What is bankruptcy, and will the process wipe out all of my debts?
Bankruptcy refers to a federal court procedure that allows debtors to catch up on their debts by having some of them discharged and others repaid, depending on the type of bankruptcy. The process is available to both businesses (which often file for Chapter 11) and consumers (usually Chapter 7 or Chapter 13).
After getting court approval, the court shields you from lawsuits and some other adverse actions while you work through the procedure. For consumers, bankruptcies are almost always either “liquidations” (Chapter 7) or “reorganizations” (Chapter 13). In a Chapter 7 proceeding, property may be sold (liquidated) to pay back creditors. In a Chapter 13 proceeding, consumers typically keep most of their property but must establish a plan to repay at least some of their debt within three or five years.
The court issues a protective order when you file for bankruptcy called an”automatic stay”, which stops most creditors from contacting you about your debts or making any collection efforts. Only the court has the authority to lift the automatic stay and allow creditors to seek repayment of debts.
Bankruptcy can help you get rid of some, but not all, kinds of debt. For instance, unsecured debt from credit cards and hospital bills may be forgiven in many cases. But child support, alimony and taxes may not be discharged. Student loans are not dischargeable unless the debtor can prove that repayment would cause an undue hardship (which is very difficult to prove). Also, creditors may argue that a given debt should not be discharged, subject to the bankruptcy judge’s approval.
What are the main differences between Chapter 7 and Chapter 13 bankruptcy?
Chapter 7 is called “liquidation” bankruptcy because filers may lose some of their property, with some important exceptions. Chapter 7 is reserved for individuals and businesses with little or no ability to repay debts in the future. So those who file Chapter 7 may lose non-exempt assets in exchange for having most debts erased.
Chapter 13 is called “reorganization” bankruptcy because it allows consumers to reorganize their debt burdens and payment schedules. Anyone filing for Chapter 13 must also propose a replayment plan showing your income and how you will pay off your debts. Working with the court, your plan will determine how much you need to repay, based on your income, debt load, and the value of your property.
How long does it take to file a case?
After you have retained your attorney, it generally will take a couple of weeks to have everything typed up, assembled, carefully reviewed and filed with the bankruptcy court. However, before filing, you must participate in an individual or group briefing that outlines opportunities for credit counseling. This briefing is mandatory.
If you decide to retain our firm to assist you in filing for bankruptcy protection, we will be willing to accept phone calls from your creditors that you refer to our office. This will give you more or less immediate relief from the creditor calls.
If I file for Chapter 7 protection, what happens to my debts?
In the typical case, the first thing that happens upon filing your bankruptcy (if this is the first time you have filed for bankruptcy protection) is that an “automatic stay” arises, temporarily prohibiting your creditors from trying to collect the debts or harassing you for payment. (If this is not your first time filing for bankruptcy protection, you should talk with your attorney about the availability of this “automatic stay.”
If one of your creditors holds a valid security interest in certain property, the creditor may seek to lift the “automatic stay” and then proceed against the collateral (by repossession, foreclosure, etc.). However, you usually can negotiate (preferably with the assistance of your attorney) with the creditor to buy back the property after the bankruptcy is completed. After all, the creditor probably would want your money instead of taking back your used property.
The process moves along with regard to your other debts until you receive what is called a “discharge.” The debts still exist, but your obligation to pay them is “discharged.” This means that creditors are permanently forbidden from trying to collect the debts from you or against your property.
Because the debts are not extinguished, any co-signers or guarantors on the debt are still liable, and the creditor may proceed against them.
Will the bankruptcy stop bill collectors from calling?
Yes, in most cases. If you have never filed for bankruptcy protection before, the automatic stay prevents bill collectors from taking any action to collect debts. The automatic stay is effective immediately upon the filing of the bankruptcy papers (called a “petition”). However, for a period of time shortly after you file, creditors may still call you because they are not aware that you have filed. Immediately after the petition is filed, the court will mail a notice to all the creditors listed in your bankruptcy schedules. It usually takes several days for this notice to get to your creditors. Once a creditor or bill collector becomes aware that you have filed for bankruptcy protection, they will stop collection efforts.
If a creditor continues to use collection tactics against you once it has been informed of the bankruptcy, it may be liable for court sanctions and attorney fees for such conduct.
Who is eligible to file under Chapter 7?
Any person may file under Chapter 7. One may only file for Chapter 7 protection once in 8 years. If a debtor needs the protection of the court before the 8 year period expires, the debtor may file for relief under the provisions of Chapter 13 of the Bankruptcy Code.
Recently, a ‘means test’ was added to the mix for Chapter 7 eligibility. Simply put, if you have sufficient money to repay a meaningful sum to your creditors over the next three to five years, you may not be allowed to continue in your Chapter 7 case. (And you should therefore consider filing a Chapter 13.) But there is a lot more to this ‘means test’ than meets the eye. It is quite a complicated formula. State and federal based average expenses for housing and transportation and food (as opposed to your personal actual expenses) must be used in detemining eligibility. The means test does not even apply if your current average monthly income for the last six months multiplied by 12 is equal to or less than the state’s median annual income. But even that (not so simple) statement is full of potential issues. What is ‘current monthly income’? What is the ‘state’s median annual income’ at any given time?
The resolution to all of these sometimes challenging issues go far beyond what we can possibly accurately set out in this kind of discussion. You should take specific questions regarding the ‘means’ analysis to an attorney experienced in bankruptcy for answers and guidance. That way, you can have better, and more personalized, information for making the decision regarding filing for bankruptcy protection.
Are taxes dischargeable?
This is a tough question, because the answer is sometimes ‘yes’ and sometimes ‘no.’ It really depends upon the timing. Generally, unpaid income taxes which were filed (but not paid) on time are dischargeable if the taxes were filed more than 3 years ago. Other taxes may be dischargeable, but the rules are complicated.
What is the process for filing?
The process in our office begins with your call to schedule an appointment to see an attorney. The initial consultation takes only about a half an hour, during which we cover the essentials of bankruptcy law and apply them to your particular situation. You do not have to bring anything to the interview, except perhaps a brief listing of your largest creditors and an approximation of how much you owe them. You will have a good idea at the end of that interview of your various options, and to the extent that non-bankruptcy options were suggested, you will be encouraged to pursue those before scheduling another interview in our office. We will give you several forms to complete and list of items to return if you decide that bankruptcy protection is your best option. You will feel no pressure to retain one of our attorneys when you come in to talk with us. Except in emergency cases, you cannot even retain the attorney at this initial consultation. We want to make sure that you do not feel pressured into filing bankruptcy or retaining our services. (Given the stressful circumstances, it is easy for an attorney to sway a person into doing something that he or she may not really feel good about doing. We want to make sure that you have a lot of time to think about this important decision.)
If you decide to file for bankruptcy protection, we will schedule a second appointment to review the paperwork you completed and begin filling out the extensive paperwork for the filing. After the attorney completes your petition/paperwork, you’ll need to carefully review and sign it. Accuracy is key, and you will sign the papers under penalty of perjury. So let’s make sure that everything is correct. The bankruptcy petition and schedules are filed with the bankruptcy court after you sign them.
The Court will schedule a hearing with a trustee and your potential creditors. Although creditors are invited to attend the hearing, they rarely do. We, of course, will be with you at the meeting.
At the hearing, the trustee will ask you questions about the accuracy of your filing, your present financial situation and may request additional information and documentation from you.
After the hearing, you must complete a “debtor education” course. (This is different from, and in addition to, the “credit counseling” course you took before the bankruptcy filing.) If you fail to take this course, your discharge will not be granted. Don’t worry — we will remind you of this requirement.
About three months from the date of filing, and assuming you have completed the “debtor education” course and no complications arose in your case (e.g., creditors haven’t filed claims to declare debts non-dischargeable, no property to surrender, etc.), and that you attended the required “debtor education” course, your case will come to an end. You will be granted your discharge in bankruptcy and a notice of this will be sent to you by the bankruptcy court.
Will my employer and landlord find out about my bankruptcy?
Possibly, but not by us. Bankruptcy petitions are public records. However, under normal circumstances, unless your employer or landlord is a creditor, he/she/it will not know you filed a bankruptcy petition. If your employer or landlord is a creditor, he/she/it must be listed as a creditor on the schedules and receive notice of the bankruptcy proceeding. In Chapter 13 debtors may be required to make payments through wage garnishment. The employer will learn about the bankruptcy because of this.
Can my employer fire me for filing bankruptcy?
No. 11 U.S.C. sec. 525 prohibits government units and private employers from discriminating against you because you filed a bankruptcy petition or because you failed to pay a dischargeable debt. Let us know if you get fired or harassed because you filed for bankruptcy.
May a husband and wife file jointly under Chapter 7?
Yes. And if the debts owed by the married couple are primarily joint debts, this probably is the best way to proceed.
How does filing under Chapter 7 affect my credit rating?
Chapter 7 will have a negative effect on your credit rating. A Chapter 7 bankruptcy will remain on record for 10 years. The decision to file for bankruptcy, therefore, will have long term consequences. It must be made thoughtfully and with a full understanding of how the bankruptcy will affect you. You will need to balance, as well, how much worse off you will be if you don’t file compared to what happens if you do. You should also consider the options available under bankruptcy and non-bankruptcy procedures.
How long is my bankruptcy listed on my credit report?
It depends on the credit reporting company rules. A Chapter 7 (liquidation) bankruptcy can stay on your credit report for up to 10 years. A Chapter 13 (wage earner plan) can stay on your credit report for up to 7 years after the completion of the plan.
Can I get credit again after bankruptcy?
Each bank or credit card company makes its own decision about to whom and when to give new credit. Some creditors may wait until a record of steady paying on another loan appears on the report. Your income and job stability at the time you apply for new credit will be critical factors. Others may grant credit soon after the bankruptcy filing because they know the debtor cannot discharge any new debts for 8 years.