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Bankruptcy helps people who can no longer pay their debts get a fresh start by liquidating assets to pay their debts or by creating a repayment plan. Bankruptcy laws also protect financially troubled businesses. This section explains the bankruptcy process and laws.

Filing bankruptcy can help a person by discarding debt or making a plan to repay debts. A bankruptcy case normally begins when the debtor files a petition with the bankruptcy court. A petition may be filed by an individual, by spouses together, or by a corporation or other entity.

All bankruptcy cases are handled in federal courts under rules outlined in the U.S. Bankruptcy Code.

There are different types of bankruptcies, which are usually referred to by their chapter in the U.S. Bankruptcy Code.

Personal Bankruptcy. In a nutshell, most individuals and married couples have two types of bankruptcy under the Bankruptcy Code: Chapter 7 Bankruptcy or Chapter 13 ... Etc. Bankruptcy is a legal status of a person or other entity that cannot repay the debts it owes to creditors. In most jurisdictions, bankruptcy is imposed by a court and other Info. Etc.

Individuals may file Chapter 7 or Chapter 13 bankruptcy, depending on the specifics of their situation.

Municipalities—cities, towns, villages, taxing districts, municipal utilities, and school districts may file under Chapter 9 to reorganize.

Businesses may file bankruptcy under Chapter 7 to liquidate or Chapter 11 to reorganize.

Chapter 12 provides debt relief to family farmers and fishermen.

Bankruptcy filings that involve parties from more than one country are filed under Chapter 15.

Bankruptcy Basics provides detailed information about filing.

Seeking the advice of a qualified lawyer is strongly recommended because bankruptcy has long-term financial and legal consequences. Individuals can file bankruptcy without a lawyer, which is called filing pro se.

Bankruptcy Basics is not a substitute for the advice of competent legal counsel or a financial expert, nor is it a step-by-step guide for filing for bankruptcy. The Administrative Office of the United States Courts can provide legal or financial advice. Such advice may be obtained from a competent attorney, accountant, or financial adviser.

While the information presented is accurate as of the date of publication, it should not be cited or relied upon as legal authority. It should not be used as a substitute for reference to the United States Bankruptcy Code (title 11, United States Code) and the Federal Rules of Bankruptcy Procedure, both of which may be reviewed at local law libraries, or to local rules of practice adopted by each bankruptcy court. Finally, this publication should not substitute for the advice of competent legal counsel

Enter Your Location: (e.g., Chicago, IL or 60611)

Is Bankruptcy a Good Idea for You?

Is Bankruptcy a Good Idea for You?

There are many factors that should be taken into account when considering filing for bankruptcy.

1. Figure out what bankruptcy options you have. There are types of bankruptcy most commonly used by individual filers in the United States:Chapter 7 bankruptcy is a bankruptcy proceeding that can wipe out many of your debts in a three to six month period. However, you may lose some of your personal property. You can find out more by looking at Bankruptcy Overview: Chapter 7.Chapter 13 bankruptcy is a bankruptcy proceeding that can be more complicated than Chapter 7 bankruptcy. In Chapter 13, you will be required to make a repayment plan based off of your income, showing how you will pay off your debts in the next three to five years. You can find out more by looking at An Overview of Chapter 13 Bankruptcy.

2. Consider your alternatives. Bankruptcy is not for everyone. Indeed, many unnecessary bankruptcies are filed each year. You should sit down with your financial documents and consider your situation carefully before making a decision. You may find that you do not need to file bankruptcy because you are judgment proof, or that you can fix your financial woes with a few simple changes.

3. Ensure that you are eligible to file for the type of bankruptcy you want to file. There are certain requirements that you must meet in order to file for certain types of bankruptcies. For example, you may not be able to file for Chapter 7 bankruptcy if your income is high enough to pay off your debts through Chapter 13. Also, if your income is too low, or your debts too high, you may not be able to file for Chapter 13 bankruptcy because you cannot show that you are able to meet your repayment plan.

4. Find out what debts will and won't be forgiven. There are certain types of debts, such as child support, alimony and tax debts, that cannot be wiped out through a bankruptcy proceeding, no matter whether you file Chapter 7 or Chapter 13. Be sure that the debts that you have are types that can be addressed in bankruptcy before you file. It won't do you any good to file only to find out that bankruptcy will afford you no protection.

5. Figure out what will happen to your home if you file for bankruptcy. Before filing for bankruptcy, you should always sit down and try to figure out what will happen to your home if you do file. If you are already having problems making your mortgage payments, perhaps they will become easier if some of your other debts are forgiven. However, if you have a lot of equity already invested in your home, you may lose your home if you file for Chapter 7 bankruptcy. On the other hand, if your income is high enough, you may be able to file for Chapter 13 bankruptcy and include your mortgage payments on your repayment plan.

6. Figure out what will happen to your other property, like your car. What happens to your other property during a bankruptcy proceeding will depend upon what you have done with your property, as well as the property exemption laws that are available to you. If, for example, you put up your boat or your car as collateral on a loan, this makes that loan secured and the creditor may still be able to take your property even if you are in bankruptcy. Also, only certain types of property are protected by exemption laws in Chapter 7 bankruptcies. Before filing, study the exemption laws carefully and make sure you will keep what you need to survive.

7. Find out if your credit card debts will be wiped out. Bankruptcy has become an effective tool for wiping out credit card debt. You should figure out if your credit card debt will be wiped out by a bankruptcy proceeding before you file. If you lied on a credit card application or spent well beyond your means, bankruptcy may not be able to forgive your credit card debt.

8. Ensure that your pension plans are safe. Most pension plans and life insurance policies are protected by state laws in a bankruptcy proceeding. Before filing for bankruptcy, it would still be a good idea to find out whether your pension plan (401(k), IRA) and/or life insurance policies will continue to be protected.

9. Make sure that any co-signers are not stuck with your debt. You should go back through all of your debt agreements to make sure that no one that co-signed for any of your loans will be stuck making payments on your debt. It does no good to go through an entire bankruptcy proceeding only to find out that your brother or parents are stuck making the payments that you are unable to make. Generally, Chapter 13 bankruptcy will protect any co-signers to your debts, but Chapter 7 will not.

10. Your personal life will be invaded. Bankruptcies are notoriously intrusive into personal lives. In order for bankruptcy to work, you will have to show the bankruptcy court every aspect of your financial life. In addition, other people may find out about your bankruptcy. In Chapter 7 bankruptcy, it is likely that some of your personal property will be taken and sold in order to pay off your debts. Also, in a Chapter 13 bankruptcy, you will probably have to ask permission to spend your own money for the next three to five years.

These are some of the starting points for you to think about when asking yourself, "is bankruptcy a good idea for me?"

Bankruptcy

Chapter 7: How it Works

Following is an overview of the early course of a typical Chapter 7 bankruptcy case.

The Chapter 7 Petition and Filing Requirements

A chapter 7 case begins with the debtor filing a petition with the bankruptcy court (the court serving the area where the individual lives, or where the business debtor is organized or has its principal place of business or principal assets). In addition to the petition, in a chapter 7 bankruptcy case the debtor must also file with the court:Schedules of assets and liabilities;A schedule of current income and expenditures;A statement of financial affairs; andA schedule of executory contracts and unexpired leases.

Debtors must also provide the assigned case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began).Individual debtors with primarily consumer debts have additional document filing requirements. They must file:A certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling;Evidence of payment from employers, if any, received 60 days before filing;A statement of monthly net income and any anticipated increase in income or expenses after filing; andA record of any interest the debtor has in federal or state qualified education or tuition accounts.

A husband and wife may file a joint petition or individual petitions. Even if filing jointly, a husband and wife are subject to all the document filing requirements of individual debtors. (The Official Forms may be purchased at legal stationery stores or downloaded from the internet at http://www.uscourts.gov/bkforms/index.html.)

Fees and Payment Options

As of October 17, 2005, the courts must charge a $220 case filing fee, a $39 miscellaneous administrative fee, and a $15 trustee surcharge. Normally, the fees must be paid to the clerk of the court upon filing. With the court's permission, however, individual debtors may pay in installments. The number of installments is limited to four, and the debtor must make the final installment no later than 120 days after filing the petition. For cause shown, the court may extend the time of any installment, provided that the last installment is paid not later than 180 days after filing the petition. Id. The debtor may also pay the $39 administrative fee and the $15 trustee surcharge in installments. If a joint petition is filed, only one filing fee, one administrative fee, and one trustee surcharge are charged. Debtors should be aware that failure to pay these fees may result in dismissal of the case.

If the debtor's income is less than 150% of the poverty level (as defined in the Bankruptcy Code), and the debtor is unable to pay the chapter 7 fees even in installments, the court may waive the requirement that the fees be paid.

Required Information

In order to complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules, the debtor must provide the following information:A list of all creditors and the amount and nature of their claims;The source, amount, and frequency of the debtor's income;A list of all of the debtor's property; andA detailed list of the debtor's monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.

Married individuals must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files, the income and expenses of the non-filing spouse is required so that the court, the trustee and creditors can evaluate the household's financial position.

The "Automatic Stay"

Filing a petition under chapter 7 "automatically stays" (stops) most collection actions against the debtor or the debtor's property. But filing the petition does not stay certain types of actions listed under the Bankruptcy Code, and the stay may be effective only for a short time in some situations. The stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.

Meeting of Creditors

Usually between 20 and 40 days after the petition is filed, the case trustee will hold a meeting of creditors. During this meeting, the trustee puts the debtor under oath, and both the trustee and creditors may ask questions. The debtor must attend the meeting and answer questions regarding the debtor's financial affairs and property. If a husband and wife have filed a joint petition, they both must attend the creditors' meeting and answer questions. Within 10 days of the creditors' meeting, the U.S. trustee will report to the court whether the case should be presumed to be an abuse under the "means test" (which determines eligibility for filing bankruptcy under chapter 7)

It is important for the debtor to cooperate with the trustee and to provide any financial records or documents that the trustee requests. The Bankruptcy Code requires the trustee to ask the debtor questions at the meeting of creditors to ensure that the debtor is aware of the potential consequences of seeking a discharge in bankruptcy such as the effect on credit history, the ability to file a petition under a different chapter, the effect of receiving a discharge, and the effect of reaffirming a debt. Some trustees provide written information on these topics at or before the meeting to ensure that the debtor is aware of this information.

In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the meeting of creditors.

Conversion from Chapter 7

In order to accord the debtor complete relief, the Bankruptcy Code allows the debtor to convert a chapter 7 case to case under chapter 11, 12 or 13 as long as the debtor is eligible to be a debtor under the new chapter. However, a condition of the debtor's voluntary conversion is that the case has not previously been converted to chapter 7 from another chapter. Thus, the debtor will not be permitted to convert the case repeatedly from one chapter to another.

Debts that Remain After a Chapter 7 Discharge

If you file for bankruptcy under Chapter 7, you should be aware that not all debts are eliminated (or "discharged") once the bankruptcy process is complete. Generally speaking, in a Chapter 7 proceeding, the following debts are not discharged:

Debts or creditors not listed on the schedules filed at the outset of the case. Most student loans, unless repayment would cause the debtor and his or her dependents undue hardship (more on student loans below). Recent federal, state, and local taxes. Child support and spousal maintenance (alimony). Government-imposed restitution, fines, and penalties. Court fees. Debts resulting from driving while intoxicated. Debts not dischargeable in a previous bankruptcy because of the debtor's fraud.

Student Loans

As noted in the above list, educational loans are generally not discharged by a Chapter 7 bankruptcy. They may be dischargeable, however, if the court finds that paying off the loan will impose an "undue hardship" on the debtor and his or her dependents.

In order to qualify for a hardship discharge of a student loan, the debtor must demonstrate that he or she cannot make payments at the time the bankruptcy is filed, and will not be able to make payments in the future. The debtor must apply for the hardship discharge before discharge of the debtor's other debts is granted. Application for a hardship discharge is not included in the standard bankruptcy fees, and must be paid for after the case is filed.

The Bankruptcy Code does not specifically define the requirements for granting a hardship discharge of a student loan. Courts have applied different standards, but they often apply a three-part test to determine eligibility: Income -- if the debtor is forced to pay off the student loan, the debtor will not be able to maintain a minimum standard of living for himself or herself and his or her dependents; Duration -- the financial circumstances that satisfy the income test in (1) will continue for a significant portion of the repayment period; and Good Faith -- the debtor must have made a good-faith effort to repay the loan prior to the bankruptcy.

Additional Non-Dischargeable Debts

In addition, the following debts are not discharged if the creditor objects during the case and proves that the debt fits one of these categories:Debts from fraud, including certain debts for luxury goods or services incurred within ninety days before filing and certain cash advances taken within seventy days after filing. Debts from willful and malicious acts. Debts from embezzlement, larceny, or breach of fiduciary duty. Debts from a divorce settlement agreement or court decree, if the debtor has the ability to pay and the detriment to the recipient would be greater than the benefit to the debtor.

Exempt vs. Non-exempt Property Under Chapter 7

In a Chapter 7 liquidation case, the debtor has to turn certain property over to the bankruptcy trustee, so that the property can be sold and the proceeds used to pay off debts. Debtors, whether they are businesses or individuals, are often justifiably concerned about what property they will be allowed to keep and what they must give up. Below are examples of property that a Chapter 7 debtor will usually have to give up ("non-exempt" property), and property that the debtor may usually keep ("exempt" property).

Non-exempt Property

Items that the debtor usually has to give up include:Expensive musical instruments, unless the debtor is a professional musician. Collections of stamps, coins, and other valuable items. Family heirlooms. Cash, bank accounts, stocks, bonds, and other investments. A second car or truck. A second or vacation home.

Exempt Property

Exempt property (items that a debtor may usually keep) can include:Motor vehicles, up to a certain value. Reasonably necessary clothing. Reasonably necessary household goods and furnishings. Household appliances. Jewelry, up to a certain value. Pensions. A portion of equity in the debtor's home. Tools of the debtor's trade or profession, up to a certain value. A portion of unpaid but earned wages. Public benefits, including public assistance (welfare), social security, and unemployment compensation, accumulated in a bank account. Damages awarded for personal injury.

If you have questions about what property you will be allowed to retain if you file bankruptcy under Chapter 7 of the Bankruptcy Code, you may want to speak with an experienced bankruptcy attorney.

Sample Personal Financial Statement

If you want to see a snapshot of your finances at a particular point in time or wish to monitor fluctuations in the value of your assets or level of liabilities and net worth, you may find the sample Personal Financial Statement helpful. Each time you prepare a Personal Financial Statement you create a snapshot of your finances at a particular point in time. To monitor fluctuations in your finances, you may choose to prepare a financial statement periodically (on a set date every month, quarter, bi-yearly etc.) and compare statements.

Once you document all asset and liability figures, total your assets and liabilities. Next, subtract total liabilities from total assets to determine your net worth figure.

Assets
Cash $__________
Checking $__________
Savings $__________
Securities $__________
Accounts/Notes Receivable $__________
Real Estate $__________
Household Goods $__________
Vehicles $__________
Cash Value Life Insurance $__________
401(k) Plan $__________
Individual Retirement Accounts $__________
Other Assets $__________
TOTAL ASSETS $__________

Liabilities
Notes Payable $__________
Accounts/Bills Due $__________
Credit Cards Payable $__________
Vehicle Loans $__________
Unpaid Taxes $__________
Real Estate Mortgages Payable $__________
Land Contracts Payable $__________
Life Insurance Loans $__________
Other Liabilities $__________
TOTAL LIABILITIES $__________
NET WORTH $__________
TOTAL LIABILITIES AND NET WORTH $__________
(Assets always equal Total Liabilities and Net Worth)

Chapter 12: How It Works

Following is an overview of the early course of a typical Chapter 12 bankruptcy case.

Filing the Chapter 12 Petition

A chapter 12 case begins by filing a petition with the bankruptcy court serving the area where the individual lives or where the corporation or partnership debtor has its principal place of business or principal assets. Unless the court orders otherwise, the debtor also shall file with the court:Schedules of assets and liabilities,A schedule of current income and expenditures,A schedule of executory contracts and unexpired leas es, andA statement of financial affairs.

A husband and wife may file a joint petition or individual petitions. (The Official Forms may be purchased at legal stationery stores or downloaded from the internet athttp://www.uscourts.gov/bkforms/index.html.

Filing and Administrative Fees

As of October 17, 2005, the courts must charge a $200 case filing fee and a $39 miscellaneous administrative fee. Normally the fees should be paid to the clerk of the court upon filing. With the court's permission, however, they may be paid in installments. The number of such installments is limited to four and the debtor must make the final installment no later than 120 days after filing the petition. For cause shown, the court may extend the time of any installment, provided that the last installment is paid not later than 180 days after the filing of the petition. The debtor may also pay the $39 administrative fee in installments. If a joint petition is filed, only one filing fee and one administrative fee are charged. Debtors should be aware that failure to pay these fees may result in dismissal of the case.

Required Information

In order to complete the Official Bankruptcy Forms which make up the petition, statement of financial affairs, and schedules, the debtor will need to compile the following information:A list of all creditors and the amounts and nature of their claims;The source, amount, and frequency of the debtor's income;A list of all of the debtor's property; andA detailed list of the debtor's monthly farming and living expenses, i.e., food, shelter, utilities, taxes, transportation, medicine, feed, fertilizer, etc.

Married individuals must gather this information for each spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files, the income and expenses of the non-filing spouse is required so that the court, the trustee, and the creditors can evaluate the household's financial position.

Appointment of Trustee

When a chapter 12 petition is filed, an impartial trustee is appointed to administer the case. In some districts, the U.S. trustee appoints a standing trustee to serve in all chapter 12 cases. As in chapter 13, the trustee both evaluates the case and serves as a disbursing agent, collecting payments from the debtor and making distributions to creditors.

The "Automatic Stay" Under Chapter 12

Filing the petition under chapter 12 "automatically stays" (stops) most collection actions against the debtor or the debtor's property. Filing the petition does not, however, stay certain types of actions listed in the Bankruptcy Code. The stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally cannot initiate or continue any lawsuits, wage garnishments, or even telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.

Chapter 12 also contains a special automatic stay provision that protects co-debtors. Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a "consumer debt" from any individual who is liable with the debtor. Consumer debts are those incurred by an individual primarily for a personal, family, or household purpose.

Meeting of Creditors

Between 20 to 35 days after the petition is filed, the chapter 12 trustee will hold a "meeting of creditors." If the U.S. trustee or bankruptcy administrator schedules the meeting at a place that does not have regular U.S. trustee or bankruptcy administrator staffing, the meeting may be held no more than 60 days after the debtor files. During the meeting the trustee puts the debtor under oath and both the trustee and creditors may ask questions. The debtor must attend the meeting and answer questions regarding the debtor's financial affairs and the proposed terms of the debtor's repayment plan. If a husband and wife have filed a joint petition, they both must attend the creditors' meeting. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending. The parties typically resolve problems with the plan either during or shortly after the creditors' meeting. Generally, the debtor can avoid problems by making sure that the petition and plan are complete and accurate, and by consulting with the trustee prior to the meeting.

Claim Filing

In a chapter 12 case, to participate in distributions from the bankruptcy estate, unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors. A governmental unit, however, has 180 days from the date the case is filed file a proof of claim.

Repayment Plan Hearing

After the meeting of creditors, the debtor, the chapter 12 trustee, and interested creditors will attend a hearing on confirmation of the debtor's chapter 12 repayment plan.

t Legal Help with Bankruptcy or Debt

When financial problems become serious enough to cause stress on your personal and family life, it may be time to take legal action that might improve the situation. Whether you are thinking about filing for bankruptcy, or just want to learn more about your debt relief options, you should speak with an experienced bankruptcy and debt attorney. Especially in light of changes in the bankruptcy laws that went into effect on October 17, 2005, meeting with a bankruptcy attorney to discuss your situation and explore your legal options is the best way to ensure the most favorable outcome -- personally and financially -- for your situation.How a Bankruptcy & Debt Attorney Can Help

No matter the specific circumstances of your financial situation -- whether you need relief from harassing creditors, are looking to file for Chapter 7 bankruptcy, or just want to understand your debt relief options under the law -- now is the time to make sure you will have an experienced bankruptcy attorney on your side to help you achieve a satisfactory resolution to your financial problems. Perhaps more so than in other types of cases, what can be at stake in a bankruptcy or debt relief matter can seriously impact you now and for many years in the future, not just financially but also on a personal level. An experienced bankruptcy and debt attorney will evaluate your case with you and explain all of your legal options -- from the bankruptcy process to more informal debt relief actions such as negotiating with creditors and reaching a non-bankruptcy "debt workout" agreement. Your attorney will represent you zealously, and will act to protect your legal rights, your assets, and your personal interests, all with the goal of ensuring that the outcome of your situation is as favorable for you as possible.

Finding an Experienced Bankruptcy Law Attorney

To find a bankruptcy and debt attorney or law firm to help you with resolution of your debt situation, go to the "Find a Lawyer" box below. You can also search for an experienced Bankruptcy Attorney near you by using the FindLaw Lawyer Directory.

Your Options When You Can't Repay Student Loans

How can you go about getting your student loans cancelled, forgiven, or deferred when you can't pay them back?

It can be pretty scary when you are unable to pay back your student loans. You may start thinking about your credit score being ruined or having collection agencies start knocking on your door. However, don't panic, there may be some options available to you.

What is important is that you need to learn about the various options you have when it comes time to pay back your student loans. Default is something that you should try to avoid at all costs as it will not only damage your credit score, but it will also most likely increase the balance on your loans. Indeed, your loan holder may even get a court order that would allow them to take a portion of your paycheck or even grab your tax refund.Options

There are several options that are available to you when you cannot make the payments on your student loans. These options include:Delaying payments on your loans through forbearance or deferment programs,Getting your loan canceled and eliminating all payments,Discharging your loan through bankruptcy proceedings,Getting on a income-sensitive or income-based repayment schedule, orConsolidating your loans into one loan.Student Loan Deferments

In some situations, you may be able to obtain a deferment on your student loan payments. These deferments allow you to stop making payments for a certain period of time if you can show that you qualify. For instance, you may be able to get a deferment if you can show economic hardship, are returning to school, are unemployed, or looking for a job.

Depending on your type of loan, the deferment will not only allow you to stop making payments on the principal, but it will also stop interest from accruing on the unpaid balance. For other types of loans, you are only allowed to defer the principal of the loan, meaning that interest on your loan will continue to increase during the time you are not making payments. You will need to figure out what types of loans you have, as well as where you got them from, in order to see what kinds of deferments you are eligible for.

In most situations, you will be able to defer payments on your student loans if you meet one of the conditions that are described below (see the last section of this article titled "Conditions for Deferments on or Cancellations of Student Loans") and you are not currently in default on your loan. In some situations, you may even be able to qualify for a deferment even when you are in default this is called a retroactive deferment.

Like many things in life, deferments are never automatically put in place. In general, you must apply for a deferment. To do this, you should contact your loan holder and get the necessary paperwork. It can be a lot of work to get everything done correctly, but you should take the time and do it properly if a deferment will help you.

To get the necessary paperwork, you should contact your loan holder and talk to them about the various types of deferment that you think you may qualify for. Then, you should ask them to send you the right forms that you need to fill out. Doing this may help keep the loan holder from calling you about past due payments.Student Loan Forbearances

If you are unable to qualify for a deferment, you may be able to postpone payments on your student loans by setting up a loan forbearance. A loan forbearance can generally be thought of as your loan holder allowing you to stop making payments for a set period of time. However, you should keep in mind that interest will continue to accrue during a forbearance so your loan balance will be higher when you come out of the forbearance. Generally, forbearances are easier to obtain than deferments because they are not linked to the type of student loans you have and they are not covered by the laws and rules that apply to deferments and cancellations of student loans.

Generally, you may be able to obtain a forbearance for a variety of reasons. For example, if you have suffered from poor health or unforeseen personal problems, you may be able to get a forbearance. Also, if you foresee that you will not be able to pay back your student loans within the period for repayment (generally 10 years), or your monthly payments are more than 20% of your income each month, you may be able to get a forbearance. Loan forbearances are generally granted for up to one year at a time and you may be able to get a forbearance even if you have defaulted on your student loans.

In order to apply for a forbearance, you should contact you loan holder and tell them about your inability to pay. You will probably have to fill out some forms, either online or via mail, to apply for a forbearance.Bankruptcy and Student Loan Discharge

Another option that you have when you cannot pay back your student loans is to try to have your loans discharged through bankruptcy. However, this is very hard, indeed almost impossible, to accomplish under current law. Generally speaking, your student loans can only be discharged through bankruptcy if you can show that the burden of repaying your student loan would impose a severe hardship on you. This is quite a tough standard to meet. Courts generally consider a number of factors when you try to make this argument such as your age, health condition, income, expenses, and the length that your income problems are likely to persist.

In order to have the best chance of having your student loans discharged through bankruptcy, you will have to file a separate court action and you should probably also hire an attorney to help you make the most convincing argument possible.Cancellation of Student Loans

Much like a loan deferment, there are only certain situations in which you may be able to have your student loans cancelled. Just like a deferment, you will have to show that you fall into a specific situation (see the last section of this article titled "Conditions for Deferments on or Cancellations of Student Loans") depending upon what types of loans you have. Also, cancellation does not always take care of an entire loan and you may only end up getting a portion of your loan cancelled.

The first step in the loan cancellation process is to contact the holder of your loan or the Department of Education's Debt Collection Services Office. You will be required to fill out a loan cancellation application and submit this form with any requisite documentation (like proof of a disability via a note from your doctor that describes your physical condition and how it impacts your ability to work).Conditions for Deferments on or Cancellations of Student Loans

Here are the conditions that may allow you to defer or cancel your student loans. Keep in mind that some of the conditions may only qualify you for loan cancellation, others for both deferment and cancellation, and others for only deferment. Be sure to read carefully.The borrower has died. If the person that took out the student loan has died, the executor of the borrower's estate will most likely be able to cancel any student loans that the deceased had outstanding.The borrower is suffering from a permanent total disability. If you have suffered a personal injury that prevents you from working for an indefinite period of time or that will likely cause your death, you may be eligible to cancel any student loans you have. Generally speaking, to qualify for this cancellation, you cannot have had this permanent total disability before you applied for your student loan, or your situation must have deteriorated significantly since that time. In order to prove this, you will need to supply a letter from your doctor, most likely on a form that your loan holder will provide.The borrower is suffering from a temporary total disability. If you have a student loan that you took out before July 1, 1993, you may be able to defer loan payments for up to three years if you can show that you, your spouse or a dependant has suffered from a temporary total disability. If you are claiming you have the disability, you must be able to show that you are unable to attend school or a work a job for at least 60 days. If it is your spouse or dependant that suffered the disability, you must be able to show that the disabled person needs you to care for them for at least 3 months. The borrower is enrolled in a rehabilitation program for his or her disability. If you are currently enrolled in a rehabilitation program for a disability you suffered, you may be able to defer your loan payments for the length of the program and an additional six months after the program ends.The borrower is unemployed. If you are currently unemployed, but are looking for work, you may be able to defer your loan payments. In order to qualify for this deferment, you will need to prove your unemployment (for example, by stubs for unemployment benefits) and/or your search for a job (written documentation of job applications). In order to qualify, you must be looking for full-time employment, meaning at least 30 hours a week for a period that is at least three months long.Economic hardship. If you have a loan that was obtained after June 30, 1993, you may be able to defer payments for up to three years if you can prove that you are suffering from an economic hardship. If you receive public assistance (such as welfare or SSI), you are automatically entitled to this deferment. However, if you are not receiving public assistance, you must apply for an economic hardship deferment. This application will look into your wages and compare them to the federal minimum wage as well as the federal poverty level. You will need to provide proof of your income, most likely through pay stubs.The borrower is currently enrolled in school. If you return to school on at least a half-time basis, you will most likely be able to defer you payments until you leave school again.The borrower enters uniformed service. If you are currently serving the country in one of the uniformed services (U.S Military, National Oceanic and Atmospheric Corps or the Public Health Service), you may qualify to have your loans deferred or cancelled. You should talk to your commanding officer as well as your loan holder to see what you qualify for.The borrower is teaching a needy population. If you are currently a teacher that is teaching for a needy, low-income population, you may be able to have your student loans canceled or deferred.The borrower is serving a needy population. If you are currently serving a needy population, but not teaching them, you may also be able to qualify to have your loans deferred or cancelled.The borrower is performing community service. If you have student loans and are currently performing community service (such as serving in the peace corps or volunteering with local associations that assist low income families), you may be able to partially cancel your student loans or get a deferment.The borrower is working in the health-care field. Borrowers that are currently working in the health-care field (for example, nurses or doctors in residency) can sometimes have their loans canceled or deferred.The borrower is working in law enforcement. If you are working full time in the law enforcement field (police force and sheriff's office), you may be eligible to have some of your older Perkins loans cancelled.The borrower went to a trade school. If you were goaded into attending a trade school only to have the school close before you could obtain your degree, or if you were falsely told that taking out a student loan for trade school would benefit you, you may be eligible to have all of your student loans forgiven.The borrower was a victim of identity theft. If someone used your identity falsely to obtain a student loan, you will most likely be able to get the loan canceled.The borrower left school but never got a refund. If you were a student that took out a student loan but withdrew from the school before attending any classes, or only attended less than 60% of the class before withdrawing and never received a refund, you may be able to cancel your loan up to the amount that you should have received as a refund.

While the information presented is accurate as of the date of publication, it should not be cited or relied upon as legal authority. It should not be used as a substitute for reference to the United States Bankruptcy Code (title 11, United States Code) and the Federal Rules of Bankruptcy Procedure, both of which may be reviewed at local law libraries, or to local rules of practice adopted by each bankruptcy court. Finally, this publication should not substitute for the advice of competent legal counsel

Bankruptcy Glossary

Following are definitions and explanations for frequently-used words and phrases related to bankruptcy.

Adversary Proceeding: A lawsuit arising in or related to a bankruptcy case that is commenced by filing a complaint with the court.

Assume: An agreement to continue performing duties under a contract or lease.

Automatic Stay: An injunction that automatically stops lawsuits, foreclosures, garnishments, and all collection activity against the debtor the moment a bankruptcy petition is filed.

Bankruptcy: A legal procedure for dealing with debt problems of individuals and businesses; specifically, a case filed under one of the chapters of title 11 of the United States Code (the Bankruptcy Code).

Bankruptcy Administrator: An officer of the judiciary serving in the judicial districts of Alabama and North Carolina who, like the U.S. trustee, is responsible for supervising the administration of bankruptcy cases, estates, and trustees; monitoring plans and disclosure statements; monitoring creditors' committees; monitoring fee applications; and performing other statutory duties. Compare U.S. trustee.

Bankruptcy Code: The informal name for title 11 of the United States Code (11 U.S.C. sections 101-1330), the federal bankruptcy law.

Bankruptcy Court: The bankruptcy judges in regular active service in each federal judicial district; a unit of the district court.

Bankruptcy Estate: All legal or equitable interests of the debtor in property at the time of the bankruptcy filing. (The estate includes all property in which the debtor has an interest, even if it is owned or held by another person.)

Bankruptcy Judge: A judicial officer of the United States district court who is the court official with decision-making power over federal bankruptcy cases.

Bankruptcy Petition: The document filed by the debtor (in a voluntary case) or by creditors (in an involuntary case) which opens the bankruptcy case. (There are official forms for bankruptcy petitions.)

Chapter 7: The chapter of the Bankruptcy Code providing for "liquidation" (i.e., the sale of a debtor's nonexempt property and the distribution of the proceeds to creditors).

Chapter 9: The chapter of the Bankruptcy Code providing for reorganization of municipalities (which includes cities and towns, as well as villages, counties, taxing
districts, municipal utilities, and school districts).

Chapter 11: The chapter of the Bankruptcy Code providing (generally) for reorganization, usually involving a corporation or partnership. (A chapter 11
debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. People in business or individuals can also seek relief in chapter 11.)

Chapter 12: The chapter of the Bankruptcy Code providing for adjustment of debts of a "family farmer," or a "family fisherman" as those terms are defined in the Bankruptcy Code.

Chapter 13: The chapter of the Bankruptcy Code providing for adjustment of debts of an individual with regular income. (Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.)

Claim: A creditor's assertion of a right to payment from the bankruptcy debtor or the debtor's property.

Confirmation: Bankruptcy judge's approval of a plan of reorganization or liquidation in chapter 11, or payment plan in chapter 12 or 13.

Consumer Debtor: A debtor whose debts are primarily consumer debts.

Consumer Debts: Debts incurred for personal (as opposed to business) needs.

Contested Matter: Those matters, other than objections to claims, that are disputed but are not within the definition of an "adversary proceeding".

Contingent Claim: A claim that may be owed by the debtor under certain circumstances, e.g., where the debtor is a cosigner on another person's loan and that person fails to pay.

Creditor: One to whom the debtor owes money or who claims to be owed money by the debtor.

Credit Counseling: Generally refers to two events in individual bankruptcy cases: (1) the "individual or group briefing" from a nonprofit budget and credit counseling agency that individual debtors must attend prior to filing under any chapter of the Bankruptcy Code; and (2) the "instructional course in personal financial management" in chapters 7 and 13 that an individual debtor must complete before a discharge is entered. There are exceptions to both requirements for certain categories of debtors, exigent circumstances, or if the U.S. trustee or bankruptcy administrator have determined that there are insufficient approved credit counseling agencies available to provide the necessary counseling.

Creditors' Meeting: see 341 meeting

Current Monthly Income: The average monthly income received by the debtor over the six calendar months before commencement of the bankruptcy case, including regular contributions to household expenses from nondebtors and income from the debtor's spouse if the petition is a joint petition, but not including social security income and certain other payments made because the debtor is the victim of certain crimes.

Debtor: A person who has filed a petition for relief under the Bankruptcy Code.

Debtor Education: see credit counseling

Defendant: An individual (or business) against whom a lawsuit is filed.

Discharge: A release of a debtor from personal liability for certain dischargeable debts identified in the Bankruptcy Code. A discharge releases a debtor from personal liability for certain debts known as dischargeable debts and prevents the creditors owed those debts from taking any action against the debtor to collect the debts. The discharge also prohibits creditors from communicating with the debtor regarding the debt, including telephone calls, letters, and personal contact.

Dischargeable Debt: A debt for which the Bankruptcy Code allows the debtor's personal liability to be eliminated.

Disclosure Statement: A written document prepared by a chapter 11 debtor or other plan proponent designed to provide "adequate information" to creditors to enable them to evaluate the chapter 11 plan of reorganization.

Equity: The value of a debtor's interest in property that remains after liens and other creditors' interests are considered. (Example: If a house valued at $100,000 is subject to a $80,000 mortgage, there is $20,000 of equity.)

Executory Contract or Lease: Generally includes contracts or leases under which both parties to the agreement have duties remaining to be performed. (If a contract or lease is executory, a debtor may assume it or reject it.)

Exemptions, Exempt Property: Certain property owned by an individual debtor that the Bankruptcy Code or applicable state law permits the debtor to keep from unsecured creditors. For example, in some states the debtor may be able to exempt all or a portion of the equity in the debtor's primary residence (homestead exemption), or some or all "tools of the trade" used by the debtor to make a living (i.e., auto tools for an auto mechanic or dental tools for a dentist). The availability and amount of property the debtor may exempt depends on the state the debtor lives in.

Family Farmer or Family Fisherman: An individual, individual and spouse, corporation, or partnership engaged in a farming or fishing operation that meets certain debt limits and other statutory criteria for filing a bankruptcy petition under chapter 12.

Fraudulent Transfer: A transfer of a debtor's property made with intent to defraud or for which the debtor receives less than the transferred property's value.

Fresh Start: The characterization of a debtor's status after bankruptcy, i.e., free of most debts. (Giving debtors a fresh start is one purpose of the Bankruptcy Code.)

Insider (of an Individual Debtor): Any relative of the debtor or of a general partner of the debtor; partnership in which the debtor is a general partner; general partner of the debtor; or a corporation of which the debtor is a director, officer, or person in control.

Insider (of a Corporate Debtor): A director, officer, or person in control of the debtor; a partnership in which the debtor is a general partner; a general partner of the debtor; or a relative of a general partner, director, officer, or person in control of the debtor.

Joint Administration: A court-approved mechanism under which two or more cases can be administered together. (Assuming no conflicts of interest, these separate businesses or individuals can pool their resources, hire the same professionals, etc.)

Joint Petition: One bankruptcy petition filed by a husband and wife together.

Lien: The right to take and hold or sell the property of a debtor as security or payment for a debt or duty.

Liquidation: A sale of a debtor's property with the proceeds to be used for the benefit of creditors.

Liquidated Claim: A creditor's claim for a fixed amount of money.

Means Test: Section 707(b)(2) of the Bankruptcy Code applies a "means test" to determine whether an individual debtor's chapter 7 filing is presumed to be an abuse of the Bankruptcy Code requiring dismissal or conversion of the case (generally to chapter 13). Abuse is presumed if the debtor's aggregate current monthly income (see definition above) over 5 years, net of certain statutorily allowed expenses, is more than (i) $10,000, or (ii) 25% of the debtor's nonpriority unsecured debt, as long as that amount is at least $6,000. The debtor may rebut a presumption of abuse only by a showing of special circumstances that justify additional expenses or adjustments of current monthly income.

Motion to Lift the Automatic Stay: A request by a creditor to allow the creditor to take action against the debtor or the debtor's property that would otherwise be prohibited by the automatic stay.

No-Asset Case: A chapter 7 case where there are no assets available to satisfy any portion of the creditors' unsecured claims.

Nondischargeable Debt: A debt that cannot be eliminated in bankruptcy. Examples include a home mortgage, debts for alimony or child support, certain taxes, debts for most government funded or guaranteed educational loans or benefit overpayments, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine included in a sentence on the debtor's conviction of a crime. Some debts, such as debts for money or property obtained by false pretenses and debts for fraud or defalcation while acting in a fiduciary capacity may be declared nondischargeable only if a creditor timely files and prevails in a nondischargeability action.

Objection to Dischargeability: A trustee's or creditor's objection to the debtor being released from personal liability for certain dischargeable debts. Common reasons include allegations that the debt to be discharged was incurred by false pretenses or that debt arose because of the debtor's fraud while acting as a fiduciary.

Objection to Exemptions: A trustee's or creditor's objection to the debtor's attempt to claim certain property as exempt from liquidation by the trustee to creditors.

Party in Interest: A party who has standing to be heard by the court in a matter to be decided in the bankruptcy case. The debtor, the U.S. trustee or bankruptcy administrator, the case trustee and creditors are parties in interest for most matters.

Petition Preparer: A business not authorized to practice law that prepares bankruptcy petitions.

Plan: A debtor's detailed description of how the debtor proposes to pay creditors' claims over a fixed period of time.

Plaintiff: A person or business that files a formal complaint with the court.

Postpetition Transfer: A transfer of the debtor's property made after the commencement of the case.

Prebankruptcy Planning: The arrangement (or rearrangement) of a debtor's property to allow the debtor to take maximum advantage of exemptions. (Prebankruptcy planning typically includes converting nonexempt assets into exempt assets.)

Preference or Preferential Debt Payment: A debt payment made to a creditor in the 90-day period before a debtor files bankruptcy (or within one year if the creditor was an insider) that gives the creditor more than the creditor would receive in the debtor's chapter 7 case.

Presumption of Abuse: see means test

Priority: The Bankruptcy Code's statutory ranking of unsecured claims that determines the order in which unsecured claims will be paid if there is not enough money to pay all unsecured claims in full. For example, under the Bankruptcy Code's priority scheme, money owed to the case trustee or for prepetition alimony and/or child support must be paid in full before any general unsecured debt (i.e. trade debt or credit card debt) is paid.

Priority Claim: An unsecured claim that is entitled to be paid ahead of other unsecured claims that are not entitled to priority status. Priority refers to the order in which these unsecured claims are to be paid.proof of claim A written statement and verifying documentation filed by a creditor that describes the reason the debtor owes the creditor money. (There is an official form for this purpose.)

Property of the Estate: All legal or equitable interests of the debtor in property as of the commencement of the case.

Reaffirmation Agreement: An agreement by a chapter 7 debtor to continue paying a dischargeable debt (such as an auto loan) after the bankruptcy, usually for the purpose of keeping collateral (i.e. the car) that would otherwise be subject to repossession.

Secured Creditor: A creditor holding a claim against the debtor who has the right to take and hold or sell certain property of the debtor in satisfaction of some or all of the claim.

Secured Debt: Debt backed by a mortgage, pledge of collateral, or other lien; debt for which the creditor has the right to pursue specific pledged property upon default. Examples include home mortgages, auto loans and tax liens.

Schedules: Detailed lists filed by the debtor along with (or shortly after filing) the petition showing the debtor's assets, liabilities, and other financial information. (There are official forms a debtor must use.)

Small Business Case: A special type of chapter 11 case in which there is no creditors' committee (or the creditors' committee is deemed inactive by the court) and in which the debtor is subject to more oversight by the U.S. trustee than other chapter 11 debtors. The Bankruptcy Code contains certain provisions designed to reduce the time a small business debtor is in bankruptcy.

Statement of Financial Affairs: A series of questions the debtor must answer in writing, concerning sources of income, transfers of property, lawsuits by creditors, etc. (There is an official form a debtor must use.)

Statement of Intention: A declaration made by a chapter 7 debtor concerning plans for dealing with consumer debts that are secured by property of the estate.

Substantive Consolidation: Putting the assets and liabilities of two or more related debtors into a single pool to pay creditors. (Courts are reluctant to allow substantive consolidation since the action must not only justify the benefit that one set of creditors receives, but also the harm that other creditors suffer as a result.)

341 Meeting: The meeting of creditors required by section 341 of the Bankruptcy Code, at which the debtor is questioned under oath by creditors, a trustee, examiner, or the U.S. trustee about his/her financial affairs. Also called "creditors' meeting".

Transfer: Any mode or means by which a debtor disposes of (or parts with) the debtor's property.

Trustee: The representative of the bankruptcy estate who exercises statutory powers, principally for the benefit of the unsecured creditors, under the general supervision of the court and the direct supervision of the U.S. trustee or bankruptcy administrator. The trustee is a private individual or corporation appointed in all chapter 7, chapter 12, and chapter 13 cases and some chapter 11 cases. The trustee's responsibilities include reviewing the debtor's petition and schedules and bringing actions against creditors or the debtor to recover property of the bankruptcy estate. In chapter 7, the trustee liquidates property of the estate, and makes distributions to creditors. Trustees in chapter 12 and 13 have similar duties to a chapter 7 trustee and the additional responsibilities of overseeing the debtor's plan, receiving payments from debtors, and disbursing plan payments to creditors.

U.S. Trustee: An officer of the Justice Department responsible for supervising the administration of bankruptcy cases, estates, and trustees; monitoring plans and disclosure statements; monitoring creditors' committees; monitoring fee applications; and performing other statutory duties. Compare, bankruptcy administrator.

Undersecured Claim: A debt secured by property that is worth less than the full amount of the debt.

Unliquidated Claim: A claim for which a specific value has not been determined.

Unscheduled Debt: A debt that should have been listed by the debtor in the schedules filed with the court but was not. (Depending on the circumstances, an unscheduled debt may or may not be discharged.)

Unsecured Claim: A claim or debt for which a creditor holds no special assurance of payment, such as a mortgage or lien; a debt for which credit was extended based solely upon the creditor's assessment of the debtor's future ability to pay.

Voluntary Transfer: A transfer of a debtor's property with the debtor's consent.



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