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Answering Your Common Bankruptcy Questions

Talk to Attorney Kevin Mack About the FAQs of Filing Bankruptcy

Remember: The law often changes. Each case is different. This page is meant to give you general information and not to give you specific legal advice. Please contact us for a free and confidential consultation. A decision to file bankruptcy should be made only after determining that bankruptcy is the best way to deal with your financial problems. This information cannot explain every aspect of the bankruptcy process. If you still have questions after reading it, you should speak with Attorney Kevin Mack.

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. Federal law provides the right to file bankruptcy, and federal courts handle all bankruptcy cases. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until you have your debts sorted out according to the law.

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 force the creditor to return property even after repossession.
  • Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt.
  • Restore or prevent termination of utility service.
  • Allow you to challenge the claims of creditors who have committed fraud or who otherwise try to collect more than you really owe.

What Bankruptcy Cannot Do

Bankruptcy cannot, however, cure every financial problem. Nor is it the right step 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 mortgage or other lien 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 cannot 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 filing bankruptcy.

Which Different Types of Bankruptcy Cases 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, which gets sold to pay creditors. Generally, those who file chapter 7 keep all of their property except very valuable property or property 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. You can file either type of case individually or jointly with a spouse.

Chapter 7 (Straight Bankruptcy)

In a bankruptcy case under Chapter 7, 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. Selling the non-exempt property distributes money to creditors.

If you want to keep property like a home or a car and find yourself 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 falls above the median family income in your state, you may have to file a Chapter 13 case. 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 you can pay to unsecured creditors, the bankruptcy court may decide that they cannot file a chapter 7 case, unless extenuating circumstances exist.

Chapter 13 (Reorganization)

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 property— especially your home and car—which might otherwise be lost, if you can make the payments to your creditors which the bankruptcy law requires. In most cases, these payments cost 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 should consider filing a Chapter 13 plan if you:
  • Own your home and risk losing it because of money problems;
  • Find yourself behind on debt payments, but can catch up if given some time;
  • Have valuable non-exempt property but 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.

What Does It Cost to File Bankruptcy?

It now costs $335 to file for bankruptcy under Chapter 7 and $310 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 installments if you cannot pay it all at once. If you hire an attorney you will also have to pay the attorney fees you agree to.

If you find yourself 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 , you may request that the court waive the Chapter 7 filing fee. The filing fee cannot be waived in a Chapter 13 case, but it can be paid in installments.

What Must I Do Before Filing Bankruptcy?

You must receive budget and credit counseling from an approved credit counseling agency within 180 days before your bankruptcy case is filed. The agency will review possible options available to you in credit counseling and assist you in reviewing your budget. Different agencies provide the counseling in-person, by telephone, or over the Internet. If you decide to file bankruptcy, you must have a certificate from the agency showing that you received the counseling before your bankruptcy case was filed.

It is usually a good idea for you to meet with an attorney before you receive the required credit counseling. Unlike a credit counselor, who cannot give legal advice, an attorney can provide counseling on whether bankruptcy is the best option. If bankruptcy is not the right answer for you, a good attorney will offer a range of other suggestions. The attorney can also provide you with a list of approved credit counseling agencies, or you can check the website for the United States Trustee Program office at www.usdoj.gov/ust.

What Will Happen to My Home and Car if I File Bankruptcy?

In most cases, you will not lose your home or car during your bankruptcy case as long as you have fully exempt equity in your property. Even if your property is not fully exempt, you can keep it if you pay its non-exempt value 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 on the home or put your other property up as collateral for the debt. Bankruptcy does not make these security interests go away. If you do not make your payments on that debt, the creditor may have the right to take and sell the home or the property, during or after the bankruptcy case.

In a Chapter 13 case, you may have the right 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 bankruptcy. You can agree to keep making your payments on the debt until paid in full. You can also pay the 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 can challenge the debt. If you put up your household goods as collateral for a loan (other than a loan to purchase the goods), you can usually keep your property without making any more payments on that debt.

Can I Own Anything After Bankruptcy?

Yes! Many people believe they cannot own anything for a period of time after filing for bankruptcy. This is not true. You can keep your exempt property and anything you obtain after filing bankruptcy. However, if you receive an inheritance, a property settlement, or life insurance benefits within 180 days after filing for bankruptcy, that money or property may go to your creditors if the property or money is not exempt.

Will Bankruptcy Wipe Out My Debts?

Yes, with some exceptions. Bankruptcy will not normally wipe out:
  • Money owed for child support or alimony;
  • Most fines and penalties owed to government agencies;
  • Most taxes and debts incurred to pay taxes which you cannot discharge;
  • Student loans, unless you can prove to the court that repaying them poses an ‘‘undue hardship’’;
  • Debts not listed on your bankruptcy petition;
  • Loans you got by knowingly giving false information to a creditor, who reasonably relied on it in making you the loan;
  • Debts resulting from ‘‘willful and malicious’’ harm;
  • Debts incurred by driving while intoxicated;
  • Mortgages and other liens which are not paid in the bankruptcy case (but bankruptcy will wipe out your obligation to pay any additional money if the property is sold by the creditor).

Will I Have to Go to Court?

In most bankruptcy cases, you only have to go to a proceeding called the ‘‘meeting of creditors’’ to meet with the bankruptcy trustee and any creditor who chooses to come. Most of the time, this meeting consists of a short and simple procedure where the trustee asks you a few questions about your bankruptcy forms and your financial situation.

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 earn approval. If you need to go to court, you will receive notice of the court date and time from the court and/or from your attorney.

What Else Must I Do to Complete My Case?

After filing your case, you must complete an approved course in personal finances. This course will take approximately two hours to complete. Many of the course providers give you a choice to take the course in-person at a designated location, over the Internet (usually by watching a video), or over the telephone. Your attorney can give you a list of organizations that provide approved courses, or you can check the website for the United States Trustee Program office at www.usdoj.gov/ust. If you cannot 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 should sign up for the course soon after filing your case. If you file a Chapter 13 case, you should ask your attorney when you should take the course.

Will Bankruptcy Affect My Credit?

There is no clear answer to this question. Unfortunately, if you find yourself behind on your bills, your credit may already have suffered. Bankruptcy will probably not make things any worse.

The fact that you have filed a bankruptcy can appear on your credit record for ten years from the date of your case filing. But, because bankruptcy wipes out your old debts, you are likely in a better position to pay your current bills, and you may have the ability to get new credit.

If you decide to file bankruptcy, remember that you should list the debts discharged in your bankruptcy with a zero balance, meaning you do not own anything on the debt. Debts incorrectly reported as having a balance owed will negatively affect your credit score and make it more difficult or costly to get credit. You should check your credit report after your bankruptcy discharge and file a dispute with credit reporting agencies if you find incorrect information.

What Else Should I Know?

Utility services—Public utilities, such as the electric company, cannot refuse or cut off service because you have filed for bankruptcy. However, the utility can require a deposit for future service, and you do have to pay bills which arise after bankruptcy is filed.

Discrimination—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 bankruptcy filing.

Driver’s license—If you lost your license solely because you could not pay court-ordered damages caused in an accident, bankruptcy will allow you to get your license back.

Co-signers—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 have the ability to protect co-signers, depending upon the terms of your Chapter 13 plan.

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