WHAT IS BANKRUPTCY?
Many people turn to bankruptcy when they cannot pay their bills-both unsecured and secured. Bankruptcy is a legal proceeding that's designed to help you discharge or eliminate most, if not all, of your unsecured debt and help you save your property which is secured by a lien, such as your house from foreclosure and your automobile from repossession. Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property; you must continue making your payments or pay off the lien if you wish to keep the asset. However, if your property was illegally repossessed, bankruptcy can force the creditor to return it. It all depends on which chapter is right for you. Bottom line, all bankruptcy chapters are intended to give you a fresh financial start, a “do over” if you will.
WHAT ARE THE MOST COMMON REASONS FOR FILING BANKRUPTCY?
The most common reasons for consumer bankruptcy are: unemployment; large medical expenses; marital problems, credit cards, store cards, utility bills, some personal loans, payday loans, and more—basically, most debt not tied to property. The majority of people do not just run up their credit cards and equity lines irresponsibly with the expectation that you can just wipe out the debts in a bankruptcy. There are often real financial problems causing this situation.
WHAT CAN BANKRUPTCY DO FOR ME?
Filing bankruptcy immediately stops all creditors' actions in trying to collect from you. The harassment stops, as well as similar, unsavory creditor collection actions. Wage garnishment is stopped. You can restore service, or prevent termination, of utility service. And, you are allowed to challenge claims of creditors who have committed fraud in trying to collect more than you owe. During the process, you sort out your unsecured debt from the secured and see what can be discharged and what can be saved. With the help of your attorney, you decide which Chapter is best for your unique situation, and how the money will then play out. Will you be able to responsibly walk away from your unsecured debt and potentially lose your secured debt, such as your house and car? Or, will you be able to pay off your unsecured debt over time, while being allowed to keep your secured debt? Your attorney will help you sort through these tricky waters and decide what is right for your unique situation.
WHAT DOESN'T BANKRUPTCY DO?
Bankruptcy cannot 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 who, for example, have taken a mortgage or other lien on your property as collateral for a loan—such as with a home mortgage and car loan. Generally, you can keep this secured property as long as you keep up with your current payments, and spread the back payments over time.
Discharge types of debts that are singled out by the bankruptcy law for special treatment, including child support, alimony, certain other debts related to divorce, 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 bankruptcy has been filed.
BANKRUPTCY: IS IT RIGHT FOR ME?
Do you have a substantial amount of credit card, or other unsecured, debt?
Are creditors calling and harassing you day and night?
Do you owe a large amount in medical bills?
Are you at risk of losing your home to foreclosure?
Are you facing a wage garnishment?
Have you recently lost your job or had a reduction in income?
Are you experiencing a business failure?
Are you dealing with dropping home values?
Do you owe more on your house than it's worth?
Do you want to eliminate your second mortgage?
Did you invest in risky investments that didn't pay off?
Do you have large IRS debts? (Talk to us before accepting an "Offer & Compromise")
Is there a court judgment or wage garnishment against you?
Are you saddled with large student loans?
Have you found hidden debts by your spouse?
Are you facing a divorce?
If you answered “yes” to any of the above questions, then bankruptcy may be the right solution for you. Bankruptcy is a legal way to get back on your feet.
WHAT ARE THE THREE MOST COMMON TYPES OF BANKRUPTCY TO CONSIDER?
Chapter 7 is known as "straight" bankruptcy because of the straight relief that it offers. In the majority of cases, most, if not all, unsecured debt is discharged. However, in some cases, Chapter 7 requires you to give up property that the law says you can keep, called "exemptions", which is worth more than the amount of the exemption to which you are entitled.
Chapter 11, known as "reorganization," is used by businesses and wealthy individuals whose debts are very large, yet have the resources or earning capacity to bring in enough income to pay back these debts. Depending on your situation, the bankruptcy court may even exempt your business from paying all or part of its debts. Chapter 11 bankruptcy is usually sought and granted in the case where the value of the business is greater than the sum of its assets. And, if your business has the earning potential to exceed your debt, the court may let you continue with your business as usual. It is possible though that the court will elect to sell off your assets, dividing the proceeds among your creditors.
Chapter 13 is called "wage earner's” because the debtor is required to bring in steady income to pay off the debts, both unsecured and the arrears amount of the secured debt. This Chapter requires a debtor to file a plan to pay debts (or parts of debts) from current income. Chapter 13 is used most often if your house faces foreclosure.
Most people filing bankruptcy will want to file under either Chapter 7 or Chapter 13. Either type may be filed individually or jointly by a married couple.
DO I HAVE TO HIRE AN ATTORNEY?
No, but it is strongly recommended. Most bankruptcy cases without attorney representation fail. Neither the bankruptcy trustee nor the Court will represent you and neither can give you legal advice.
DOES FILING BANKRUPTCY STOP CREDITORS FROM ATTEMPTING TO COLLECT A DEBT?
Bankruptcy rules state that a creditor must immediately stop all collection efforts as soon as they are notified of the bankruptcy filing—whether by mail or via phone. They may not take any further action to attempt to collect a debt. In other words, the harassing phone calls must stop immediately. Any lawsuit proceedings must cease, a creditor may not report the debt to credit reporting agencies, and the debtor's property and income may be safe from seizure depending on whether the debtor filed for Chapter 7 or Chapter 13 bankruptcy and if they can continue making the monthly payments. Collection activities may continue for spousal and child support, tax debt, student and pension loans, among others. If a creditor continues to use collection tactics after being informed of the bankruptcy, they may be liable for court sanctions, attorney fees, or lawsuits for this conduct.
ALONG WITH OTHER DEBT, I OWE BACK TAXES TO THE IRS. CAN BANKRUPTCY HELP?
One advantage of Chapter 13 bankruptcy over Chapter 7 Bankruptcy is your ability to deal with debt that would not be wiped out in any bankruptcy, such as most tax debt. Unless it qualifies for discharge because of its age, you must repay 100% of your tax debt. You may do so over the course of your Chapter 13 repayment plan, which usually lasts from three to five years.
WE'RE FACING FORECLOSURE. CAN BANKRUPTCY HELP US KEEP OUR HOME?
Chapter 13 Bankruptcy may be a good option if you're trying to save your home from foreclosure. Chapter 13 lets you pay off a mortgage arrearage (delinquent payments) over the length of your repayment plan--usually between three and five years. In order for this to work, you'll need enough income to meet your current mortgage payment at the same time you're paying off the arrearage. Once you file your Chapter 13 bankruptcy petition, the "automatic stay" stops foreclosure proceedings until your repayment plan is approved (or rejected) by the court. If approved, the mortgage lender is then bound by the plan and must accept payments towards the arrearage over the length of your repayment period. If you make all the required payments up to the end of the repayment plan, and keep current on your regular monthly mortgage payments, you'll avoid foreclosure and keep your home.
WILL BANKRUPTCY WIPE OUT ALL MY DEBTS?
No. There are exceptions depending on the bankruptcy chapter.
WHAT DEBTS WILL BE ELIMINATED IN A CHAPTER 7 BANKRUTPCY?
Bankruptcy will generally wipe out all your credit card debt except cash advances in excess of $750 taken within 60 days of filing, medical bills, and debts owed due to repossession of a vehicle.
WILL I LOSE ALL MY ASSETS IN A CHAPTER 7 BANKRUPTCY?
California and Federal law have various exemptions which will allow you to retain a good amount of your property after the conclusion of your Chapter 7 case. California allows a debtor to retain up to $23,250 of miscellaneous property (“wildcard” exemption), which for many debtors encompasses everything they own. If you own your home, California will allow you to keep up to $75,000 in equity if you are single and $100,000 in equity if you are married. If you select the California homestead exemption as authorized, you will not be able to use the wildcard exemption for other property. If your equity exceeds the exemptible amounts, Chapter 13 may be a better option for you if you wish to retain your home. Additionally, most pension plans, private retirement plans and IRAs are exempt in their entirety.
WHAT DEBTS ARE NOT DISCHARGED IN CHAPTER 7 BANKRUPTCY?
The debts that cannot be discharged are:
Debts for alimony and child support
Certain educational benefit over-payments
Loans made or guaranteed by a governmental unit
Debts for death or personal injury caused by the debtor's operation of a motor vehicle while the debtor was intoxicated from alcohol or other substances
Debts for certain criminal restitution orders.
Debts for money or property obtained by false pretenses,
Debts incurred by theft, embezzlement or misappropriation while acting in a trustee or other fiduciary capacity
Debts for willful and malicious injury to another entity or to the property of another entity
Student loans owed to a school or government body unless the court decides that payment would be an undue hardship.
Debts obtained by fraud or false representations
Income taxes less than three years old.
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.
And, debts not listed on your bankruptcy petition
WILL MY EMPLOYER FIND OUT ABOUT MY BANKRUPTCY?
Bankruptcy petitions are public records. However, under normal circumstances, unless your employer or landlord is a creditor, they will not know you filed a bankruptcy petition. If your employer or landlord is a creditor, they must be listed as a creditor in the court papers and will receive notice of the bankruptcy proceeding.
CAN I BE FIRED FROM MY JOB FOR FILING BANKRUPTCY?
No. The U. S. Bankruptcy Law specifically prohibits discrimination based upon a debtor filing for protection under the bankruptcy laws.
I'M MARRIED. CAN I FILE BY MYSELF?
Yes, but your spouse will still be liable for any joint debts. In some cases where only one spouse has debts, or one spouse has debts that are not dischargeable, then it might be advisable to have only one spouse file. If the spouses have joint debts, the fact that one spouse discharged the debt may show on the other's credit report.
IF I AM GOING THROUGH A DIVORCE AND MY EX-SPOUSE FILES FOR BANKRUPTCY, HOW WILL THAT AFFECT OUR DIVORCE SETTLEMENT?
Alimony, maintenance, and/or support are protected from discharge in most cases. Property allocation or equalization agreements contained in divorce decrees and separation agreements are covered by bankruptcy laws.
These debts are specifically not dischargeable:
the debtor is engaged in a business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business. Discharging such debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse, or child of the debtor.
These debts may be dischargeable in certain circumstances:
the debtor does not have the ability to pay the debt from income or property used for the maintenance or support of the debtor, spouse, former spouse or a dependent child of the debtor.
CAN I ERASE MY STUDENT LOANS BY FILING BANKRUPTCY?
Generally, student loans are not discharged in bankruptcy. There are two exceptions to this general rule:
The student loan may be discharged if it is neither insured or guaranteed by a governmental unit, nor made under any program funded in whole or in part by a governmental unit or nonprofit institution.
If paying the loan will "impose an undue hardship on the debtor and the debtor's dependents." This is, however, a very difficult burden to sustain in court.
Student loans more than 7 years old used to be dischargeable under certain circumstances, but this provision was removed in October of 1998. An exception depends on the facts of the particular case and/or on local court decisions. Even if a student loan falls into one of the two exceptions, discharge of the loan may not be automatic. You may have to file in the bankruptcy court to obtain a court order declaring the debt discharged.
WHAT HAPPENS TO MY CREDIT RATING AFTER BANKRUPTCY?
The bankruptcy is a judgment and will be listed for a period of up to 10 years after the discharge. You can re-establish credit and get an "A" credit mortgage three to fours years after the discharge of bankruptcy if you re-build your credit rating. However, it may be very difficult to get a credit card until the bankruptcy case is closed. Secured credit cards and car loans are the pathways to a better post-bankruptcy credit rating.
WILL BANKRUPTCY HURT MY CREDIT?
At first, yes, bankruptcy will hurt your credit scores. While the bankruptcy filing remains on your credit report—ten for Chapters 7, 11 and 13—your credit does not have to stay ruined during that time. Right after filing bankruptcy, it will most likely be more difficult to get loans and low-interest credit cards. However, if you don't have accounts go into collection, like utility bills, and don't get evicted, and keep on top of your mortgage payments, you'll be improving your credit scores. You can find a starter credit card, which is usually secured by a deposit you will make into a bank account. It will probably have a higher interest rate, but paying it off every month, or at least making higher than minimum payments, will also help with your credit. If you keep those habits up, you'll likely see your credit score rise in 1-2 years after filing. Your credit probably wasn't the best before you filed bankruptcy. It will take time to boost it back up, but it can be done if you remain dedicated to responsible spending.
IF I AM FINANCING MY CAR, DO I HAVE TO CONTINUE MAKING THE MONTHLY PAYMENTS?
If you want to keep your vehicle, it will be necessary for you to continue making the monthly payments and reaffirm the debt. If you then fail to make payments, the creditor can take the car and sue you for the difference between what it was sold for and what you owe. However, in a bankruptcy, you also have the right to return the vehicle to the finance company if you do not want to keep your car, or to pay them the value of the car as of the time you filed the bankruptcy (this process is called “redemption”.)
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 the Chapter 7 bankruptcy is filed. However, if you receive an inheritance, a property settlement, or life insurance benefits within 180 days after your bankruptcy is filed, that money or property may have to be paid to your creditors if the property or money is not exempt. You can also keep any of the property that was exempt throughout the bankruptcy.
WHAT IS A REAFFIRMATION AGREEMENT?
A reaffirmation agreement is an agreement confirming that you wish to keep the asset and that you will continue to make the payments. It is also for any unsecured debt that you wish to keep and start paying off. An example is that you have a business debt and wish to honor it. The reaffirmation agreement tells that business owner you will continue to be liable for that debt. The effect is that these debts will not be wiped out in your bankruptcy case. If you do not reaffirm, you will no longer be liable for the debt to the extent such debt is unsecured. Thus, if you need to, in the case of vehicles, a number of creditors are taking the position that if you do not reaffirm, they will repossess your car.
HOW OFTEN CAN I FILE FOR BANKRUPTCY?
You can get a discharge in a Chapter 7 after eight years have passed from the date of your last filing. A Chapter 13 bankruptcy can be filed at any time but there are similar limitations on obtaining a discharge.
WHAT ABOUT CO-SIGNERS?
If someone has co-signed a loan with you and you file for bankruptcy, the co-signer may be responsible for your debt.