Frequently Asked Questions (FAQ) about Bankruptcy
Q. I am finding it difficult to make ends meet. What can I do?
Many, if not most of us, find that we are living week to week and paycheck to paycheck. Often something happens to disrupt the regular flow. It could be a medical expense, a layoff from work, an injury, a cutback in available overtime, or simply too much to pay out each month based on what we have available.
The first, and most important thing to do is to become educated about your options. Nobody wants to file bankruptcy. Often, before speaking with a knowledgeable consumer bankruptcy attorney, people will take out a second mortgage, borrow at a high interest rate and pledge their personal property as collateral, borrow from their retirement plans or their family, use their tax returns to pay off some of their debt, or sign up for one of those “debt reduction” programs that are advertised. We frequently hear from clients after they have met with us that they wish they had spoken to us before they did these things.
Before you take any drastic steps, find out what your options are.
Q. What is a “Bankruptcy”?
Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts or repay them under the protection of the bankruptcy court. Bankruptcy's roots can be traced to the Bible. (Deuteronomy 15:1-2 “Every 7th year you shall practice remission of debts. This shall be the nature of the remission: Every creditor shall remit the due that he claims from his neighbor; he shall not dun his neighbor or kinsman.”) Bankruptcy is also one of the few specific rights written directly into the U.S. Constitution.
Q. What types of debt relief are available to me?
Individuals, married couples, and small businesses can file for protection under either Chapter 7 or Chapter 13.
Liquidation bankruptcy is called Chapter 7. Under Chapter 7 bankruptcy, a consumer asks the bankruptcy court to wipe out (discharge) the debts owed. Certain debts cannot be discharged, including some taxes, student loans, child support, and debts incurred by “fraud.” In exchange for the discharge of debts, the consumer's nonexempt property can be sold (or “liquidated”), and the proceeds are used to pay off creditors. For a more detailed description of Chapter 7, click on Chapter 7.
Chapter 13, sometimes called “debt relief,” “debt reorganization,” or “debt adjustment,” allows an individual or married couple to repay all or a portion of their debts through a “Chapter 13 plan,” which is administered by a “Chapter 13 trustee.” In a Chapter 13, you file a plan with the bankruptcy court proposing how you will repay your creditors. Come debts must be repaid in full, on others you pay only a percentage, and others aren't paid at all. Come debts are paid with interest, some are paid at the beginning of your plan, and some at the end. Generally, you make one monthly payment to the trustee, or it is deducted directly out of your paycheck. The trustee takes your payment and pays off the taxes and mortgage arrears that existed at the time you filed your Chapter 13 case, your other secured debts (car, furniture loans), and a portion of your unsecured debt (which can be paid at as little as 1% and up to 100%, generally with no interest). Payments are made to the trustee for a period of 3 to 5 years. Often, the monthly payments to the trustee are less than your car payment had been prior to filing the Chapter 13. Even if you have debts that would not be dischargeable in a Chapter 7 case, you can often pay or discharge them in a Chapter 13 case. For a more detailed description of Chapter 13, click on Chapter 13.
Q. Can I stop the bill collectors from calling?
Yes. One of the major and immediate benefits of filing for chapter 7 or chapter 13 is that all creditor actions are stayed (stopped). This means that debt collection efforts, garnishments, repossessions and foreclosures are immediately halted. In fact, if the creditors do not stop calling, writing or sending bills, we go after them and often collect money damages from them.
Q. I am married; does my spouse also have to file bankruptcy?
No. In some cases where only one spouse has debts, or one spouse has debts that are not dischargeable, it might be advisable to have only one spouse file.
Q. Will I lose my job?
No. Bankruptcy laws prohibit discrimination based on filing for protection under the bankruptcy laws.
Q. Can I go to jail if I file bankruptcy?
ABSOLUTELY NOT. There are no debtor prisons in the United States. The right to file bankruptcy is governed by the U.S. Constitution in Article I, Sec. 8, cl.4.
Q. Can I keep my credit cards after bankruptcy?
Generally, no. Under some circumstances you may be able to keep your credit cards. There are many factors which must be considered. Some of those include the credit card balance at the time of the bankruptcy, what the credit card company is willing to do and your ability to pay the present and future credit card debt.
Q. Will bankruptcy stop a wage garnishment?
Yes.
Q. Will bankruptcy stop a judgment?
Yes. Most civil judgments are stopped by bankruptcy.
Q. Will a Bankruptcy remove a lien?
Under some circumstances, once the bankruptcy proceedings have started, a special motion can be filed to remove certain liens against your home. It will take a bankruptcy court order to remove them.
Q. Who notifies the creditor and bill collection agencies?
After your bankruptcy is filed, the Bankruptcy Court mails a notice to all the creditors listed in your schedules. This usually takes a week to ten days. If this is not soon enough, then you should have your attorney inform the creditors immediately.
Q. Do I have to fill out forms?
YES. You will work with my office to fully complete a detailed schedule listing all of your assets, debts, income and expanses.
You will be required to list ALL of you property, ALL of your debts and ALL of your income. At the initial court appearance, you will be asked under oath whether you have listed all of your property and all of your debts and you must be able to truthfully answer that you have.
Q. Do I have to go to court?
Not usually, but within about 20 to 45 days after you file the bankruptcy, you WILL have to attend a hearing presided over by the Chapter 7 or Chapter 13 Trustee. This hearing is called the First Meeting of Creditors or Section 341 Meeting. At this hearing, the Trustee will ask some questions to you under oath regarding the content of your bankruptcy papers, assets, debts and other matters. After the trustee is done, your creditors, if any are present (usually none appear) will have an opportunity to ask questions to you regarding the location and condition of your property, insurance coverage and matters related to your financial affairs.
Your attorney will be there to represent you and will help you prepare for the hearing. After this hearing you will normally not need to return to court unless a creditor files a motion or an adversary action. This is the exception and only your attorney can determine if this is likely to happen. Generally, debtors will only need to appear at the meeting of creditors, and never have to appear in the Bankruptcy Court.
Q. What happens to my credit rating after Bankruptcy?
The bankruptcy may be listed in credit reports for a period of up to 10 years. Usually Chapter 13 stays on your credit report for only 7 years. However, by the time most debtors have filed bankruptcy, their credit rating is already damaged by late payments, repossessions, law suits, foreclosures and other debt problems which will also be reported for a period of up to 7 years. After bankruptcy your credit reports will list your debts as “included in bankruptcy” and will no longer report a balance due or late payments. As a result, often your credit rating actually goes UP after your bankruptcy.
Q. After Bankruptcy, can I get credit?
Surprisingly to most folks - YES. This is up to each particular credit grantor. It is possible to get credit if the credit grantor believes and understands your reasons for filing the bankruptcy. Also, creditors realize that after you receive a discharge in bankruptcy, you are virtually debt free with the same income and with the same assets as before you filed bankruptcy. Many people who have filed bankruptcy have been able to get mortgages from banks to purchase homes within 2 years after filing bankruptcy. Others have been able to incur additional credit card debt over $35,000 within 2 years of filing bankruptcy. (This is NOT recommended!)