Bankruptcy Basics

The American bankruptcy code consists of numerous laws grouped into Chapters.  These laws were revised in 2005 under the Bankruptcy Abuse Prevention and Consumer Protection Act, BAPCPA (bap-see-pa).  Because BAPCPA is federal law, bankruptcy cases are processed in federal courts. 

Livingston county cases are handled through our bankruptcy court in Flint, while Oakland, Wayne and Washtenaw cases are filed in Detroit.  Residents of Ingham county generally must file through the Grand Rapids bankruptcy court which conducts hearings in Lansing.

Most consumer bankruptcy cases are filed pursuant to the laws of Chapter 7 or Chapter 13 of the bankruptcy code and are referred to as a Chapter 7 or 13 Bankruptcy.  Chapter 11 cases are generally used for business reorganizations while Chapters 9  & 12 are available for Municipalities and Family Farmers respectively.

An easy to read brochure about consumer bankruptcy is available to read or print by clicking the brochure button below:

One significant change in the 2005 Bankruptcy laws is a limit on the household income allowable to qualify for a Chapter 7 Bankruptcy.  The Michigan limits are as follows*:

1 person - $43,611;      2 person - $52,620;      3 person - $61,737:        4 people - $74,824

* These income limits are effective November 1, 2009.  Add 6,900 for each individual in excess of 4.  Household income in excess of these rates can create a rebuttable presumption of Chapter 7 abuse.

Exempt property limits, as described in the Brochure above, are subject to updates.  A 2008 table of the most commonly used property limits is available by clicking on the button below:

A bankruptcy case is started with the filing of a 'Petition' with the appropriate bankruptcy court.  While the Petition itself is only 3 pages, numerous schedules must also be filed with the court and typically include an additional 40 - 60 pages for a consumer bankruptcy.  The purpose of the schedules is to provide the court with a detailed accounting of a consumer's assets, debts, financial history, and income & expenses.  A brief list of the documents necessary to complete these schedules is provided in the Forms section of this website along with a Questionnaire to be completed.

After a Petition is filed, a case number is assigned and an initial hearing is scheduled, typically 5 -6 weeks later.  A bankruptcy court Trustee is assigned to each case and questions the debtor under oath to verify the information in the petition and schedules and inquire about any changes.  This initial hearing is referred to as a '341 Hearing' and provides Creditors with an opportunity to appear and question the debtor under oath as well.  Although the circumstances of each case vary widely, many Chapter 7 cases are resolved within 6 months of filing and include a 'Discharge' of unsecured debts.  Chapter 13 cases generally extend for 3 - 5 years and involve a partial repayment of debts based on the consumer's disposable income.

Of Special Interest ~ Due to the tremendous decline in real estate values, there is an option in Chapter 13 Bankruptcy that is becoming increasing valuable.  Home owners with more than 1 mortgage may be able to 'strip off' their second mortgages if the current market value of their home is below the balance of their 1st mortgage.  This type of 'stripping' means that the second mortgage has essentially become an unsecured debt, like a credit credit card, because the value of the home (collateral) has gone down.  This is only an option in Chapter 13 cases which run for 3 -5 years and a portion of the debts must be repaid based on the debtor's income, allowable expenses, and ability to pay.  Each case is unique and the decision to take advantage of this option will depend upon your individual circumstances.  An appraisal of the home is generally necessary to prove that its current market value is below the balance of the 1st mortgage.

One of the principles behind Chapter 13 'mortgage stripping' is that if the home was sold or foreclosed at this time, the proceeds from the sale would not be sufficient to pay any money to the second mortgage creditor anyway.  Second mortgage creditors have become 'unsecured' creditors due to the state of our real estate market.  By allowing homeowners to strip off the 2nd mortgage in a Chapter 13 Bankruptcy, the courts are essentially preserving the stability of communities and families without any additional adverse effects to a 2nd mortgage creditor.