What Is Bankruptcy?
Bankruptcy is a legal proceeding in which a person who cannot pay his or her bills can get a fresh financial start. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law.
What Can Bankruptcy Do for Me?
Bankruptcy may make it possible for you to:
- Eliminate the legal obligation to pay most or all of your debts. This is called a “discharge” of debts. Bankruptcy is designed to give you a fresh financial start.
- Stop foreclosure on your house and allows you an opportunity to catch up on missed payments or time to apply for a loan modification. (Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment.)
- Sometimes eliminate second and third mortgages as well as other liens but is dependent on the value or your home.
- Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
- Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt.
- Restore or prevent termination of utility service.
- Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.
What Bankruptcy Cannot Do
- Eliminate certain rights of “secured” creditors. A creditor is “secured” if it has taken a mortgage or other lien on the property as collateral for a loan. Common examples are car loans and home mortgages. You can force secured creditors to take payments over time in bankruptcy. Bankruptcy can often eliminate your obligation to pay any additional money on the debt if you decide to give back the property. But you generally cannot keep secured property unless you continue to pay the debt. However, it should be noted that depending on the value of your home it may be possible to eliminate a second or third mortgage. You should consult with an attorney who can help you make this determination.
- Certain types of debts cannot be discharged in bankruptcy, such as child support, alimony, most student loans, court restitution orders, criminal fines, and most taxes.
- Protect cosigners on your debts. When a relative or friend has cosigned 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 have been filed.
What Different Types of Bankruptcy Cases Should I Consider?
There are four types of bankruptcy cases provided under the law:
- Chapter 7 is known as “straight” bankruptcy or “liquidation.” It requires an individual to give up property which is not “exempt” (protected) under the law, so the property can be sold to pay creditors. Generally, those who file Chapter 7 keep all of their property except property which is very valuable and cannot be protected or which is subject to a lien which they cannot avoid or afford to pay.
- Chapter 11, known as “reorganization,” is used by businesses and by individuals whose debts are very large.
- Chapter 12 is reserved for family farmers and fishermen. Your attorney will be able to assist you in determining whether special circumstances exist to help qualify you for a Chapter 7.
- Chapter 13 is a type of “reorganization” used by individuals to pay all or a portion of their debts over a period of years using their current income. Chapter 13 is often used by individuals to protect property which would not be protected in a Chapter 7.
Most people filing bankruptcy will want to file under either Chapter 7 or Chapter 13. Either type of case may be filed individually or by a married couple filing jointly.
Chapter 7 (Straight Bankruptcy)
In a bankruptcy case under Chapter 7, you file a petition asking the court to discharge your debts. The basic idea in a Chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up certain property, except for “exempt property which the law allows you to keep. In most cases, all of your property will be exempt. But property that is not exempt can be sold (liquidated), with the money distributed to creditors.
If you want to keep property like a home or a car and are behind on the mortgage or car loan payments, a Chapter 7 case probably will not be the right choice for you. This is because Chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt.
If your income is above the median family income in your state, you may have to file a Chapter 13 case. Median family income is different in each state. Higher-income consumers, through their attorney, must fill out “means test” forms requiring detailed information about their income and expenses. If the forms show, based on standards in the law, that they have an excess income that could be paid to unsecured creditors, the bankruptcy court may decide that you are not eligible to file a Chapter 7 case, unless there are special extenuating circumstances. Your attorney will be able to assist you in determining whether special circumstances exist which may be taken to help qualify you for a Chapter 7.
Chapter 13 (Personal Reorganization)
In a Chapter 13 case, you file a “plan” showing how you will pay off some of your past-due and current debts over three to five years. The most important thing about a Chapter 13 case is that it will allow you to keep valuable property–especially your home and car–which might otherwise be lost if you can make the payments which the bankruptcy law requires to be made to your creditors. In most cases, these payments will be at least as much as your regular monthly payments on your mortgage or car loan, with some extra payment to get caught up on the amount you have fallen behind.
You should consider filing a Chapter 13 plan if you:
- Own your home and are in danger of losing it because of money problems;
- The value of your home is below your first mortgage and you have a second or third mortgage;
- Are behind on debt payments, but can catch up if given some time;
- Have a valuable property that is not exempt, but you can afford to pay creditors from your income over time.
You will need to have enough income during your Chapter 13 case to pay for your necessities and to keep up with the required payments as they come due.
Should you consider filing for bankruptcy? It is important to keep in mind these important points:
- Bankruptcy is not necessarily to be avoided at all costs. In many cases, bankruptcy may actually be the best choice for you. The alleged stigma attached to filing bankruptcy is mostly created by the credit card industry to keep you from receiving the fresh start Congress envisioned.
- If you sign up for a debt management plan that you cannot afford, you may end up in bankruptcy anyway only after first spending thousands of dollars. The debt settlement copies are owned in large part by the credit industry.
- There are approved agencies for bankruptcy counseling that do not offer debt management plans.
What Property Can I Keep?
In most cases you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt. Even if your property is not fully exempt, you will be able to keep it, if you pay its non-exempt value to creditors in Chapter 13. Call me to discuss your specific situation.
Some of your creditors may have a “security interest” in your home, automobile, or other personal property. This means that you gave that creditor a mortgage on the home or put your other property up as collateral for the debt. Bankruptcy does not make these security interests go away. If you don’t make your payments on that debt, the creditor may be able to take and sell the home or the property, during or after the bankruptcy case.
In a Chapter 13 case, you may be able to keep certain secured property by paying the creditor the value of the property rather than the full amount owed on the debt. Or you can use Chapter 13 to catch up on back payments and get current on the loan.
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 bankruptcy is filed. However, if you receive an inheritance, a property settlement, or life insurance benefits within 180 days after filing for bankruptcy, that money or property may have to be paid to your creditors if the property or money is not exempt.
Will I Have to Go to Court?
In most bankruptcy cases, you only have to go to a proceeding called the 341-hearing “meeting of creditors” to meet with the bankruptcy trustee and any creditor who chooses to come. In 99.999% of cases, no creditors will show up at your hearing. Most of the time, this meeting will be a short and simple procedure where you are asked a few questions about your bankruptcy forms and your financial situation, which we will have already discussed on multiple occasions. As your attorney, I will attend this hearing with you.
Occasionally, if complications arise, or if you choose to dispute a debt, you may have to appear at a court hearing. In a Chapter 13 case, you may also have to appear at a hearing when the judge decides whether your plan should be approved. If you need to go to court, you will receive notice of the court date and time from the court. It should be noted it is rare that a debtor needs to attend a hearing when they have an attorney.
Will Bankruptcy Affect My Credit?
There is no clear answer to this question. Unfortunately, if you are behind on your bills, your credit may already be bad. Bankruptcy probably will not make things any worse. My clients have reported their credit scores increasing by more than 150 points while still in their bankruptcy. I think the increase in the credit score is effected by the credit agencies and the economy at any given time.
The fact that you have filed a bankruptcy can appear on your credit record for ten years from the date your case was filed. But because bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills, and you may be able to get new credit. In most cases your credit score when increase within the first year after filing for bankruptcy.
If you decide to file bankruptcy, remember that debts discharged in your bankruptcy should be listed on your credit report as having a zero balance, meaning you do not own anything on the debt. Debts incorrectly reported as having a balance owed will negatively affect your credit score and make it more difficult or costly to get credit. You should check your credit report after your bankruptcy discharge and file a dispute with credit reporting agencies if this information is not correct.
What Else Should I Know?
Utility services–Public utilities, such as the electric company, can not refuse or cut off service because you have filed for bankruptcy. However, the utility can require a deposit for future service and you do have to pay bills that arise after bankruptcy is filed.
Driver’s license–If you lost your license solely because you couldn’t pay court-ordered damages caused in an accident, bankruptcy will allow you to get your license back. In New Jersey bankruptcy also eliminates DMV surcharges.
Cosigners–If someone has cosigned a loan with you and you file for bankruptcy, the cosigner may have to pay your debt. If you file under Chapter 13, you may be able to protect cosigners, depending upon the terms of your Chapter 13 plan.
Beware of Bankruptcy Petition Preparers
Document preparation services are also known as typing services” or “paralegal services” involve non-lawyers who offer to prepare bankruptcy forms for a fee. Problems with these services often arise because non-lawyers cannot offer advice on difficult bankruptcy cases and they offer no services once a bankruptcy case has begun. There are also many shady operators in this field, who give bad advice and defraud consumers.
Remember: The law often changes. Each case is different. These faqs are meant to give you general information and not to give you specific legal advice.
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