dischargeable. Debtors must be responsible for managing any new debts or financial obligations that arise during the bankruptcy process. This underscores the importance of prudent financial management and avoiding new debts while undergoing bankruptcy proceedings.

Individuals filing for Chapter 13 bankruptcy can gradually reorganize their finances and repay their debts. Debtors can demonstrate their commitment to financial responsibility and work toward a fresh start by following the structured repayment plan. Seeking the advice of a qualified bankruptcy attorney is critical to successfully navigating the complexities of Chapter 13 bankruptcy.

Understanding which debts are exempt from filing for bankruptcy is crucial for individuals considering Chapter 7 or Chapter 13 bankruptcy. While bankruptcy can relieve certain debts, consulting with a qualified bankruptcy attorney is important to navigate the complex legal requirements.

Chapter 7 bankruptcy offers a fresh start by liquidating non-exempt assets, but student loans, child support, alimony, taxes, and debts resulting from fraud or misrepresentation remain non-dischargeable. In contrast, Chapter 13 bankruptcy provides a repayment plan over a period. Still, debts from willful injury, certain tax, unlisted, and post-petition debts are not dischargeable.

Navigating the bankruptcy process requires careful consideration of individual circumstances and a thorough understanding of the applicable laws. Seeking professional legal advice is advisable to assess the specific situation and make informed decisions accurately.

Bankruptcy laws may vary across jurisdictions, so you must be familiar with the regulations in your area. By obtaining the necessary knowledge and guidance, individuals can work towards financial rehabilitation and establish a solid foundation for their future.

How Long Does Chapter 7 Bankruptcy Take?

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The short answer to the question is it takes anywhere between four to six months for a Chapter 7 bankruptcy to close after the petition has been filed. The reason for the variation in the time table comes down to the complexity of the assets you own, the creditors that you owe, and if corrections are necessary while the Chapter 7 filing is in progress. Here’s a look at the process of filling for bankruptcy, and how it affects the timeline after the petition has been submitted.

How a Chapter 7 Bankruptcy Works

The basic concept of bankruptcy is that of asking the federal bankruptcy court to review your debts against your ability to pay them, and ask for a discharge of what you owe. The court has to make an attempt that your creditors get something from your bankruptcy estate, which means it performs an investigation into your debts and assets during the process. It also informs your creditors of your bankruptcy and bars them from making collection attempts while your petition is active.

Chapter 7 is known as a liquidation bankruptcy because it requires you to surrender your valuable assets to the trustee and see them sold off for debt repayment. However, if you don’t have assets with value, and your income is below the median, you can still file a Chapter 7 bankruptcy and have it accepted by the court.

Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy

Consumers tend to file under Chapter 7 or Chapter 13, depending on their assets and income. Chapter 13 is seen as being less desirable because it can last up to five years and requires a repayment plan to partially repay creditors before a discharge is granted. In contrast, a Chapter 7 bankruptcy is completed in a few months, has no repayment program, and you can start rebuilding your financial life in less time.

How to Get Started Filing a Chapter 7 Bankruptcy

In order to start filling for bankruptcy, you need to gather all of your financial paperwork together and create a list of your assets. Once you’ve collected all of your papers, you fill out the means test that determines which chapter of bankruptcy you can file under. After you’ve determined that you can file under Chapter 7, you can fill out the petition.

You’re required to take a credit counseling course by an approved provider before you can file your petition. After you’ve successfully completed the course, you’ll receive a certificate of completion that needs to be included with your petition.

It’s worth noting that a bankruptcy filing is a complex process, and it’s a good idea to work with a bankruptcy lawyer. The lawyer has experience with the bankruptcy process, and makes sure that your petition is correct, helps you with exemptions, and represents you during the 341 hearing.

Filling for Bankruptcy

Upon completion and review of your petition, you can file it with the bankruptcy court. Bankruptcy is a legal action that’s done at the federal level as this ensures no creditor can claim they’re exempt from your petition. You’ll file your petition with the local branch of the federal bankruptcy court.

The Automatic Stay

Once the court accepts your petition for review, the automatic stay goes into effect. The automatic stay prevents creditors from contacting you while the bankruptcy is active, and is essentially a temporary restraining order. If you receive a discharge, the automatic stay becomes permanent.

The 341 Meeting With the Trustee

When you file for bankruptcy, your assets are called an estate for various reasons. The trustee has the role of overseeing your estate and investigating your assets. This is why it’s important to list all of your assets as the trustee is capable of finding anything that’s been left off the petition, and threaten your ability to achieve a discharge of your debts.

Retaining a bankruptcy lawyer helps you learn about protecting your assets legally, while satisfying the trustee that your need for debt relief is genuine. You’ll have a better outcome with legal assistance at your side.

Reaching the Discharge Date

The court sets a discharge date after you’ve filed for bankruptcy, and this is typically set for a period of time after the 341 hearing. The waiting period is to give creditors a chance to object to your bankruptcy, or file a claim against your estate.

If no objections or claims are filed, your Chapter 7 bankruptcy is complete and discharged on the date that the court set. The automatic stay becomes permanent, and no creditor can attempt to collect on their debt going forward. If a creditor does make an attempt, they can be held liable in court and pay you a fine for their behavior.

Once the discharge date has passed, you are free from your old debts, and can start rebuilding your financial picture and credit score.

Can Creditors Contact You After You File for Bankruptcy?

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When you file for bankruptcy, an automatic stay is issued. This was created to ensure that the debtors are protected from creditors. An automatic stay is also intended to stop creditors from contacting you. Unfortunately, many people find that their creditor still contacts them after they have filed for bankruptcy. There are several things that you can do about this.

What to Do if a Creditor Contacts You

Creditors receive a notice in the mail that tells them to stop contacting you. However, if you did not give the right address, then the creditor may never receive the notice. You should go to the court and verify that the information is correct. Give them the updated address if the current one is incorrect.

If everything is correct and the creditor is still contacting you, then you should contact your attorney. Your lawyer will likely send a letter to the creditor that tells them that you have filed for bankruptcy. The letter will also state that they can no longer attempt to collect debt from you, so they have to stop contacting you. If the creditor still attempts to contact you, then they can be sued for harassment.

It is also important to note that you have to list all of your creditors on your bankruptcy schedules. Many people forget to list a creditor. If you forgot to put a creditor, then you will have to update the Schedule F form. You have to pay a fee to update this form. If you intentionally did not put a creditor on the form, then that debt may not be discharged in bankruptcy.

What Determines If a Creditor Can Be Sued

There are many factors that will determine if a creditor will be required to pay compensation to you for violating the automatic stay. The creditor has to be aware that you have filed for bankruptcy and still contacted you. They also must not have taken actions to correct this after they knew that you filed for bankruptcy. Additionally, an attorney must prove that the creditor’s actions were intentional.

How Can You be Compensated for Harassment?

When creditors call, email or send mail to people who have filed for bankruptcy, this is a violation of the Bankruptcy Code. There are several ways that you can be compensated for this. For example, the creditor may be required to pay compensation directly to you for the harassment.

The court can also order the creditor to pay fines. Additionally, your creditor may have to pay for your legal fees. It is common for the court to also order the creditor to pay punitive damages. Punitive damages are not awarded to you. The main purpose of punitive damages is to further punish the defendant and dissuade them from doing the same thing in the future.

There are also state and federal laws that apply to bankruptcy cases. If a creditor is found to have violated state or federal laws, then they can be ordered to pay additional fines.

What Happens in Debt Consolidation?

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Put simply, consolidation is when you take all of your various debts and fuse them into a single payment. However, this simple concept involves several important details that need to be accounted for before proceeding with debt consolidation. The rest of this article covers the different forms of consolidation and what needs to be considered before taking out a loan.

  • Seek out the free services of a nonprofit credit counselor. Several organizations can inform you on how best to manage your finances and settle your debts in a way that prevents future issues.
  • Figure out why you are indebted. Knowing why you got into debt can help you untangle yourself from it. For example, if your spending has overtaken your income, a consolidation loan is not likely to achieve much unless you also raise your income or lower your spending.
  • Establish a budget. List your expenses each week, month, or year, then look at your debts to see how you can tweak your spending to diminish them.
  • Communicate with your creditors to see if they will consent to lowering your payments. There is always a chance that a creditor might lower your minimum monthly payment, ignore some fees, lower your interest rate, or even change your recurring due date to better synch with your paydays, all in order to help you escape debt sooner.

Types of Consolidation Loans

If you are looking into consolidating debt, there are a few options available to you, each of which has several considerations you be mindful of.

Credit Card Balance Transfers

Most credit card companies will offer you a 0% or low-interest balance transfer as an invitation to consolidate your credit card debt to a single card.

What Should I Know?

While those promotional rates for transfers are nice, they do not last forever. Once the disclosed period of time for the promotion concludes, that interest rate is going to rise and that rise is going to hurt how much you will need to pay back. You will also likely have to pay a balance transfer fee, either as a percentage of the amount you transferred or a fixed amount, whichever winds up paying out better for the creditor.

If you use the same credit card to make new purchases, you will not be able to apply a grace period for those purchases and must pay interest on them until the entire balance is settled, including the balance you transferred, to begin with. If your payment is more than 60 days behind, the credit card company can elevate your interest rate on all of your balances, even the transferred balance.

Debt Consolidation Loan

Many varieties of lenders will offer debt consolidation loans. These convert all of your debts into one payment, streamlining your number of payments. Notably, this new loan is often set at a lower interest rate than what you may have been dealing with.

What Should I Know?

A lot of these lowered interest rates from a consolidation loan may be teasers, lasting for a limited period. Once that time ends, you can expect your interest rate to rise. Although your monthly payment might be lower, that may be because your lender is playing a shell game with how long you will need to pay it off. In short, you might owe less by consolidating, but the fees and costs incurred will mean you wind up paying more money than if you had not consolidated.

A piece of advice: If you are considering this sort of loan, compare and contrast the loan’s terms and interest rates to see how much you’ll be paying in total with interest and fees. Even this bit of homework can pay off in less of your money going to other parties.

Home Equity Loan

This sort of loan is set up to allow you to borrow against the equity of your home. When you use it to consolidate your debt, the loan is used to pay off your existing creditors; after that point, you shift to paying back the home equity loan itself.

What Should I Know?

This sort of loan may yield a lower interest rate than other loans but using your home’s equity to manage your credit card debt is risky. Fail to pay the loan back and your home could be foreclosed. You could also be on the hook for closing costs, potentially hundreds to thousands of dollars, with this sort of loan.

Also, be mindful that putting your home’s equity up for a loan risk placing you “underwater” if your home’s value drops. If that happens, you will have an uphill challenge when selling or refinancing the home. If you use your home’s equity as a means of consolidating debt, it may not be available to you for an emergency or to cover expenses like renovations or repairs.

Other Factors to Consider Before Consolidation

Using new debt to manage old debts may just be a stopgap measure. Few people succeed in paying off debts in this manner without also cutting back on how much money they spend.

Loans that you take out to consolidate debt may wind up eating more of your wallet than if you had stayed on your previous debt payment plans, thanks to the various fees and rising interest rates involved with consolidation. If your debt winds up harming your credit score, you will not be likely to find lower interest rates on your balance transfer, consolidation loan, or even your home equity loan.

Watch out for any promotions about debt consolidation that appear to be too effective to be a reality. A lot of companies will promote consolidation services when they are actually debt settlement companies that will charge you up-front fees in exchange for a promise to settle debts. These debt settlement firms will also try to get you to stop the repayment of your debts and shift your financial attention to transferring money into a special account. Lastly, these services are far from reliable and merit an extra level of scrutiny before you ever consider agreeing to deal with them.

How Bad is it to File for Chapter 7 Bankruptcy?

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These days, it’s all too easy to get in over your head in debt. A job loss, medical emergency, or even an unexpected increase in living expenses can put anyone in a tough financial situation that quickly spirals out of control.

Filing for chapter 7 bankruptcy is a one option for wrangling wild money problems. Many people avoid taking this measure, however, because the things they heard about it makes them feel filing would do more harm than good.

Here are a few pros and cons about filing chapter 7 bankruptcy to help you decide if this is the right move for you.

Pro: Chapter 7 Immediately Stops Debt Collection Action

Being constantly hounded by creditors is no one’s idea of a good time. Thankfully, when you file chapter 7 bankruptcy, a protection called the automatic stay falls into place that requires creditors to immediately stop all collection action.

For instance, a creditor who is garnishing your wages must cancel the legal order once they’re notified you filed for bankruptcy. If they receive any money from the garnishment in the interim, they must refund it to you.

While the Automatic Stay only lasts for as long as your case is active, the reprieve you get from credit calls and lawsuits can provide you with the mental space you need to plan your next steps in your quest for a better financial future.

Con: The Automatic Stay Doesn’t Apply to All Creditors

Like many things in life, there are exceptions to the automatic stay rule. The state and federal government can withhold your tax refund to pay any outstanding taxes you owed prior to filing bankruptcy, for example.

Other exceptions include:

  • Modifications to child or alimony support obligations
  • Efforts to collect debts and damages related to criminal actions
  • Wage deductions for loan repayments related to pensions, certain retirement plans, and stock bonuses

Additionally, if you have filed for bankruptcy within the previous year, the length of the automatic stay may be limited to 30 days or eliminated altogether depending on the circumstances of your case. It’s a good idea to consult with a bankruptcy attorney for advice if you think one or more of these exceptions apply to you.

Pro: Debt is Permanently Eliminated

During your bankruptcy, your trustee will pay your creditors with money they receive from liquidating your non-exempt assets. Any balances left in your accounts are subsequently wiped out, meaning you aren’t responsible for paying those bills any longer and the creditors can’t come after you for them.

This means the bankruptcy will free up money you can use for other things, such as rent or building up a savings fund. Additionally, the bankruptcy court requires you to complete a debtor education course that teaches important money management skills to help you avoid financial problems in the future.

Be aware, though, any debts secured by collateral typically require you to surrender the property to the creditor (i.e. vehicle repossession). Sometimes, though, you can keep the property if you can pay the creditor the market value of the item. You must obtain the court’s permission to do this, so discuss the issue with your trustee prior to making any arrangements to buy assets.

Con: Some Debts Cannot be Discharged

Some debts are protected by law and cannot be discharged through bankruptcy; so, you’ll still be responsible for paying them after your case concludes.

Non-dischargeable debts include:

  • Student loans
  • Personal injury lawsuit awards stemming from DUI accidents
  • Debts incurred because of fraud or similar criminal acts
  • Child and spousal support
  • Any debts you omitted from your forms or reaffirm

In some cases, you can still obtain a discharge under special circumstances. For example, you can get a hardship discharge for student loans if you can prove paying them will interfere with your ability to maintain a minimum standard of living.

A bankruptcy attorney can provide information about your options for eliminating non-dischargeable debt, so connect with a lawyer in your area.

Pro: You Can Save Assets

If you’re facing repossession or foreclosure, filing chapter 7 bankruptcy can help you save your assets from being taken by the bank. As noted previously, the automatic stay stops all collection action. So, even if the bank had a repossession order from the court, they can’t do anything until the automatic stay ends.

This gives you time to either get caught up on your payments or work out a new deal with the creditor. For instance, your mortgage company may agree to a loan modification rather than try to sell the home in a bad market where they’re unlikely to recoup their losses.

It goes without saying that you must be able to afford to continue paying for the assets; otherwise, you’ll end up losing the property if you fall behind again.

Con: Some Assets May Be Lost

As noted previously, the trustee will liquidate your assets and pay your creditors any money they get from the process. Bankruptcy laws let debtors exempt property up to a certain dollar amount. However, any property that doesn’t qualify for an exemption will usually be taken.

For example, the vehicle exemption is $1,200 in Wisconsin. If you have a car that’s only worth $500, you can use this exemption to keep the trustee from selling it. However, if you have a vehicle that’s worth $10,000, the trustee will sell the car, give you the exemption amount, and use the rest to pay creditors.

Con: Your Credit Score Will Take a Big Hit

There’s no way around it. Your credit score will take a big hit when you file for bankruptcy. In fact, according to some experts, your score can drop as much as 240 points after undergoing the process. Since the bankruptcy will stay on your report for up to 10 years, it will take a while for the effect to wear off.

Depending on how low your score goes, you may have difficulty obtaining credit. When you are approved for a new credit card or loan, you may be hit with high interest rates and/or unfavorable terms. In some cases, you may be required to have someone co-sign the loan with you before you’ll be approved.

Pros: Rebuilding Credit is Much Easier

While improving your credit after bankruptcy will be challenging, it’s not impossible. In fact, you may find it easier to qualify for certain types of credit, such as secured credit cards, that can help you rebuild your score.

Additionally, the impact a bankruptcy has on your score lessens over time. Not only does the bankruptcy itself become less important, but the discharged accounts will fall off your report as creditors stop submitting updates to the credit agencies about them. You may find your score rebounds much faster than expected, particularly if you’re paying new accounts on time every month.

Con: Filing Bankruptcy Costs Money

Filing chapter 7 bankruptcy in Wisconsin does require you to pay a court fee of $338 plus various minor administrative fees. Attorneys also charge a fee for their services, the amount of which varies depending on the lawyer and where you live. When you’re broke, coming up with all this cash may seem like an impossible task and can add more stress to an already high-tension situation.

The good news is that the bankruptcy court lets petitioners pay the filing fee in installments and may even reduce or eliminate the fee altogether if your income is low enough. Your lawyer may also work with you to develop a reasonable payment plan, so you can get the services you need without putting yourself further in debt.

There are benefits and drawbacks to filing for bankruptcy. If your financial circumstances are dire enough, though, it may be the best option available. Connect with an attorney who can help you decide if filing chapter 7 bankruptcy in Wisconsin is the right solution for you.

Things Chapter 13 bankruptcy does not cover

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Many Americans are in debt. That’s the conclusion reached in multiple studies, including one from Motley Fool, a private financial and investing advice company based in Alexandria, Virginia. It revealed the average household debt was reportedly $101,915 as of the end of 2022 and that American households collectively carry over $17 trillion in debt as of the second quarter of 2023. While that is alarming, there is some good news insofar as most Americans recognize how much debt they carry and are slowly trying to dig themselves out of that debt. As of the writing of this article, the debt payment-to-income ratio is around 9.6% in America.

For those who might not know what that means, the average American spends over 9% of their monthly income on debt payments. For most people, that is manageable and does not markedly disrupt their lives. However, for others, it can mean the difference between being able to put food on the table and not being able to put food on the table. When debt becomes too much to handle, many families file for bankruptcy.

How To Decide Between Filing Chapter 7 and Chapter 13 Bankruptcy

Both Chapter 7 and Chapter 13 will negatively impact an individual’s credit; the difference comes down to how long each will remain on their credit report. According to Bankrate, a consumer financial services company in New York City, Chapter 7 bankruptcy, which erases most unsecured debts, such as medical bills, credit card debt, and personal loans, remains on an individual’s credit report for seven years. Chapter 13 bankruptcy, meanwhile, which allows individuals to keep their property and repay debts over time, typically 3 to 5 years, stays on their credit report for seven years. While Chapter 7 bankruptcy sounds like the more appealing of the two since it erases one’s unsecured debts, it only benefits low-income households. High-income households will have to go with Chapter 13 bankruptcy instead.

Not All Debt Is Dischargeable Debt: The Truth About Filing Bankruptcy

While it would be nice to have all of our outstanding debt discharged or included in a structured repayment plan, some debts don’t qualify for either. And those debts are known as non-dischargeable debts. Having made that distinction, examples of dischargeable debts, also known as unsecured debts, include the following:

• Auto accident claims
• Business debts
• Collection accounts
• Credit card charges
• Most civil court judgments
• Unpaid rent payments and money owed under lease agreements
• Past-due utility balances
• Personal loans
• Repossession deficiency balances from auto loans
• Unpaid medical bills
• Unpaid taxes and related tax penalties

Now that we are up to speed on dischargeable debts, let’s discuss their non-dischargeable counterparts. According to Wisconsin bankruptcy attorneys, non-dischargeable debts, which are applicable when someone files Chapter 7 or Chapter 13 in Milwaukee or anywhere else in Wisconsin, include the following:

• Alimony and child support payments
• Debts incurred from death or personal injury resulting from a DUI
• Debts not previously included in an initial bankruptcy filing
• Debts resulting from the malicious injury to individual or property
• Tax liens

It is worth noting that the above list is not all-encompassing; many other things fall under the non-dischargeable umbrella when filing for bankruptcy in Wisconsin. To that point, it is best to speak with a Wisconsin bankruptcy attorney to determine what constitutes dischargeable and non-dischargeable based on the specifics of your bankruptcy case.

Are There Alternatives To Filing Bankruptcy?

Most Wisconsinites are mindful of how badly bankruptcy can destroy their credit, and most only choose this option as a last resort. That makes sense when you consider how many alternatives there are to resolving outstanding debt that doesn’t involve ruining one’s credit for years. Studies show people who have a bankruptcy on their credit are less likely to be approved for a mortgage, car loan, credit card, or personal loan than someone who does not. And if they are approved, they generally get loans with a much higher interest rate than someone who never filed for bankruptcy. That aside, some alternatives for resolving outstanding debt while keeping your credit intact include

Negotiating With Creditors

Going through the process of securing a judgment to collect an outstanding debt from a debtor is the last thing most creditors want to do. Most would prefer to negotiate a lower monthly payment or allow the debtor to pay off the debt for a fraction of what they owe. After all, both options keep creditors out of court and at their business where they can make money.

Debt Consolidation

If you owe a lot of debt to multiple creditors, debt consolidation is another alternative to bankruptcy worth considering. For those unfamiliar with debt consolidation, it entails taking out a personal loan or borrowing against your home’s equity and using that money to pay off the balance owed on high-interest credit cards and other loans. Generally speaking, debt consolidation is a good fit for individuals with debt payments that don’t exceed 50% of their gross monthly income. And that’s according to NerdWallet, a personal finance company that prides itself on helping clients make better and more informed financial decisions. It further notes that debt consolidation is ideal for individuals who have a credit score that allows them to secure a 0% or low-interest debt consolidation loan.

Debt Counseling

If you feel like you’re in over your head in debt, debt counseling could be the financial lifesaver that keeps your head above water. In short, debt consolidation entails seeking help from a certified nonprofit credit counseling agency to help you manage your outstanding debt. The way it works is these agencies review your income versus debt and day-to-day living expenses and help you figure out a budget and a plan for getting back on track financially. Sometimes, that might entail negotiating with your creditors to lower your monthly payments or agree to a lower payoff amount to resolve your outstanding debt on your behalf. Other times, they work with you to figure out a budget that will enable you to pay off your debt as quickly as possible.

In summary, debt is part of adulting. While some people can get out of debt under their own steam, doing so can be a far more challenging proposition for others. Often, those are the ones who have to ask for help, usually from debt collection companies, debt counseling agencies, and, as a last resort, a well-versed Chapter 7 or Chapter 13 Wisconsin bankruptcy attorney.