Bankruptcy FAQs

What are the types of bankruptcies?

• Chapter 7 Bankruptcy
  Chapter 7 is the most popular form of bankruptcy. It is a liquidation proceeding in which the bankruptcy court is asked to eliminate the debts owed. Don't be misled by the term liquidation, since most people who file for Chapter 7 bankruptcy do not have any non-exempt assets, and thus there is no actual liquidation. This gives the debtor a "fresh start". It allows the debtor to wipe out balances on credit cards, medical bills, personal loans, lawsuits, personal lines of credit, payday loans, judgments resulting from car accidents, deficiencies on repossessed vehicles, deficiencies on foreclosed houses, some older tax debts, and garnishments. However, certain debts, such as student loans, alimony and child support, cannot be eliminated or discharged. The debtor then receives a bankruptcy discharge in about three to six months after filing bankruptcy.
• Chapter 13 Bankruptcy
  Chapter 13 provides a great solution for people who are behind on house payments or car payments and are looking for a way to keep them. It is available to individuals with regular income and provides a solution for people who have faced short-term financial setbacks like job loss, illness, or large unexpected expenses. In a Chapter 13 bankruptcy, debtors keep their assets and pay back creditors gradually over the life of the payment plan, usually three to five years. At the completion of the payment plan, the debtor receives a discharge of all unsecured debt that was unable to be paid back. With certain exceptions, the discharge that the Chapter 13 debtor receives is similar to the discharge that the Chapter 7 debtor receives.

Will I have to give up all of my assets?

Not at all! Most, if not all, of your assets should be protected by the Bankruptcy Code, which provides that a debtor filing for bankruptcy can keep certain assets for a fresh start by exempting property from the bankruptcy estate.

Will I be allowed to file bankruptcy?

Anyone with a regular income should be able to file for a Chapter 13 bankruptcy (some exceptions apply). For a Chapter 7 filing, your qualification will depend on whether your yearly gross household income is above or below the median income for your state. Generally, if you are below the median income for your state, and your monthly expenses exceed your monthly income - you should qualify for a Chapter 7. If you are above the median income for your state, a means test must be performed, and if you pass the means test then you qualify -- if you fail it, you may want to consider filing a Chapter 13.

What do I have to do to file bankruptcy?

First, you must take a credit counseling class. This can be accomplished online, over the phone via a toll free number, or by actually sitting in a classroom. Second, you need to round up your last six months pay stubs (call your payroll department a request them) and your last four years tax returns (call the IRS and request them). Next, you (or your attorney) will need to prepare a bankruptcy petition including schedules of assets and liabilities, and a statement of financial affairs. Following the preparation of your bankruptcy petition, you must be prepared to pay the court filing fee, which compensates the Trustee for hearing your case and the Judge for signing your discharge papers. Once your case has been filed with the Court, you will be required to attend at least one meeting of creditors (the 341 meeting), in which the trustee and creditors who choose to come can ask you questions under oath about your financial affairs. Additionally, you may be required to attend a reaffirmation hearing, in front of a judge, if you intend on reaffirming any of your secured debt (houses, cars, boats, etc.). The initial 341 meeting is traditionally 30-45 days after the filing of your case.

How long does it take?

In Chapter 7 cases, the period of time between when the case is filed to receipt of the discharge order is usually about 3 to 6 months. During that period, the debtor generally does not have to do anything other than attend the first meeting of creditors. The most time consuming part of filing bankruptcy is usually preparing the schedules necessary to file the case. In Chapter 13 cases, people are usually placed on a repayment plan for 36 to 60 months, depending on income and the amount of secured debt. The discharge affects debts that existed on the date the case was filed or have their origin in facts that occurred before the case was filed.

How do you get credit after bankruptcy?

You WILL get credit after bankruptcy. Most clients are very concerned about the state of their credit after filing bankruptcy. Although a bankruptcy entry will appear on your credit report for 7 to 10 years (depending on the type of bankruptcy) following the case filing, this does not mean that you will not be able to get a credit card, or buy a home or car for 7 to 10 years. Far from it; remember: creditors want you to borrow. Shortly after your bankruptcy discharge, we can almost promise that you will receive numerous credit card offers. The fact is, you no longer have the majority of your debt; you have an ability to repay (income is freed up), and you can't declare bankruptcy (Chapter 7) again for eight years. Further, the probability of a consumer declaring bankruptcy a second time in their lifetime is low (it does happen, but after most people do it once, they change their habits). In order to help you get back on your feet, it might be a good idea to obtain one open line of credit, whether it is a gas card or a secured credit card. It should only be used it in small doses every month and pay it in full every month.

Are student loans discharged in a bankruptcy proceeding?

Educational loans guaranteed by the United States government are generally not discharged by a Chapter 7 or Chapter 13 bankruptcy. Although, they may be dischargeable if the court finds that paying off the loan will impose an undue hardship on the debtor and his or her dependents. In order to qualify for a hardship discharge, the debtor must demonstrate that he or she cannot make payments at the time the bankruptcy is filed and will not be able to make payments in the future. The debtor must apply before the discharge of the debtor's other debts is granted. Application for a hardship discharge is not included in the standard bankruptcy fees, and must be paid for after the case is filed.

The Bankruptcy Code does not specifically define the requirements for granting a hardship discharge of a student loan. Courts have applied different standards, but they often apply a three-part test to determine eligibility:

• 1. Income - If the debtor is forced to pay off the student loan, the debtor will not be able to maintain a minimum standard of living for himself or herself and his or her dependents
• 2. Duration - The financial circumstances that satisfy the income test in (1) will continue for a significant portion of the repayment period
• 3. Good Faith - The debtor must have made a good-faith effort to repay the loan prior to the bankruptcy

What effect does a bankruptcy filing have on the collection of alimony and child support?

A Chapter 7 filing should have no effect on such collections. Although filing bankruptcy stops, or "stays," all efforts to collect debts, the Bankruptcy Code excludes actions to collect child support or spousal maintenance from the stay unless the creditor attempts to collect from the "property of the estate." In a Chapter 7 proceeding, "property of the estate" includes all possessions, money, and interests the debtor owns at the time he or she files. Money earned after the bankruptcy is filed, however, is not property of the estate. Since most child and spousal support is paid out of the debtor's current income, the bankruptcy should have little impact. A debtor under Chapter 13 must pay all domestic support obligations that fall due after the petition is filed. Failure to do so could result in dismissal of the case. Neither a Chapter 7 nor a Chapter 13 discharge affects future child or in most cases spousal support obligations. In other words, even at the conclusion of the bankruptcy proceeding, these on-going obligations remain.

Does a bankruptcy discharge (a.k.a. eliminate) all debts?

The rules on which debts are discharged, or eliminated, are different depending on which type of bankruptcy is filed. A Chapter 13 discharge affects only those debts provided for by the plan. Unsecured debt in a Chapter 13 can be eliminated just as it would in a Chapter 7, without paying any of it back. Additional exceptions to a Chapter 13 discharge include claims for spousal and child support; educational loans; drunk driving liabilities; criminal fines; restitution obligations; and certain long-term obligations, such as home mortgages, that extend beyond the term of the plan.

In a Chapter 7 proceeding, the following debts are not discharged:

• Debts or creditors not listed on the schedules filed
• Most student loans, unless repayment would cause the debtor and his or her dependents undue hardship
• Recent federal, state, and local taxes
• Child support and sometimes spousal maintenance (alimony)
• Government-imposed restitution, fines, or penalties
• Court fees
• Debts resulting from driving while intoxicated
• Debts not dischargeable in a previous bankruptcy because of the debtor's fraud

In addition, the following debts are not discharged if the creditor objects during the case and proves that the debt fits one of these categories:

• Debts from fraud, including certain debts for luxury goods or services incurred within ninety days before filing and certain cash advances taken within seventy days before filing; Debts from willful and malicious acts
• Debts from embezzlement, larceny, or breach of fiduciary duty

What types of property are exempt?

• Motor vehicles, up to a certain value;
• Reasonably necessary clothing;
• Reasonably necessary household goods and furnishings;
• Household appliances;
• Jewelry, up to a certain value;
• Pensions;
• A portion of the equity in the debtor's home;
• Tools of the debtor's trade or profession, up to a certain value; A portion of unpaid but earned wages;
• Public benefits, including public assistance (welfare), Social Security, and unemployment compensation, accumulated in a bank account; and Damages awarded for personal injury.

Will a debtor lose his or her home by filing bankruptcy?

One of the debtor's major concerns in a consumer bankruptcy is the thought of losing the family home. Although that is possible in some cases (depending on your state laws), loss of the debtor's home need not always result from a bankruptcy filing. If the debtor in a Chapter 7 liquidation bankruptcy is behind on his or her mortgage payments, and cannot get current, the home could be lost. The mortgage lender in such cases usually asks the bankruptcy court to lift the automatic stay so that it can institute foreclosure proceedings, in which case the home will be sold and the proceeds used to pay off the debt. Whether a debtor who is not behind on mortgage payments will lose his or her house depends on how much equity the debtor has in the property and the amount of the state homestead exemption (depending on your state laws). If the amount of debt owed on the home is less than the home's market value, the debtor could lose the house unless the applicable bankruptcy exemptions entitle the debtor to the equity (keeping the house). In a Chapter 13 proceeding, however, even if the debtor is behind on mortgage payments, the wage-earner plan includes paying back any missed mortgage payments over an extended time period in order to keep the house. If the debtor is current on his or her house payments, the home will not be lost if the debtor continues to make payments when due (sometimes included in the plan). If the debtor is a renter rather than a homeowner, and if the debtor is current in his or her rent payments, it is unlikely that the lessor would even become aware of the bankruptcy proceeding. If the debtor is behind, however, he or she could be evicted. Even after the automatic stay is triggered by the bankruptcy filing, the landlord is likely to ask the court to lift the stay on its behalf, and the court is likely to grant that request. If the request is granted, the debtor will be subject to eviction and must vacate.

How long is bankruptcy and other credit information included on the debtor's credit report?

The consumer credit reporting agencies may include Chapter 7 bankruptcy information for ten years and Chapter 13 bankruptcy information for 7 years (sometimes up to 10) from the time the case is filed. Most other credit information can be included in a consumer credit report for seven years. Civil suits, civil judgments, and arrest records, however, can be reported for at least seven years, and longer if the information is relevant for a longer time period. For example, if the civil judgment against the debtor is valid for ten years, it can be reported for credit-rating purposes for the same time period. These time limits on reporting credit information do not apply to reports for credit transactions that involve or are reasonably expected to involve a principal amount of $150,000 or more, the underwriting of life insurance involving or reasonably expected to involve a face amount of $150,000 or more, or the employment of a person at a salary that is or is reasonably expected to be at least $75,000 annually. Because both the Fair Credit Reporting Act, which controls what a credit reporting agency may include in a consumer's credit report, and the Bankruptcy Code are federal law, the same rules apply in all states. There may be some differences, however, in relation to the more-than-seven-year information, since most of the relevant time periods or statutes of limitations are found in the individual states' laws.

What happens if the debtor's salary increases after filing a chapter 13 wage earner plan?

The Bankruptcy Code requires that the debtor contribute his or her projected disposable income toward the plan payments for the duration of the plan. Although the code imposes this requirement only when the trustee or a creditor demands it, in reality the trustee always requires it, at least at the beginning of the plan. Whether changes in salary will change the payment plan depends on a complete consideration of all of the circumstances. If the debtor's income changes after the case has been filed but before the court has confirmed the plan, making it binding on the creditors, the trustee will closely scrutinize the debtor's disposable income to make sure that the payments and the income are consistent and will incorporate any necessary changes into the plan. If the debtor's income changes during the duration of the repayment plan, changes in income may not necessitate any changes in payments. The trustee may, however, ask that payments be adjusted if the debtor's income increases significantly. The trustee does not closely monitor the debtor's income, and it may actually be outside the scope of a trustee's duties to do so. The trustee will consider not only the salary increase, but also whether there has been a corresponding increase in disposable income, on which the payments are based. Disposable income is the amount of the debtor's salary that is left after deducting all reasonable living expenses. If the debtor's salary increases but so do his or her expenses, there may be no increase in disposable income and therefore no change in the payment plan. If there is a significant increase in disposable income, the trustee may ask for an increase in payments. In cases in which the plan is paying back 100% of the secured and unsecured debt, the increased payments may actually reduce the length of the plan's term, so that the debtor can pay off the debts and receive a discharge sooner.

What is a reaffirmation agreement?

Even if a debt can be discharged, you may have special reasons why you want to promise to pay it. For example, you may want to continue paying on your house, car or computer in order to keep it. To promise to pay that debt, you must sign a reaffirmation agreement with the creditor, after the bankruptcy has been filed. Reaffirmation agreements are under special rules and are voluntary. They are not required by bankruptcy law or by any other law, but if you refuse to sign a reaffirmation agreement and want to keep the property, you run the risk of ultimately loosing it.

Reaffirmation agreements:

• Must be voluntary;
• Must not place to heavy a burden on you or your family;
• Must be in your best interest;
• Can be canceled anytime before the Court issues your discharge or within 60 days after the agreement is filed with the Court, whichever gives you the most time.

If you are an individual and not represented by an attorney, the Court must hold a hearing to decide whether to approve the reaffirmation agreement. The agreement will not be legally binding until the court approves it. If you reaffirm a debt and then fail to pay it, you owe the debt the same as though there was no bankruptcy. The debt will not be discharged and the creditor can take action to recover any property on which it has a lien or mortgage. The creditor can also take legal action to recover a judgment against you.

What is the difference between secured and unsecured debt?

Secured debt is a creditor's claim that is secured by a lien of some type on your property, either by your agreement or involuntarily such as with a court judgment or taxes. A creditor can generally claim and in certain instances retake the property that secures the debt in the event of bankruptcy. Unsecured debt is not tied to any type of property, leaving the creditor without any claim to property. The best and perhaps the easiest way to find out whether a debt is a secured debt is to review the documents signed at the time the debt was incurred. If the debt is secured, the documents will say so and will describe the creditor's security interest, which is usually in the property that is the subject of the financing. Sometimes, however, the type of debt itself will suggest whether it is secured. The following types of debts are often secured debts, which means that if the debtor does not make payments on the debt when due, the creditor can take back the property that secures the debt, sell it, and apply the proceeds to pay off the debt. (If the sale price is not enough to cover the full amount owed, the debtor may still be liable for the remainder.)

Home mortgages

Companies financing home purchases always require a mortgage on the house. If the borrower falls behind on the mortgage payments, the lender begins foreclosure proceedings and eventually is foreclosed upon, in which case the house is sold on the court house steps (literally) and the proceeds are used to pay of the debt. If the proceeds are not sufficient to pay off the entire debt owed, the debtor will be in jeopardy of being sued. Remaining balances owed to a mortgage company after the sell of a house are always unsecured and dischargeable in a bankruptcy.

Motor-vehicle loans

When a person purchases a car on credit, the lender puts a lien on the car, which allows it to repossess the car if the borrower defaults (i.e., fails to make payments on time). If for some reason you paid in full your vehicle and then took out a loan against it, depending on your situation and your state, you may be able to have the lien removed through the bankruptcy proceedings.

Store purchases

Although many consumers are unaware of this, when they charge something that they purchase at the local department store, the store may retain a security interest in the item purchased based on the agreement that the consumer signed when he or she first opened the account. As a result, if the purchaser fails to pay according to the credit-card agreement, the store can take back the merchandise. A store actually coming to your house and taking back their merchandise is rare, and is hardly ever done without a call trying to set up a day and time to come pick it up. The most common type of store purchases that are considered secured debt are computers, electronics and furniture. Rarely, if ever, do clothing, apparel, or groceries fall into this category.

Finance company loans

When a borrower obtains a loan from a finance company and is asked to list things that he or she owns in order to take out the loan, it is possible that the finance company will obtain a security interest in the items listed. If you are unsure of the status of your loan, do not hesitate to call your creditor and ask if is this debt unsecured or secured, and if secured, by what personal property.

Personal Lines of Credit

When people apply for a personal line of credit, generally speaking, the line of credit is not secured with any of the personal property or belongings. Similar to finance company loans, if you are asked to list out the things you own, you could be securing the line of credit. Beware of personal lines of credit from the bank you bank at or are financing a vehicle with. They sometimes consider the line of credit secured by your bank account or the vehicle you have financed with them. As a rule of thumb, Credit Unions normally tie all accounts together, whether they appear to be unsecured or not.

Payday Loans (Unsecured)

Beware of filing a Chapter 7 bankruptcy on payday loans taken out with hand written checks. If the checks are hand written and they bounce at any time, you could be prosecuted by your local District Attorney. On the other hand, if you file a Chapter 13 and are willing to pay them back 100% over time, you may be able to eliminate that problem. If you have taken out internet payday loans or other paydays loans without providing hand written checks, then they are usually safe from D.A. prosecution and can be discharged in a Chapter 7.

Does the experience of a bankruptcy lawyer matter?

In the past, people often referred to a phone book or relied on a personal referral to find an experienced bankruptcy attorney. In many instances, the results can often be uncertain. In current times, the uncertainty over your future is over. The attorneys and law firms that are members of StraightBankruptcy are respected and experienced bankruptcy lawyers ready to assist you and are happy to provide a free, no-obligation analysis of your case.