Common Bankruptcy Questions
1. What is bankruptcy? Bankruptcy is a legal procedure for dealing with debt problems of individuals and businesses; specifically, a case filed under one of the chapters of title 11 of the United States Code (the Bankruptcy Code). 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.
2. What are the different types of bankruptcy? There are four types of bankruptcy cases provided under the law for most instances: • Chapter 7 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. • Chapter 11, known as “reorganization,” is used by businesses and individuals whose debts and/or income are very large or who have a need that cannot be met in another chapter. • Chapter 12 is reserved for family farmers and fishermen. • Chapter 13 is a type of “reorganization” used by individuals to pay all or a portion of their debts over a period of years. In California, the time of debt repayment is almost always making monthly payments over 60 months. Many 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.
3. 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. 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.) – 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.
4. What property can I keep if I file for bankruptcy? In a chapter 7 case, you can keep all property which the law says is “exempt” from the claims of creditors. It is important to check the exemptions that are available in the state where you live. (If you moved to California from a different state within two years before your bankruptcy filing, you may be required to use the exemptions from the state where you lived just before the two-year period.) In some states, you are given a choice when you file bankruptcy between using either the state exemptions or using the federal bankruptcy exemptions. California has “opted” out of the federal bankruptcy exemptions, and you will be required to choose exemptions mostly under California law. Further, California has two different schedules of exemptions, and it will be necessary to consider your particular case to determine which exemption list works best in your particular case. In addition to the California exemptions, you may use a special federal bankruptcy exemption that protects retirement funds in pension plans and individual retirement accounts (IRAs) as well as other special types of property. The two exemption lists used in California are both very generous. They are designed to allow most consumers to file a bankruptcy case and be able to exempt most, or all, of their property. We will do a careful review of your situation to make sure we maximize your exemptions.
5. What is Chapter 7 Bankruptcy? In a bankruptcy case under chapter 7, also known as a “straight bankruptcy”, 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 property, except for “exempt” property which the law allows you to keep. In most cases, all of your property will be exempt. However, property which is not exempt is sold, 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. 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 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 a certain amount left over that could be paid to unsecured creditors, the bankruptcy court may decide that they cannot usually file a chapter 7 case, unless there are special extenuating circumstances.
6. What is Chapter 13 Bankruptcy? 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; • Are behind on debt payments, but can catch up if given some time; • Have valuable property which 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.
7. What must I do before filing for bankruptcy? You must receive budget and credit counseling from an approved credit counseling agency within 180 days before your bankruptcy case is filed. The agency will review possible options available to you in credit counseling and assist you in reviewing your budget. Different agencies provide the counseling in-person, by telephone, or over the Internet. If you decide to file bankruptcy, you must have a certificate from the agency showing that you received the counseling before your bankruptcy case was filed. I can help you to find a proper approved credit counseling agency. Most approved agencies charge between $30–$50 for the pre-filing counseling. However, the law requires approved agencies to provide bankruptcy counseling and the necessary certificates without considering an individual’s ability to pay. If you cannot afford the fee, you should ask the agency to provide the counseling free of charge or at a reduced fee. If you decide to go ahead with bankruptcy, you should be very careful in choosing an agency for the required counseling. It is extremely difficult to sort out the good counseling agencies from the bad ones. Many agencies are legitimate, but many are simply rip-offs. And being an “approved” agency for bankruptcy counseling is no guarantee that the agency is good. It is also important to understand that even good agencies won’t be able to help you much if you’re already too deep in financial trouble. Some of the approved agencies offer debt management plans (also called DMPs). A DMP is a plan to repay some or all of your debts in which you send the counseling agency a monthly payment that it then distributes to your creditors. Debt management plans can be helpful for some consumers. For others, they are a terrible idea. The problem is that many counseling agencies will pressure you into a debt management plan as a way of avoiding bankruptcy whether it makes sense for you or not. You should not consider a debt management plan if making the monthly plan payment will mean you will not have money to pay your rent, mortgage, utilities, food, prescriptions, and other necessities. 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. • If you sign up for a debt management plan that you can’t afford, you may end up in bankruptcy anyway (and a copy of the plan must also be filed in your bankruptcy case). • There are approved agencies for bankruptcy counseling that do not offer debt management plans.
8. Should I meet with an attorney before I go to credit counseling? It is usually a good idea for you to meet with an attorney before you receive the required credit counseling. Unlike a credit counselor, who cannot give legal advice, an attorney can provide counseling on whether bankruptcy is the best option. If bankruptcy is not the right answer for you, I will offer a range of other suggestions that might work in your case. I can also provide you with a list of approved credit counseling agencies, or you can check the website for the United States Trustee Program office at www.usdoj.gov/ust.
9. What property can I keep if I file for bankruptcy protection? In a chapter 7 case, you can keep all property which the law says is “exempt” from the claims of creditors. It is important to check the exemptions that are available in the state where you live. (If you moved to California from a different state within two years before your bankruptcy filing, you may be required to use the exemptions from the state where you lived just before the two-year period.) In some states, you are given a choice when you file bankruptcy between using either the state exemptions or using the federal bankruptcy exemptions. California has “opted” out of the federal bankruptcy exemptions, and you will be required to choose exemptions mostly under California law. Further, California has two different schedules of exemptions, and it will be necessary to consider your particular case to determine which exemption list works best in your particular case. In addition to the California exemptions, you may use a special federal bankruptcy exemption that protects retirement funds in pension plans and individual retirement accounts (IRAs) as well as other special types of property.
10. What do I need to know about exemptions in California? In determining whether property is exempt (protected), you must keep a few things in mind. The value of property is not the amount you paid for it, but what it is worth when your bankruptcy case is filed. Especially for furniture and cars, this may be a lot less than what you paid or what it would cost to buy a replacement. You also only need to look at your equity in property. That means you count your exemptions against the full value minus any money that you owe on mortgages or liens. For example, if you own a $250,000 house with a $240,000 mortgage, you have only $10,000 in equity. You can fully protect the $250,000 home with a $10,000 exemption. While your exemptions allow you to keep property even in a chapter 7 case, your exemptions do not make any difference to the right of a mortgage holder or car loan creditor to take the property to cover the debt if you are behind. In a chapter 13 case, you can keep all of your property if your plan meets the requirements of the bankruptcy law. In most cases you will have to pay the mortgages or liens as you would if you didn’t file bankruptcy.
11. What is the automatic stay? The automatic stay is an injunction that automatically stops lawsuits, foreclosures, garnishments, and all collection activity against the debtor the moment a bankruptcy petition is filed.
12. Will bankruptcy wipe out all my debts? Generally, yes, with some exceptions. 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” (a very difficult, but not impossible standard); • Debts not listed on your bankruptcy petition; • 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).
13. Will I have to go to Court? In most bankruptcy cases, you only have to go to a proceeding called the “meeting of creditors” to meet with the bankruptcy trustee and any creditor who chooses to come. 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. Occasionally, if complications arise, or if you choose to dispute a debt, you may have to appear at a 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 and/or from your attorney.
14. What else must I do to complete my case? After your case is filed, you must complete an approved course in personal finances. This course will take approximately two hours to complete. Many of the course providers give you a choice to take the course in-person at a designated location, over the Internet (usually by watching a video), or over the telephone. I can give you a list of organizations that provide approved courses, or you can check the website for the United States Trustee Program office at www.usdoj.gov/ust. If you cannot afford the fee, you should ask the agency to provide the course free of charge or at a reduced fee. In a chapter 7 case, you should sign up for the course soon after your case is filed. If you hire me to represent you and file a chapter 13 case, I will advise you should take the course.
15. Will bankruptcy affect my credit? Somewhat surprisingly, there is no clear answer to this question. Unfortunately, if you are behind on your bills, your credit may already be bad. Bankruptcy will probably not make things any worse. The fact that you’ve 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. 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.