Frequently Asked Bankruptcy Questions
What is bankruptcy?
The word “bankruptcy” refers to the legal process that relieves individuals and organizations from their debts. Bankruptcy is overseen by a federal court. During bankruptcy, the court oversees not only the elimination or restructuring of debt, but also ensures that secured creditors’ rights are preserved and the claims of unsecured creditors are treated equally.
There are four types of bankruptcy: Chapter 7, 11, 12, and 13. Chapters 7 and 13 are the most common.
You will choose a type depending on your financial situation.
- Chapter 7: also known as “straight” or “liquidation” bankruptcy, is the most common form. Chapter 7 helps debtors with limited means by discharging most or all debts. In return, the debtor must turn over all nonexempt assets to be liquidated and distributed to creditors by the trustee.
- Chapter 11: normally used by businesses or organizations.
- Chapter 12: specific to farmers.
- Chapter 13: also known as “wage-earner” or “debt adjustment,” available to both individuals and organizations with a regular source of income who intend to pay off most or all debt over a three to five year period and work through bankruptcy court to create a plan to do so.
Am I eligible for bankruptcy?
Most individuals and businesses can file for bankruptcy if they feel the need to do so. Whether or not to file, and under which Chapter, depends on the financial situation of the debtor. If you decide to file, you may undergo a “Means Test” to determine your eligibility for Chapter 7 bankruptcy, which eliminates most debt. For those who have an income above the median for a similar-sized family, Chapter 13 bankruptcy, where you make a plan to repay most or all debt, is more appropriate.
No matter what decision you make, be sure to consult a qualified bankruptcy attorney who can answer your questions and give advice.
What are the different roles in a bankruptcy filing?
No matter the Chapter, these are normally the people involved in a bankruptcy filing:
- Debtor – this is the person filing for bankruptcy.
- Creditor(s) – the individual or organization demanding payment from the debtor
- Trustee – a person appointed by the court who oversees different elements of bankruptcy, including the bankruptcy estate. The trustee acts on behalf of unsecured creditors, liquidates and distributes nonexempt assets, understands the debtor’s financial situation, determines the eligibility of creditors’ proof of claim, keeps all parties informed, files reports and tax returns and, if necessary, recommends civil or criminal legal proceedings against the debtor if they have committed fraud or another crime.
- Bankruptcy Judge: presides over any contestations in the bankruptcy case.
- Credit Counselor: an independent advisor who certifies that the debtor has completed the necessary financial and credit counseling both before a bankruptcy can be filed and before debts can be discharged.
What is included in the bankruptcy estate?
The bankruptcy estate includes all property the debtor either owns, co-owns, or in which they have an interest. In Chapter 13 bankruptcy, the estate also includes any income, gifts, inheritance, settlements, or insurance payouts the debtor receives within 180 days after filing. Certain assets are exempt from the bankruptcy estate (see below for specifics), and the trustee administers and oversees the estate during a bankruptcy case.
What are the pros and cons to filing for bankruptcy?
- If you are the subject of legal action or constant contact from creditors, filing for bankruptcy will stop these actions.
- In Chapter 7 bankruptcy, most credit card debt, past-due accounts, medical bills, and certain other debts will be discharged.
- You may be able to keep most or all property due to certain state and federal exemptions.
- Wage garnishment and certain liens may be avoided by filing for bankruptcy.
- You’re on your way to a fresh financial start.
- A number of debts are not dischargeable through bankruptcy, such as child or spousal support, most student loans, government fines, or criminal or fraudulent conduct-related fines.
- If your creditors have a mortgage or security interest in your home or vehicle, they may be able to repossess that asset.
- You may face tax consequences from filing for bankruptcy.
- Debts can be discharged once every eight years. Should you choose to file for bankruptcy, it is important to have a plan in place so you don’t need to do so again during the next eight years.
- A bankruptcy filing is a matter of public record, and your financial situation will be out there for all to see. This can make it more difficult to be approved for a line of credit in the future, and could cause embarrassment from overexposure of the details of your financial life.
In Chapter 7 bankruptcy, what debts are not discharged?
Under Chapter 7 bankruptcy, many debts are discharged. However, there are a number of exceptions to this rule; debts you will still be responsible for even after receiving a discharge of certain debts through Chapter 7 bankruptcy.
Here are some of the commonly unaffected debts, or debts you will still be responsible for, in a Chapter 7 bankruptcy filing: child support and alimony, government fines, forfeitures or restitution, liabilities from drunk driving, divorce property divisions, most student loans, and some income and business taxes.
If the debtor has committed fraud, the entire discharge may be revoked.
Additionally, while personal debt liability on a home, car, boat, etc. can be discharged under Chapter 7 bankruptcy, a creditor who holds a lien on this property has the option to enforce the lien in court. To keep the property, the debtor may have to reaffirm the debt.
Remember, even for dischargeable debts, a creditor may sue the debtor in bankruptcy court to have the debt declared non-dischargeable.
In Chapter 7 bankruptcy, what property can I keep?
There are certain types of property that are protected from creditors should they obtain a judgement to seize their claim through the bankruptcy court. These are called exemptions, and include a certain percentage of equity in your home, car, household items, work supplies, life insurance, certain bank accounts, and retirement holdings, among other assets.
You may have property that is secured by a lien, like a mortgage on your home or a car loan. If you file for bankruptcy, you will need to decide whether to keep these assets, or surrender them to the creditor. If you decide to surrender, the unpaid amount on that lien will probably be discharged alongside your other, unsecured debts.
If the above situation applies and you decide to keep (or “retain”) your home or car, you must either reaffirm the debt on the asset or redeem the collateral. To reaffirm a debt means to sign a contract outlining how you will repay the debt over time, and to redeem the collateral means you pay back the value of the asset to the creditor in one payment. Only family-use and home items are eligible for redemption, with certain restrictions.
As with many aspects of bankruptcy, understanding what property you can keep is a complex issue. For questions, contact the experienced attorneys of Burr Law Office today.
Who is eligible for Chapter 13 bankruptcy?
Chapter 13 bankruptcy is available to individuals and businesses with a consistent income. Under Chapter 13, the debtor creates a plan with the court and creditors to pay back as much debt as reasonably possible over the next three or more years, taking into account their financial situation. The court then takes over administration of the debtor’s budget, with paychecks going directly to a trustee, who oversees distribution of funds to various creditors.
In order to qualify for Chapter 13 bankruptcy, the total amount of secured debt for the individual or organization filing must be less than $1,081,400. The total amount of unsecured debt must be less than $360,475.
How do I file for bankruptcy?
If you think bankruptcy might be the best option for you, your first step is to consult a qualified bankruptcy attorney. Though it is legal to represent yourself in bankruptcy court, having the expertise of an attorney is critical to making sure you are making the right decision, and in helping you navigate the process.
Once you have an experienced legal advocate on your side, you will need to gather your documentation. This would include records of debts, assets, income, budget, and a statement of financial affairs. Your attorney will also help you prepare a statement of intention for any secured debts.
Before you can file, you will also be required to complete credit counseling.
When you have completed the tasks above, you can file a petition for bankruptcy. At this time, you will pay the bankruptcy court a filing fee.
I’ve filed for bankruptcy. What happens next?
While the specifics of every bankruptcy filing are unique to the case at hand, this is the general process you can expect to experience when you file for bankruptcy:
Step 1: The court communicates your bankruptcy filing to your creditors, including the automatic stay on collection efforts, when a meeting of creditors will be held, and the deadline for filing challenges to the case.
Step 2: The debtor goes to court and answers creditors’ questions under oath and in the presence of the trustee.
Step 3: The debtor undertakes the actions promised in the statement of intentions, including surrender, reaffirmation or redemption of secured collateral. At this step, before a discharge can be made, the debtor must complete a financial management course.
Step 4: You and your creditors will receive a discharge notice, either after 90 days, as in a Chapter 7 filing, or when all payments have been made in a Chapter 13 case.