Bankruptcy – Frequently Asked Questions
What is Bankruptcy?
Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts or repay a portion of them under the protection of the bankruptcy court. Bankruptcy provides a “fresh start” that enables individuals or businesses to start over without the burden of debt. It also gives people who are owed money – the creditors – a fair share of the money that the debtors can afford to pay back.
Are there any alternatives to filing bankruptcy?
Before making a decision to declare bankruptcy, you may want to consider other alternative options. But be careful though – if your financial problems are long term, or if all your creditors will not agree to work with you, bankruptcy may be the best way for you to get out from under a big debt load and get a fresh start. No matter what course you take, you should see an attorney to figure out the best solution for your situation.
How will I live with the embarrassment of filing for bankruptcy?
Bankruptcy has become a common and accepted way to take action to solve your problems. As your financial situation improves, you can reestablish credit, and get on with your life. No one really looks forward to filing bankruptcy because most people really want to pay their debts if they can. But consider the alternative: the financial stress caused by insurmountable debt can take a huge toll on your life at work and at home; creditor calls at all hours, lawsuits, pressure from the IRS. It can ruin your health and family life. Bankruptcy can provide a fresh start. If you don’t file because you are worried about being embarrassed, you could be making a big mistake.
Once I decide to file bankruptcy, what should I do to prepare?
Once you decide to file, every step you take is watched closely. To make the process go smoothly, it is important that you obey the rules of the bankruptcy court. You should work closely with an attorney to make sure you stay within the guidelines established by the court and the law.
Can I go to jail if I file bankruptcy?
NO. If you tell the truth and disclose all that is required there is no chance you will go to prison.
There are, however, instances of threats of prison based on bankruptcy fraud. This is a serious federal offense! Don’t try to “scam” the system by lying or “strategic omissions.”
Do I lose any of my rights, such as the right to vote, if I file for bankruptcy?
No. You do not forfeit any of your civil rights by filing. Also, you may not be discriminated against because you have filed for bankruptcy relief.
Did You Know – Bankruptcy is specifically mentioned in the United States Constitution? In Article I, Section 8, our Congress is given the power to make uniform laws on the subject of Bankruptcy.
Who does all the paperwork?
Your attorney fills out all the forms related to the actual filing. You can prepare the forms yourself or work with a debt counselor, but in order to get the best result, it makes sense to work with an attorney. Having an experienced attorney saves you time, money and the headaches of trying to manage bankruptcy by yourself.
After I file, who notifies the creditors?
As part of your bankruptcy petition, you provide a list of creditors. After the bankruptcy petition is filed, the court mails a notice to all the creditors listed in the schedules. If you don’t want to wait for the court to send notice, your attorney can notify creditors for you.
Who deals with bill collectors?
This is one of the things that your attorney can provide for you once you file.
Will bill collectors stop calling once I file?
Once you file you are granted an “automatic stay.” This means creditors have to stop calling. The court or the bankruptcy trustee mails a notice to all the creditors you have listed notifying them of your bankruptcy petition. If creditors continue to call, you should refer them to your attorney. If you have any lawsuits or garnishments pending, you should notify your attorney, who will contact those creditors immediately. If creditors persist in calling you once you have filed, keep a record of the time and substance of the call and contact your attorney immediately.
Continuing collection efforts violates bankruptcy laws and can subject the bill collector to substantial sanctions.
Can I keep some assets out of the bankruptcy proceeding?
You must disclose all your assets. If you knowingly conceal an asset the court could dismiss your bankruptcy, and you could face serious penalties, including fines and imprisonment. (See #5 above)
Will my out-of-state debts be affected by my bankruptcy?
Yes. The Supremacy Clause of the United States Constitution states that federal law (bankruptcy laws are federal law) trumps state laws that conflict. Bankruptcy is a federal proceeding. The Bankruptcy Court has the jurisdiction and power to discharge debts contracted anywhere in the country.
Will my employer or landlord find out about my bankruptcy?
Generally NO – not unless they are also your creditors, or you tell them about it. Bankruptcy petitions are public records, so it is impossible to keep them secret. However, it is unlikely that your landlord or employer will go digging through public records to find out.
**Note: If you have a Ch 13 repayment plan that requires you to have money deducted from your check, your employer would have to be notified.
Should I file separately from my spouse?
Under the present law this is a tricky question which needs to be discussed with your attorney. Depending on your circumstances, it may be to your advantage for only one spouse to seek relief.
Wouldn’t it be cheaper to work with a debt counselor, paraprofessional or consolidation service?
Working with a debt counselor can make sense in certain circumstances, but be sure you are not setting yourself up for failure. Make sure you understand the service’s fee structure, and their ability to work effectively with your creditors.
What is the difference between Chapter 7 and Chapter 13?
Generally speaking, a Chapter 7 is shorter and less expensive and is intended to discharge general unsecured obligations. A Chapter 13 is longer and generally more expensive. A Chapter 13 requires payments over a period of time, not greater than 60 months. In most cases the decision between filing a Chapter 7 and a Chapter 13 becomes a factor of the results of four tests:
- What kind of net income do you have after you have paid your living expenses and before you address unsecured debt service?
- Do you own any non-exempt assets?
- Whether your financial problems are a result of secured and/or priority obligations or whether your problems are a result of unsecured debts?
- The results of the “means test” as implemented by the Bankruptcy Reform act in October 1995. This test is complicated to explain, but is intended to remove much of the discretion from bankruptcy judges in the determination of whether you can afford to pay “something” back to the creditors. As a practical matter, although complicated to implement and explain, the means test has little impact on the type of relief available to individuals.
You should consult with an attorney to discern what alternative best suits your financial circumstances.
How do I know the attorney’s fee is fair?
All fees paid in connection with or contemplation of filing a bankruptcy must be approved by the bankruptcy court. This ensures the fairness of the fee paid or to be paid in connection with the legal services provided.
Will my bankruptcy appear on my credit reports?
Yes. Your bankruptcy can be listed in credit reports for a period of up to 10 years. Chapter 7 filings are normally reported for 10 years and Chapter 13 filings for 7 years.
How can I re-establish my credit rating after bankruptcy?
The best way to rebuild your good credit over time is by making payments every month without fail. A bankruptcy followed by a good payment record is much more desirable than a continued history of unpaid bills. Creditors also may be willing to work with you because you are prohibited by law from filing Chapter 7 bankruptcy again for a significant period of time.
Other ways to renew credit you may want to consider are:
- You can reaffirm a debt owed to a creditor based on an agreement made during bankruptcy.
- You can get secured debt based upon providing collateral.
- You can obtain credit using a co-signer.
Normally, two years after a bankruptcy discharge, debtors are eligible for mortgage loans on terms as good as those of others with the same financial profile, who have not filed bankruptcy. The size of your down payment and the stability of your income will be much more important than the fact you filed bankruptcy in the past.
After I file, can I obtain new credit?
Yes. The decision of whether to extend you credit belongs to each particular lender. While some potential creditors will reject your application for credit simply because you have a bankruptcy on your record, others will grant you credit because you have no other debts left and have the ability to pay a new loan.
What assets do I have to include in the bankruptcy?
You must disclose any and all assets you own, have possession of, or have a right to posses. Honest disclosure is extremely important. Keep in mind that simply because you must disclose the assets does NOT necessarily mean you will lose those that are reasonable and necessary. You are not required to surrender ANY assets when filing a Chapter 13.
What are exempt assets?
Generally speaking, exempt assets are those you retain when you file a Chapter 7. In a Chapter 7, non-exempt assets are surrendered to a trustee, in a Chapter 13 non-exempt assets may add to the total you must repay. Both the Federal Government and the State of Texas have defined exempt assets. In most cases, you may choose federal and Texas exemptions.
Can I keep my home if I have a mortgage?
One of the biggest concerns you may have in considering bankruptcy is the possibility of losing your home. If you are behind on your mortgage payments, you will almost certainly lose your house if you file a Chapter 7 bankruptcy. Your mortgage lender will ask the bankruptcy court to lift the automatic stay to begin or resume foreclosure proceedings. In a Chapter 7 bankruptcy in most cases whether or not you keep your home depends on whether you pay your mortgage, keep the house insured and pay property taxes.
In a Chapter 13 bankruptcy, you will not lose your house if you immediately resume making regular payments under your mortgage, and you repay your missed mortgage payments through your Chapter 13 plan.
Can I keep my home if I rent?
If you are current on your rent payments and file for bankruptcy, you are able to keep your lease without difficulty. However, if you are behind on your rent, there are some complicated and financially demanding guidelines that must be met to keep the rental property. It is not impossible to remain in the property, just difficult.
Will bankruptcy stop a foreclosure proceeding or eviction?
Filing a Chapter 7 will stop a foreclosure or eviction temporarily, but a creditor can usually get the court’s permission to proceed fairly quickly. Filing a Chapter 13 will stop foreclosure and allow a mortgage arrearage to be cured through the Chapter 13 repayment plan. Keeping your home is one of the most critical procedures you will face in bankruptcy, and if you are a homeowner you should see an attorney, especially if you are in foreclosure.
Will bankruptcy remove a lien?
Yes, under some circumstances. This is a complicated procedure, and requires the assistance of an attorney.
Will I lose my car if I file for bankruptcy?
Whether you keep or lose your vehicle In Chapter 7, bankruptcy is a function of two factors.
- Can you maintain required payments (loan payments and insurance)?
- Does the value of your interest in the car (a.k.a. equity) exceed allowed exemptions?
In Texas, debtors rarely lose a vehicle due to too much equity. In a Chapter 13, the issue is less difficult. You may keep the car, but you must keep it insured and pay for it directly to the creditor or through the plan of reorganization.
Are pension plans, 401(k) plans and IRA accounts protected?
Pension and 401(k) plans are usually exempt, but there are some exceptions. If you have a retirement plan, you should consult with an attorney.
Do some debts have priority over others?
Different types of debts have priority over other debts. This priority determines the order in which debts have to be paid, and how much is paid. The bankruptcy court defines three categories of debt:
- Debts held by collateral, such as mortgages and car loans, are known as secured debts. These must normally be paid first, and collateral can be repossessed if the debt is not paid.
- Priority debts are paid second, from the money left over after your secured debts are paid. Taxes normally fall into this category.
- Unsecured debts, which comprise the largest share of most consumer debts, are paid last after secured and priority debts are paid. In Chapter 13, unsecured debts may often be paid at a very small percentage of what is owed.
Are income taxes dischargeable?
The following income taxes are priority claims and are not dischargeable:
- Taxes where the returns were due within three years of the bankruptcy, and
- Income taxes that were assessed within 240 days (about 8 months) before the bankruptcy.
If you file Chapter 13, your plan must provide for payment in full of these taxes. Penalties assessed on the taxes are not priority claims however, and can be reduced substantially. Once you have filed, the tax debt does not continue to accrue interest.
Are un-filed tax returns dischargeable?
You will usually need to prepare and file the returns for the years you did not file, either before the bankruptcy filing or shortly thereafter. You should consult with an attorney before you file any un-filed tax returns to determine the best time to file and who should file the returns.
When you have not filed a return or if a return was filed less than two years before you file bankruptcy, the taxes cannot be discharged in Chapter 7. However, they can be discharged in Chapter 13 if the tax return was due more than three years before you file bankruptcy and the tax was not assessed within 240 days (about 8 months) of the filing.
It may be possible to negotiate other settlements with the IRS. Consult with an attorney before you decide how to deal with your taxes in bankruptcy.
Will bankruptcy stop a wage garnishment?
Yes, unless it is a garnishment for ongoing alimony, spousal maintenance or child support.
Will bankruptcy stop a judgment?
Yes. Most civil judgments are stopped by bankruptcy.
Will a bankruptcy remove a lien?
Yes, under some circumstances. This is a complicated procedure, and requires the assistance of an attorney.
Will I be able to keep any credit cards?
It may be possible to keep one or more cards, depending on how much you owe and your ability to pay on the card in the future. If you want to keep the card in a Chapter 7 case you will need to reaffirm your debt, which means you will need to pay the amount discharged in bankruptcy. While this may seem like a good idea at first glance, you should consult with an attorney before doing so.
If you do not owe a balance on the card on the day your bankruptcy is filed, you need not list the credit card company as a creditor on your bankruptcy. If you are filing a Chapter 7, you may be able to maintain a relationship with the excluded credit card company. In a Chapter 13, you are prohibited from obtaining credit unless you have the Court’s permission.
Can credit card issuers challenge the discharge?
While credit cards are generally unsecured and therefore dischargeable in a Chapter 7 bankruptcy, there are exceptions. Credit card issuers can challenge the discharge of their debt in Chapter 7 by filing a nondischargeability action claiming that the debt should not be discharged. Credit card debts can be excluded from discharge for two reasons:
- The credit card application was fraudulent, or
- The card was used fraudulently.
If you plan to file bankruptcy, stop using your credit cards and consult an attorney to make sure you are within the guidelines established by the bankruptcy court.
When do card issuers challenge discharge of debts?
Credit card debts can be excluded from discharge for the following reasons:
- Increase in credit card usage shortly before filing
- Newly issued card
- Large cash advances in months before filing
- Use of card for travel or vacations
- Pattern of borrowing on one card to make payments on others
- Exceeding credit limit without authorization
- Using card when unemployed or without reasonable belief that the debt can be repaid
- Large balance at the time you file.
Generally, the more time that elapses between any particular use and the bankruptcy filing, the less likely it is that the usage will trigger a challenge to the discharge. Consult your attorney to reduce the likelihood your credit card discharge will be challenged.
Is alimony dischargeable?
Alimony, maintenance, and child support payments generally are not dischargeable.
Will my creditors be allowed to collect finance charges as part of my Chapter l3 plan?
Yes and No. Your general (unsecured) creditors will not be allowed to collect interest, penalties, or finance charges which accrue during the life of your plan. General Creditors may only collect the amount owed to them on the day your Chapter 13 is filed. Secured Creditors on the other hand, will be allowed to collect interest up to the value of the collateral pledged against the claim.
Can I discharge student loans?
Student loans are generally not discharged in bankruptcy. There are two categories of exception to this rule:
- The student loan may be discharged if it is not insured or guaranteed by a governmental unit or made under any program funded in whole or in part by a governmental unit or nonprofit institution.
- The student loan may be discharged if paying the loan will impose an undue hardship on the debtor and the debtor’s dependents.
These provisions are not automatic. You should consult an attorney to determine whether your student loans are dischargeable.
If I am a co-signer for a debt, how does bankruptcy affect the obligation?
This depends on whether the debt itself is dischargeable. If the debt is dischargeable, you can usually discharge it in bankruptcy.
What if I fail to list a creditor on the bankruptcy papers?
If you failed to list the creditor by mistake, you can amend your schedules to include the creditor. After your bankruptcy is complete, however, if a creditor does not have an opportunity to participate, and payments were made to other creditors in the bankruptcy – your debt to the “left out” creditor will not be discharged.
If you omit the creditor intentionally to keep the creditor from participating in the bankruptcy proceeding, this may be regarded as perjury. If you discover you have omitted a creditor on your bankruptcy papers, see an attorney immediately.