If you are considering filing for bankruptcy relief, you probably have many questions about whether it is the right choice for you, what procedures to follow, and how bankruptcy will affect your property and debts. Read on to learn the answers to the most commonly asked questions about bankruptcy.
For more information on whether bankruptcy is in your best interest, see our Bankruptcy: Should I File? topic area.
Here are common questions related to the basics of bankruptcy.
What exactly is bankruptcy?
Bankruptcy is a federal court process that allows debtors to wipe out or reorganize their debts under the supervision and protection of a bankruptcy court. Bankruptcy provides legal protection for struggling debtors who are unable to repay their obligations.
How does it work?
Chapter 7 bankruptcy is designed primarily to discharge unsecured debts such as credit card and medical bills. It is commonly referred to as a liquidation bankruptcy because the bankruptcy trustee has the authority to sell your nonexempt assets to pay back your creditors.
In Chapter 13 bankruptcy, you get to keep all of your property. In exchange, you pay back some or all of your debts through a repayment plan. Chapter 13 is called a reorganization bankruptcy because it allows debtors to restructure their debts and catch up on back taxes and missed mortgage, car loan, and domestic support payments.
Who can file for bankruptcy?
There are certain eligibility requirements depending on which type of bankruptcy you wish to file. But basically any individual, married couple, or business entity may file for bankruptcy.
How long does bankruptcy take?
A typical Chapter 7 bankruptcy will take approximately three months to complete. A Chapter 13 involves a three to five-year repayment plan and it will be completed after you have made all required plan payments to the trustee.
How much does bankruptcy cost?
Currently, court filing fees are $306 for a Chapter 7 and $281 for a Chapter 13. If you decide to hire a bankruptcy lawyer, attorney fees typically range from $500 to $3,500 for a Chapter 7 depending on the complexity of your case. They are generally between $3,000 and $5,000 for a Chapter 13 but you can pay a portion of your attorney fees through your repayment plan.
Will I have to go to court?
In Chapter 7 bankruptcy, you don't have to actually go to court in most cases. But you are required to attend a hearing called the meeting of creditors (also called the 341 hearing).
In Chapter 13 bankruptcy, you may have to attend a confirmation hearing in front of the judge in addition to the 341 hearing. But keep in mind that if any of your creditors file motions or objections in bankruptcy court, you will typically have to attend a court hearing on the matter. As a result, whether you will have to go to court depends on the circumstances of each individual case.
Will bankruptcy affect my employment in any way?
Generally no, bankruptcy will not affect your current employment or future employment options. But there are exceptions. If you are in the military or require a security clearance, bankruptcy can potentially affect your employment or clearance. If you are unsure whether bankruptcy will adversely affect your employment, talk to the legal or human resources department at your work. In most cases, federal and state laws prohibit employers from the discriminating against debtors because of a bankruptcy filing.
Deciding Between Bankruptcy and Other Options
Is bankruptcy your only option? Here are some common questions about your bankruptcy options.
Should you file for bankruptcy?
The answer depends on each debtor's individual circumstances. If you are struggling to pay back your debts and your creditors are not willing to work with you, you may be a good candidate for bankruptcy. But whether bankruptcy is in your best interest also depends on the types of debt you have and the amount of property you own.
The tipping point for most people is when debt collectors or creditors become a constant source of stress, collection lawsuits are filed, wages are garnished, or there is threat of foreclosure. If you are facing any serious issues caused by unpaid debt, then it's a good idea to talk to a bankruptcy attorney to discuss your options.
What about alternatives like debt settlement?
Debt settlement is a viable solution for certain debtors. But it does have serious drawbacks that should be considered. Debt settlement does not guarantee any particular outcome. If a creditor refuses to settle, there is not much anyone can do about it. Also, any forgiven debt may be treated as income by the IRS which can increase your tax liability.
But debt settlement companies tell me I can settle for pennies on the dollar?
Be wary of any company you see advertising the ability to settle your debt for pennies on the dollar. You can settle many debts with creditors but the settlement amount will vary by creditor. Also, you typically must have the cash available in a lump sum to settle. If you are interested in debt settlement, you can usually do it yourself or consult a bankruptcy attorney about it.
How about debt consolidation?
Debt consolidation may be an option if you can afford to pay back your debts. But avoid any debt consolidation companies that charge unreasonably high fees. Debt consolidation can work if you just need to lower your interest rate and monthly payments.
Your Property in Bankruptcy
Is your property safe from bankruptcy? Here are some common questions about your property and bankruptcy.
Will I lose all of my property if I file for bankruptcy?
No. This is a very common misconception. Filing for bankruptcy does not mean that you have to give up all of your assets. In Chapter 7 bankruptcy, the amount of property you can keep is determined by your bankruptcy exemptions. Each state (and the federal system) has its own unique set of exemptions. As a result, how much property you can protect depends on the exemption laws of your state. But an overwhelming majority of Chapter 7 bankruptcies are "no asset" cases, meaning there were no assets that could be sold to repay creditors. (To learn more, see No-Asset Chapter 7 Bankruptcies.)
As discussed, if you file for Chapter 13 bankruptcy, you get to keep all of your property. But you must pay an amount equal to the value of your nonexempt assets to your unsecured creditors in your repayment plan.
Can I keep my car if I file for bankruptcy?
The answer depends on the value of the car and whether you have a car loan. Almost all states allow debtors to exempt a certain amount of equity in their motor vehicle. If the equity in your car is covered by your motor vehicle exemption (or other applicable exemptions), the trustee can't take your car. If you have a car loan, it will be treated as a secured debt in your bankruptcy. This means that if you want to keep your car, you have to continue making your regular payments. if you default on your car loan, your lender has the right to repossess the car regardless of your bankruptcy discharge. (To learn more, see Your Car in Bankruptcy.)
What if my car payment is too high?
If your car payment is too high, you may be able to reduce your monthly obligation through Chapter 13 bankruptcy. If certain conditions are met, you can reduce your loan balance and interest rate through a cramdown in a Chapter 13. But even if you don't qualify for a cramdown, you may be able to reduce your monthly payments by paying the car off through your repayment plan and stretching out the payments over a longer period. (See, How a Bankruptcy Cramdown Can Reduce Your Car Payments.)
What about my house?
Most states also have a homestead exemption that protects a certain amount of equity in your principal residence. If your equity is above the exemption amount, then you may still be able to file for Chapter 13 bankruptcy and keep your home. Chapter 13 also allows you to catch up on any missed mortgage payments through your plan. (To learn more, see Your Home in Bankruptcy.)
What about rental property or investment property?
Equity in rental or investment properties is not covered by the homestead exemption. As a result, if you want to keep your properties, Chapter 13 is likely a better choice. If you are upside down on those properties, the trustee will not go after them because there is no value to the bankruptcy estate. But a Chapter 13 may allow you to cramdown your rental or investment property mortgages if they exceed the value of the property. (See How to Keep Rental Property in Chapter 13.)
Are my retirement accounts protected?
In general, yes most legitimate retirement accounts are protected in bankruptcy. But if you take the money out of your retirement account prior to filing your case or if it is not a proper retirement account, then the trustee may be able to go after that money. (See 401k and Retirement Funds in Bankruptcy.)
What should I do with my bank accounts?
Generally, you don't need to do anything with your bank accounts. But make sure that you can exempt all of the money in your account prior to filing your case. If you can't, a Chapter 7 trustee can take the money and give it to your creditors. If you have more money than you can exempt, try to spend it on necessary living expenses such as rent, food, and gas to reduce your balance before filing.
If the bank will be a creditor in your case (for example if you have a credit card issued by your bank), then it may be a good idea to take the money out and open an account with a different bank. If your bank is a creditor, it may try to freeze your accounts or go after your money.
Your Debts in Bankruptcy
Here are the most common questions about what happens to your debts when you file for bankruptcy.
What debts are discharged in bankruptcy?
The most common debts that are discharged in bankruptcy are credit card debt, personal loans, payday or cash advance loans, and medical bills. Bankruptcy also discharges your personal liability on secured debts such as your mortgage or car loan but it does not eliminate the lender's lien on your property (the bank retains the right to foreclose on or repossess the property).
What debts are not discharged?
Certain obligations (called priority debts) can't be discharged through bankruptcy. The most common examples of priority debts include alimony, child support, and recent tax debts. Student loans are not considered priority debts but they are also nondischargeable (except in very rare circumstances).
How much debt is enough to warrant filing for bankruptcy?
The answer varies from person to person. But keep in mind that once you receive a Chapter 7 discharge, you must wait eight years before you can file another Chapter 7 case. As a result, bankruptcy should be reserved for when you need it most.
Can tax debt ever be discharged?
Tax debts that are older than three years may be discharged if certain conditions are met. In general, you must also have filed your returns at least two years prior to the bankruptcy. But you must satisfy many requirements before a tax debt will be deemed dischargeable. The laws and conditions regarding tax debt discharge can be extremely complex. As a result, consider talking to a knowledgeable bankruptcy attorney in your area prior to filing your case.
Can student loans ever be discharged?
In general, student loans can only be discharged in very rare circumstances. If you can prove that repayment of the debt would be an undue hardship on you, then it may be discharged. However, this is extremely difficult to prove and almost never done successfully. You may have a better chance of discharging student loans if you have become permanently disabled and will never be able to work again.
Can lawsuit judgments be discharged?
In most cases, lawsuit judgments are dischargeable in a bankruptcy. But if a judgment lien has attached to your property, you will have to file a separate motion to avoid the lien. Your discharge will not automatically get rid of liens on your property.
Bankruptcy Lawyers and Petition Preparers
Sometimes hiring a lawyer is your best option when filing for bankruptcy. Here are some common questions about hiring a lawyer.
What is a bankruptcy petition preparer?
In general, petition preparers offer nothing more than a typing service. They are not allowed to give you any legal advice. Petition preparers complete the necessary bankruptcy forms with the information you provide them.
Do I need a lawyer to file bankruptcy?
No, you are not required to have an attorney in order to file for bankruptcy. If you are willing to put in the necessary time and research, you may be able to file a simple Chapter 7 bankruptcy on your own. However, for more complicated bankruptcies and Chapter 13 cases, it is recommended that you hire an attorney.
What if I can't afford a lawyer?
Many bankruptcy courts offer free clinics to help debtors file for bankruptcy without an attorney. You can also check for other free clinics or legal aid societies in your area that may be able to help. In addition, many attorneys offer reduced rates or may take on your case pro bono (for free) if your case is simple and you have no resources to afford a lawyer.
What will a lawyer actually do for me?
There are many benefits to having a bankruptcy attorney. Consulting a bankruptcy attorney prior to filing your case can teach you about all of your options and help you make an informed decision about whether bankruptcy is the right choice for you.
If you decide to file, your attorney will complete the necessary paperwork, file your case with the court, and represent you at all required hearings until you receive your discharge. In essence, an attorney can navigate you through the bankruptcy process and make sure your property is protected.