What Is Bankruptcy?
Bankruptcy is a legal proceeding in which a person who can not 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 most of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law.
What Type of Bankruptcy Should You File?
Most consumer debtors filing bankruptcy will want to file under either chapter 7 or chapter 13 bankruptcy. Either type of case may be filed individually or by a married couple filing jointly.
- Chapter 7 Bankruptcy– is known as “straight” bankruptcy or “liquidation.” It requires an individual to give up property which is not “exempt” 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 or which is subject to a lien which they cannot avoid or afford to pay. 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. That 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.
- Chapter 13 Bankruptcy– 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. 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.
What Can Bankruptcy Do For You?
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. It is designed to give you a fresh financial start.
- Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment. However, unsecured 2nd mortgages may be “stripped” in Chapter 13 bankruptcy cases.
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.
Bankruptcy will not normally wipe out:
- Money owed for child support or alimony.
- Most fines and penalties owed to government agencies.
- Most taxes and debts incurred to pay taxes which can not be discharged.
- Student loans, unless you can prove to the court that repaying them will be an “undue hardship”.
- Debts not listed on your bankruptcy petition (chapter 13).
- Loans you got by knowingly giving false information to a creditor, who reasonably relied on it in making you the loan.
- Debts resulting from “willful and malicious” harm.
- Debts incurred by driving while intoxicated.
- 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 (ex. You surrender property to creditor).
Chapter 7 Bankruptcy – Frequently Asked Questions
- What is a chapter 7 bankruptcy case and how does it work?
A chapter 7 bankruptcy case is a proceeding under federal law in which the debtor seeks relief under chapter 7 of the Bankruptcy Code. Chapter 7 is that part (or chapter) of the Bankruptcy Code that deals with liquidation. The Bankruptcy Code is a federal law that deals with bankruptcy. A person who files a chapter 7 case is called a debtor. In a chapter 7 case, the debtor must turn his or her nonexempt property, if any exists, over to a trustee, who then converts the property to cash and pays the debtor’s creditors. In return, the debtor receives a chapter 7 discharge, if he or she pays the filing fee, is eligible for the discharge, and obeys the orders and rules of the bankruptcy court.
- What is a chapter 7 discharge?
It is a court order releasing a debtor from all of his or her dischargeable debts and ordering the creditors not to attempt to collect them from the debtor. A debt that is discharged is a debt that the debtor is released from and does not have to pay.
- What is means testing?
Means testing is a method of determining a person’s eligibility to maintain a chapter 7 case.
- Is there anything that a person must do before a chapter 7 case can be filed?
Yes. A person is not permitted to file a chapter 7 case unless he or she has, during the 180-day period prior to filing, received from an approved nonprofit budget and credit counseling agency an individual or group briefing that outlined the opportunities for available credit counseling and assisted the person in performing a budget analysis. This briefing may be conducted by telephone or on the internet, if desired, and must be paid for by the person. When the chapter 7 case is filed, a certificate from the agency describing the services provided to the person must be filed with the court. A copy of any debt repayment plan prepared for the person by the agency must also be filed with the court.
- How much is the filing fee in a chapter 7 case and when must it be paid?
The filing fee is the same for either a single or a joint case. The filing fee is payable when the case is filed. However, if the person filing can show that his or her income is less than 150 percent of the official poverty line and that he or she is unable to pay the filing fee, the court can waive payment of the filing fee. If the person filing is unable to pay the entire filing fee when the case is filed, it may be paid in up to four installments, with the final installment due within 120 days. The period for payment may later be extended to 180 days by the court, if there is a valid reason for doing so. Unless payment is waived by the court, the entire filing fee must ultimately be paid or the case will be dismissed and no debts will be discharged.
- May a husband and wife file jointly under chapter 7?
Yes. A husband and wife may file a joint case under chapter 7. If a joint chapter 7 case is filed, only one set of bankruptcy forms is needed and only one filing fee is charged. However, both husband and wife must receive the required credit counseling before the case is filed and both must complete the required financial management course after the case is filed.
- When is the best time to file a chapter 7 case?
The answer depends on the status of the person’s dischargeable debts, the nature and status of the person’s nonexempt assets, and the actions taken or threatened to be taken by creditors.
- How does the filing of a chapter 7 case by a person affect collection and other legal proceedings that have been filed against that person in other courts?
The filing of a chapter 7 case by a person automatically suspends virtually all collection and other legal proceedings pending against that person. A few days after a chapter 7 case is filed, the court will mail a notice to all creditors ordering them to refrain from any further action against the person. This court-ordered suspension of creditor activity against the person filing is called the automatic stay. If necessary, notice of the automatic stay may be served on a creditor earlier by the person or the person’s attorney. Any creditor who intentionally violates the automatic stay may be held in contempt of court and may be liable in damages to the person filing. Criminal proceedings and actions to collect domestic support obligations from exempt property or property acquired by the person after the chapter 7 case was filed are not affected by the automatic stay. The automatic stay also does not protect cosigners and guarantors of the person filing, and a creditor may continue to collect debts from those persons after the case is filed. Persons who have had a prior bankruptcy case dismissed within the past year may be denied the protection of the automatic stay.
- How does filing a chapter 7 case affect a person’s credit rating?
It will usually worsen it, if that is possible. However, some financial institutions openly solicit business from persons who have recently filed under chapter 7, apparently because it will be at least 8 years before they can file another chapter 7 case. If there are compelling reasons for filing a chapter 7 case that are not within the person’s control (such as an illness or an injury), some credit rating agencies may take that into account in rating the person’s credit after filing.
- Are the names of persons who file chapter 7 cases published?
When a chapter 7 case is filed, it becomes a public record and the names of the persons filing may be published by some credit-reporting agencies. However, newspapers do not usually report or publish the names of consumers who file chapter 7 cases.
- Are employers notified of chapter 7 cases?
Employers are not usually notified when a chapter 7 case is filed. However, the trustee in a chapter 7 case often contacts an employer seeking information as to the status of the person’s wages or salary at the time the case was filed or to verify a person’s current monthly income. If there are compelling reasons for not informing an employer in a particular case, the trustee should be so informed and he or she may be willing to make other arrangements to obtain the necessary information.
- Does a person lose any legal or civil rights by filing a chapter 7 case?
No. Filing a chapter 7 case is not a criminal proceeding, and a person does not lose any civil or constitutional rights by filing.
- May employers or governmental agencies discriminate against persons who file chapter 7 cases?
No. It is illegal for either private or governmental employers to discriminate against a person as to employment because that person has filed a chapter 7 case. It is also illegal for local, state, or federal governmental agencies to discriminate against a person as to the granting of licenses (including a driver’s license), permits, student loans, and similar grants because that person has filed a chapter 7 case.
- Will a person lose all of his or her property if he or she files a chapter 7 case?
Usually not. Certain property is exempt and may not be taken by creditors unless it is encumbered by a valid mortgage or lien. A person is usually allowed to retain his or her unencumbered exempt property in a chapter 7 case. A person may also be allowed to retain certain encumbered exempt property. Encumbered property is property against which a creditor has a valid lien, mortgage or other security interest.
- What is exempt property?
Exempt property is property that is protected by law from the claims of creditors. However, if exempt property has been pledged to secure a debt or is otherwise encumbered by a valid lien or mortgage, the lien or mortgage holder may claim the exempt property by foreclosing upon or otherwise enforcing the creditor’s lien or mortgage. In bankruptcy cases property may be exempt under either state or federal law. Exempt property typically includes all or a portion of a person’s unpaid wages, home equity, household furniture, and personal effects. Your attorney can inform you as to the property that is exempt in your case.
- When must a person appear in court in a chapter 7 case and what happens there?
The first court appearance is for a hearing called the “meeting of creditors,” which is usually held about a month after the case is filed. The person filing the case must bring photo identification, his or her social security card, his or her most recent pay stub and all of his or her bank and investment account statements to this hearing. At this hearing the person is put under oath and questioned about his or her debts, assets, income and expenses by the hearing officer or trustee. In most chapter 7 consumer cases no creditors appear in court; but any creditor that does appear is usually allowed to question the person. For most persons this will be the only court appearance, but if the bankruptcy court decides not to grant the person a discharge or if the person wishes to reaffirm a debt, there may be another hearing about three months later which the person will have to attend.
- What happens after the meeting of creditors?
After the meeting of creditors, the trustee may contact the person filing regarding his or her property and the court may issue certain orders to the person. These orders are sent by mail and may require the person to turn certain property over to the trustee, or provide the trustee with certain information. If the person fails to comply with these orders, the case may be dismissed, in which case his or her debts will not be discharged. The person must also attend and complete an instructional course on personal financial management and file a statement with the court showing completion of the course.
- What is a trustee in a chapter 7 case, and what does he or she do?
The trustee is a person appointed by the United States trustee to examine the person who filed the case, collect the person’s nonexempt property, and pay the expenses of the estate and the claims of creditors. In addition, the trustee has certain administrative duties in a chapter 7 case and is responsible for seeing to it that the person filing performs the required duties in the case. A trustee is appointed in a chapter 7 case, even if the person filing has no nonexempt property.
- What are the responsibilities to the trustee of the person filing the case?
The law requires the person filing to cooperate with the trustee in the administration of a chapter 7 case, including the collection by the trustee of the person’s nonexempt property. If the person does not cooperate with the trustee, the chapter 7 case may be dismissed and the person’s debts will not be discharged. At least 7 days before the meeting of creditors the person filing must give the trustee and any requesting creditors copies of his or her most recent Federal income tax returns.
- What happens to property that is turned over to the trustee?
It is usually converted to cash, which is used to pay the fees and expenses of the trustee, to pay the claims of priority creditors, and, if there is any left, to pay the claims of unsecured creditors.
- How long does a chapter 7 case last?
A successful chapter 7 case begins with the filing of the bankruptcy forms and ends with the closing of the case by the court. If there are no nonexempt assets for the trustee to collect, the case will most likely be closed shortly after the person filing receives his or her discharge, which is usually about four months after the case is filed. If there are nonexempt assets for the trustee to collect, the length of the case will depend on how long it takes the trustee to collect the assets and perform his or her other duties in the case. Most chapter 7 consumer cases with assets last about six months, but some last considerably longer.
Chapter 13 Bankruptcy – Frequently Asked Questions
- What is a chapter 13 bankruptcy case and how does it work?
A chapter 13 bankruptcy case is a proceeding under federal law in which the debtor seeks relief under chapter 13 of the Bankruptcy Code. Chapter 13 is the chapter of the Bankruptcy Code, which allows a person to repay all or a portion of his or her debts under the supervision and protection of the bankruptcy court. The Bankruptcy Code is the federal law that deals with bankruptcy. A person who files a chapter 13 case is called a debtor. In a chapter 13 case, the debtor must submit to the court a plan for the repayment of all or a portion of his or her debts. The plan must be approved by the court to become effective. If the court approves the debtor’s plan, most creditors will be prohibited from collecting their claims from the debtor. The debtor must make regular payments to a person called the chapter 13 trustee, who collects the money paid by the debtor and disburses it to creditors in the manner called for in the plan. Upon completion of the payments called for in the plan, the debtor is released from liability for the remainder of his or her dischargeable debts.
- How does a chapter 13 case differ from a chapter 7 case?
The basic difference between a chapter 7 case and a chapter 13 case is that in a chapter 7 case the debtor’s nonexempt property (if any exists) is liquidated to pay as much as possible of the debtor’s debts, while in chapter 13 cases a portion of the debtor’s future income is used to pay as much of the debtor’s debts as is feasible under the debtor’s circumstances. As a practical matter, in a chapter 7 case the debtor loses all or most of his or her nonexempt property and receives a chapter 7 discharge, which releases the debtor from liability for most debts. In a chapter 13 case, the debtor usually retains his or her nonexempt property, but must pay off as much of his or her debts as the court deems feasible and receives a chapter 13 discharge, which is slightly broader than a chapter 7 discharge and releases the debtor from liability for a few types of debts that are not dischargeable under chapter 7. However, a chapter 13 case normally lasts much longer than a chapter 7 case and is usually more expensive for the debtor.
- How does a chapter 13 case differ from a private debt consolidation service?
In a chapter 13 case, the bankruptcy court can provide relief to the debtor that a private debt consolidation service cannot provide. For example, the court has the authority to prohibit creditors from attaching or foreclosing on the debtor’s property, to force unsecured creditors to accept a chapter 13 plan that pays only a portion of their claims, and to discharge a debtor from unpaid portions of debts. Private debt consolidation services have none of these powers.
- What is a chapter 13 discharge?
It is a court order releasing a debtor from all of his or her dischargeable debts and ordering creditors not to collect them from the debtor. A debt that is discharged is one that the debtor is released from and does not have to pay. There are two types of chapter 13 discharges: (1) a full or successful plan discharge, which is granted to a debtor who completes all payments called for in the plan, and (2) a partial or unsuccessful plan discharge, which is granted to a debtor who is unable to complete the payments called for in the plan due to circumstances for which the debtor should not be held accountable. A full chapter 13 discharge discharges a few more debts than a chapter 7 discharge, while a partial chapter 13 discharge is similar to a chapter 7 discharge.
- What is a chapter 13 plan?
It is a written plan presented to the bankruptcy court by a debtor that states how much money or property the debtor will pay to the chapter 13 trustee, how long the debtor’s payments to the chapter 13 trustee will continue, how much will be paid to each of the debtor’s creditors, and certain other matters.
- What is a chapter 13 trustee?
A chapter 13 trustee is a person appointed by the United States trustee to collect payments from the debtor, make payments to creditors in the manner set forth in the debtor’s plan, and administer the debtor’s chapter 13 case until it is closed. In some cases the chapter 13 trustee is required to perform certain other duties. The debtor is required to cooperate with the chapter 13 trustee.
- Must all debts be paid in full under a chapter 13 plan?
No. While priority debts, such as debts for domestic support obligations and taxes, and fully secured debts must be paid in full under a chapter 13 plan, only an amount that the debtor can reasonably afford must be paid on most debts. The unpaid balances of most debts that are not paid in full under a chapter 13 plan are discharged upon the completion or termination of the plan.
- How much of a debtor’s income must be paid to the chapter 13 trustee under a chapter 13 plan?
Usually all of the disposable income of the debtor and the debtor’s spouse for a 3 or 5 year period must be paid to the chapter 13 trustee. Disposable income is income received by the debtor and his or her spouse that is not deemed to be necessary for the support of the debtor and his or her dependents.
- When must the debtor begin making payments to the chapter 13 trustee and how are the payments made?
The debtor must begin making payments to the chapter 13 trustee within 30 days after the chapter 13 case is filed with the court. The payments must be made regularly, usually on a weekly, bi-weekly, or monthly basis. If the debtor is employed, some courts require that the payments to be made directly to the chapter 13 trustee by the debtor’s employer.
- How long does a chapter 13 plan last?
The required length of a chapter 13 plan depends on the debtor’s income. If the debtor’s annual income is less than the median family income for the debtor’s state and family size, the length of the plan must be 3 years, unless the debtor can justify a longer period, which may not exceed 5 years. If the debtor’s annual income exceeds the median family income, the length of the plan must be 5 years unless all unsecured claims can be paid off in a shorter period. The debtor’s annual income is his or her current monthly income multiplied by 12.
- How are cosigned or guaranteed debts handled in chapter 13 cases?
A cosigned or guaranteed debt is a debt of the debtor that has been cosigned or guaranteed by another person. If a cosigned or guaranteed consumer debt is being paid in full under a chapter 13 plan, the creditor may not collect the debt from the cosigner or guarantor. However, if a consumer debt is not being paid in full under the plan, the creditor may collect the unpaid portion of the debt from the cosigner or guarantor. A consumer debt is a nonbusiness debt. Creditors may collect business debts from cosigners or guarantors even if the debts are to be paid in full under the debtor’s plan.
- May a self-employed person file a chapter 13 case?
Yes. A debtor engaged in business may continue to operate the business during his or her chapter 13 case.
- May a chapter 7 case be converted to a chapter 13 case?
Yes. An existing chapter 7 case may be converted to a chapter 13 case at any time at the request of the debtor if the case has not previously been converted from chapter 13 to chapter 7.
- What fees are charged in a chapter 13 case?
There is a filing fee charged when the case is filed, which may be paid in installments if necessary. In addition, the chapter 13 trustee assesses a fee of generally about 10 percent on all payments made by the debtor under the plan. These fees are in addition to the fee charged by the debtor’s attorney.
- Will a person lose any property if he or she files a chapter 13 case?
Usually not. In a chapter 13 case, creditors are usually paid out of the debtor’s income and not from the debtor’s property. However, if a debtor has valuable nonexempt property and has insufficient income to pay enough to creditors to satisfy the court, some of the debtor’s property may have to be used to pay creditors.
- How does the filing of a chapter 13 case affect collection proceedings and foreclosures that are filed against the debtor?
The filing of a chapter 13 case automatically stays (stops) all lawsuits, attachments, garnishments, foreclosures, and other actions by creditors against the debtor or the debtor’s property. This stay is called the automatic stay. A few days after the case is filed, the court will mail a notice to all creditors advising them of the automatic stay. Certain creditors may be notified sooner, if necessary. Most creditors are prohibited from proceeding against the debtor during the entire course of the chapter 13 case. If the debtor is later granted a chapter 13 discharge, the creditors will then be prohibited from collecting the discharged debts from the debtor after the case is closed. If the debtor has had a prior bankruptcy case dismissed within the past year, he or she may be denied the protection of the automatic stay.
- How does filing a chapter 13 case affect a person’s credit rating?
It may worsen it, at least temporarily. However, if most of a person’s debts are ultimately paid off under a chapter 13 plan, that fact may be taken into account by credit reporting agencies. If very little is paid on most debts, the effect of a chapter 13 case on a person’s credit rating may be similar to that of a chapter 7 case.
- Are the names of persons who file chapter 13 cases published?
When a chapter 13 case is filed, it becomes a public record and the name of the debtor may be published by some credit reporting agencies. However, newspapers do not usually publish the names of persons who file chapter 13 cases.
- Is a person’s employer notified when he or she files a chapter 13 case?
In most cases, yes. Many courts require a debtor’s employer to make payments to the chapter 13 trustee on the debtor’s behalf. Also, the chapter 13 trustee may contact an employer to verify the debtor’s income. However, if there are compelling reasons for not informing an employer in a particular case, it may be possible to make other arrangements for the required information and payments.
- May employers or government agencies discriminate against persons who file chapter 13 cases?
No. It is illegal for either private or governmental employers to discriminate against a person as to employment because that person has filed a chapter 13 case. It is also illegal for local, state, or federal governmental agencies to discriminate against a person as to the granting of licenses, permits, student loans, and similar grants because that person has filed a chapter 13 case.
- When does the debtor have to appear in court in a chapter 13 case?
Most debtors have to appear in court at least twice: once for a hearing called the meeting of creditors, and once for a hearing on the confirmation of the debtor’s chapter 13 plan. The meeting of creditors is usually held about a month after the case is filed. The confirmation hearing may be held on the same day as the meeting of creditors or at a later date, depending on the scheduling practices in the local court. If difficulties or unusual circumstances arise during the course of a case, additional court appearances may be necessary.
*Remember: The law often changes and each case is different. The above is meant to give you general information and is not legal advice. You should contact a bankruptcy attorney to obtain answers regarding your specific situation.