Bankruptcy Frequently Asked Questions
Bankruptcy Frequently Asked Questions
A decision to file for bankruptcy should
only be made after determining that bankruptcy is the best way to deal with your financial problems. This article provides an overview of commonly asked
questions, but it simply can not explain every aspect of the bankruptcy process. If you still have questions after reading it, you should speak with one of our bankruptcy attorneys. There have been reports that suggest that changes to the bankruptcy law passed by Congress in 2005 prevent many individuals from filing bankruptcy.
While it is true that these changes have made the process more
complicated, the basic right to file bankruptcy and most of the benefits of bankruptcy remain the same for most individuals.
WHAT IS BANKRUPTCY?
Bankruptcy is a legal proceeding in which a person who cannot pay his or her bills can get a fresh financial start. The right to file for bankruptcy is provided by the United States Constitution and federal law, and all bankruptcy cases are handled in federal court. Filing bankruptcy immediately stops all of your creditors from
seeking to collect debts from you, at least until your debts are sorted out according to the law.
This stop of collecting debt is called the “automatic stay”.
WHAT CAN BANKRUPTCY DO FOR ME?
Bankruptcy may make it possible for you to:
• Eliminate the legal obligation to pay most or all of your debts. This is called a ‘‘discharge’’ of debts. It is designed to give you a fresh financial start.
•Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. (Bankruptcy does not, however, automatically eliminate mortgages and other liens on your
property without payment.)
•Prevent repossession of a car or other property
, or may even force the creditor to return property even after
it has been repossessed.
•Stop wage garnishment, debt collection harassment, and
other similar creditor actions to collect debts.
•Restore or prevent the termination of utility service.
Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.
WHAT BANKRUPTCY CANNOT DO
Bankruptcy cannot, however, cure every financial problem. Nor is it the right
decision for every individual. In bankruptcy, it is usually NOT possible to:
•Eliminate certain rights of ‘‘secured’’ creditors. A creditor is ‘‘secured’’ if it has taken a lien (e.g., a mortgage) on property as collateral for a loan. Common examples
include car loans and home mortgages. You can force secured creditors to take payments over time in the bankruptcy process and bankruptcy can eliminate your obligation to pay any additional money on the debt if you decide to give back the
property. But you generally can not keep secured property unless you continue to pay the debt.
•Discharge types of debts singled out by the bankruptcy law for special treatment, such as child support, alimony, most student loans, court restitution orders, criminal fines, and most taxes.
• Protect cosigners on your debts. When a relative or friend has co-signed a loan, and the consumer discharges the loan in bankruptcy, the cosigner may still have to repay all or part of the loan.
• Discharge debts that arise after bankruptcy has been filed.
WHAT DIFFERENT TYPES OF BANKRUPTCY SHOULD I CONSIDER?
There are four types of bankruptcy cases provided under the law:
• Chapter 7 is known as ‘‘straight’’ bankruptcy or ‘‘liquidation.’’ It requires an individual to give up property which is not ‘‘exempt’’ under the law, so the property can be sold to pay creditors. Generally, those who file chapter 7 keep all of their property except property which is very valuable or which is subject to a lien
which they cannot avoid or afford to pay.
•Chapter 11, known as ‘‘reorganization,’’ is used by businesses and a few individuals whose debts are very large.
•Chapter 12 is reserved for family farmers and fishermen.
•Chapter 13 is a type of ‘‘reorganization’’ used by individuals to pay all or a portion
of their debts over a period of years using their current income. Most people filing bankruptcy will want to file under either chapter 7 or chapter 13. Either type of case may be filed individually or by a married couple filing jointly.
CHAPTER 7 (LIQUIDATION)
In a chapter 7 bankruptcy case, you file a petition asking the court to discharge your debts. The basic idea in a chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property, except for ‘‘exempt’’ property which the law allows you to keep. In most cases, all of your property will be exempt. But property which is not exempt is sold, with the money distributed to creditors. If you want to keep property like a home or a car and are behind on the mortgage or car loan payments, a chapter 7 case probably will not be the right choice for you. That is because chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt. If your income is above the median family income in your state, you may have to file a chapter 13 case (the national median family income for a family of four in 2006 was approximately $65,796—your state’s figures may be higher or lower). Higher income
consumers must fill out ‘‘means test’’ forms requiring detailed information about their income and expenses. If the forms show, based on standards in the law, that they have a certain amount left over that could be paid to unsecured creditors, the bankruptcy court may decide that they can not file a chapter 7 case, unless there are special extenuating circumstances.
In a chapter 13 case
you file a ‘‘plan’’ showing how you will pay off some of your past
due and current debts
over three to five years. The most important thing about a chapter 13 case is that it will allow you to keep valuable
especially your home and car
ht otherwise be lost, if you can make the payments which the
bankruptcy law requires to be made to your creditors. In most cases, these payments will be at least as much as your
regular monthly payments on your mortgage or car loan, with some extra payment
to get caught up on the amount
you have fallen behind. You shou
ld consider filing a
chapter 13 plan if you:
Own your home and are in danger of losing it because of money problems;
Are behind on debt payments, but can catch up if given some time;
aluable property which is not exempt, but you can afford to pay creditors from your income over
time. You will need to have enough income during your chapter 13 case to pay for your necessities and to
keep up with the required payments as they come due.
It now costs $299 to file for bankruptcy under chapter 7 and $274 to file for bankruptcy under chapter 13,
whether for one person or a married couple. The court may allow you to pay this filing
fee in insta
llments if you
not pay it all at once. If you hire an attorney
you will also hav
e to pay the attorney fees you
agree to. If you are
unable to pay the filing fee in installments in a chapter 7 case, and your household income is less than 150 percent of
the official poverty guidelines (for example, the figures for 2006 are $19,800 for a family of two and $30,000 for a
family of four), you may request that the court waive the chapter 7
filing fee. The filing fee can
not be waived in a
, but it can be paid in
You must receive budget and credit counseling from an approved credi
t counseling agency within 180
your bankruptcy case is filed. The agency will review
tions available to you in credit counseling
assist you in reviewing your budget. Different agencies
provide the counseling in
person, by telephone, or over
Internet. If you decide to file bankruptcy, you must have a
certificate from the agency show
ing that you received
counseling before your bankruptcy case was filed.
agencies charge between $30
filing counseling. However, the law requires approved
agencies to provide bankruptcy counseling and the necessary
ates without considering an individual’s ability
to pay. If you can
not afford the fee, you should ask the
agency to provide the counseling free of charge or at a
If you decide to go ahead with bankruptcy, you should be
very careful in choosin
g an agency for the
It is extremely difficult to sort out the good counseling
agencies from the bad ones. Many
agencies are legitimate,
but many are simply rip
offs. And being an
‘‘approved’’ agency for bankruptcy counseling
is no guar
that the agency is good. It is also important to understand
that even good agencies won’t be able to
much if you’re already too deep in financial trouble.
Some of the approved agencies offer debt
plans (also called DMPs). A DMP is
a plan to repay some
or all of your debts in which you send the
a monthly payment that it then
distributes to your creditors.
Debt management plans can be helpful for some consumers.
For others, they are a terrible idea. The
counseling agencies will pressure you into a debt management
plan as a way of avoiding
bankruptcy whether it makes
sense for you or not. You should not consider a debt
management plan if making the
monthly plan payment will
mean you will not have
money to pay your rent, mortgage,
utilities, food, prescriptions,
and other necessities. It is
important to keep in mind these important points:
Bankruptcy is not necessarily to be avoided at all costs.
In many cases, bankruptcy may actually be the
choice for you.
If you sign up for a debt management plan that you
can’t afford, you may end up in bankruptcy
(and a copy of the plan must also be filed in your
There are approved agencies for bankruptcy counseling
that do not
offer debt management plans.
usually a good idea for you to meet with an attorney
before you receive the required credit counseling.
credit counselor, who can
not give legal advice, an attorney
can provide counseling on
whether bankruptcy is
option. If bankruptcy is not the right answer for you, a good
will offer a range of other suggestions. The attorney
can also provide you with a list of approved credit
agencies, or you can check the website for the United
s Trustee Program office at
In a chapter 7 case, you can keep all property which ‘‘exempt’’
under the law.
exemptions that are available. (If you moved to your current state
from a different state within two years before your
filing, you may be required to use the exemptions
from the state where you lived just before the two
me states, you are given a choice when you file
bankruptcy between using either the state
using the federal bankruptcy exemptions.
One of our experienced bankruptcy attorneys can help you
understand how your property may be affected by filin
g for bankruptcy.
In most cases you will not lose your home or car during
your bankruptcy case as long as your equity in the
is fully exempt.
Even if your property is not fully exempt,
u will be able to keep it, if you pay its non
to creditors in chapter 13.
However, some of your creditors may have a ‘‘security
interest’’ in your
home, automobile, or other personal property.
This means that you gave that creditor a mortgage
the home or put
your other property up as collateral for the
debt. Bankruptcy does not make these security interests go
away. If you
don’t make your payments on that debt, the
creditor may be able to take and sell the home or the
property, during or
after the bankruptcy case.
In a chapter 13 case, you may be able to keep certain
secured property by paying the
creditor the value of the
property rather than the full amount owed on the debt. Or
you can use chapter 13 to catch
up on back payments and get
current on the loan.
There are also several ways that you can keep collateral
or mortgaged property after you file a chapter 7
You can agree to keep making your payments on the debt
until it is paid in full
(affirm the debt)
. Or you
can pay th
e creditor the amount
that the property you want to keep is worth. In some cases
involving fraud or other
improper conduct by the creditor,
you may be able to challenge the debt. If you put up your
household goods as
collateral for a loan (other than a loa
purchase the goods), you can usually keep your property
any more payments on that debt.
s! Many people believe they can
not own anything for
a period of time after filing for bankruptcy. This is
You can keep your exempt property and anything you obtain
after the bankruptcy is filed. However,
if you receive an
inheritance, a property settlement, or life insurance benefits
within 180 days after filing for
bankruptcy, that money or
perty may have to be paid to your creditors if the
property or money is not exempt.
Yes, with some exceptions. Bankruptcy will not normally
Money owed for child support or alimony;
Most fines and penalties
owed to government agencies;
Most taxes and debts incurred to pay taxes which cannot be discharged;
Student loans, unless you can prove to the court that
repaying them will be an ‘‘undue hardship’’;
Debts not listed on your bankruptcy petition;
got by knowingly giving false information to
a creditor, who reasonably relied on it in making
Debts resulting from ‘‘willful and malicious’’ harm;
Debts incurred by driving while intoxicated;
Mortgages and other liens which are not paid in t
bankruptcy case (but bankruptcy will wipe out your
obligation to pay any additional money if the property
is sold by the creditor).
In most bankruptcy cases, you only have to go to a
proceeding called the ‘‘meeting of credit
to meet with
the bankruptcy trustee and any creditor who chooses to
. Most of the time, this meeting
will be a short and
simple procedure where you are asked a few questions about
your bankruptcy forms and your
Occasionally, if complications arise, or if you choose to
dispute a debt, you may have to appear
at a hearing. In a
chapter 13 case, you may also have to appear at a hearing
when the judge decides whether your
plan should be approved.
If you need to go
to court, you will receive notice of
the court date and time from the court
and/or from your
After your case is filed, you must complete an approved
course in personal finances. This course will take
two hours to complete. Many of the course providers
give you a choice to take the course in
location, over the Internet (usually by watching a
video), or over the telephone.
can give you a
of organizations that prov
ide approved courses, or you
can check the website for the United States Trustee Program
t www.usdoj.gov/ust. If you can
not afford the fee,
you should ask the agency to provide the course free of
charge or at a reduced fee. In a chapter 7 case, you
sign up for the course soon after your case is filed. If you
a chapter 13 case, you should ask your attorney when you
should take the course.
There is no clear answer to this question. Unfortunately,
if you a
re behind on your bills, your credit may
bad. Bankruptcy will probably not make things any worse.
The fact that you’ve filed a bankruptcy can
appear on your
credit record for ten years from the date your case was filed.
But because bankruptcy wi
pes out your
old debts, you are
likely to be in a better position to pay your current bills, and
you may be able to
Many debtors are surprised after filing bankruptcy that they often receive solicitations for credit cards.
If you decide
to file bankruptcy, remember that debts
discharged in your bankruptcy should be listed on your
credit report as
, meaning you do not
own anything on the debt. Debts incorrectly reported as
having a balance
owed will negatively affect y
score and make it more difficult or costly to get credit. You
your credit report after your bankruptcy discharge
and file a dispute with credit reporting agencies if this
is not correct.
Public utilities, such as the electric company,
cannot refuse or cut off service because you have
for bankruptcy. However, the utility can require a deposit for
future service and you do have to pay bills which
bankruptcy is fil
An employer or government agency cannot discriminate against you because you have filed for
bankruptcy. Government agencies and private entities involved
in student loan programs also cannot discriminate
against you based on a bankrupt
If you lost your license solely because
you couldn’t pay court
ordered damages caused in an
bankruptcy will allow you to get your license back.
If someone has co
signed a loan with you
and you file for
bankruptcy, the co
signer may have to pay
your debt. If you file under chapter 13, you may be able to
signers, depending upon the terms of your
Although it may be possible for some peo
ple to file a
bankruptcy case without an attorney, it is not a step to
taken lightly. The process is difficult and you may lose
property or other rights if you do not know the law.
Nearly every 341 Meeting we attend, there is a pro se debtor that risks
the case being dismissed for various
deficiencies. As a result, bankruptcy courts widely discourage
individuals from attempting to file for bankruptcy
without competent legal counsel.
Remember: The law often changes. Each case is different. This article is meant to give you general information and not to give you specific legal advice
with a free consultation