Bankruptcy FAQ

Chapter 13 bankruptcy is also known as a reorganization bankruptcy.

Individuals who want to pay off their debts over a period of three or five years file chapter 13 bankruptcy. This type of bankruptcy appeals to individuals who have non-exempt property that they want to keep. It is also only an option for individuals who have predictable income and whose income is sufficient to pay their reasonable expenses with some amount left over to pay off their debts.

One of the main purposes of bankruptcy legislation is to afford the opportunity to a person who is hopelessly burdened with debt to free himself of the debt and start a “fresh new lease on life.”

If it is your first Chapter 13 case, by law all actions against a debtor must cease once the documents are filed. If it is your second Chapter 13 bankruptcy within one year, all actions must cease for 30 days. The 30 days may be extended by a court order after notice and hearing. If you have filed two or more case within the last year, there is no “stay” until it is granted by the Court after a hearing. If the stay is granted, creditors cannot initiate or continue any lawsuits, wage garnishes, or even telephone calls demanding payments. Secured creditors such as banks holding, for example, a lien on a car, will get the stay lifted if you cannot make payments.

In most states, a wife or husband will not be affected by a bankruptcy if they are not responsible (did not sign an agreement or contract) for any of the debt. If they have a supplemental credit card, they are probably responsible for the debt.

However, in community property states, either spouse can contract for a debt with the other spouse’s signatures on anything, and still obligate the marital community. There are a few exceptions to that rule, such as the purchase or sale of real estate; those few exceptions do require spouses to have signed.

Chapter 7 bankruptcy, sometimes called straight bankruptcy is a  liquidation proceeding. The debtor turns over all non-exempt property to the bankruptcy trustee who then converts it to cash for distribution to the creditors. The debtor receives a discharge of all dischargeable debts usually within four months. In the vast majority of cases the debtor has no assets that he would lose so Chapter 7 give that person a relatively quick “fresh start.”

However, in community property states, either spouse can contract for a debt with the other spouse’s signatures on anything, and still obligate the marital community. There are a few exceptions to that rule, such as the purchase or sale of real estate; those few exceptions do require spouses to have signed.

Bankruptcy filings are public records. However, under normal circumstances, no one will know you went bankrupt. The Credit Bureaus will record your bankruptcy and it will remain on your credit record for 10 years.

The most common reasons for filing bankruptcy are:

1. Unemployment
2. Large medical bills
3. Seriously overextended credit
4. Marital problems, and
5. Other large unexpected expenses

Whether a debtor keeps credit cards after filing bankruptcy is up to the credit card company. If you are discharging a credit card they will cancel the card unless you reaffirm the debt. Even if you have a 0 balance the credit card company might cancel the card.

Yes! A number of banks now offer “secured” credit cards where a debtor puts up a certain amount of money (as little as $200) in an account at the bank to guarantee payment. Usually the credit limit is equal to the security given and is increased as the debtor proves his or her ability to pay the debt.

Two years after a bankruptcy discharge, debtors are eligible for mortgage loans on terms as good as those of others, with 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.

The fact that you filed bankruptcy stays on your credit report for 10 years. It becomes less significant the further in the past the bankruptcy is. The truth is, that you are probably a better credit risk after bankruptcy than before.

No. U.S.C. Sec. 525 prohibits any employer from discriminating against you because you filed bankruptcy.

A person can file Chapter 7 again if it has been more than 8 years since he or she was discharged from the previous Chapter 7 bankruptcy.

There are two ways a person can become a bankrupt. The first and more common way is to have the person file a petition to voluntarily go bankrupt.

The second, and rarely used way is for creditors to ask the Court to make an Order that a person is bankrupt. In both these cases, a Bankruptcy Trustee is required to administer the bankruptcy.

In a bankruptcy, assets in excess of your allowed personal exemptions, or non-exempt assets, such as rental property, or more than the allowed number of vehicles, the trustee will liquidate to pay creditors.

Pre-petition – (Before Filing) Individuals must have credit counseling within 180 days of filing from an approved counseling service.

Day 1: The Bankruptcy documents are filed with the Bankruptcy Court. In most cases, there is an immediate stay so that most actions by creditors are prevented, wages cannot be garnished, legal actions cannot be continued. (See exceptions on page 1)

Day 14: Creditors are advised by the clerk that a petition has been filed.

Day 35 or later: A meeting of creditors is held at the Court (“The 341 meeting”)

The debtor must attend this meeting. If they attend, they only have a few minutes to ask questions.

The trustee assigned to the case presides. The meeting is either tape recorded or recorded by a court reporter. The trustee ask you questions under oath such as:

1. Did you read the schedules before signing?
2. Did you list all of your assets?
3. Did you list all of your debts?
4. Are the schedules accurate?
5. Do you want to make any corrections to the schedules?
6. Are your cars insured?
7. Have you destroyed your credit cards?

The trustee either orally, or by giving the debtor written information, will insure that the debtor is aware of: The effect on credit history, the effect of receiving a discharge; the effect of reaffirming a debt; the ability to file a petition under a different chapter.

Note: The typical creditor meeting lasts about 4 to 5 minutes

Day 20-30 and After:

The trustee will sell any non-exempted assets available for the benefit of the creditors.

The trustee has authority to:

• Pursue causes of action (lawsuits belonging to the debtor);
• Set aside preferential transfers made to creditors within 90 days before filing the petition,
• Undo security interests and other pre-petition transfers of property that were not properly perfected.

Day 90 (after the 341 meeting):

Unsecured creditors must have filed their proof of claims.

Day 60-90 (after the 341 meeting)

Chapter 7 and Chapter 13 debtors must have a financial management course before they can receive a discharge.

The debtor is discharged and all debts (with some exceptions) are written off.

More than 99% of the debts are discharged.

Individuals may file Chapter 13 bankruptcy petitions if they:

Reside, have a domicile, a place of business, or property in the United States, or a Municipality; have a source of regular income; and on the date of the petition is filed owe less than $307,675 in unsecured debts and less than $922,975 in secured debts. Note: The amount given here are 2005 amounts. They are regularly adjusted to keep up with the cost of living.

Corporations and partnerships may not file a Chapter 13 bankruptcy petition.

If you filed a prior bankruptcy petition and the prior proceeding was dismissed within the last 180 days, you may not be able to file a second petition and should check 11 U.S.C. sec 109(g).

If you got a discharge in a prior Chapter 13 bankruptcy, you may not get another discharge in a Chapter 13 bankruptcy for 2 years.

The following debts are not erased in both Chapter 7 and Chapter 13. If you file for Chapter 7, these will remain when your case is over. If you file for Chapter 13, these debts will have to be paid in full during your plan. If they are not, the balance will remain at the end of your case.

• Debts you forgot to list in your bankruptcy papers, unless the creditors learn of your bankruptcy case.
• Child support and alimony
• Debts for personal injury or death caused by intoxicated driving
• Debts for willful and malicious injury to property
• Student loans, unless it would be an undue hardship for your to repay;
• Fines and penalties imposed for violating the law, such as traffic tickets and criminal restitution, and
• Recent income tax debts and all other tax debts. This is a complicated area of the bankruptcy law and an attorney should be consulted.

You can discharge (wipe out) debts for federal income taxes in a Chapter 7 and Chapter 13 only if all of the following five conditions are met:

• The IRS has not recorded a tax lien against your property. (If all other conditions are met, the taxes may be discharged, but even after bankruptcy, the lien remains against all property you owned on the date of filing, effectively giving the IRS a way to collect.
• You didn’t file a fraudulent return or try to evade paying taxes.
• The liability is for a tax return (not a Substitute Return) actually file at least two years before you file bankruptcy.
• The tax return was due at least three years ago.
• The taxes were assessed (you received a notice of assessment of federal Taxes from the IRS) at least 240 days (eight months) before you filed for bankruptcy. (11 U.S.C. sec 523 (a)(1)).

In addition, the following debts may be declared non-dischargeable in a Chapter 7 but may be discharged in a Chapter 13:

• Debts incurred on this basis of fraud, such as lying on a credit application
• Credit purchases of $500 or more for luxury goods or services made within 90 days of filing;
• Loans or cash advances of $750.00 or more taken within 70 days of filing;
• Debts from willful or malicious injury to another person’s property.
• Debts from embezzlement, larceny or breach of trust;
• Debts incurred to pay non-dischargeable tax obligations; and
• Debts arising from property settlements in divorce or separation proceedings.