Many questions go through your mind when considering bankruptcy as an alternative to financial problems. We have listed a few of the more frequently asked questions below so you may be able to find your answer below.
If several of the following apply in your situation, you might consider bankruptcy:
- your wages or your bank account have been garnished
- most of your debts are Unsecured Debt like credit card bills, hospital or doctor's bills, etc.
- your total debt, not including your car or house loan, is more than you could pay, even over five or more years
- collection agencies are calling you at home and/or at work
- your payments are more than 30 days behind on more than one bill
- there are lawsuits pending against you
- you have high medical bills not covered by insurance
- you owe income taxes that you are currently unable to pay
- you have few assets
- you have little or no savings
- you have had property repossessed (such as a vehicle)
- your mortgage lender has threatened or started foreclosure proceedings against your home
People who have had their wages garnished can especially benefit from bankruptcy because the bankruptcy will stop the garnishment and could potentially help you get some of the garnished money back.
A law passed in 2005 makes it more complicated for some people to file for bankruptcy and to be freed of past debts. Most people, however, can still file for bankruptcy and free themselves of past debts.
You should talk to a lawyer before deciding whether to file for bankruptcy. Each bankruptcy case is unique and your lawyer can tell you what will happen to you, your debts and your property in bankruptcy.
Bankruptcy laws serve two main purposes. The two main policies of bankruptcy are the fresh start for the honest but unfortunate Debtor (you) and equal treatment of Creditors (the people you owe). If you file for bankruptcy and follow the Bankruptcy Code rules, bankruptcy law gives you a fresh start by canceling many of your debts through a court order known as the Discharge. Bankruptcy will allow you to pay your Creditors a portion of what they are owed depending on what you can pay. After bankruptcy, the Discharge prevents your creditors from trying to collect the remainder of what you owe them.
There are four types of bankruptcy available to individuals:
- Chapter 7 (a two to three-month process in which your property is sold to pay your debts);
- Chapter 13 (a three to five-year process in which you pay a portion of your debts under a court-supervised repayment plan);
- Chapter 12 (like Chapter 13, but only available to family farmers and fishermen); and
- Chapter 11 (a more complex process used primarily by business debtors, but sometimes by individuals with substantial debts and assets).
The two most important types of cases for consumers are chapter 7 and chapter 13. Both provide for some possible payments to creditors, a discharge for you and supervision by a Trustee appointed by the court. In both types of bankruptcy, most creditors must stop efforts to collect debts after you file your case. This protection is called the "Automatic Stay".
Chapter 7 involves surrendering some of your property in return for a discharge of many of your debts. The ????? sells this property and pays your creditors. In chapter 13, you keep your property but must commit to a three to five-year repayment plan. You then obtain a Discharge of most of the debts not paid in the plan.
What property do I keep?
Only Exempt property, which usually means necessities. A Trustee appointed by the court will sell the rest of your property to pay people you owe (your Creditors).
All of your property. You pay your debts out of future income.
How much time does it take?
Two to three months.
Three to five years. During this time, you will be paying people you owe a portion of what you owe them.
How much does it cost?
$299 to file the papers (the Petition) with the court. You should hire a lawyer, and you will also have to pay that lawyer’s fees, which will depend on the lawyer.
$274 to file the papers (the Petition) with the court. You should hire a lawyer, and you will also have to pay that lawyer’s fees, which will depend on the lawyer.
What happens to my credit report?
Stays on your credit report for 10 years.
Stays on your credit report for 7 years.
What happens to my retirement account or pension if I file for bankruptcy?
You will be allowed to keep it.
You will be allowed to keep it.
Chapter 7: A Brief Overview
Chapter 7 bankruptcy is liquidation. That means that a bankruptcy trustee will sell ("liquidate") certain property that you own at the time you file the bankruptcy case. The trustee uses the proceeds of the sale to pay creditors. In most cases, you will not have any assets that the trustee can sell because of state and federal laws that may allow you to keep necessities. These laws are called "Exemption Laws" and the property that the trustee may sell is known as "non-exempt" property. If all of your property is Exempt, the trustee will not sell any of your property.
About 90 days after you file chapter 7, most of your debts will be discharged, if yours is the typical case. This means you are no longer liable to pay the debt. Some debts are not discharged, however, and you still must pay them. Examples include past-due child support payments, some taxes and student loans. Debts for which you have pledged Collateral (such as cars, homes and household goods) also do not go away entirely in a bankruptcy.
Filing for bankruptcy allows you to discharge only the debts you list at the time of the bankruptcy case (your "pre-petition" debts). You must pay debts you incur after the filing the bankruptcy case as usual. You may keep the money that you earn after filing a chapter 7 bankruptcy cases, as well as most other property that you obtain after the filing.
Chapter 13: A Brief Overview
Chapter 13 is very different. If you file under chapter 13, you may keep your property and you agree to pay your debts over time from your income, pursuant to a court-approved plan. The amount that you will repay to creditors under the plan will vary based on your particular circumstances.
The payments you make to creditors under the plan must total at least as much as creditors would have received if you filed a case under chapter 7. The payments are made to a trustee, who distributes the payments to the creditors.
The plan usually lasts until the end of a three- to five-year period. Your lawyer can tell you whether you will have to pay over three or five years. You receive a discharge at the completion of the plan.
This was just an overview. More detail is provided throughout this FAQ.
Chapter 7 Eligibility
If you are an individual with primarily Consumer Debts and you want to file a case under chapter 7, your lawyer will examine your finances to determine if you can afford to pay creditors. If you can, based on a set formula known as the "means test", you will not be eligible to file a chapter 7.
If you do, the court will either dismiss your bankruptcy case or you may choose to convert your case to chapter 13. If your income is at or below the median income for your state, the means test will not apply and you will be permitted to file for chapter 7.
If your income is above the median income for your state, the means test compares your monthly income, minus your permitted living expenses, to the amount of your Unsecured Debt to determine how much you could repay to creditors if you were in chapter 13. Unsecured debts are those for which you have not given collateral. An example is credit card debt. Because this calculation is hypothetical and does not necessarily reflect your true financial condition, you may appear to be able to repay the minimum portion of your debts but you, in reality, cannot. In that situation, the court may permit you to stay in chapter 7. The means test is very complicated and you should talk to a lawyer who can help you decide the chapter under which to file.
Chapter 13 Eligibility
There are two principal requirements for eligibility in a chapter 13 case. First, you must have a regular income, although this need not be from a job; regular benefit payments (such as unemployment or disability payments) or rental income would qualify. Second, you must not have debts over a certain amount. The debt limits are $1,081,400 in Secured Debt (like home mortgages and auto loans), and $360,475 in Unsecured Debt (like most credit card debt). These numbers go up every three years.
The moment you file for bankruptcy, you are protected from your creditors. The Automatic Stay stops all collection efforts against you and against your property. Creditors must stop calling you and sending letters to you. If a creditor has already sued you, that lawsuit must stop. The automatic stay also prevents creditors from repossessing your property and from foreclosing on your home. The automatic stay is explained in more detail below.
If a debt is discharged, you no longer have an obligation to pay the debt, and the creditor may not make any effort to compel you to repay. However, if some other person (such as a relative or friend) has co-signed or guaranteed your loan, his/her obligation is not discharged. In addition, if you have property that is collateral for a loan, the creditor may still be able to repossess that property if you do not repay the loan.
No, not all debts will be discharged through the bankruptcy, even if you have followed all of the Bankruptcy Code’s rules during your case. First, a bankruptcy case only discharges debts that you owed and listed at the time you filed the case, not those you incurred after filing the case.
- In addition, even after bankruptcy, you will have to pay debts that are not discharged. Non-dischargeable debts include:
- debts for income and property taxes
- debts to creditors you did not list in your bankruptcy paperwork
- domestic support obligations such as alimony and child support debts
- fines payable to any governmental unit, such as a city or state
- restitution imposed on you as part of a criminal sentence
- student loans
Other debts that may not be discharged include debts you may have incurred through fraud or by willful or malicious actions. An example of a debt incurred by fraud is a loan you obtained when you knew you could not repay. Some credit card use immediately before bankruptcy may be considered fraudulent, especially if you use the card to pay for "luxury" goods or services, such as a vacation. If the creditor does not ask the court to rule on these debts, they will be discharged.
The current filing fee for a chapter 7 case is $299 and for a chapter 13 case is $274. Some courts also impose an additional administrative fee. You may pay the filing fee in installments. The court may waive the filing fee in a chapter 7 case if your income is below specified levels and the court finds that you cannot pay the filing fee in installments.
You should hire an attorney to assist you with filing bankruptcy. Attorneys usually charge a fixed fee for certain services in a bankruptcy case and the fees typically differ depending on the chapter under which you file. Your lawyer may request payment up front, especially if you are filing for chapter 7.
Yes, you can file again, unless you have been in bankruptcy within the past six months and either:
- your case was dismissed because you did not follow the orders of the bankruptcy court or did not show up in court when you were supposed to; or
- you asked the court to dismiss your case after a creditor moved for relief from the Automatic Stay.
If you have been in bankruptcy within the past year, you may not get the full protection of the Automatic Stay. Because the automatic stay protects you from your creditors after you file a bankruptcy case, it might not be worth it for you to file for bankruptcy if the automatic stay will not apply. Your lawyer can tell you if it makes sense for you to file for bankruptcy if you have been in bankruptcy within the past year.
As explained above, the bankruptcy Discharge gives you your fresh start. But if you have received a bankruptcy discharge in the past, you may not be eligible for another discharge right now.
Today, you simply need to consider carefully whether bankruptcy is the right choice for you and then gather the paperwork we talk about later in these FAQs.
In order to be eligible to file bankruptcy, you must receive credit counseling within the 180 days prior to filing. Specifically, the law requires you to receive, from an approved agency, a briefing outlining the opportunities for credit counseling and help with a budget analysis. You may do this alone or in a group, and in person, on the phone, or even on the Internet. If, due to an emergency, you are unable to obtain credit counseling services from an approved agency during a 5-day period, the court may excuse the requirement temporarily but you still must fulfill it within 30 days (or in some instances 45 days) after filing. If you use a bankruptcy attorney, he/she will most likely be able to help you complete this requirement.
You can find a list of approved non-profit budget and credit counseling agencies at the office of the United States Trustee or Bankruptcy Administrator, at the bankruptcy court Clerk's office.
Your lawyer will prepare the forms that you must file in a chapter 7 case. To prepare those forms, your lawyer will need certain information from you. The information you should take with you to your lawyer is listed below.
Information to Take With You When Consulting a Bankruptcy Attorney
- A copy of every bill or letter you have received from a collection agency;
- A copy of any lawsuit or pleading you have received in a case in which you are involved;
- Two pay stubs representing an average pay period (include pay stubs for your spouse, even if he/she is not filing bankruptcy with you);
- Deeds to real estate in which you have any (even a partial) interest (including real estate you are purchasing or that you already own);
- The original or memorandum title for any cars, trucks, trailers, boats, motorcycles, mobile or motor homes you own or are purchasing, or other documents showing the value of your assets;
- Appraisals of your home, jewelry, etc., if you have them;
- Any policies of life insurance you have on your life, and/or the life of your spouse or children (where possible, you should contact the agent who sold you the policy and find out if the policy has any "cash surrender value." If your policy has "cash surrender value", please provide your attorney with that value); and
- Income Tax Returns filed in the previous two years.
You need to file these forms, all of which should be prepared by an attorney:
- the bankruptcy petition;
- a list of creditors;
- a list of assets and liabilities;
- a list of current income and current expenditures;
- a statement of your financial affairs;
- a certificate from the attorney or bankruptcy petition preparer (if there is one) indicating that you received a notice describing the different bankruptcy chapters and the services available from the credit counseling agencies as well as a statement specifying that anyone who knowingly or fraudulently conceals assets or makes a false statement under oath is subject to fine, imprisonment or both (if no one assisted you, then you must file a certificate that such notice was received from the court and read by you);
- copies of all pay stubs received by you within 60 days before filing;
- a statement of your monthly net income itemized to show how it is calculated; and
- a statement disclosing a reasonably anticipated increase in income or expenditures over the following 12 months.
If you fail to file all information noted above within 45 days of filing the petition, the court will dismiss your case. If your case is dismissed, you will lose the benefit of the automatic stay and your creditors can resume their collection efforts.
You will also have to file the following documents with the court. Again, your lawyer will help you with these.
- if you have property that secures a debt, such as a car or home, a Statement of Intention stating whether you plan to keep or give up the property;
- a certificate from the approved non-profit budget and credit counseling agency that describes the services provided to you and a copy of the debt repayment plan, if any, developed by that agency;
- a record of any interest that you have in an individual retirement account; and
- an analysis of the means test.
Chapter 7 cases are pretty simple for the most part. In most cases, you will attend one creditors' meeting and just wait for your discharge notice to come in the mail.
The bankruptcy Trustee runs the creditors' meeting, which is also called a 341 meeting (named after the section of the bankruptcy law that requires the meeting), and will question you under oath about all the information contained in your bankruptcy documents.
If you and your spouse file a Joint Petition, you must both attend the creditors' meeting and answer questions. It is important to cooperate with the trustee and to provide any records or documents requested.
In a simple case, the meeting will usually last just five minutes or so. While all creditors may attend, very few actually do. Be sure to bring a form of identification to the meeting, as well as proof of your Social Security number (usually your Social Security card). The trustee may ask you to provide additional documentation during the meeting and give you a few days to produce it.
The discharge notice will arrive in the mail about 60 days after you attend the creditors' meeting. This piece of paper is proof that most of your debts have been discharged. You should keep it in a safe place.
If you are filing a chapter 13 case, rather than a chapter 7, in addition to the documents mentioned above, you must file a plan that describes how much you will pay your creditors and over what time period. Your plan must provide that you pay creditors at least what they could have received in chapter 7 liquidation case, which basically means creditors must receive payments equal to the value of your non-exempt assets. Your lawyer will prepare your plan.
In addition, the plan must provide that you contribute all your "disposable income" to the plan. Disposable income is the income above what is necessary for the support of you and your family. However, in many cases the means test formula determines that amount. The means test is a very complicated test, but essentially requires that you average your income over the past six months (from any source including regular gifts from family members), then deduct a series of allowed expenses, and see what is left to pay creditors. You will need an attorney to complete this analysis.
The chapter 13 plan lasts until the earlier of you pay your debts in full or the end of a three- to five-year period. If your income is below your state's median income, the maximum plan period without court approval is three years. If your income is not below your state’s median income, creditors may be able to insist that the debtor pay a five-year plan.
Within 30 days of filing your petition, you must begin making payments under your plan. You make the payments to a trustee, who distributes the payments to the creditors.
Like in a chapter 7 case, after filing the bankruptcy petition, you must attend a creditors' meeting (also known as a 341 meeting, named after the section of the bankruptcy law that requires the meeting). The chapter 13 trustee will conduct the meeting and will question you under oath about the paperwork you filed in your case. This creditors' meeting will last longer than a meeting in a chapter 7 case. The trustee will likely question you about your income and your expenses, and may also require additional documentation at the meeting.
After the meeting of creditors, you, the chapter 13 trustee, and those creditors who wish to attend will come to court for a hearing on your chapter 13 plan. If there are no problems, the court will approve ("confirm") your plan.
After completing payments under the plan and completing any financial counseling required, you will receive a discharge of any debts not paid under the plan.
Yes. You must provide the trustee and/or any creditor with copies of any federal tax return that you filed for the year prior to filing. If you do not comply with this request, the court may dismiss your bankruptcy case.
You must also file copies of any federal tax returns filed during the case with the bankruptcy court.
Any taxing authority may request dismissal of a bankruptcy case if you fail to file all required tax returns.
Yes. You must list all your debts, with the name and address of the creditors. This is so creditors receive notice of the bankruptcy and get their fair share of any money paid to creditors. You may think that you should omit a creditor because you want to continue to pay the debt. This would violate the law, and it is unnecessary because you can always choose to pay a debt voluntarily, even though the debt has been discharged and there is no legal obligation to make payment. However, creditors are prohibited from taking any action to collect discharged debts.
You should notify your attorney and provide him or her with all the information necessary to complete the schedule (the amount of the debt, the type and value of any collateral, and the name and address of the creditor). This is very important because if you do not list a debt on your schedules, that debt might not be discharged. That means you will be required to pay the debt in full after bankruptcy.
If an omitted creditor demands payment of the debt, you should inform the creditor of the bankruptcy, as discussed below.
You should notify your attorney and provide him or her with all the information necessary to complete the schedule (the amount of the debt, the type and value of any collateral, and the name and address of the creditor). This is very important, because if you do not list a debt on your schedules, that debt might not be discharged. That means you will be required to pay the debt in full after bankruptcy.
If an omitted creditor demands payment of the debt, you should inform the creditor of the bankruptcy, as discussed below.
Most efforts by a creditor to collect a pre-petition debt (one that you owe as of the filing of your case) or to repossess your property without the permission of the bankruptcy court are violations of the automatic stay. If a creditor repossesses any property, such as your car, after you file for bankruptcy, the creditor must return the property to you.
The court may punish a creditor who knowingly violates the automatic stay and the creditor is liable to the debtor for harm caused. If you did not list a debt on the schedules filed with the court, the creditor may not be on notice of the bankruptcy. Therefore, you should inform the creditor of your bankruptcy and request that the creditor stop the collection efforts.
If you are represented by an attorney, you should give the creditor your attorney's name and telephone number. If you are not represented by an attorney, you should give the creditor additional information about the case, the date of filing, the court in which the case was filed and the case number. If improper collection action continues, you should consult with an attorney, notify the trustee or seek protection from the court.
Every state has exemption laws that allow you to keep some necessities, even if you do not pay your creditors. The idea is that it would do little good to take all of your assets because you would not have a place to live, clothes to wear or a way to get to work. Most exemption laws allow you to keep clothes, household goods, a car of some limited value, tools of trade, as well as other property. Some exemptions allow you to keep some equity in a house.
In addition, bankruptcy law contains its own set of exemptions, which you can use when you are in bankruptcy, at least in some states. If you live in Arkansas, Connecticut, the District of Columbia, Hawaii, Massachusetts, Michigan, Minnesota, New Jersey, New Mexico, Pennsylvania, Rhode Island, Texas, Vermont, Washington or Wisconsin, you can choose to use either the state or the bankruptcy exemptions, based upon your particular circumstances. One scheme may be great for one person, but horrible for another. An experienced bankruptcy attorney will be able to help you choose the appropriate exemptions.
As we described above, you must give all your non-exempt assets (the ones that do not fit within the exemptions) to the bankruptcy trustee. The trustee will then sell these assets to pay a portion of your pre-petition debts. However, many people do not have property in excess of the allowed amount of exempt property, and if that is the case, you do not need to surrender any property. Despite the exemptions, you always need to pay debts owed to Secured Creditors in order to keep the collateral securing the debt. Your exemptions do not affect their claims.
Most people who file for Chapter 13 keep all of their property. In exchange for keeping their property, however, they commit to repaying a portion of their debts under a three- to five-year repayment plan. The plan will include payments to your secured creditors (creditors who took collateral for their loans, such as car lenders).
You may use a chapter 13 to save your home from foreclosure. The automatic stay stops the foreclosure proceeding as soon as you file bankruptcy. Chapter 13 allows you to catch up on overdue pre-petition payments over time, while keeping up with current payments.
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