Bankruptcy Frequently Asked Questions
DISCLAIMER: The following information should not be relied upon as legal authority nor should be used as a substitute for reference to the U.S. Bankruptcy Code and/or Attorney. Finally, this information should supplement, not substitute, for the advice of competent legal counsel.
Bankruptcy allows individuals or business (debtors) who owe others (creditors) more money than they are able to pay to either work out a plan to repay the money over time or completely eliminate (discharge) most of the bills.
Secured debt is a claim that is secured by some type of property, either by an agreement or involuntary with a court judgment or taxes. A mortgage is a secured debt on your property.
Unsecured debt is not tied to any type of property, and the creditor does not have a claim to their property.
The type depends on your circumstances and if you have assets available to repay all or part of your debts.
Consumers typically file Chapter 7, where debts are discharged or Chapter 13, where payments are made to creditors before they are discharged. Businesses typically file Chapter 13 or Chapter 11, where the business is reorganized. Chapter 12 allows family farmers and fishermen to repay their debts.
Each chapter of bankruptcy spells out what debts can be eliminated or how long payments can be stretched out and what possessions you can keep. Bankruptcy laws can be tricky and involved, so determining if, when and which type of bankruptcy you need should be made with careful thought and with the input of a bankruptcy lawyer.
Generally, you can convert a case one time to any other chapter you are eligible for. There are some issues when moving from Chapter 13 to a Chapter 7 bankruptcy, including reviewing whether you have acquired items that are now considered property of the estate under Chapter 7 that were not a part of the previous filing. As these matters are most complex, you should consult a bankruptcy lawyer.
With few exceptions, any person or business owing money to a creditor can file a bankruptcy petition. Bankruptcy laws can be tricky and involved, so determining if, when and which type of bankruptcy you need should be made with careful thought or the input of a bankruptcy lawyer.
Chapter 7 Bankruptcies can be filed every 8 years from a previous Chapter 7 filing or 6 years from a prior chapter 13 filing. Chapter 13 Bankruptcies can be filed 4 years from a prior Chapter 7 filing or 2 years from a prior Chapter 13 filing.
First we must determine if you are eligible for bankruptcy and what chapter of bankruptcy you are eligible to file. Bankruptcy and Chapter eligibility is determined by income and type of debt. The income considered for eligibility is your average gross (before taxes) income from all sources over the last 6 months. Some debts are not dischargeable in bankruptcy. A review of the type of debts will determine if they are dischargeable or not. See: Can all types of debt be discharged discussion below.
The length of a bankruptcy case depends on many circumstances, but mostly depends on which type of bankruptcy you file.
The average successful Chapter 7 bankruptcy case generally takes between 3 and 6 months before the filer receives his or her bankruptcy discharge. Once those unsecured debts are discharged, the filer is no longer responsible to pay for them.
The average successful Chapter 13 bankruptcy cases take 3 to 5 years after the repayment plant has been approved by the Court.
No. However, some financial situations may not warrant filing for bankruptcy. If your financial situation is temporary, you may consider making arrangements with individual creditors for a change in payment amount or a reduction in the total amount due.
A joint petition is when an individual and a spouse file a single petition. Unmarried partners must each file a separate case.
If one spouse files and the other doesn’t, the one who does not file could be responsible for the debts if they were acquired during the marriage. The income of both spouses is considered in determining eligibility.
Yes. The lender can require the co-signer to make payments on a loan once the principal has declared bankruptcy on the credit. This makes it extremely important when considering co-signing a loan: Be ready, and able, to pay the loan in the event that the principal signor defaults.
No. The debts that can’t be discharged vary slightly between the different chapters of bankruptcy. Generally, the following cannot be discharged:
- Debts for taxes owed to local, state or federal agencies
- Debts for money, property, services, or an extension, renewal, or refinancing of credit, which was obtained fraudulently.
- Debts that were not in the initial list of debts or that the debtor waived being cancelled.
- Debts owed to a spouse, former spouse, or child, for alimony, maintenance, or support of a spouse or child, with separation agreement, divorce decree or other order of court of record.
- Debts owed for injury to another person or property owned by another (as in a court judgment)
- Debts for government-sponsored education loans, unless it can be shown that repayment will cause an undue hardship.
- Debts for death or personal injury caused by the debtor’s drunk driving or from driving while under the influence of drugs or other substances (as in a court judgment)
- Debts incurred after a bankruptcy was filed.
- Any type of legal judgment.
Generally, you are entitled to keep household goods, clothing, and personal effects of ordinary value. You can usually keep the equity in your home up to a certain dollar value. You can also keep a certain amount of cash, including bank deposits, and one or more vehicles up to a specified value. You can keep the wages you earn after filing your chapter 7 petition. With rare exceptions, you can keep your retirement accounts and pension funds, as well as your right to receive disability payments. In addition, California gives you a “wildcard” exemption of a certain dollar value that can be applied to any property you designate.
If there is no equity in the house (today’s value less costs of sale less payoff balances on all liens) the trustee in a Chapter 7 will abandon the house to you. That is, you keep it, as long as you pay the mortgages.
A bankruptcy does not relieve property of the liability for voluntary liens, like mortgages or deeds of trust, nor for tax liens. So, the lender retains the right to foreclose if you don’t pay.
If you pay, everyone is happy. Remember, the lender does not want the property; it wants you to pay regularly on the loan. Foreclosure is a last resort for the lender if it concludes it can’t get its money any other way.
If there is equity, a determination must be made to determine whether the exemptions available to you equal or exceed the equity in the property. If the equity is all exempt, you can keep the house, so long as you pay the mortgages.
Usually, yes. What you must do to keep the car through a Chapter 7 bankruptcy varies depending on whether there is nonexempt equity in the car.
If there is no equity in the car, after subtracting any car loan and exemption from the car’s present sale value, the bankruptcy trustee will not take the car.
If there is equity in the car over and above the value of the exemptions available, a debtor can usually buy any unprotected equity from the Chapter 7 trustee.
If you still owe money on the car, you can chose to reaffirm the debt to the secured lender, keep the car, and continue paying under the existing terms; or you can buy the car from the secured creditor in a single payment for its present value (redemption
If you chose, you can surrender the car and be free of any obligation to pay for it.
Student loans are not dischargeable in any chapter of bankruptcy. Student loans are sometimes unenforceable due to school closures, fraud, etc. Chapter 13 can provide a way to cure defaults on student loans, or to pay them off over the course of the plan.
Putting your assets in someone else’s name to keep them beyond the reach of creditors and bankruptcy trustees is not allowed. Worse, such action may lead to the denial of your discharge.
A bankruptcy trustee can recover assets transferred within one year of the bankruptcy filing where the debtor did not get reasonably equivalent value for the asset, or where the transfer was made with intent to hinder creditors. The “look back” period may be even longer under some circumstances, giving the trustee that same time period to recover assets.
If you have more assets than you can protect with the available exemptions, consider filing Chapter 13 where the debtor generally keeps all of their property and “buys back” the nonexempt value from the creditors through payments to the Chapter 13 trustee out of future income.
Even an innocent transfer without consideration can cause serious trouble.
You must include all the debts you owe in your petition and schedules, include any debts owed to family and friends, regardless of the amount. You may opt to keep some debts by “reaffirming” the specific debt.
Bankruptcies remain on credit reports anywhere from seven to ten years.
Yes. Credit can generally be issued to anyone, however, the interest and type of credit that you will get after filing bankruptcy will greatly depend on your credit score after your bankruptcy has been discharged. A bankruptcy filing can improve your credit score by eliminating unsecured debt that holds your credit score down.
As soon as the bankruptcy petition is stamped “Relief Ordered” upon filing, you are immediately protected from your creditors. This is called an automatic stay. After that time, if a creditor attempts to collect a debt, immediately notify the creditor in writing that you have filed bankruptcy, and provide them with either the case name, number and filing date or a copy of the petition that shows it was filed. If the creditor still continues to collect, you may be entitled to take legal action against them.
The bankruptcy court notifies, by mail, all creditors advising them of:
- The filing of the bankruptcy
- The case number
- The automatic stay
- The name of the trustee assigned to the case (if filed under Chapters 7 and 13)
- The date set for the meeting of creditors
- The deadline, if any, set for filing objections to the dismissal of debts
- Whether and where to file claims
The exact information in the notice may be slightly different depending on the chapter under which the case is filed.