Answers to Your Bankruptcy Questions
Anyone considering bankruptcy naturally has many questions ranging from process issues, to questions about property and dischargeability of debt. This page is categorized into several sections and attempts to cover the most common questions people have about bankruptcy.
Bankruptcy Questions
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1. About: The Basics of Bankruptcy
2. About: Choosing Bankruptcy
3. About: Your Property and Assets
4. About: Debts in Bankruptcy
5. About: Bankruptcy Lawyers
Bankruptcy Basics
What exactly is bankruptcy?
Bankruptcy is a court regulated and protected debt relief solution that allows honest debtors a legal way to get out from under an unmanageable amount of debt. The laws are structured in such a way as to provide legal protection for struggling debtors who are facing an inability to repay debt to which they would otherwise be contractually bound.
How does it work?
There are several different options for consumer debtors, but the most common fall under one of two "Chapters" of bankruptcy code: Chapter 7 and Chapter 13.
In a Chapter 7 bankruptcy, the debtor asks the court to discharge or erase their debts. In exchange, the court is afforded the ability to liquidate certain of the debtor's assets to raise money to repay some of the debt when possible.
In a Chapter 13, the debtor gets into a monthly payment plan that is designed to be affordable, and repay some of the debt over time. Even in this case, a lot of debt will be erased and never repaid.
Who can file for bankruptcy?
There are certain eligibility requirements, but basically any individual, married couple or business entity may file for bankruptcy. Any honest debtor in financial distress can get help from a bankruptcy court.
How long will it take?
A typical Chapter 7 bankruptcy, the most common kind, will take about three months from start to finish. A Chapter 13 will take about the same time, but then involves a three to five-year payment period, during which monthly payments are made to the bankruptcy court.
How much does it cost?
The court fees are relatively small, $299 for a Chapter 7 and $274 for a Chapter 13. However, the bankruptcy court urges all bankruptcy petitioners to have legal representation for every case. Lawyers' fees can range from $1,000 for a simple Chapter 7 case to $3,000+ for more complicated Chapter 13 cases.
Will I have to go to court?
You don't have to actually go to court in most cases, but you will be required to attend a meeting at the courthouse in a hearing room. This is often referred to as the "meeting of creditors" or simply the "341 meeting", because section 341 of the bankruptcy code outlines this meeting requirement. Your creditors are unlikely to show up, and it will just be a meeting with the bankruptcy trustee assigned to your case, your attorney and yourself.
In some rare cases where creditors dispute the dischargeability of their claim, you may need to attend an actual hearing called an adversary proceeding, where your creditor and your attorney will make each of their cases before the judge. This usually only happens in cases where significant assets and very large debts are involved. Bankruptcy litigation is usually reserved for complex corporate bankruptcy cases.
Will bankruptcy affect my employment in any way?
Generally no, bankruptcy will not affect your current employment or future employment options. There are some exceptions however, most notably, for people in government or military roles that require security clearance, your bankruptcy may pose a problem.
In most cases though, it should not impact any current or future job. As a matter of fact, federal law prohibits the discrimination in employment of any employee based on a prior, current or upcoming bankruptcy. If your employer does anything in terms of firing, demoting or otherwise treating you unfairly due to a bankruptcy, he or she could face a very serious lawsuit.
Get Informed: Learn more about Bankruptcy Basics
Deciding on Bankruptcy vs. Other Options
Who should file bankruptcy?
This is a difficult question to answer in a short way, but basically, if you have become encumbered with debt to the extent that you cannot realistically repay it in three years and continue to live a normal life, then you may be a good candidate for bankruptcy.
The tipping point for most people is when debt collectors or creditors become a constant source of stress, or even worse, when lawsuits are filed, wages are garnished or a home is foreclosed upon. If you are facing any serious issues caused by unpaid debt, then it's a good idea to talk to a bankruptcy attorney.
Who should not file bankruptcy?
Some people think that bankruptcy is a quick way to get out of paying debt. While this is true to some extent, it is certainly not for everyone. If you owe $1,000 to Macy's but you don't want to pay it, bankruptcy is not your solution. Bankruptcy is for people who have significant debt that has become a burden.
What about alternatives like debt settlement?
Debt settlement is a viable solution for certain situations, but it does have some 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. Any forgiven debt will be treated as income by the IRS, so you will get a tax bill on any debt you settle.
But debt settlement companies tell me I can settle for pennies on the dollar?
Be very 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 a more realistic amount is 35 to 45 percent, and you must have the cash available in a lump sum to settle it. If you are interested in a debt settlement, you can do it yourself, or talk to a bankruptcy attorney about it. They can do the same thing for much less than debt settlement companies charge, often more effectively.
How about debt consolidation?
Debt consolidation is an excellent option if it will work for you, but again, avoid any "debt consolidation" companies. Instead, talk to your bank about opening up a line of credit at a reasonable interest rate. Work with them to see if you can get all of your outstanding debts paid off using that one low interest account. Debt consolidation is a great method if you just need to lower your interest rate and monthly payments.
Get Informed: Learn more about The Process of a Bankruptcy Case
Your Property in Bankruptcy
Will I lose all of my stuff if I file bankruptcy?
No. This is a very common misconception, often pushed out by the same companies that want you to use their debt settlement service to get out of debt, or by the creditors themselves. Filing bankruptcy does not mean you must give up all of your worldly possessions.
For 98 percent of people, no property must be lost to complete a bankruptcy case. For some people who have a lot of non-exempt assets, such as a vacation house, an expensive boat, or a fancy second car or third car with no loan on it, then yes, that property would be liquidated in a Chapter 7. That is commonly wealthy people who have hundreds of thousands of dollars in debt but would gladly give up a boat in return for getting rid of it.
Most people that are considering bankruptcy simply don't own such significant assets that would be worth the trouble to attempt to liquidate.
Can I keep my car if I file for bankruptcy?
Yes, the equity you have in your car is likely protected by bankruptcy exemptions. If it is not, as in cases where a car is relatively new, worth a lot and there is no loan against it, then there are other options to protect it during your case.
What if my car payment is too high?
If you find yourself in a situation where you're paying off $30,000 on a car that's only worth $20,000, bankruptcy offers a solution to strip off the excess $10,000 and discharge it, greatly reducing your monthly payments. It's called a cram down, and can sometimes be done in either a Chapter 7 or Chapter 13 bankruptcy case.
What about my house?
Every state also has a homestead exemption that protects a certain amount of your equity from Chapter 7 liquidation. If you have a lot of equity, then a Chapter 13 would be a better option for you, and allows you to keep everything. Some states, such as Florida, completely protect all of your home equity, so even if you have a house worth $500,000 and own it outright, it is completely protected. Most states, however, cover somewhere around $40,000 to $80,000 of your home equity.
What about rental property or investment property?
If you have second or third properties, and you have positive equity in them, you will want to get into a Chapter 13 plan. This will allow you to keep all of your equity, while still discharging some of your debt.
If you are upside down on those properties, then it doesn't matter which chapter you file since there is no equity to be pulled out. A Chapter 13 will allow you to cure past due mortgage debt and is generally better for people who own a lot of property and are facing a foreclosure.
Are my retirement accounts protected?
Yes. Typical retirement accounts like a 401k and IRA's are protected in a bankruptcy up to just over one million dollars. This is why many people will increase their contributions into a retirement plan before filing a chapter 13. It reduces your net monthly income, protects your money and gets you a lower monthly payment for a chapter 13 payment plan.
What should I do with my bank accounts?
Generally, you don't need to worry about your bank accounts, and you should just leave them as is. The one exception to this rule is the case where you have cash in a bank with whom you also have a line of credit outstanding. For example, if you have a checking, savings and credit card account all at one bank, then there could be potential for your bank to take money from your checking or savings to pay down a delinquent credit card account.
If this is the case, then it would be a wise move to take the money out of the checking and savings account, and just open a new account at another bank. Since most people that are planning a bankruptcy will stop paying monthly payments towards credit cards and other debts that will be discharged, the accounts will become delinquent. The bank can only move money from other accounts within the same bank, so opening an account in a different bank will safeguard your cash on hand.
Get Informed: Learn more about The Process of a Bankruptcy Case
Different Debts in 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, old tax debts, medical debts and most other unsecured debts.
What debts are not discharged?
Typically, secured debt like a car loan and home loan is not dischargeable. Similarly, certain unsecured debts like child or spousal support debt, recent IRS tax debts and student loan debts are non-dischargeable.
How much debt is enough to warrant filing for bankruptcy?
Although it varies widely for everyone, bankruptcy should be reserved for those people who have such a large amount of debt that they cannot realistically repay all of it within 3 years. Some attorneys would say that if you have less than $10,000 in debt, then bankruptcy may not be the best choice. Other will simply say, "it depends on your age and your income compared to the amount of debt you owe".
Generally, the best way to look at it is in terms of your debt to income ratio. If you make very little money or you've experienced a reduction in income and you're carrying more debt than you can handle, it's best to talk to a bankruptcy lawyer and get advice on your particular case.
Can IRS tax debt ever be discharged?
IRS debt that is over three years old can generally be discharged, as long as the petitioner is up to date with recent IRS filings, or in some type of payment plan for recent debt.
Can student loans ever be discharged?
Yes, but only very rarely. If you can prove that repayment of student loan debt would be an undue hardship, then it may be discharged. However, this is almost never done, and only works in cases where you will likely never be able to repay it, like if you've 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.
Get Informed: Learn more about Debts in a Chapter 7 and Debts in a Chapter 13 Bankruptcy
Bankruptcy Lawyers and Petition Preparers
What is a bankruptcy petition preparer?
Strictly speaking, a petition preparer offers nothing more than a typing service. They are not allowed to advise you in any way. That being said, there are some companies that can offer help with preparing your petition, but it's difficult to distinguish the good from the bad.
Do I need a lawyer to file bankruptcy?
No, you can certainly file a simple personal Chapter 7 without an attorney. It is always advisable to have an attorney, because the process can be intimidating and complicated, but it's not required. The US Bankruptcy Court says this on the subject of bankruptcy attorneys:
"While individuals can file a bankruptcy case without an attorney or "pro se," it is extremely difficult to do it successfully.It is very important that a bankruptcy case be filed and handled correctly. The rules are very technical, and a misstep may affect a debtor's rights. For example, a debtor whose case is dismissed for failure to file a required document, such as a credit counseling certificate, may lose the right to file another case or lose protections in a later case, including the benefit of the automatic stay. Bankruptcy has long-term financial and legal consequences - hiring a competent attorney is strongly recommended."
Only businesses structured as a corporate entity or partnership are required to have an attorney. Individuals can choose to file pro se, meaning for one's self. It is tempting for many people to skip an attorney just because they are already in financial trouble and another fee is the last thing they need.
What if I can't afford a lawyer?
If you are going to file bankruptcy, then you have some options to put away money since you can ignore the monthly bills that you've been paying for months. Alternatively, you can rack up even more debt to pay your attorney. The court will allow a cash advance against a credit card for up to $750 to cover your legal fees.
What if I Really can't afford a lawyer?
If you have absolutely no means of paying for your bankruptcy attorney, then he or she will likely ask you about your creditors, and how they have been contacting you recently, whether by phone or mail, or better yet, at work. Your attorney is looking to find a violation of the Fair Debt Collection Practices Act.
If he or she can find a violation of this law, then you can bring a lawsuit against the creditor, and force them to pay for all your legal fees as a settlement. The FDCPA offers a lot of protection to debtors from creditor harassment, and violations are not always that difficult to find. This works out great for you, because you get all your debts discharged and your creditor(s) have to pay for it to boot.
What will a lawyer actually do for me?
There are many benefits to having an attorney represent your bankruptcy case. By far the most important benefit is the legal and financial advice they will offer you before you even begin thinking about filing your bankruptcy petition. There are many nuances in bankruptcy law that an experienced attorney can leverage to help you discharge more of your debt, keep more of your assets and spend less in the pre-bankruptcy planning stage.
After that, they will complete the petition paperwork and required schedules accurately and appropriately, as well as represent you in your hearing, or in further hearings should complications arise.
First and foremost though, a consultation with a bankruptcy attorney before you do anything else can help you make a decision about bankruptcy confidently. If yours is not a situation that really calls for bankruptcy, an attorney can offer other services that may be better suited to your case, such as debt settlement or negotiations.
It's always best to discuss your situation with an attorney before you do anything else. It doesn't cost anything to consult with an attorney or two, and it will ease your mind regarding your options.
Get Informed: Learn more about Hiring and Working With a Bankruptcy Lawyer
