Myths, Truths, and FAQs about Bankruptcy
WHAT IS BANKRUPTCY?
Bankruptcy is the process by which a consumer or a business can eliminate or repay some or all of their debts while being protected by the federal bankruptcy court. It enables debtors to obtain a “fresh start” with their finances.
WHAT ARE SOME COMMON REASONS FOR FILING FOR BANKRUPTCY?
There are many reasons why people file for bankruptcy relief: unemployment, large medical debts, over-extended credit, divorce, foreclosure, repossession retirement, disability, and taxes are among the more common reasons.
WHAT WILL HAPPEN TO MY CREDIT?
The most widespread myth about bankruptcy is that it ruins your credit for 10 years. Very quickly after you receive your discharge in a Chapter 7 or sometimes even during the case, your credit will jump back up. Generally, if you make wise decisions, your credit can be excellent within 2 years. However, the bankruptcy will show up on your credit report for 10 years. If you are filing a Chapter 13, you will likely see your credit score go up during the case.
WHAT IS THE DIFFERENCE BETWEEN CHAPTER 7 AND CHAPTER 13? ARE THERE OTHER CHAPTERS?
Chapter 7 bankruptcy is the chapter in which most debts can be discharged without payment. Individual debtors are allowed to “exempt” certain of their assets, meaning that they can keep them and the assets will not be used to pay creditors.
Chapter 13 bankruptcy is appropriate for people who have fallen behind in mortgage, car, or other secured debt payments and need to get them caught up, who have substantial tax debt, have property that they would lost in a Chapter 7 case, or simply have household income too high to qualify for Chapter 7. A Chapter 13 Plan would require a payment plan lasting three to five year, but the Debtors can bring the secured debt payments current, pay off tax debt which would otherwise be non-dischargeable at a reduced cost and keep the property which they would lose if they had filed a Chapter 7 case.
There are other chapters that are usually not applicable to most consumers: Chapter 9 bankruptcy only is available to municipalities/governments, Chapter 11 bankruptcy is available to businesses or individuals who have substantial debts and assets and can be used to pay off debts while continuing to function as a business. Chapter 11 can also be used by individuals who have too much debt to qualify and cannot otherwise file for Chapter 13 bankruptcy. Chapter 12 bankruptcy is only available to family farmers and fishermen, and Chapter 15 bankruptcy is only relevant in the context of international litigation.
WHAT IS A DISCHARGE?
A discharge is a court order that prevents creditors from attempting to collect a debt and effectively eliminates any personal obligation on that debt. A discharge is the ultimate goal of filing for bankruptcy.
WHEN SHOULD I FILE?
If a bankruptcy is filed at the wrong time, it may already be too late to salvage your situation. If a Chapter 7 is filed when you are at risk of losing property, such as a house, car, bank account, or tax refund, you cannot easily dismiss the case to avoid this property being forcibly taken by the Chapter 7 bankruptcy trustee. Even at the earliest stages before you've disclosed your assets and financial affairs, an attempt to dismiss will raise suspicion and the trustee can force the case to proceed, force you to disclose your assets, and force the sale or turnover of your home, car, bank accounts, or anything else that is not exempt or not disclosed. At this point, your best outcome will be to mitigate the harm. Proper planning will ensure that the outcome of your case will be a near certainty before it is filed.
Timing can be very important when filing for bankruptcy. Sometimes immediate filing may be necessary to stop a foreclosure or repossession. However, it is can also be necessary to delay filing in order to qualify for bankruptcy protection or to take full advantage of a discharge. Other factors may affect the timing of filing your bankruptcy petition. Your attorney will be able to determine when is the best time to file after reviewing your case.
WHAT DO I NEED BEFORE I FILE?
It is helpful to bring with you to your initial consultation a list of your debts and assets, recent proof of income (such as pay stubs), as well as evidence of any kind of ongoing or imminent collection actions such as a foreclosure or wage garnishment.
WHAT IS THE “MEANS TEST”?
In 2005, the bankruptcy laws changed to add a Means Test in an effort to curb what Congress saw as an abuse of the Bankruptcy Code. The Means Test is a complex analysis of your current income, debt, and monthly expenses to determine the amount of “disposable income.” Debtors whose disposable income is too high will be presumed to be abusing the Bankruptcy Code. However, your attorney will be able to either help you pass the Means Test if possible or rebut the presumption of abuse if appropriate circumstances are present.
WILL MY BANK OR CREDIT UNION CLOSE MY ACCOUNT IF I FILE?
It depends. Some banks may freeze your account, ask you to reaffirm your debt, or take no action. Your attorney will be able to help you plan for the bank's reaction to your bankruptcy.
WHO/WHAT IS A TRUSTEE?
A Chapter 7 trustee is an agent appointed by the Department of Justice, usually an attorney or an accountant, whose primary duty is to liquidate property, avoid certain transfers, and pay money to the creditors, something which occurs in only a very small percentage of the cases filed. In the more typical Chapter 7 case, the trustee will review the bankruptcy petition and related documents and will conduct a 341(a) examination, also known as the Meeting of Creditors. One of our attorneys will be present with you at that meeting and will help guide you through it. The trustee is paid a flat rate per case and is also entitled to a percentage of all assets liquidated.
A Chapter 13 trustee will also review the bankruptcy petition and related documents and will conduct a 341(a) examination, also known as the Meeting of Creditors, where one of our attorneys will be there in attendance with you. After the meeting, the Chapter 13 trustee will advise the Court whether or not he believes your Chapter 13 Plan complies with all of the applicable provisions of the Bankruptcy Code and will make a recommendation as to whether your plan of repayment should be approved by the Court. After your plan is approved, the Trustee's primary duty is to take your plan payment and make payments to your creditors in accordance with your Chapter 13 Plan. The trustee will also monitor your plan to make sure that you are complying with all of its terms.
The Office of the United States Trustee is the government agency that is a part of the Department of Justice that is tasked with overseeing bankruptcy. There are various ways that the US Trustee can get involved in a case. Our goal is to keep them happy and put together a case that shows that you are someone who deserves bankruptcy relief.
WHAT WILL HAPPEN TO MY PROPERTY? WILL THE TRUSTEE SELL EVERYTHING?
Our goal is to exempt as much of your property so that the trustee won't be able to sell anything.
DO I HAVE TO LIST ALL OF MY CREDITORS?
Yes. Federal bankruptcy law requires full disclosure of all debts and the bankruptcy petition must be true and correct, under penalty of perjury. The trustee will ask you about this under oath at the 341(a) meeting of creditors.
CAN CREDITORS OBJECT TO MY BANKRUPTCY?
Yes. Your creditors have the right to object to the discharge of a debt or to your discharge entirely. There are a few, limited grounds upon which a creditor may raise these objections such as fraud, false representations, abuse of process, etc. The trustee may also raise similar objections.
Fairly often we will receive objections to Chapter 13 plans. Many of these objections are relatively easy to resolve and have either withdrawn or overruled by the judge.
WHAT IS A REAFFIRMATION AGREEMENT?
Some creditors might try to get you to sign a reaffirmation agreement after you file for bankruptcy. This agreement will effectively treat a specific debt as if it had never been included in the bankruptcy and it will not get discharged. If a reaffirmation agreement is signed, the debtor may later be liable for any deficiency if that property is repossessed and sold for an amount less that the debt. Your attorney will be able to advise you as to whether or not it is in your best interest to sign a reaffirmation agreement.
WILL I BE ABLE TO GET MY DRIVER'S LICENSE BACK?
If you had your license suspended because you owe someone money, the filing of a bankruptcy will likely help get your driver's license back.
WHAT ARE EXEMPTIONS?
Exemptions are laws that protect your property from being sold by the bankruptcy trustee. When you file for bankruptcy, everything you own becomes part of the bankruptcy estate. One of our roles as your attorney is to help you protect as much property as possible by using the exemption laws so that your property will not be sold. In California, we have 3 separate sets of bankruptcy exemptions, but not all of them are applicable in every case.
WHAT HAPPENS TO PROPERTY THAT IS NOT COVERED BY ANY EXEMPTIONS?
Property that is not exempt can potentially be sold by the trustee to pay off creditors. This may be a reason to file a Chapter 13 instead of a Chapter 7. With careful planning, our clients can usually exempt all of their property.
CAN I KEEP MAKING PAYMENTS ON CERTAIN DEBTS?
Many clients give priority to their creditors and wish to continue to do so. For instance, most clients are current on their car and mortgage payments, but have fallen behind on their credit cards. With our help, clients can continue to make payments to these creditors and avoid repossession or harm to their business relationship. Clients can also continue to make payments to doctors, dentists, relatives, and other who they want to pay.
CAN I TRANSFER MONEY AND/OR PROPERTY TO SOMEONE TO KEEP IT OUT OF THE BANKRUPTCY?
NO. If you are considering bankruptcy you should not dispose of or transfer any property that could be used to pay creditors. If the trustee becomes aware of it, this property can be recovered by the trustee and sold even if it could have been exempted if you were to have kept and listed it in the first place.
WHAT IS THE DIFFERENCE BETWEEN A SECURED AND AN UNSECURED DEBT?
A secured debt is a debt that attaches to a piece of property, an unsecured debt is not attached to any piece of property. An unsecured debt, such as a credit card debt, can only be enforced after the creditor files a lawsuit against you and obtains a judgment. Thereafter it can be enforced by a sheriff levying your bank account or garnishing your wages. In the case of a secured debt, such as a mortgage or a auto loan, if you default on paying of the debt, the creditor can repossess piece of property and sell it with the proceeds going towards paying off your debt and any deficiency will be treated as unsecured debt for which you will be personally liable.
IF A CREDITOR ALREADY HAS A JUDGMENT AGAINST ME, WILL A BANKRUPTCY DISCHARGE ELIMINATE THAT JUDGMENT?
Yes. If that judgment was not the product of fraud, willful and malicious injury, defalcation, or another non-dischargeable debt and the judgment creditor has not attached any of your property, the judgment will be treated as unsecured debt that will likely be discharged. Under some circumstances, we can have judgment liens released from property so that the judgment can be fully discharged.
CAN MY BUSINESS FILE FOR BANKRUPTCY?
If you operate a business that is an LLC or a corporation that has incurred significant debt, the business might be eligible to file for bankruptcy under Chapters 7 or 11. Businesses that are operated as a sole proprietorship or a partnership can only qualify for bankruptcy when the owners' file since the owners of the business are personally liable for its debts. A personal bankruptcy might be able to alleviate those business debts.
WILL MY STUDENT LOANS BE DISCHARGED?
Generally, student loans cannot be discharged in a bankruptcy. However, there are unique circumstances in which they can be discharged, such as when the repayment of the student loans would result in an unreasonable hardship or if the debt does not qualify as a type of student loan that is protected against discharge.
WILL BANKRUPTCY STOP MY UTILITIES FROM BEING DISCONNECTED?
A bankruptcy will stop your utilities from being shut off. However, you may be required to provide the utility company with some form of adequate assurances in the form of a security deposit that you will be able to make future utility payments. You may also be able to discharge your back payments.
WILL MY TAX DEBTS BE DISCHARGED?
The laws concerning dischargeability of tax debts are very complex. Your attorney will be able to advise you of which of your tax debts might be dischargeable.
HOW WILL MY CO-SIGNERS BE AFFECTED?
Chapter 7 bankruptcy does not protect co-signers of your debts. In addition to a creditor being able to go after a co-signer for these joint debts, the co-signers credit report may show that the debt was included in a bankruptcy or that a co-debtor filed bankruptcy. Co-signers have limited protection in a Chapter 13.
WHAT IS ARE THE CREDIT COUNSELING AND FINANCIAL MANAGEMENT COURSES?
All debtors are required by the Bankruptcy Code to complete a credit counseling course before they file their bankruptcy petition. This only takes about an hour and can be done online. The counseling involves a review of your debt, your income, and your ability to make payments on your debts.
All debtors are also required by the Bankruptcy Code to complete a financial education course before they are eligible for a discharge. This is to be completed after the case is filed and usually takes about two hours. It involves some reading and taking a test but you will have a window of approximately three months to complete it.
WILL I BE ABLE TO KEEP MY HOME?
Whether you can keep your home in a Chapter 7 depends on the balance on the mortgage(s), the value of the property, and the amount of your homestead exemption. If you are filing under Chapter 13, you can keep your home.
I HAVE A STEADY INCOME, CAN I STILL FILE?
Yes, being employed or receiving income does not automatically disqualify you from filing bankruptcy. However, if your income is too high, you might be disqualified from filing a Chapter 7.
WILL I BE ABLE TO KEEP MY CREDIT CARDS?
You will want to get rid of your credit cards if you are considering bankruptcy for the following reasons:
First, charges made within a certain time-frame before filing for bankruptcy can raise a presumption that you had no intention of paying back that debt and can be deemed non-dischareable on the basis of fraud.
Second, since your credit card debt will most likely be discharged, your credit card company will probably not want to extend you additional credit. However, since you will soon be in a better financial position, you will most likely start receiving credit card offers within a very short time after receiving your discharge.
Third, if you have a credit card with a zero balance, even though they will not be listed in your bankruptcy they will likely close your account. Any payments made to pay off certain debts will not only be made in vain, but those payments can sometime be reversed by the trustee and can complicate your case.
WHAT DEBTS ARE DISCHARGED?
After you have received a discharge, most of your debts will be discharged, however certain debts will remain. The most common debts that are not discharged are child support, spousal support, taxes, and student loans.
HOW DO I STOP CREDITORS FROM HARASSING ME?
Once you have retained one of our attorneys, you may inform your creditors that you have retained our firm to file a bankruptcy and give them our name and number. Once your petition is filed, your creditors will be subject to the bankruptcy stay and may be liable for severe penalties if they attempt to contact you or collect a debt. Once you receive your discharge, that puts a permanent end to collection activity and creditors can be held liable for violations of this discharge.
WHO SHOULD NOT FILE FOR BANKRUPTCY?
Generally, people who are in a stressed financial situation are eligible for bankruptcy. However, people who own and want to retain too much property and cannot propose a plan that would allow them to keep their property may not want to file for bankruptcy since their property could be liquidated by the trustee. Your attorney will be able to give you a clear picture of what your bankruptcy options are and we will not advise you to file bankruptcy if it is not in your best interests.
DOES MY SPOUSE NEED TO FILE?
Your spouse does not need to file. However, based on your particular situation, it may make the most sense for you both to file a joint bankruptcy petition. Again, we will be able to give you a clear picture of the pros and cons.
HOW WILL MY SPOUSE BE AFFECTED?
This is a very complex area of the law and really depends on the specifics of your financial situation. Your attorney will be able to advise you of how your spouse could potentially be affected.
CAN I STOP A FORECLOSURE ON MY HOME?
A bankruptcy proceeding will stop any foreclosure actions on your home. This does not necessarily permanently stop the foreclosure, but a bankruptcy might be able to help you get caught up on payments or give you some breathing room.
WHAT HAPPENS IF A CREDITOR TRIES TO COLLECT AFTER FILING BANKRUPTCY?
Once your bankruptcy is filed, creditors will not be allowed to take any actions to collect on a debt. If they fail to abide by this order, they will be subject to being held in contempt.
WHAT IS A “LIEN STRIP”?
A lien can be "stripped" when you have more than one lien on your property and the senior lien is owed more than your property is worth. If this is the case, the junior lien can be removed from and treated as unsecured debt which can be discharged. Liens can only be stripped in Chapters 13 and 11, but not in Chapter 7 case.
WHAT DO I DO AFTER MY CASE IS CLOSED?
After you have received your discharge and your case is closed, you should work towards rebuilding your credit and taking better care of your finances. You will be in a much better position to achieve this.
HOW EASY IS BANKRUPTCY?
Bankruptcy can be a very difficult process. However, with the help of an experienced attorney, it can go through very smoothly for you. Our primary goal is to make it as easy as possible.
WILL I HAVE TO GO TO COURT? WHAT IS A 341 HEARING (AKA "MEETING OF CREDITORS")?
Your “day in court” for your bankruptcy is usually just the 341(a) Meeting of Creditors hearing. This is where you will go before the bankruptcy trustee with one of our attorneys and be asked questions about your bankruptcy. The name “meeting of the creditors” is somewhat misleading since creditors are rarely present. For most cases, the trustee will ask you to attest the the accuracy and honesty of your bankruptcy petition, ask a few simple questions, and you will then be free to leave.
WHAT ARE MY ALTERNATIVES TO FILING?
Bankruptcy is not for everyone as there are alternatives. Our consultations are free and our attorneys will review your various options with you and will not advise you to file for bankruptcy unless they believe it is the best course of action for you.
I HAVE FILED BANKRUPTCY IN THE PAST, CAN I FILE AGAIN?
Filing for bankruptcy can limit your ability to file again in the future. Generally, if you file for Chapter 7 bankruptcy, you cannot do so again for 8 years. However, you may still be eligible to file for Chapter 13 bankruptcy.
WHAT IS THE TIMELINE OF A BANKRUPTCY CASE?
A Chapter 7 case will usually take around four months from the date of filing until the date of discharge. A Chapter 13 Plan will usually take between three to five years, but it is often possible to complete your case sooner than that.
WHAT IS A “PETITION PREPARER”?
A petition preparer is a person that can assist you in filing for bankruptcy. However, petition preparers are not attorneys and are prohibited from advising you. Petition preparers often cause dire harm such as dismissed cases, repossessed property, or other more malicious illegal activity. The problems caused by petition preparers got so bad that there have been efforts to make their services illegal. The petition preparer community narrowly avoided this by raising free speech arguments. In turn, it was made unlawful for these people to charge more than about $200, although some often charge substantially more than an experienced attorney would charge.
If you have already met with a petition preparer and fear that your case is not being handled properly, please contact us and we will likely be able to fix any errors and ensure that your case proceeds smoothly and does not cause any harm to you and your family.
HOW MUCH DOES IT COST?
Our philosophy is that anyone who truly needs bankruptcy should also be able to afford it. At the time of your free initial consultation, the attorney should be able to quote a fee for you and suggest any other payment arrangements that can ensure that we are able to handle your case.