Wednesday, April 17, 2013

Filing Chapter 7 or Chapter 13 Bankruptcy in Hawaii. What you need to know BEFORE you file for bankruptcy. By Honolulu Attorney Brian Kawamoto

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DISCLAIMER:  The following discussion is for general reading purposes only. Accordingly, anything stated herein should not be relied upon as a legal opinion for your particular fact situation.  Bankruptcy case law changes constantly and sometimes daily, accordingly statements contained herein may not be current and up to date with the constant changing court decisions being rendered around the country each and every day.  Also states vary in  interpreting and deciding certain bankruptcy issues, therefore if you are considering filing for bankruptcy, you should retain the services of an experienced bankruptcy attorney in the state of your residence before filing.
Introduction.  Now that the new bankruptcy law or "BAPCPA" is in effect, filing bankruptcy is much  more complicated then ever before.  As you will gather from reading this article, not everything is "black and white," in fact there are many grey areas and litigation goes on today regarding the interpretation of the new bankruptcy code.  Courts in the various circuits sometimes have different opinions and rulings on the same issue and as we are in the 9th judicial circuit we follow those court decisions. In addtion to all this, there are hurdles to overcome and tests that you must now pass in order to receive your discharge under BAPCPA.  The biggest change was the adoption of the median income and the means test.

Should I hire a Bankruptcy Attorney to represent me?  If you don't know what you are doing and file your own case, or if you hire a "bankruptcy preparer" who is not be familiar with the rather intricate and complicated bankruptcy laws,  your experience could become a living nightmare. For example you could be forced to turnover some of your assets, including your home to the trustee, or you may have to file a Chapter 13 instead of a Chapter 7, or your case could be dismissed and your discharge denied or set aside. In one case the debtor failed to seek counsel and filed his own Chapter 7 bankruptcy case and did not know years earlier his mother had put him on title to her home as co-owners, the trustee found out about this while searching public records and told the debtor that he would seek to sell the property unless the debtor's mother obtained a new loan to pay in the value of the debtor's equity.  The debtor then tried to dismiss his chapter 7 case but the court refused to allow him to do that, see .  People have also gone to prison for giving false testimony to the trustee and for hiding or concealing assets. Some debtors had their discharge set aside because they failed to cooperate with the trustee's orders.  Sometimes people file too early, for example if you had tax debts that could have been discharged had you simply waited one more week before you filed for bankrutpcy, you would now have to wait 8 more years before you can file another Chapter 7 case to discharge those same taxes....this means that you have given the IRS  8 more years to collect from you, all of which could which could have been avoided through proper planning.  If your petition and schedules are not prepared correctly you could spend a lot of time attending continued hearings. For these and countless other reasons I suggest that you hire only an experienced bankruptcy attorney to represent you.

How often can you file for Bankruptcy if you filed before? You cannot file for a Chapter 7 case if you filed another previous Chapter 7 case within the last 8 years. If you previously filed a Chapter 7 case you must wait 4 years to file a Chapter 13 case. If you previously filed a Chapter 13 case you must wait 2 years before you can file another Chapter 13 case. If you previously filed a Chapter 13 case you must wait 6* years before you can file a Chapter 7 case. * Unless debtor’s previous plan paid 100 percent or 70 percent with good faith and best effort requirements met; then no waiting period is required for eligibility for discharge, see 11 U.S.C. §727(a)(9)

Chapter 7 and Chapter 13:  The two most common types of individual bankruptcy cases are Chapter 7 and Chapter 13.  Essentially a Chapter 7 does not require that you make any payments to obtain your discharge. All assets that are not exempt however will be liquidated and sold by the trustee, that is why this is also known as a liquidation bankruptcy. So long as your Chapter 7 case remains open,  assets that you thought were exempted when your petition was filed could later be sold by the Trustee (read below for more on this topic).  Unlike a Chapter 7, a Chapter 13 requires that you make monthly payments to the trustee for a period of 3, 4 or 5 years before you can obtain your discharge, this essentially is a court approved "bankruptcy payment plan" that is binding upon your creditors. How much you pay back will depend upon your income and other factors and you may not be required to pay back 100% towards your unsecured creditors, in fact plans providing for less than that are routinely approved by the courts.  Unlike a Chapter 7 where you can lose property, a Chapter 13 bankruptcy allows you to keep certain non exempt property.  Chapter 13 cases however have specified debt limitations which you cannot exceed, There are no such debt limits for a Chapter 7.  Debt limits for Chapter 13 are set for an increase on April 1, 2013, from $360,475 to $383,175 of unsecured debt and from $1,081,400 to $1,149,525 of secured debt, as these amounts change from time to time please review 11 USC 109(e) for the most current amounts.  If you exceed these debt amounts and cannot file for a Chapter 7, you would probably have to file a Chapter 11 reorganization, unfortunately legal fees for a Chapter 11 are very expensive and often times out of reach for the average person and there are only a few attorneys in Honolulu that will file a Chapter 11 reorganization for you. Once you file your petition for Chapter 7 or Chapter 13 bankruptcy you fall under the automatic stay protection, this means that any action on a lawsuit or a garnishment on your wages must stop.  The automatic stay will even STOP the IRS from levying upon your wages.   If however, you are a "serial bankruptcy filer" the automatic stay is not "automatic" and would require court approval by way of a separate motion filed with the court.  Once you file a chapter 7 and you want to dismiss the case, good luck, it is extremely difficult to voluntarily dismiss a chapter 7 case, which would require good grounds and court approval.  A chapter 13 however can be dismissed by the debtor at any time.

Why File for Bankruptcy? Most people file for bankruptcy because they are not able to pay their credit card debts and at the same time make ends meet. Some have maxed out their credit cards and no longer use them, while the payments that they make goes only towards the interest and does not reduce the principal. Others have tax debts, are facing foreclosures or are being garnished or facing lawsuits. For these people filing for bankruptcy has the following benefits:
  • If you qualify and are successful you can get rid of most "pre-petition debts" (which are debts incurred prior to the date that you filed for bankruptcy).
  • Certain taxes can also be discharged.
  • Automatic stay stops all garnishments and levies. Stops bill collectors from calling.
  • If you file a Chapter 13, you may be able to save your home from foreclosure, you may protect co signers, you can strip off underwater second mortgages or home equity loans, you can reduce your auto loan balance down to fair market value under the 910 day rule and you can lower your auto loan interest rate. You can prioritize certain debts such as co signed debts, priority taxes, delinquent child support, and give them more favorable payment treatment versus your regular unsecured debts. You don't have to pay interest on your unsecured credit cards under your Chapter 13 plan.
But on the flip, side Bankruptcy could also lead to certain problems, such as:
  • If your filing is abusive or fraudulent you won't get your discharge and will remain liable for all debts. See Section 727. You could also go to prison if you are convicted of bankruptcy fraud
  • The trustee could seize and sell your assets, this depends on the equity you have in these assets and the exemptions that are available to you. Previous transfers of money or property could also be set aside by the trustee and the recipient would have to turnover the property that they had received from you back to the trustee. If you fail to accurately value your assets, the trustee could seize and sell them if he determines it is worth more than what you claim it is, and you have used up all available exemptions.
  • If you file a Chapter 13, you will have to turn over all future tax refunds to the trustee while you are in bankruptcy. You may not be able to incur new debt such as buy or lease a new car while you are in bankruptcy, especially if it would affect future payments to your creditors, in any event court approval would be required and it is difficult to get that approved. 
  • Chapter 13 has debt limits whereas Chapter 7 has none. If you are a stock broker or commodities broker you may not be able to file a Chapter 13 bankruptcy.
  • If you have student loans and file a Chapter 13 that provides for only minimal payments to all creditors, at the end of your plan duration your student loan debt balance which will include post petition interest may be higher than what it was before you had filed bankruptcy
  • If you are in business and have employees a business Chapter 7 filing means that the business ceases operations unless continued by the Chapter 7 Trustee. A Chapter 7 Trustee is appointed almost immediately, with broad powers to examine the business's financial affairs.  The trustee generally sells all the assets and distributes the proceeds to the creditors. This means that all employees will lose their jobs. Non exempt inventory will also have to be surrendered to the trustee for subsequent sale.  If you file a Chapter 13 and you are in business, depending on how many employees you have and your gross income, you will have to submit regular documentation and proof of payment of taxes and insurance, including tdi, workers compensation premiums to the trustee while you are in bankruptcy.
  • If you inherit property or insurance after you file bankruptcy you may have to turn such property over to the trustee.
  • If you job requires security clearance with the government, you may lose your security clearance depending on the particulars of your employment history, etc. and level of security clearance that you have. 
  • Your bankruptcy filing becomes public record and is published in the Pacific Business news. Your credit may be affected for up to 10 years. For more about how bankruptcy affects your credit see,
If you are contemplating filing for bankruptcy:
  • Immediately stop using all of your credit cards and do not use your credit cards to pay your bankruptcy attorney fee. Do not participate in credit card kiting, that is where you take out cash advances or use a credit card to pay the minimum balances on your other credit cards, at the same time continuing to use those other cards.
  • Do not borrow new money or obtain new loans or obtain any cash advances (payroll cashing services).
  • Do not buy or enter into a lease for an automobile
  • Do not pay back family members or insiders for a prior debt or loan
  • Do not take your name off title or transfer property
  • Do not sell or give away any of your assets, especially to a family member or insider for less than fair market value
  • If you have a safety box, make an inventory and accurately reveal its contents and value
  • Do not hide or conceal any asset, and more importantly disclose all asset and value them correctly from the start. 
Some debts are not discharged in Bankruptcy. The following debts will not be discharged in your bankruptcy case. This may not a complete list of debts not discharged in a bankruptcy case, also as the amounts may be updated as the law changes, so it is advised that you review the most current version of 11 USC Section 523 for any changes:
  • Recent luxury purchases over $500 within last 90 days (cash advance for casino gambling is a luxury expense)
  • Cash advances over $750 within the last 70 days
  • Student loans may or may not be discharged, in most of our cases we find that it is extremely difficult if not close to impossible to discharge student loans, cases where a discharge was granted involved someone who was either disabled mentally or physically, incapacitated and unable to work because of age, health, or other justifiable reason, so if you can work (no matter what the pay is) the chances of you obtaining a discharge will be an uphill and difficult battle. Simply put, not being able to afford the payments is unfortunately not a good enough reason as far as the courts are concerned.. If you wish to discharge your student loans, you need an attorney to file a complaint to determine dischargeability of the student loan, which is an adversarial proceeding, or like a "mini trial" as I call it. At this trial you have the burden of proving undue hardship by a preponderance of the evidence. In the 9th circuit, the courts have adopted the very strict Brunner test, see .Brunner requires at the very minimum that you made payments in the past towards your student loan debt. Attorney's fees for this kind of adversarial proceeding is not included in a typical "uncontested bankruptcy" case, so you will need extra funds for this kind of legal representation. Legal fees for this kind of trial work can range anywhere from $5,000 to $12,000 or more in additional attorneys fees, especially if legal briefs are required. If you have student loans and if you cannot get rid of them thru bankruptcy, all may not be lost, you still may be able to reduce your debt balance depending upon the kind of student loan that you have, see
  • Certain income taxes (it depends if you meet the tests)
  • Employment related trust fund taxes (100% penalty tax for responsible person)
  • Government fines (i.e. traffic fines, etc.)
  • Debts incurred by actual fraud, larceny or embezzlement
  • Drunk driving related debts
  • Credit card or loans made to pay a non-dischargeable income tax (11 USC 523 14a)
  • Domestic Support Obligations - if you are behind on domestic support obligations like child support or alimony, the delinquent amounts are considered priority debts and you must cure or pay it back 100% within the term of the Chapter 13 plan. If you file for Chapter 7 the delinquent debts are not discharged in bankruptcy.
  • Traffic tickets and violations are not discharged in a Chapter 7 under 11 USC 523a7, it "may" be discharged in a Chapter 13 but it will depend on the court's interpretation of the nature of the crime. You will have to determine if under the laws of the State of Hawaii (penal code) whether parking or traffic violations are a "crime," and if they are then they are not dischargeable under a Chapter 13 as well. 
  • Post petition homeowner association fees or dues - you will be responsible for all post petition HOA fees that arise after you file for Chapter 7 bankruptcy until such time that your real property is sold at an auction. Thus only your pre-petition HOA fees may be discharged in bankruptcy. Some foreclosures take more than a year before a home is sold so if you no longer live in your home and can afford to wait, you may want to consider waiting until after your property is sold at auction before you file for a Chapter 7 bankruptcy, especially if your homeowner fees are couple hundred dollars a month. If you are filing a Chapter 13 in the 9th Circuit and surrendering your home, there is a "loophole" and you maybe able to discharge post petition HOA fees, see for more discussion, the following:
  • Property taxes due for the last year prior to filing for bankruptcy (but if you wait till the auction or sale before you file the new buyer or new mortgage company usually pays that off) and naturally post petition property taxes are not discharged if you are still the owner of the property
  • Naturally, all "post-petition" debts (or debts incurred after the date you file your bankruptcy) are not discharged
  • Gambling markers: It can be a felony in Las Vegas to have unpaid gambling markers (it depends on the amount of the marker) and they will pursue criminal prosecution if the debt remains unpaid. Whether you can get rid of this debt, read more at . Other gambling debts where a credit card was used can be problematic. In some cases debtors using credit cards for gambling purposes could not get their Chapter 7 discharge - the courts in those cases found that the debts were incurred by false pretenses and that the debtors did not intend to repay the credit card companies. This is not to say that all credit cards gambling related debts are not dischargeable, as there are other cases where the court held that debtors were able to discharge their credit card gambling debts, but if you have these kinds of debts, it is a dilemna with real risks involved. Courts will look at how much you charged, when you charged it, whether you repaid some of it over time, and in one case the court even considered whether the debtor took a gambling anonymous class to stem his gambling addiction habit.

Can I keep all of my property if I file for Bankruptcy?  It depends. First of all what is property?  Property is anything and everything that you own directly, or indirectly, or property that you have access to, dominion and control over, or have a beneficial interest in.  Even if you didn't buy property, for example if someone gave you an item as a gift, it is still property that must be disclosed. Any property that you stand to inherit within 180 days of filing for a chapter 7 bankruptcy also becomes property of the estate and if not exempted must be turned over to the trustee. If you file a chapter 13 any property inherited during the time you are in your plan is property of the estate, see which provides that under 11 USC 1306 of the Bankruptcy code, property received post petition or after acquired property becomes property of the "bankruptcy estate."
  • You could lose deposits due to your banks "right of offset":  All funds in your sole or joint account at a bank or credit union (including payroll deposits) can be taken by your lender if you default on their loan (it may possibly include a credit card with them too).  Even if you should later file for bankruptcy this "right of offset" that the bank has against your funds will trump any exemption that you try to claim to those deposits.
  • You could be forced to turnover property to the trustee because you failed to value them correctly, or if you failed to disclose them from the start.  You may also be forced to turnover property to the trustee if you fail to value them correctly, or if you failed to disclose them when you first filed your petition in bankruptcy.  In re Peters, United States Bankruptcy Court, N.D. Texas (2011), the debtor filed a Chapter 7 petition and originally valued his personal art pieces in his petition at $2,400, the trustee's appraiser however valued these paintings at $29,000 instead. Because of the debtor's incorrect petition and his false oath at the creditors meeting concerning valuation of the artwork the court denied his bankruptcy discharge. In a recent U.S. Supreme Court case, of Schwab v. Reilly , the debtor had originally valued her commercial kitchen equipment at $10,718, however the trustee found a buyer of the equipment for $17,200. As the debtor still had some exemptions left to keep the property's increased value, she tried to amend her exemptions. The trustee objected and the matter went up on appeals all the way up to the U.S. Supreme Court. The Supreme court agreed with the trustee and the property was ordered to be sold. Bascially the debtor was stuck with the value that she had originally given to her assets when she filed her petition and could not claim an increase to her exemptions.   Especially if you have artwork, inventory, guns, it would serve you best to get appaisals before you file for bankruptcy. The lesson to be learned from this is that you need to  disclose ALL OF YOUR ASSETS, also you must correctly value them before you file your petition. If despite that you are still unsure of a particular asset's value you may want to claim"100 percent fair market value" of the property in question instead of using a "$" or, dollar, amount. 
  • You could be forced to turnover your home if  the value goes up while your Chapter 7 case is still pending.  A word of extreme caution here if you own real estate or for that matter any other significant property that appreciates in value while you are in a Chapter 7 bankruptcy.  You could lose your residence if it appreciates in value while your case is still pending in bankruptcy, even if you exempted it and you received your discharge from the court. Why is this so?   First of all when you claim the federal bankruptcy exemption for your home you are exempting just the "equity", not the property itself.  Also when you file a Chapter 7 your property becomes property of the estate until your case is closed (in a Chapter 13 however you generally don't have that problem since your property vests back to you immediately upon plan confirmation, unless the plan or confirmation order provides otherwise.)  Getting a "discharge" from the court in a Chapter 7 case  is not the same thing as the court "closing" your case and releasing the trustee from his duties, rather these are two totally separate and distinct events. So if your home appreciates in value during the time your case is still pending in a Chapter 7 bankruptcy, the trustee could still seize and sell your residence, pay you the amount you claimed as exempt in your bankruptcy and keep the difference for payment to your creditors. This may not happen to you if you file bankruptcy when home prices are declining  but it could happen if you file for bankruptcy when home prices are increasing.  If you are concerned about this, please consult with your attorney regarding filing a motion for abandonment, another option would be to file a Chapter 13 instead.  For more on this issue, see
Other property that you may be able to keep:  After all of your property is disclosed and if you don't have problems like those listed above, whether you can keep your property will then depend upon the "equity" in the assets and the exemptions that you select. If you have lived in Hawaii for two years, you can claim either (1) Hawaii state exemptions under the applicable Hawaii Revised Statutes, or you can claim the (2) Federal bankruptcy exemptions under 11 USC 522d (click here to see this federal exemption ), but you cannot chose both set of exemptions. If you have not lived in Hawaii for the last two years you cannot claim these exemptions, as it will depend on the state that you previously came from. 

  • Residence in Hawaii (Different rules apply to rental property) - If you or your spouse have and maintain a residence here in Hawaii, what equity can you keep? It depends on your situation as follows:
    • IF YOU ARE SINGLE: If you are single and have a residence in your name alone and if you choose to exempt your property using the "Hawaii state exemption", presently you can keep $20,000* of equity, and this amount increases to $30,000* if you are a head of a family or over age 65; if however you claim the "Federal bankruptcy exemption", then you can keep $22,975* of equity. [*Note: These amounts may change in the future so be sure to update these numbers by checking current statute and applicable laws].
    • IF YOU ARE MARRIED AND BOTH OF YOU OWN THE HOME TOGETHER AND BOTH OF YOU FILE TOGETHER: If you are married AND both spouses are joint and equal owners of their home, then the above exemptions can be "stacked" (doubled up) if both spouses file together.
    • IF YOU ARE MARRIED AND BOTH OF YOU OWN THE HOME AS "TENANTS BY ENTIRETY" BUT ONLY ONE SPOUSE FILES: Under certain situations the Sawada v. Endo/Security Pacific Bank Washington v. Chang, or "Tenancy by Entirety" case law exemption may be available if only one spouse files for bankruptcy - naturally title to the property must say that it is owned by husband and wife as "Tenants by the Entirety". Essentially this is essentially an unlimited "Hawaii state exemption" and is based upon these Hawaii Supreme court cases, however the filing spouse may not get a discharge by the court if the non-filing spouse also has joint debts (not including the mortgage debt) - this is the trap for the unwary. The Trustee's office will require a credit report from the non-filing spouse to prove that there are no joint debts before the filing spouse will get a discharge, this because the bankruptcy estate’s interest in entireties property is in whatever equity is available in the entireties property that can be liquidated for the benefit of the joint creditors of the debtor AND the non-filing spouse. Also check to see that the debtor has lived in Hawaii for the last 2 years or he cannot claim this exemption and naturally that the debtor is still legally married and no divorce proceeding is pending.
    • IF YOU OWN PROPERTY AND IF YOU HAVE A COURT JUDGMENT AGAINST YOU, YOU ABSOLUTELY MUST TELL YOUR ATTORNEY SO THAT HE CAN STRIP THE JUDGEMENT FOR YOU: If you own real or other significant property and there is a perfected or recorded court judgment against your home, to the extent that you can, you should strip off this judgment by filing a separate motion (i.e. Motion to Avoid Judicial Lien) with the court to avoid the judicial lien pursuant to 11 USC 522(f) , if you fail to do so that judgment will survive your bankruptcy and the creditor can go after your home after your case is over, this even though the underlying debt was discharged in your bankruptcy case. So if you have a court judgment against you and fail to let your attorney know, he will not strip off this judgment for you. If your credit reports does not contain court judgments, or if you are not sure if there is a judgment against you, you can go to the Federal and State Court offices (go to both Circuit Court and District Court) to see if there are any judgments against you, if so then you must then check with the Bureau of Conveyances, or any title company in Hawaii to see if these judgments were recorded against your residence. Unfortunately, an IRS tax lien is a "statutory lien" and not a judicial lien, therefore it cannot be stripped off under 11 USC 522(f) in a Chapter 7. This means that even if the tax debt is discharged the IRS could still go after and sell your property that is subject to their federal tax lien after your case is over. See, In re Vermande (Bank N.D. Ind. 1994), and Dewsnup v. Timm, 502 U.S. 410 (1992). In a chapter 13 or a chapter 11, however, it is possible to strip off a federal tax lien if you have no equity in all of your assets or strip down a federal tax lien if you have some equity in your assets. You will need to notify your attorney of the existence of a tax lien in order that he may file the appropriate motion with the court.
    • HAWAIIAN HOMELANDS - Yes, this is an asset that you own and the Bankruptcy Code does not have a special exemption for it (other than the real property exemption if it is your residence), thus the Trustee can seize and sell it, if there exists any non-exempt equity. To determine whether you can keep your residence you will need a qualified appraisal to determine what the fair market value is (usually its more heavily weighted towards the value of the improvements since the land is leased and not owned by the debtor) - thus use an appraiser familiar with valuing Hawaiian Homeland property. You can then determine what the equity is after comparing the appraised value with the outstanding loan balance and your attorney can tell you what is exempt or non-exempt based upon the information that you've obtained.
CHECKLIST - What should you particularly pay attention to when reviewing your bankruptcy petition and schedules BEFORE they are filed with the court:
  • Did you properly disclose all of your present, as well as foreseeable future income?  Wages, tips, cash jobs, lottery winnings, commissions, bonuses, governmental benefits, retirement, pensions, social security,  sale of assets, agreement of sale, unemployment, or disablity benefits workers compensation, military reserve pay, regular dividends, taxable 401k or pension withdrawals, alimony, child support, annuities. Are you getting a big raise, bonus, huge sales commission, or any kind of payout, soon? If so you must disclose that.
  • Did you list all of your assets?  Real estate wherever  located, timeshare interest, 401k, IRAs, TSP's, pensions, deferred compensation, annuities, CD's, stocks, bonds, mutual funds, bank accounts, cars, boats, trailers, firearms,  motorcycles, mopeds,  atv's,  cash value of life insurance, annuities, artwork, collectibles, apparel, furniture, furnishings, tv, stereo equipment and speakers, heirlooms, computers, dvds, cds, game software, game playstations,  tools, jewelry, business inventory and equipment, receivables, prizes, awards of any kind, sporting items, fishing, camping,  exercise equipment, crops, livestock, poultry, farm animals, and even your household pets. Even if you own an asset jointly with others you must disclose and value that partial interest  Did you list assets you may be entitled to receive in the near or foreseeable future? (i.e. tax refunds, inheritances, potential lawsuit recovery, lottery payout). Are you a beneficiary of a trust? If so you must disclose that interest.
  • Did you value all of your assets correctly and can you keep or exempt them? You may not automatically amend your exemptions if bad faith is involved, so do it properly the first time.
  • Did you list ALL of your creditors? You cannot leave any creditor out when filing for bankruptcy.
  • If you recently transferred property recently to an insider or family member for less than fair market value you need to disclose that, if you fail to disclose it, it could lead to bigger problems for you.
  • If you are or were engaged in business and file for bankruptcy you are required to produce adequate books and records or your case can be dismissed
How do I know if I should file a Chapter 7 or a Chapter 13?   This is actually a difficult question and it takes an experienced attorney to go over the various options with you depending on the facts of your case.  Even if you passed the median income and means test, there are certain situations where you would probably be filing a Chapter 13 bankruptcy instead of a Chapter 7.  Here are just a few of these examples: You own a home with significant equity, or you have other assets  that you cannot fully exempt because of their values, if you file a Chapter 7 the trustee will sell your home and your other non-exempt assets, so to prevent this from happening you would have to file a Chapter 13 instead. Your parents helped to co-sign a loan for you years ago and they are now retired and own a home. You want to protect them from being sued and losing their home, to prevent this from happening you would not file a Chapter 7 but you would file a Chapter 13 instead.  You are not current on your mortgage payments but you want to save your home from foreclosure, a Chapter 7 does not cure the delinquent mortgage payments, but a Chapter 13 can.  Your home has two mortgages and the second mortgage is "completely underwater," you cannot strip off that second mortgage if you file a Chapter 7 but you can if you file a Chapter 13. The IRS filed a tax lien against your home and you want to get rid of that tax lien, filing a Chapter 7 may get rid of the tax if it is a non priority tax, but it will not extinguish the tax lien for you, but filing a Chapter 13 can.  You have credit card debts and priority tax debts, filing a Chapter 7 would only get rid of the credit card debts not the priority taxes, however filing a Chapter 13 allows you to get rid of both credit card debts and pay off your priority taxes through your plan. 

Benefits of Filing a Chapter 13 Explained: Chapter 13 allows you to pay something back to your creditors over a period of time usually 3,4 or 5 years. Even if you pass the median income or means test and qualify for a Chapter 7, you may still want to file a Chapter 13 because of the following benefits that a Chapter 7 does not offer:

1. STOP FORECLOSURE AND SAVE YOUR RESIDENCE: As discussed above you can save your residence from foreclosure by filing a Chapter 13, essentially the bankruptcy law allows you to stretch out the delinquent balance that you over the term of your plan. For example, you are behind on your mortgage payments for 6 months with a delinquent balance due of $12,000, you will have up to 60 months in a Chapter 13 to pay back this $12,000. You must however continue to make the regular mortgage payments after you file your bankruptcy.

2. IN HAWAII (9TH CIRCUIT) YOU MAY BE ABLE TO STRIP OFF OR GET RID OF YOUR SECOND MORTGAGE, OR HOME EQUITY LOAN.  : If you have a second mortgage or home equity loan that is "under water", or not secured by equity in your residence, you can also "strip off" (but not "strip down") this second mortgage by having your attorney filing a Motion to Value Collateral under 11 USC 506 with the court seeking to strip off this second mortgage. For example your home is valued at $300,000 and you have two mortgages. The balance on the first mortgage is $325,000, and the balance on the second mortgage is $50,000. Since the second mortgage is completely "under water", your Chapter 13 plan can provide for the stripping off of this second mortgage, and the lender will receive whatever the other unsecured creditors will receive under your plan, so when you complete all of your required plan payments and get your discharge, you will no longer have a second mortgage to pay on your home. The case that allows you to do this in Hawaii (which is in the 9th Circuit) is In re Zimmer (9th Cir. 2002) 313 F.3d 1220, 1222. Thus if you live in another state you may or may not be able to strip off a second mortgage, as it would depend upon court rulings in your state (this is another example of how different states have differeing decisions on the same issue and why it is so important that you retain a bankrutpcy attorney in your state when you file). If the second mortgage is partially secured (not completely under water) then you cannot strip it. If you file for Chapter 7 you cannot strip off a junior lien, said the U.S. Supreme Court in the Nobelman v. American Savings Bank case.
  • Totally different rules apply to investment real estate. Not only can you "strip off" a second mortgage that is totally underwater like you can for your residence, but you can also "strip down" your second mortgage even if it is only partially underwater. In addition, you could even "strip down" a FIRST mortgage too, if that loan is partially underwater to the value of the collateral, this would allow you to reduce your mortgage payments if the property is worth less than the mortgage balance since the secured portion would now be limited to the fair market value of the property and not the entire loan balance. The loan balance that exceeds the fair market value of the real estate would be treated as an unsecured claim and could be paid back at pennies on the dollar. How is this possible when it comes to investment real property? Well, Section 506 of the Bankruptcy Code provides that a lien is only secured to the extent there is value in the asset to which it attaches. If a claim exceeds the value of the collateral, that portion of the claim is considered unsecured. As a result, in a Chapter 13, even voluntary liens like mortgages and trust deeds can be stripped down to the value of the collateral as it concerns investment real property (not your residence or home unfortunately). Why is this provision not available to your residence or home? Well, the present bankruptcy code prohibits the stripping of liens that are “secured only by a security interest in real property that is the debtor’s principal residence” 11 U.S.C. 1322 (b) (2). The effect of this is to eliminate a "lien strip down" on residential real property that is the principal residence of the debtor, so unless Congress changes the law in the future, it is what it is for now. Whether you may keep investment real property while filing for bankrupcy is another issue. If it is your primary source of income that you rely upon to meet your daily living expenses, there are cases that have allowed certain debtors to keep the property, if however, you have negative cash flow there are cases that say you may not keep the property because it would be at the expense of paying your other creditors. Once again your attorney should be able to give you some guidance on this based upon case law precedent in your jurisdiction.
3. YOU CAN REDUCE YOUR AUTOMOBILE LOAN PAYMENT BY LOWERING THE INTEREST, STRETCHING OUT PAYMENTS OVER TIME AND STRIPPING DOWN THE LIEN (EVEN APPLIES TO STRIPPING OFF CROSS COLLATERAL LOANS): You can also stretch out your automobile loans over the length of your plan, as well as lower your interest payments to the "till rate", this could result in lowered monthly auto payments for you. If your purchase money auto loan was taken out more than 910 days ago, you could also strip down your auto loan to the current value of your car (as well as get rid of cross collateralized loans), this could also result in a lowered loan balance for you.  For example if your car is worth $6,000 but your "910" auto loan balance is $11,000, you need only pay $6,000, plus "till rate interest" as determined by the court to keep your car under a Chapter 13 plan.  If the loan was not a "purchase money loan," but say a loan taken out on an auto that was fully paid for, but then later pledged as security for a loan then the 910 day rule does not apply in the 9th circuit, see the Quevedo case at .     Stripping an auto loan down to the value of the collateral however requires that your attorney file a separate motion with the court (i.e. Motion To Value Collateral under 11 USC 506) and if you use a value that is less than retail value here in Hawaii, expect an objection and possible trial on the matter from the secured creditor. The litigation in this area is in determining the "replacement value" of your car under 11 USC 506a2. Unfortunately the bankruptcy code did not say whether you can use retail value, private party value or wholesale value and therein lies the problem. In the 9th circuit, the court's starting point for valuation is the "retail value" of the car, and from there the value can be reduced depending upon the condition of the vehicle, but you would need reliable repair estimates from third parties, or hire an expert to testify on your behalf if you seek to reduce your car's retail value, see$FILE/MOD_Morales_Searchable.pdf. For example deductions for windshield repair of $250, interior stain removal of $125, body paintwork of $475, inspection and fluid charge of $450, and detail work of $125, was allowed in re Cook, see . From a practical standpoint however it may not be econonomically feasible to go to trial on this issue, especially when factoring in added attorney's fees for trial and expert witness fees.

ONE YEAR RULE FOR OTHER PROPERTY:  For purchase money loans for other personal property (non-automobile), like furniture for example, Section 1325a has a one year "waiting period" before a cram down of the purchase money loan can be pursued.

4. YOU CAN KEEP CERTAIN NON-EXEMPT PROPERTY: You can keep non-exempt property under Chapter 13 if you can pay to the Trustee the "non-exempt" portion during the lifetime of your plan, whereas in a chapter 7 you would have to surrender the non-exempt property to the trustee. Debtors can do some exemption planning prior to filing bankruptcy, however if it is done to hinder, delay or defraud your creditors then it would be a bad faith filing and you may not receive your discharge from the court. Thus exemption planning does have its limitations and should not be done without a proper recognition of the potential negative consequences.
5. CO-SIGNER PROTECTION: If you file for bankruptcy and another person co-signed the credit card or loan for you, their credit rating would also be affected and the creditor could go after them for the balance if you file for Chapter 7 and discharge that debt, if however you file for Chapter 13 and pay off that loan under your Plan, then the creditor cannot go after that person while you are in bankruptcy, this is called the "co-debtor stay" (their credit however will still be affected due to your default). NOTE: Some aggressive trustees take the position that payments that the debtor makes within 90 days could be a preferential transfer to the co-signer.

6. ZERO INTEREST ON CREDIT CARDS: You do not pay interest on your unsecured credit cards in a Chapter 13. So each dollar paid under your plan towards those creditors will reduce your outstanding balance "dollar for dollar", when you think about it, its like getting an interest free loan to help to pay off or down your credit cards.

Assuming that you don't have any of the other issues described under "Benefits of Filing Chapter 13 Explained," whether you will ultimately be filing a Chapter 7 or a Chapter 13 will depend on whether you pass the median income test, the means test and the Schedule I and J test. If you  file for a Chapter 13 the length of your plan will depend on the facts of your case.  Basically if you fail the means test your plan must now be for 5 years, if you pass it, you can  file a Chapter 7, but  you also pass the Schedules I and J test here in Hawaii. If you fail the I and J test (for example you have significant disposable income) you may have to file a Chapter 13 (i.e. 3 or 4 years, not the mandatory 5 years unless you want to go that route). The flow chart below summarizes your banrkutpcy options.


(1) Take the median income test, if you pass then you don't have to take the means test---> Take the Schedule I and J Test (ideally, deductions from payroll should not have voluntary pension contributions or repayment of loans taken out against your 401k, TSP or retirement accounts + all living expenses must be basic, reasonable, necessary + You have done some belt tightening and there is no ability to pay your creditors, if you pass ---> There is no bad faith, abuse or other issues that would affect your request for a discharge + You valued all of your assets correctly + Can you exempt or keep all of your assets? ---> You may file a Chapter 7 if you don't need any of the benefits that a Chapter 13 offers. If you still want to file a Chapter 13, it can be for 3 years since you passed the median income test (some debtors would file a longer plan if the facts of their case dictates otherwise).

(2) Take the median income test, if fail --->You must propose a 5 year plan under chapter 13.
There is an exception to this, if you can pay your creditors off 100% of their claims earlier than 5 years, then you plan duration can be shortened. If you fail the median income test, you must also do the means test, if you end up with a positive disposable monthly income amount that falls within the "built in statutory exceptions to the means test" discussed below, then you could still be able to file a  Chapter 7. 

Determining how much you must pay under a Chapter 13:  The Chapter 13 DMI that is calculated on Official court form 22C or means test would generally be the minimum amount or starting point that you must pay in under your Chapter 13 plan.   11 USC Section 1325 of the Bankruptcy Code provides that child support benefits, disability and foster care payments for a dependent child to the extent reasonably necessary is not "disposable income".

Median Income Test: Under the bankruptcy code, your last six months paystubs (as well as other sources of income - explained later) are used to determine an income average which is then used to determine whether you pass or fail the first test which is called the "median income test".  This six month period for calculation purposes ends on the last day of the month directly preceding your bankruptcy filing. So if you file your petition on December 10, you will average your income for the months of June, July, August, September, October and November. This first test is based upon your family size and income. If within this six month period you have received a tax refund, or a year end bonus under  the bankruptcy code you would also have to include your these amounts as income if there is a realistic prospect of receiving similar future refunds or bonuses in the future.  In re Durczynski 405 B.R. 880 (Bankr. N.D. Ohio 2009 - where the court also looked at past refunds to determine prospects of receiving future refunds).  You might be able to assert a pro rated approach and spread the refund or bonus out over  a 12 month period assuming that you worked in the preceding 12 months. If you happened to file your bankruptcy more than six months after receiving your tax refund or yearly bonus, you do not have to include these amounts in your calculations. Other types of income that must be included in the calculation include earned income credits, net rental income, retirement income (but not social security, see below), alimony or child support, funds that you regularly receive from others for your living expenses (this includes money from your spouse if you don't file bankruptcy jointly), insurance payments and reimbursements from health and accident insurance plans, compensation for injury or illness, inheritance and gifts, scholarships and educational benefits, parthership income, net income from business deals and asset sales, prizes and awards. Although there is a split in the circuits on this issue, the U.S. Trustee's office has taken the position that unemployment income is not a "social security benefit" and therefore must be reported as income under the median income test.  Income that is excluded from the median income test would be social security, social security disability, food stamps and other "social security act related benefits," see 11 USC 101, paragraph 10Ab.

The Means Test: In the past (but apparently no longer) if you failed the median income test,  you would have still have been able to file a Chapter 7, or propose less than a 5 year plan, but you would have to pass the second more daunting and complicated "means test."  After a recent court case in the 9th circuit however, this appears to have all changed. Debtors who fail the median income test must now commit to a 5 year chapter 13 plan, unless he or she can pay off his creditors 100 percent, in less time. CHANGE IN THE LAW. On August 29, 2013, the Ninth Circuit issued an en banc opinion in the case of In re Flores, holding that above-median income Chapter 13 debtors only qualify for five-year plans, even if the Means Test shows a negative disposable income. This decision effectively overturned In re Kagenveama (541 F.3d 868, 9th Cir., 2008), which had held that three-year plans were permissible in such cases.

 A lot of the litigation today focuses on this means test. It should be noted that in June of 2010, the U.S. Supreme Court in Hamilton v. Lanning said that the "six month average" used in the means test can sometimes be too mechanical and the courts should therefore take into account a "forward looking approach" and consider certain income to be earned in the future of the debtor. In this case the prior six month average was higher than the debtor's present income from a new lower paying job, this because there was a onetime payment or a buyout from her former employer that was included during the preceding six month period. This was not an invalidation of the means test but can be used only in limited cases. No one said bankruptcy under the new law was easy, I consider it to be one of the more difficult and challenging areas of the law due to the dynamics involved and the constantly changing and sometime contradicting court decisions from state to state. To view a copy of the form for the means test, click Unless you are an experienced attorney familiar with the myriad means testing issues, it is extremely difficult to complete it on your own properly.

 In certain situations even if you have a positive DMI or number after you conduct the means test you could still file a Chapter 7. I shall refer to this as "built in statutory exceptions to the means test." For example, if you have less than $124.58* of disposable monthly income or if you cannot pay more than $7,475 under a 60 month plan, then you pass the means test and can file a Chapter 7. If you have between $124.58 and $207.91 of "disposable monthly income" then you have two options: If you can pay off more than 25% of your total unsecured debt over 5 years then you fail the means test and you must file a 5 year Chapter 13 plan. If you cannot pay off more than 25% of your total unsecured debt over 5 years then you pass the means test and you can file a Chapter 7. If you have $207.91* of "disposable monthly income" or more, or if you can pay $12,475 under a 60 month plan, then you fail the means test and you must file a 5 year Chapter 13 plan. *these amounts may change from time to time so please refer to most current version of 11 U.S.C. § 707(b)(2)(A)(i). Arriving at the final number under the means test is not a simple task, for example under the means test, social security is not considered income, however in Schedule I you must list it down as income. Theoretically, you could pass the means test but if Schedules I and J shows disposable net monthly income because of your social security income, the Trustee's office would challenge your request for a Chapter 7 discharge forcing you to convert to a Chapter 13 repayment plan instead. See in re Booker (which was a Missouri case).

Exception to the Means Test: If a majority of your debts are "business debts" and not "consumer debts," then you are exempt from taking the means test and could file a Chapter 7 instead,. See . In a recent 2011 case, the 9th circuit ruled that income taxes are not "consumer debts", see   If you are a high income debtor with primarily business debts,  one bankruptcy court in Michigan held that having excess disposable income was enough to dismiss the Chapter 7 case for cause, see, effectively telling the debtor to pay something back to his creditors instead. 

What happens if only one spouse files? If reading this blog seems a bit complicated or slightly overwhelming, the means test becomes a more complicated when only one spouse files bankruptcy and you are dealing with marital adjustment issues (i.e your spouse has separate expenses). If you want to read more about it, please read my other article at:

Schedule I and J Test:  If you pass the median income test then you could file for a Chapter 7, but in the 9th circuit you must also pass the "Schedule I and J" test before you can get your discharge (even if you pass the means test you must pass this test as well).  Under Schedule I you report all of your income and all of your payroll deductions.  Under Schedule J you report all of your family's living expenses, however the deductions from payroll must be "allowable" and your living expenses that you claim must be "reasonable and necessary" and not inflated or excessive (i.e. they should be for basic services and in line with other families typically spend for such services), if they do not past muster with the trustee's office, your request for a Chapter 7 could be denied and you may have to file a Chapter 13 before you will receive your discharge. The Bankruptcy code and case law determines what payroll deductions under Schedule I are "allowable".

RECENT COURT RULING IN THE 9TH CIRCUIT. An above median income debtor in a Chapter 13 case, in re Parks 475 BR 703 (9th cir BAP 2012), deducted 401k voluntary contributions on Form B22C (means test) and on Schedule I of $318 per month. The trustee objected and said those amounts should be committed to plan payments instead. The appeals court agreed with the trustee. It noted that although section 541(b)(7)(A) excludes retirement account contributions from the bankruptcy estate, and excludes such contributions from section 1325′s definition of disposable income, the exclusion only applies to funds already contributed to the retirement account on the date of the filing of the chapter 13 case. Thus, ongoing retirement account contributions were not within the scope of section 541(b)(7)(A) and were forbidden. Park therefore stands for the proposition that an above median income debtor cannot continue payroll deductions for a voluntary retirement account, such as contributing to a 401(k) during a chapter 13, but the Court also ruled that 401(k) loan repayments could, continue during a chapter 13 plan, this based upon section 1322f which specifically allows for retirement loan repayments during a chapter 13. This decision was limited by In re Bruce (Bankr. Wash. Dec. 11, 2012) a below median income debtor Chapter 13 case.  In Schedule I the debtor deducted 401k contributions and loans. The trustee objected to the contributions (but not to the loans, except that the parties agreed once the loans were paid off, the amounts 'saved' by not having any more loan payments had to be committed by the debtor to the plan)  stating that it was disposable income committed and should be committed to repaying the unsecured creditors under his Chapter 13 plan. The Court considered the debtor's age, balance in his 401k, other sources of retirement, and concluded that the proposed 401(k) contributions in the Bruce plan were permissible. "First, Bruce is a below median debtor. Whether Bruce’s expenses are reasonably necessary under § 1325(b)(2) is a factual determination for the Court. The 401(k) contributions in this case are reasonably necessary for the maintenance and support of the debtor and his dependents" said the court. The court distinguished itself from the decision in the Park case because that case dealt with an above median debtor. "In calculating whether expenses are reasonably necessary for the debtor and the debtor’s dependents under 11 U.S.C. § 1325(b)(2), above-median debtors are limited to expenses determined “in accordance with subparagraphs (A) and (B) of section 707(b)(2).” 11 U.S.C. § 1325(b)(3). Section 707(b)(2) is the so-called “means test.” “When it introduced the means test, Congress provided, by reference to the IRS guidelines, specific guidance as to what qualifies as a necessary expense for the purposes of applying the test.” Parks at 709 (citing Egebjerg v. Anderson, 574 F.3d 1045, 1052 (9th Cir. 2009) ). Voluntary contributions to a 401(k) plan are not necessary expenses under the means test. Id. By contrast, the current monthly income of Mr. Bruce and his spouse is below median. Therefore, the § 707(b)(2) means test and the IRS guidelines are not incorporated into the determination of “reasonably necessary” expenses for purposes of determining disposable income under § 1325(b)(2). Rather, the test applicable to below median debtors under §1325(b)(2)(A)(i) is the same as applied to all debtors before passage of BAPCPA. [2] It is a factual determination for a trial court. Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 4th Ed., § 165.1 at ¶ 1, Sec. Rev. 6/14/04, the majority of cases addressing whether voluntary contributions to a retirement account are “reasonably necessary” expenses hold they are not reasonable, Lundin and Brown, supra at § 165 ¶ 38, under certain circumstances, courts have allowed the deduction of contributions from disposable income. In re Fields, 190 B.R. 16, 18-19 (Bankr. D. N. H. 1995)."

What does this all mean for Chapter 13 debtors?  Voluntary contributions to a pension plan is definitely not allowed for above median income debtors, but for below median income debtors in a chapter 13 case, the door is not completely closed, rather these contributions will be evaluated on a case by case basis by the trustee's office and so long as it is 'reasonably necessary' under section 1325b2, then it may be allowed and there is case precedent for it as well.  The trustee will look to the debtor's individual circumstances (i.e his age, balance in retirement account, other sources of retirement income, etc.) before deciding to file a motion objecting to the plan or not. For more, see TSP or 401k loan repayments are allowed expenses to above median debtors and since the trustee in the below median income Bruce case did not object to such expenses, one could logically make the argument that it also applies to below median income debtors in a Chapter 13, and rightfully so, see 11 USC 1322f which allows loan repayments to be left alone in a Chapter 13 plan.

Chapter 7: Retirement Loan Repayments. In a Chapter 7 case  (see In re William George Tauter, U.S.B.Ct. Florida 2009 ) the court did not allow 401k loan repayments and contributions as a deduction for the Chapter 7 debtor. This case however was distinguished in a subsequent Florida case, in  re Eartha Evelyn Norwood-Hill (U.S.Bankruptcy Court, Florida. March 19, 2009) in that case the above median income debtor filed for Chapter 7 and in her means test on Form 22A, she listed  $477 per month in 401k contributions and 401k loan repayments, and another $108 in U.S. savings bonds contributions as expenses. The trustee objected on the grounds that she could repay her creditors at least $585 a month if she did not make these contributions, the court noted that these expenses would be allowable in a Chapter 13 and therefore denied the motion to dismiss stating that the trustee failed to meets its burden of proving that the totality of circumstances of the debtor's financial situation constitutes "abuse" under 707b3.

In a below median income case, the debtor deducted expenses for TSP voluntary contributions and TSP loan repayments in his Chapter 7 case and the trustee filed a motion to dismiss. Although the court granted the motion on other grounds, the court  stated that it made no sense to consider the contributions and loan repayments as 'disposable income' when they would be allowed in a chapter 13 filing. The court also considered relevant whether unsecured would in reality get anything if the debtor converted her case to a 13. See also the Ean J. Lavin, a Florida debtor contributed approximately $1,100 a month to his 401k, he filed a Chapter 7 and the trustee filed a motion to dismiss for abuse under the totality circumstance test under section 707b3. In deciding against the trustee, the court said the debtor's creditors may not receive a meaningful distribution if this case was converted to Chapter 13. With the addition of Sections 541(b)(7) and 1322(f), Congress has placed retirement plans, including contributions to a 401k account, outside the realm of a Chapter 13 plan....such contributions do not constitute disposable income under 1325b2...Because the 401k contributions form the only basis of the debtor’s ability to repay creditors, and because the contributions would not be included as disposable income in a Chapter 13, the debtor would not have the ability to pay a substantial amount to creditors in a Chapter 13 plan." Although not stated in the decision, it appears the debtor was a below median income debtor because prior to filing bankruptcy he was unemployed for around 4 months, and just shortly after filing for bankruptcy he found a new job which paid him $70,000 a year, which is when he began funding his 401k.

WHAT DOES THIS MEAN?  In Hawaii, if you wish to file a Chapter 7 and have TSP or 401k loan payments (or even TSP or 401k contributions), the outcome may depend on whether you pass or fail the means test. If you fail the means test, loan repayments to a 401k canot be deducted under the means test to help you qualify for a Chapter 7, see In re Egebjert (9th Cir. 2009), this also applies to voluntary contributions to a retirement account.  If you pass the means test however you have a better chance of deducting these amounts, although the amounts being repaid or contributed towards your retirement account may still be subject to a challenge by the U.S. Trustee's office as being disposable income available to general unsecured creditors. One of the factors considered is how much of the debtor's pay is being contributed to his or her 401k (generally 5% should withstand a challenge by the Trustee). It does appear clear however that those that pass the median income test and are on a constrained budgets to begin with would have a better chance of prevailing should the trustee file a motion to dismiss, especially if the amounts being contributed or repaid as loans are allowed in a Chapter 13 for under median income debtors and there is nothing left to pay the unsecured creditors. There may be a factual determination into the debtor's budget, in inquiry when the loan was taken out and what the proceeds were used for (special circumstances may apply for example if the loan was taken out for medical emergency for example), whether the debtor who is on a shoe string budget and is sacrificing a necessity such as food to make a TSP loan repayment or contribution may stand a better chance of withstanding an objection versus another debtor whose budget is not as constrained and whose car payments are higher than normal). For more about defending against motions to dismiss filed under 707b2 (presumption of abuse) or b3 (bad faith or totality of circumstance) see  Under 707b2 the burden of persuasion shifts to the debtor to prove "special circumstance" to rebut the presumption of abuse. Under 707b3, the U.S. Trustee has the burden of proving abuse under the "totality of circumstance" test, see The chilling factor is that you could be liable for attorney's incurred by the Trustee's office if you lose under a motion to dismiss or to convert filed under 707b.  Under both Chapter 7 and Chapter 13, you can deduct payroll taxes, union dues, medical insurance, term life insurance if you have a spouse or dependents, union dues, court ordered child support, etc.

As far as basic living expenses are concerned, you are allowed Schedule J  expenses for reasonable housing, utilities, transportation, clothing, food, toiletries, sundries, grooming, misc cleaning, household and pest control expenses, laundry, out of pocket medical, dental, prescription and co-payments, security monitoring and alarm fees for your family's protection, baby sitting fees if it allows both parents to work, family pet expenses, support of others not living in your household but whom depend upon you for financial basic and necessary support, court ordered child support (if it does not include private school tuition), or alimony, unreimbursed work related expenses necessary to maintain your job, education costs for yourself if required to maintain your present position or to retain your license to continue in your profession, and if you have children (school books, school supplies,  A plus, school bus fare).

Religions tithing and contributions are allowed expenses.  Thanks to BAPCPA your contributions are allowed as a deduction both under the means test and also on Schedule J. There is a limit however and you should be prepared to provide proof of your contributions either by way of cancelled checks or a ledger from your house of worship's treasurer documentating your tithing or religious contributions. Therefore if you contribute to religious organizations, you should write a check to document your charitable giving expenses.

Are visitation travel related expenses allowed on Schedule J: If you are divorced and you have minor children living on the mainland and you want to see them can you factor in transportation or air fare costs as part of your budget? Generally speaking, costs related to purely recreational vacations or trips are not allowed as an expense, however this issue has a twist to it because it has to do with custodial visitation rights of a divorced person. I haven't had a case with this issue yet, but an argument can be made that it is vital that visitation related travel costs be allowed for the general good, health, and welfare of children and of the parent, Although this issue was not specfically decided upon in a case that I found, the bankruptcy court recognized the life changing and career related sacrifices that the debtor father made just to be close to his twin minor children when their mother moved them from state to state apparently in an attempt to prevent the father from seeing his own children. The court emphasized the importance and need that the debtor father see his children, implying then that any resulting travel costs related thereto would probably have been allowed, see  The court stated that it is simply not prepared to find in BAPCPA, or former section 707b1, congressional intent to penalize a debtor motivated by concern for his children.

Court cases routinely hold that Schedule J expenses cannot be lavish or excessive. Why is this so?  Keep in mind the trustee is concerned whether you have made your best faith effort to contribute all of your disposable income towards paying your unsecured creditors, and the lower your Schedule J expenses are,  the more money you have that is available to pay to your creditors. This explains why the expenses that you claim on your Schedule J must be reasonable, necessary and not excessive or lavish.  The following are not hard and fast rules as your individual situation may vary, however examples of  expenses that have generally been disallowed by the court include high discretionary spending and entertainment expenses, second home or vacation home mortgage payments, time share payments, recreational vehicle, boat, ATV, or recreational motorcycle payments, two auto loan payments when there is only one driver in the household, excessive rent or house payments, car payments on luxury vehicles (i.e. Mercedes, Lexus, etc.),  private school or public university tuition for your adult children over 18 years of age (tuition for yourself is generally not allowable unless it is required for your occupation or to maintain your license), and even delivery bottled water service.  In a 2009 bankruptcy case the debtor and his wife claimed as part of their budget the following expenses for a family of four (they had two children): $150 a month for telephone, $250 a month for cable/internet and $180 month for cellphone, the court found it to be excessive as it was more than the basic level of service necessary for a family their size, in other words some belt tightening was in order said the court.  For this case see: .  Courts have  dismissed cases where debtors chose to live in upscale neighborhoods and drive luxury vehicles rather than repay their debts.  In re Roppo  the debtors were renting a spacious luxury home and drove two luxury automobile payments, one was a Lincoln Aviator and the other was a Mercedes (the Lincoln auto loan had been acquired some 3-4 years before bankruptcy and the Mercedes auto loan had been acquired close to a year and a half before bankruptcy was filed). The court said the debtors choice of housing and cars exceeded what is reasonably necessary to live in modest and thrifty ways and as the debtors chose not to do any "belt tightening" their request for a Chapter 7 was denied.  In essence then, what the court said was that the debtors would have to find more basic housing accomodations and that either one or both of the cars had to go and that the debtors would  have to file a Chapter 13 and pay back their creditors if they wanted a discharge.  In another case the court held that the debtor's expenses for his live-in fiance/girlfriend's Acura auto loan and operating expenses were not necessary and not reasonable. In re Aprea 368 B.R. 558 ( Bankr. Court E.D. Texas 2007). In other words just because you pay for an expense does not mean that it will be allowed by the court, what matters is whether your expenses are reasonable and necessary and whether you have done some "belt tightening" on your own prior to filing for bankruptcy.  So if you want to claim Schedule J expenses of $250 a month for dog grooming, $100 a month for private fitness or health spa, $200 for pool cleaning, $300 for landscaping, $150 for timeshare payments, $600 a month for a Mercedes lease, $400 a month for entertainment, and $1,300 a month for your child's private school tuition (that is not for special needs) then you should think twice before filing for bankruptcy as some very serious belt tightening would definitely be in order.

RECENT CASE in the 9th circuit: A surprising result in a California bankruptcy case: an $800,000 house with a monthly payment of $4,446, a motor home with a monthly payment of $396, and a boat with a monthly payment of $760 actually enabled a married couple to successfully file chapter 7. The court in In re Jensen, 2009 WL 1708229 (Bky.C.D.Cal. April 28, 2009), held that the monthly payments on these large secured debts were allowed, thereby consuming that part of the debtors’ income which, in the U.S. Trustee’s opinion, should have been used to force them into a chapter 13 repayment plan. The court noted that the means test (section 707(b)(2)) allowed the debtors to include the monthly debt payments for any secured debts, even expensive houses, motor homes or boats. When the U.S. Trustee argued that under the totality of the debtors’ circumstances (section 707(b)(3)), they should quit paying for these unnecessary debts, the court rejected that reasoning. Although the debtors would have had significant disposable income with which to fund a chapter 13 plan if they were to quit paying for the house, motor home and boat, to require that they do so would contravene section 707(b)(2)’s allowance of those expenditures.

Even if you pass the median income, the means test and the Schedules I and J test, obtaining your discharge is never automatic.  Honesty of purpose and fair dealing is essential whenever you file for bankruptcy. For example if you scheme to quit a job just so that you qualify and pass the median income test, that is a bad faith filing and your case would be subject to a motion to dismiss by the trustee's office. In re James, 345 BR 664 (Bankr. N.D. Iowa 2006), the court granted the Trustee's 707(b)(3) motion to dismiss for abuse where the debtor spent $13,000 of salary bonus on gifts, a new dog kennel, a gun, bowling ball, snow blower, washer and dryer and took a trip to watch a football game, all of this in the six months prior to filing bankruptcy, rather than use any of the bonus money towards paying down any of his debts that totalled $24,000. If the debtor thought he was doing some exemption planning it surely backfired in his face. The court found that the debtor was "recklessly wastefuly" and said bad faith existed since the debtor had motives that lacked honesty of purpose or fair dealing. For more information about cases being dismissed for bad faith, totality of cirumstance or for cause, you may read pages 262 - 279:
Other factors that lead to case dismissals are:
  • You have engaged in a creative or elaborate scheme to conceal assets
  • Your petition was filed in bad faith (i.e. it is misleading, not truthful, inaccurate, and contains false information, or you did not list all of your debts). In re Harris WL 1732924 (1st Cir BAP 2008), the debtor listed her large debts but not her small ones (thinking she could preserve her credit by keeping those cards outside of bankruptcy) the court dismissed her case under 11 USC 727a4. Debtors who voluntarily quit their job then file for bankruptcy (or retire early) may face challenges by the Trustee's office for "bad faith" filing.
  • There is egregious behavior or misconduct on your part
  • Your testimony is deceptive and/or misleading and you failed to cooperate with the trustee
  • You lived on credit beyond your means or you are presently indulged in a lifestyle in excess of a reasonable standard of living
  • If you bought a new car and obtained a new loan prior to filing for bankruptcy, the Trustee may dismiss your case as abusive, the rationale being that if you did not have that new loan or debt then you would have had extra funds to pay something back your creditors. This is not a hard and fast rule, however, as there may be a justifiable reason why you needed a new car, such as your other car was totalled in an accident, or there was a recent birth of a twins and your former two seater convertible was not safe and practical for your family needs. (For more, see 11 U.S.C 727 and 707 that discusses how a case can be dismissed on various grounds).
Credit Card Abuse?  If you have abused your credit cards the trustee could move to dismiss your case either as a bad faith filing, or under the totality of circumstance test, see 11 USC 707b3.  If however you are only guilty of poor financial management then that would not be abuse, unfortunately there is a fine line between the two and it is difficult at times to distinguish between them.  Generally, however the courts will get involved only if there is some sort of bad faith or abuse present in your case. If you suddenly had to file for bankruptcy because there was a sudden and unexpected termination of employment, divorce, casualty, death, or other exigent circumstance, then that may not be abuse. See, where the court considered a change in employment status as a relevant intervening factor that should have been considered by the lower court in determining whether there was abuse.  Some of the factors that courts look for in determining credit card abuse, are:
  • Credit card "bust outs"; Credit card "kiting"
  • Purchase of non-essential goods or services (i.e. entertainment, luxury items, trips, gifts, high fashion, jewelry, gambling, electronics, cash advances)
  •  Employment status at time of use; Salary or income at the time of charges; Intervening events
  • Amounts charged or borrowed
  • Repayment history
  • Time between filing bankruptcy and credit card use
Credit Card Kiting: In Citibank v. Amjad Eashi, the debtor was injured and lost his job, thereafter his only source of income was disability payments of $1,200 a month. His living expenses were about $3,300 a month. While receiving disability and not bringing in enough money to pay for his basic living expenses, the debtor took out cash advances from his Citibank card to supplement his living expenses and to make minimum monthly payments on other cards. He also used the Citibank card to take a trip, gambling and bought $10,000 of gold bars which he claimed to have sold at a loss for $6,000. When he filed bankruptcy, he had 26 credit cards and his balance was over $100,000, just the minimum monthly payments on all of his cards totalled $2,000 a month, more than the disability payments he was receiving, not including his basic living expenses. The court found that he had employed a fraudulent scheme of credit card kiting and as a result his debt to Citibank was not discharged, see The Bankruptcy Appellate Panel for the Ninth Circuit set out twelve nonexclusive factors to be considered in determining the debtor's intent not to pay its creditors, see  These factors are:

1.   The length of time between the charges made and the filing of bankruptcy;
2.   Whether or not an attorney has been consulted concerning the filing of bankruptcy before the charges were made;
3.   The number of charges made;
4.   The amount of the charges;
5.   The financial condition of the debtor at the time the charges are made;
6.   Whether the charges were above the credit limit of the account;
7.   Whether the debtor made multiple charges on the same day;
8.   Whether or not the debtor was employed;
9.   The debtor's prospects for employment;
10.  Financial sophistication of the debtor;
11.  Whether there was a sudden change in the debtor's buying habits;  and
12.  Whether the purchases were made for luxuries or necessities.

Inability to pay your debts because of your income, without more may not be actual fraud, if so then all debtors would be guilty of it.  In re Bashir Anastas v. American Savings Bank, the debtor's take home pay was $3,500 and his living expenses were about the same amount, leaving nothing extra with which to make payments on his credit cards.  The bankruptcy court dismissed his case on the grounds of fraud, stating that the debtor had no intention of paying back his creditors at the time the charges arose.  Apparently the court considered the fact that the debtor did not have sufficient monthly income to pay the minimum on all of his cards. The court on appeal disagreed with the lower bankruptcy court's ruling and stated,  "the focus should not be on whether the debtor was hopelessly insolvent at the time he made the credit card charges.   A person on the verge of bankruptcy may have been brought to that point by a series of unwise financial choices, such as spending beyond his means, and if ability to repay were the focus of the fraud inquiry, too often would there be an unfounded judgment of non-dischargeability of credit card debt.   Rather, the express focus must be solely on whether the debtor maliciously and in bad faith incurred credit card debt with the intention of petitioning for bankruptcy and avoiding the debt".  See,

The U.S. Trustee's office investigates high credit card debt cases (relative to your income). High credit card debt cases relative to your income invites particularly close scrutiny by the United States Trustee's office.  Quite naturally they look for evidence of bad faith, fraud or abuse in high credit card debt cases.  In re Motaharnia, 215 B. R. 63 (Bank. C.D. Cal 1997) factors that the U.S. Trustee's office will look for in  high credit card debt cases are  (1) whether the overwhelming percentage of your unsecured debt is due to credit cards; (2) whether you used so many credit cards that it would multiply the workload of the court to adjudicate each 523(a)(2) action separately; (3) whether there is no economic incentive to individual creditors to bring a 523 action; (4) whether the credit card debt was used for luxury goods, high lifestyle, or improper purpose, and; (5) whether you tried to make an honest effort to repay these obligations before filing bankruptcy.   In re Harry William Donohue, Jr., the debtor had $78,000 in credit card debt.  His annual three year income prior to his bankruptcy was $10,000, -$600, and and $4,800, respectively. His credit card debts went from $2,800 to $78,000 in the 12 month period prior to filing for bankruptcy. His credit card debt relative to his income was way out of line and the trustee moved to dismss the case, the court found that there was credit card abuse, that bad faith existed and therefore denied the discharge. See,
 In a 9th circuit bankruptcy case the debtor had $62,500 in unsecured debt and earned $0 in 2003, $11,000 in 2004, $0 in 2005 and $0 in 2006, thus relative to her income her credit card debts were extremely high. She filed bankruptcy around May of 2006, and within about a year to a year and a half prior to filing bankruptcy she incurred $15,000 in credit card charges, mostly for for "discretionary and non-essential" purposes such as dog pampering, eating out, woman's fashions, beauty treatments and electronics. The court also found that she told one credit card company that she was employed and was making $80,000 a year when she was unemployed at the time. The trustee filed a motion to dismiss the bankruptcy case under 707b(3) for bad faith and the court agreed. A copy of this case can be obtained at:

Creditor Objection in Bankruptcy: Under 11 USC 523(a)(2). a creditor or lender can file an objection against your debt being discharged if you made a false financial statement in order to obtain a loan or a credit card, and the lender relied upon your statement in making the loan to you (it is also a felony if you mistated your income on one of those mortgage "liar loans" applications in the past).

What happens at the important meeting of creditors, or 341 Meeting....some debtors have gone to prison for giving false testimony.  Filing a Chapter 7 bankruptcy takes about 4 to 5 months. Within a month after you file your petition with the court you will be required to attend a mandatory 341 hearing, or meeting of creditors which is presided over by your assigned Chapter 7 case trustee. The main purpose of this creditors meeting (which I call an investigative meeting), is to allow the trustee and any interested creditor the opportunity to ask you questions about your case under oath. The trustee acts like a "detective" is appointed by the court to preserve the integrity of the bankruptcy system. If there are assets his role is to liquidate the debtor's non-exempt assets for the benefit of the unsecured creditors. Property is liquidated if not exempt or if it is worth more than a security interest or lien attached to the property and any exemption claimed by the debtor. The trustee also recovers money or property thru their "avoiding powers", this includes preferential transfers or payments to creditors within 90 days of filing, they can also set aside security interests and other transfers of property pursuant to nonbankruptcy law such as fraudulent conveyance and bulk transfers. The trustee looks for bad faith filings, abuse, fraud, and criminal conduct.. He reviews your petition and schedules, paystubs, and tax returns.and whether you have truthfully disclosed all of your income (he may even ask to see statements of your bank accounts). He goes over your asset lists and whether you disclosed everything and valued them correctly. If you conceal or hide assets or income, or if you recently transferred asssets in anticipation of bankruptcy for example, it is his job to fully investigate and follow up on that. If you give false testimony at your hearing and if there is evidence of criminal conduct, he will refer your case over to the Department of Justice for prosecution. Several rather famous Hawaii residents have gone to prison for bankruptcy fraud or other bankruptcy related crimes, one of them was a former Bishop Estate trustee, the other person on once owned a bank here in Hawaii and was a well known developer - he had failed to report the sale of an asset prior to bankruptcy and had concealed a valuable wine collection from the trustee. For cases where debtors have gone to prison for giving false testimony at their hearing, or because they failed to correctly report their assets and/or income, see In 2010, the United States Attorney's office in the Northern District of Ohio announced a grand jury indictment against a debtor for concealment of assets and making false statements in his bankruptcy case. The indictment states that the debtor concealed that he was in possession of a Cartier watch and a Gents ring, stating in his paperwork that he had a watch and other jewelry worth approximately $50, the true value of which was closer to $20,000 said the U.S. Attorney's office. If you have a safe deposit box the trustee may want to review the contents of the box at the bank. If you have somewhat valuable artwork in your home the trustee may schedule a house visit to view, catalogue and inventory them. The trustee has access to and can review real property records to determine whether you now own or previously owned real property and whether you transferred any property away recently. If you are in business he will look over your business tax returns, books, financial statements and bank statements. His task is to determine if there are any receivables that are still collectible, whether there were fraudulent transfers, preferential payments to insiders, or unexplained withdrawals. He will look at the values you have given for your inventory, equipment or other business assets to see if it is accurate, and whether there is non-xempt equity in those assets for possible seizure and sale.

To show you just how powerful the trustee is, if the debtor fails to cooperate with any of the trustee's requests or orders, you could not only face sanctions by the court, but your bankruptcy discharge could also be vacated or set aside, as was done in this one particular case,  see


BEWARE OF THIS -  YOUR BANK’S CROSS COLLATERALIZATION  "DRAGNET" CLAUSE:  If you have an auto loan and a credit card or other unsecured loan with the same bank or credit union you must review all of your credit card and loan documents  to see if the auto is pledged as collateral for the credit card or unsecured loan, if so then this is called "cross collateralization", which means you must pay off all such loans with the lender if you want to get your car free and clear of all liens. For example say your auto loan balance is $10,000 and your credit card balance with the same bank or FCU is $8,000. The car is worth only $10,000. As your loans are "cross collateralized" you must repay the bank or FCU $18,000 (the sum of the two loans) just to keep the car! Either that or you can file a motion to redeem but a single payment is required for that and most debtors don’t have $10,000 cash in the bank just lying around (or they wouldn’t file bankruptcy to begin with). If you car was purchased more than 910 days ago you can "cram it down" to the value of $10,000 but you must file a Chapter 13 for thatHow do you know if you have a cross collateral agreement?  You need to carefully read all loan and line of credit agreements with your lending institution to see if there is a clause that states that the collateral or security being pledged or financed is secured by any and all other loans, lines of credit or obligations with that lender, if so then it is cross collateralized. In the 9th circuit, under a Chapter 13 case, you may be able to treat the "cross collateralized" loans as "unsecured creditors" (called a cram down) depending on the value of the vehicle even if those cross collateralized loans were taken out within the last 910 days, naturally your attorney must file a motion to strip the lien, this because the 910 day waiting period provision applies only to "purchase money auto loans." 11 USC 1325a.

DEFAULTED CASH ADVANCES OR PAYANYDAY LOANS AND  CRIMINAL PROSECUTION?  If you took out a cash advance, or payanyday loan and you defaulted on it, some companies they will threaten you with criminal prosecution, in reality they can only prosecute you if you intentionally tried to defraud them when you borrowed the money. If you gave your cash advance company a post dated check that alone should not be a criminal matter since the company knew you did not have the funds to begin with when they asked you for a post dated check, see .

BEST BUY, RADIO SHACK, PETCO, SEARS, COULD BE  SECURED CREDIT CARDS:  If you bought an item using a store's in house financing or the store's own credit card like Best Buy, Radio Shack, Sears, or Petco,  it may be "secured" credit card or secured loan.  In a Chapter 7 you must either return the item, reaffirm the debt entirely, or redeem the value of the item that you wish to keep.  In a Chapter 13, you can simply surrender the item and treat the creditor as unsecured or if you wish to keep the item you  can cram down the debt to the value of  the item you wish to keep.  To do this you would have to file a separate motion to value collateral.  11 USC 1325a provides that the items must be purchased over a year ago to be "stripped down", but local rules in various jurisdictions may possibly allow for stripping even if purchased within a year.  In a Georgia bankruptcy case the debtors wanted to keep items that were purchased from Best Buy, however in their Chapter 13 plan they treated Best Buy as an unsecured creditor. Best Buy objected to the plan, the court agreed, ordering the debtors to treat Best Buy as a secured creditor. See

AAFES (Military Star) credit cards:   Just like the Internal Revenue Service, AAFES is another "super creditor" with more rights than the average credit card company.  For example if you are delinquent on your AAFES credit card, they can without court action levy your federal tax refund, as well as garnish your military retirement and/or military regular pay if you haven't yet filed for bankruptcy protection. So if you have a choice of using credit cards while shopping, keep this one at home instead.

MEDICAL BILLS (In Hawaii you can be sued for your spouse's unpaid medical bills):  If only one spouse owes medical bills and files bankruptcy, under well established case law here in Hawaii, the creditor could still pursue collection of the debt against the non-filing spouse simply by virtue of the fact that  the bills were necessary and incurred during the couple's marriage - this is called the law of necessity. Unless the legislature decides to change this antiquated law, this  "unfair" law remains on the books.
See Queens Medical Center v. Kagawa (1998 Intermediate Court of Appeals), citing to HRS 572-24 (spousal liability statute for doctrine of necessaries).

Chapter 13 ZERO PERCENT PLANS: A Chapter 13 plan must meet the "best interests test" and the "feasibility test" to be confirmed. These concepts are both more fully discussed in my other article, see The feasiblity test requires that certain "priority debts and adminstrative expenses" must be paid in full during the life of your plan. Some of these debts or expenses are unpaid child support, delinquent unpaid mortgage balances if you wish to keep your home, priority non dischargeable taxes, secured taxes if liens were filed and you own property, unpaid attorneys fees and trustee's administrative fees. Basically the best interests test requires that your unsecured creditors in your Chapter 13 plan receive no less than what they would have received if your estate (less exemptions) were liquidated. Theoretically then you would think that in certain situations someone could submit a 0% plan for their unsecured creditors, in reality however the court may not confirm such a plan if you have not done some belt tightening first. Personally I think submitting a 0% plan raises a red flag. Some courts have already held that 0% plans are per se bad faith filings. Others say it is only one factor to consider whether bankruptcy was filed in good faith. In any event all courts will scrutinize your expenses and look for disposable income or an ability to pay more for your unsecured creditors. In re: Paula Walls, a North Carolina bankruptcy case decided in 2010, the debtor proposed to pay 0% to her unsecured creditors at the expense of keeping a luxury Lexis auto lease at $1,000 a month, the court agreed with the trustee that the debtor had an ability to pay more and because she chose not to, the court dismissed her case. In another case the debtor's plan proposed only to pay for their attorney's bankruptcy fees under the plan, needless to say the court also dismissed that case as well. See, also

Homeowner Association LIens are statutory liens (not judicial liens), this distinction becomes important when discussed in the Chapter 7 context. The treatment of HOA liens will depend if you want to keep the home, surrender it, file a Chapter 7 or 13, and whether there is equity in the property.

If you file a Chapter 13 and wish to keep the property, one first look to see if there is any equity after recorded mortgages, etc. If there is no equity then the HOA prepetition debt may be stripped in a Chapter 13,  but the Debtor must file a motion to value real property to strip the lien. See Huggins v. Westbrook Townhouse HOA, the effect of which relegates the claim to unsecured status if the court enters an order stripping off  the lien.  If there is equity however, then the HOA lien is a secured claim (like any junior mortgage), and the backpayments must be cured via future plan payments. 

If you file a Chapter 13 case and you wish to surrender the property (usually because there is no equity) there is precedent and case law that says the debtor will no longer be liable for post petition HOA fees. Have your attorney research this issue before you file as case law changes over time and varies between different jurisdictions

Unless there is a change in the law, it is not presently possible to strip a statutory HOA lien in a Chapter 7 case here in Hawaii.  if you plan to keep the property (judicial liens can be stripped in a Chapter 7  if a motion is filed with the court, but case law have held that HOA liens even if recorded are not judicial liens).   

If you file a Chapter 7 and surrender the property before foreclosure is completed, the debtor will still be liable for post petititon HOA fees until such time that a new owner to the property has been deeded the property..

CONVERSION FROM CHAPTER 13 TO CHAPTER 7 - WHEN DOES IT APPLY?  There may be circumstances that occur over time during someone's Chapter 13 case where it becomes financially unfeasible for the debtors to continue to fund their plan, for example a spouse lost his or her job, a spouse died, a child has increased medical expenses not covered by insurance, etc.  In such cases the debtor can ask the court to convert his or her case to a Chapter 7 due to a material change in circumstance (i.e. either income went down, or certain necessary expenses have gone up).  This is not to say that such a request to convert is automatic however.  If one spouse voluntarily quit his or her job and is employable but chose not to seek employment, the trustee's office would probably object to the conversion on the grounds of "lack of good faith" efforts by the debtors to pay their bills.

CONVERSION FROM CHAPTER 13 TO CHAPTER WHEN YOU OWN A HOME:  If you were in a Chapter 13 and later had to convert your case to a Chapter 7, what happens to your home if it appreciated in value during the time you were in a Chapter 13?  This matter depends on what jurisdiction you live in as case law differs on this issue. In re Lynch, 363 B.R. 101 (9th Cir. BAP 2007), the Bankruptcy Appellate Panel held that confirmation of a chapter 13 plan does not implicitly value a debtor's house. This decision parted from the majority position then prevailing in the 9th circuit at the time and instead followed the minority position.  Accordingly, if this decision stands, the Chapter 7 trustee can look at your home's present value and equity upon conversion and is not bound by the value and equity that you stated in your Chapter 13 petition when you first filed.  Thus any post appreciation equity in your home upon conversion could become property of the estate.  Left open is the question as to whether you will receive credit for any payments made to reduce principal during your Chapter 13 case.  See:

GETTING RID OF AND DISCHARGING CERTAIN TAXES AS WELL AS TAX LIENS: Certain individual income taxes can be discharged in bankruptcy, but it depends if you filed your tax return and when you filed it (it has to be more than 2 years ago, it also depends on when the taxes were assessed (it has to be more than 240 days ago) and what year taxes are due, including whether you filed for any requests for tax return extensions. Some taxes may not be discharged even if you filed your return more than 2 years prior to filing bankruptcy, for example if the IRS filed an "SFR" (substitute for return) on your behalf and the taxes were assessed before you filed your tax return, the IRS considers this as a non-filed return for bankruptcy purposes, see the result is that the taxes will not be discharged.  See also,  There are also tolling events that must be considered, such as a previous bankruptcy filing, whether you filed for an extension to file your tax return and whether you submitted an Offer in Compromise, or sought a Taxpayer Assistance Order, and if a tolling event applies it must be factored into the tax discharge analysis. If you meet and pass all of these tests then your income taxes are called "non priority taxes" and they would be wiped out in a Chapter 7. Priority taxes would not however be wiped out in a Chapter 7 case. If you are filing a Chapter 13, you do not have to pay 100 cents on the dollar for any "non-priority tax", essentially then you are able to get a tax discount for those kinds of taxes, all priority taxes however must be paid in full under your plan. No longer are you allowed to get rid of taxes in a Chapter 13 if you did not file your tax return, this loophole was finally closed when Congress enacted BAPCPA in 2006. If you owe "trust fund" employment related taxes such as 941 taxes, the trust fund portion is a "priority tax" and cannot be discharged in bankruptcy unless you pay it off in full. If a fraud penalty was assessed by the IRS then you may not be able to discharge those taxes. In a recent victory for taxpayers, the court held that the debtor's failure to pay the taxes by itself and without more, was not considered fraudulent, thus the debtor was able to wipe out certain income taxes this despite protests filed by the IRS, If you anticipate that a tax lien will be filed against you soon, and if all of your taxes are non-priority taxes then it is to your advantage if you file bankruptcy BEFORE the tax lien is filed. A federal tax lien is a "statutory lien" and cannot be avoided in a Chapter 7, thus it will survive bankruptcy and attach to all property in existence at the time you filed. You may be able to limit the value of the tax lien by filing a motion to value tax lien but that involves an adversary proceeding or a "mini trial" and that usually comes at a stiff price, as far as legal fees are concerned, as you no longer have an uncontested bankruptcy case.   For more about tax liens and how to deal with them after your Chapter 7 bankruptcy case is over see, .
In a Chapter 13 non-priority taxes become secured taxes if a lien is filed, so if you wish to keep all of your assets you must now pay the secured tax amount plus interest under your plan (whereas if you had filed before the tax lien was filed you wouldn't have had to pay any significant amount under the plan towards the non-priority  and unsecured taxes). Depending on how much taxes you owe, you may have to pay into your Chapter 13 plan an amount equal to your combined equity of your assets plus interest if you wish to keep your assets as well as get rid of the tax lien. For more information see my other article in  Unfortunately, in most (but not all) cases that we see tax liens are filed before delinquent taxes become "non-priority taxes." 

STUDENT LOAN ISSUES AND TREATMENT IN THE NINTH CIRCUIT: Recently a Florida bankruptcy court in Potgeiter, see held that student loans under a Chapter 13 could be paid by the debtors outside the plan as a separate class of creditor, at its normal contract rate and terms since the debtors plan called for a 100% payment to all of its other general unsecured creditors. The court noted that the remaining student loan balance survived the discharge (since it was non dischargeable), and that the plan did not unfairly discriminate against the other general unsecured creditors as they were receiving payment of 100% of their debt. This meant that the debtors didn't have to pay off the student loan off in full within the debtor's 5 year Chapter 13 plan. Unfortunately there is a conflict between circuits on this precise issue and the Florida case follows the minority view. The Chapter 13 Trustee in Hawaii has taken the majority position followed by most circuits, see AMFAC Distribution Corp. v. Wolff, 22 B.R. 510 (9th Cir. BAP 1982 , and is of the view that student loans and other general unsecureds must be treated in the same class of creditors under the plan, thus if the plan provides for 100%* payment to general unsecureds then student loans must be paid back 100%* within the life of the plan (*If your plan provides for 60% payment then you would only have to pay 60% of the student loan balance within the life of your plan with the unpaid balance surviving the discharge). So, if you proposing a 100% plan this could lead to certain debtors not being able to afford to fund their plan especially if their student loan balance is rather significant and they cannot afford to pay off the balance on the student loan in full within a 5 year plan. Maybe there is hope on this issue, other jurisdictions (and we hope Hawaii will also jump on the same bandwagon someday) provide that the plan may "cure and maintain" payments on a student loan as 'long term debt' pursuant to 1322b5 as long as this treatment does not violate the unfair discrimination rule of 1322b1. This is relevant because it would allow those debtors who must do a 100% plan, to not have to payoff the balance of the student loan during the life of the chapter 13 plan.  Trustees in these other jurisdictions will still take the position that the plan may not provide for direct payment of student loan claims by debtors, so it appears that debtors in those jurisdictions are proposing plans that designate a "per monthly" disbursement amount to be made by the Trustee to the student loan claim, as part of the 'cure and maintain' treatment. In a post BAPCA Wisconsin case, the debtor's step-up plan provided for payments of $430 a month of which he directed the trustee to pay $300 a month towards the student loan (this was the regular monthly payment for the student loan). These student loan payments were scheduled to extend beyond the duration of the plan. The plan treated the student loan creditor as a separate classified unsecured creditor and provided it with a dividend of approximately 79% representing total contract payments while the plan is in effect. The remaining unsecured creditors were projected to receive a dividend of 2.44%. If the funds were instead distributed pro rata however, all unsecured creditors would receive a dividend of 23.5% instead. The trustee objected to the plan on the grounds that the plan unfairly classified the unsecured student loan claims as if it were entitled to priority treatment and the matter went before the court. Essentially the trustee was arguing for pro rata treatment for all unsecured creditors. The debtors maintained that their plan was confirmable because they merely proposed to maintain contractual payments pursuant to the student loan note and did not propose to accelerate payments. The court agreed that the plan was confirmable (with some minor changes) stating that while 11 USC 1322b1 provides that a plan may not unfairly discriminate against any class of unsecured claims, section 1322b5 allows for the cure and maintenance of long term debt obligations, such as the student loans. In re Timothy J. Truss et al. Case No. 08-21626. USBC Eastern District of Wisconsin.  (April 24, 2009). Basically the court's position was that section 11 USC 1322b5 trumped section 11 USC 1322b1. See also. In re Ivana Machado. USBC Mass (2007).

Presently, the Chapter 13 Trustee for Hawaii will not allow debtors to claim student loan expenses as part of their budget on Schedule J, as stated above the plan must provide for equal treatment of all unsecured claims including student loans. For Chapter 7 cases that has generally been the rule as well, however In re Delbecq, 368 B.R. 754 (Bankr. S.D. Ind. 2007), which is unfortunately not a 9th circuit case, the Chapter 7 debtor was able to successfully rebut the presumption of abuse and the court allowed student loan expenses as a "special circumstance" under the means test. In a 9th circuit Chapter 7 case (in re Carrillo, Bankr. D. Ariz. 2009), the debtors unsuccessfully asserted that the fact that their student loan debt was nondischargeable was sufficient to establish a "special circumstance" (see ) the court disagreed, found it to be abusive and rejected the Delbecq case, stating that filing a Chapter 13 (or Chapter 11) repayment plan provided a reasonable alternative for debtors with student loans.

Post petition interest on student loans continue to accrue while you are in a Chapter 13 especially if your plan doesn't pay it off 100%, thus you may end up with a bigger balance on your student loan after you receive your discharge, especially if you are making deminimus payments to your creditors under your plan. If however your plan provides for 100% payment and if post petition interest is not allowed under your plan, the possibility exists that you may be able to discharge the post petition interest, see

Other interesting links covering bankruptcy related issues:

       b) Car Loans and Reaffirmation Issues:  Before you decide to reaffirm any car loan, make sure that the loan is not "cross collateralized."

      c)  Personal Property versus Real Property Reaffirmation Issues:  One court has ruled that under BAPCPA, only reaffirmations of personal property is now required under 11 USC 521a6, see,  If a debtor signs a statement of intention saying he will reaffirm a car loan, 11 USC Section 521a6 requires that he do so
within 45 days after the meeting of creditors and if he fails to do so the lender "may" repossess the vehicle and the debtor has failed to comply with section 521a6.
2. Chapter 7 - Can you reaffirm a lease? Court do not wish to get involved with "reaffirming" leases.  You can offer to assume the lease but if the lessor doesn't do anything your lease is rejected. This can be a problem if you have a valuable lease (i.e. real property for example).   See 11 U.S.C. 365(p)(2) (A) .  See also

4. If you are in the military or work for the federal government as a civilian and need security clearance will bankruptcy affect your job?  Maybe, it depends: (filing a chapter 13 repayment plan will be looked on more favorably than filing a chapter 7).

6.  Will filing a Chapter 13 prevent the state of Hawaii from garnishing my pay or bank accounts for past due child support?  The state of Hawaii could and has gone after non exempt property or future wages, or refunds, while the debtor is in a chapter 13, for this they rely upon  Section 362(b)(2)(B) which specifically excludes from the automatic stay any action to collect a “domestic support obligation.  See,   For practical purposes, this leads to financial hardship for the debtor and it may cause the debtor to fall behind on his Chapter 13 plan payments.

7. Hot topic, stay tuned as there is a split of opinion in several court circuits on this issue: Whether you have to pay in all your social security income under a chapter 13 plan may depend on what state you live in. A Utah court held that social security income even though statutorily excluded from the means test, must be accounted for and therefore included in "projected disposable income" under 1325b1B. This inclusion of social security income is also consistent with the pre BAPCPA procedures. See, In re Cranmer 433 B.R 391 (Bankruptcy District Utah. June 29, 2010). Due to the conservative nature of the 9th circuit which Hawaii is a part of, my instincts tell me that the court here would probably follow the  Utah's court decision. But, see In re Thompson (B.A.P. 8th Circuit. Sept. 16, 2010, Western District of Missouri) where the debtors partially excluded some of their social security income from their chapter 13 plan payments (they submitted only about one half of their social security income to their plan), and the trustee objected on the grounds that the plan was filed in bad faith because not all of the debtors' projected disposable income (i.e. social security income) was being contributed to the plan. The bankruptcy court confirmed the plan and the trustee appealed. On appeal,  the bankruptcy appellate panel agreed with the lower bankruptcy court's decision, and held: (1) debtors' exclusion of social security income from plan payments could not be considered in determining whether the plan was proposed in good faith, and (2) even if debtors's exclusion of social security income from plan payments could contribute to bad faith finding, it could not, standing alone, prevent debtors from establishing good faith. One wonders if the appellate panel would have reached the same conclusion if the debtors did not submit ANY of their social security income to their plan.

8. Debtor's prison: Still legal in some states. In some states in the U.S. you can be jailed for not paying your debts.  See

9. Post petition mortgage defaults under a Chapter 13. If you miss any required mortgage payments while you are still in your chapter 13 bankruptcy, you may not always be able to save your home. Whenever the debtor misses required mortgage payments the lender will file a motion with the court seeking a release of the automatic stay in order that they may begin the foreclosure proceedings. If the debtor cures the default and pays the lender's attorneys fees before the hearing date on the motion, most lenders will be satisfied with that and withdraw their motion. If the debtors cannot bring it current by then may have two options, one would be to timely file your response that you are contesting the motion, in effect asking, the court for time to work with the lender on a consent decision. How much time you will get depend on the lender, some lenders may give you only up to several months to get current again. and if it your first default, generally the court would lean towards giving the debtor a chance to keep their home. If it is the second default, good luck. The debtor could also file an amended plan (in certain states it is allowed to do so, but not in all states) to cure the post petition defect but once again the lender could object and there is no guaranty that the court will let you save your home due to post petition defaults. In one cast the debtors missed 14 consecutive payments and tried to amend their plan to cure the post petition default, the lower court ruled in favor of the lender and allowed the motion seeking relief from the automatic stay, thereby effectively allowing the foreclosure process to begin. The debtor's appealed the bankruptcy court's decision and lost. What we learned from this case, is that no matter what, if the lender objects or does not agree to a workout, the court could rule against the debtor. See The bottom line is that debtors should not fall behind on their mortgage payments, and if they do they must realize that they could very well  lose their home.

10. If you file a Chapter 13 and fall behind in your taxes the IRS could file a motion to dismiss your case for incurring post petition tax debts. In the McGruder case the court agreed with the IRS and dismissed the debtor's chapter 13 bankruptcy as a material default under her plan

What information should I gather before seeing an attorney:  You will need to gather your last 6 months unemployment, pension, pay stubs, social security,  etc., your last two years tax returns and if just recently divorced, then provide your attorney with a copy of the divorce decree.  If you don't have all of your debts or bills then you can obtain a free credit report from, this should list all of your creditors, with balances and addresses for all creditors. If you fall within the poverty guidelines per census bureau statistics, we can file a request with the court that they waive your court filing fee. If you want to know if you qualify for this fee waiver the guidelines then click here whether you qualify.  For more Bankruptcy court information, local rules, and forms you can go to the official Hawaii bankruptcy court's website at

About the author: Brian Kawamoto is an experienced Honolulu Bankruptcy and Tax Attorney whose office and practice is located in the state of Hawaii. Over the years he has represented many residents here in Honolulu who have sought and received relief by filing for bankruptcy. Also a former IRS Tax Attorney he represents individuals seeking to eliminate debts and certain taxes by way of Chapter 7 or Chapter 13 bankruptcy. He also helps those seeking non-bankruptcy tax alternatives that either reduces or eliminate taxes by way of negotiating for an Offer in Compromise. For more information the website is at

Disclaimer - Statements made here reflects the author's viewpoint for general reading purposes only and therefore should not be relied upon or considered as a legal opinion or legal advice for your own particular factual situation. It is advised that you consult a bankruptcy attorney in  Honolulu if you live here in Hawaii, or in your state if you live elsewhere when dealing with your individual situation as the laws are very complex and every state has different laws, rulings and court decisions as it concerns bankrupty matters.  The bankruptcy laws also changes from time to time.  Each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue.