In-depth answers to 45 bankruptcy questions.
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Up 11. What are the advantages of bankruptcy?
Once discharged through bankruptcy your debts are erased; in other words you are no longer responsible for paying them.
Up 12. What about my credit?
The fact is that when lenders or other creditors review your credit report they rank bankruptcy as the worst.
Up 13. How long do I have to wait to rebuild my credit?
You can rebuild your credit immediately with a secured loan or credit card. In fact you can even obtain these items while going through the bankruptcy process.
Up 14. How long does it take before my debt are discharged?
Chapter 7 takes between 3 to 8 months;
Chapter 11 can take from just under a year to many years;
Chapter 13 can take several months while trying to get your repayment plan approved. However, the actual discharge is not final until you've met the payment plan requirements which takes from 36 to 60 months to complete.
Up 15. How long until my credit gets back to the point where I might hope to get a regular credit card or mortgage?
Rebuilding credit depends on how aggressively you try to get back on track, but don't figure less than 1-3 years. Remember, you can always get a secured credit card or a mortgage with a low loan to value (LTV) and high interest rate, sometimes even still in the middle of a bankruptcy.
Up 16. How would I know if Chapter 7 is right for my situation?
If you have very few assets with no property and your assets can be exempted then Chapter 7 may be right for you as long as you have no other obligations such as court ordered alimony, child support payments, criminal restitution, non-dischargeable taxes, or student loans. (list of non-dischargeable items) Many national creditors prefer that you file Chapter 7 if they cannot recover at least 50 cents on the dollar.
Up 17. Which bankruptcy chapter is the least expensive?
Chapter 7 is the least expensive because you do not have to pay off the debts. The next least expensive is Chapter 13 where you repay about 10 cents on the dollar, followed by Chapter 11.
Up 18. Can I pick and choose which assets to put into a personal bankruptcy?
No. Every asset you own must be included in the filing. After filing you may choose to exempt some of your assets.
Up 19. So I exempted my vehicle, what happens to it?
You didn't actually exempt the vehicle (or any asset) you really only exempted the equity (if any) in the asset . So, if you have a loan for $17,000 on a vehicle worth $20,000 then you exempt $3,000. However this does not mean you get to keep the car free. You only keep the vehicle if you make payments on it.
On the other hand, if the situation was reversed and you owed $20,000 on a vehicle worth only $17,000 then you could choose to simply give the vehicle back and owe nothing. One of the advantages to filing bankruptcy.
Up 20. What does reaffirm mean?
You become personally liable for the debt again. For instance, in the vehicle example above if you kept the car and made payments the creditor would probably want you to sign a new contract (reaffirm) for the vehicle.
Up 21. What exactly can I exempt?
It depends on which state you live in. Most states allow the Federal exemptions but also have state exemptions that may be more favorable. See this list of Bankruptcy Exemptions - Federal and State
Up . 22. Does my personal bankruptcy affect my corporation?
No! But your shares go to the trustee and may restrict your voting and transferring privileges.
Up 23. Can I file a personal Chapter 11?
Individuals may file. Chapter 11 - More info
Up 24. Do I have to appear before a bankruptcy judge?
No, you will meet with a trustee and your creditors at a meeting called 341.
Up 25. What is the trustee's job?
Find assets with equity, liquidate them and then pay off the secured creditors. If any money is left then they also pay unsecured creditors based on priority. For a more in depth explanation see Chapter 7 "The Role of the Trustee"
Up 26. What if I want to keep some non-exempted assets?
In most cases, you can buy them back from the trustee.
Up 27. If I change my mind after filing can I get of or stop the bankruptcy?
Only the judge will decide if it may be dismissed or not. Even if you get the case dismissed your credit report will still show that you filed.
Up28. After I file bankruptcy can I still workout the non-exempt assets?
In Chapters 11 and 13 you may negotiate with your creditors out of court. In a Chapter 7 you may do a workout if the trustee abandons the property.
Up 29. What does it mean when a trustee abandons property?
When the liquidation value of an asset cannot pay off the secured creditors, the trustee "abandons" it, or simply gives it back to the debtor. Although you've been discharged from the obligation, if a workout can not be achieved or payments made, you'll probably lose the property at a foreclosure.
Up 30. I thought bankruptcy stopped foreclosure? Can they still take my house?
When you file Bankruptcy, you receive an "automatic stay" on court actions such as foreclosures and sheriff's sales. A creditor can still go into court and ask the bankruptcy judge for a "relief from stay", and if granted the creditor can proceed with court action to foreclose.
Up 31. What are the reasons a judge would allow creditors to take my home after I've filed bankruptcy?
- You filed a chapter 7.
- You fail to file a reorganization plan or other required documents on time
- You default on your scheduled Chapter 13 or Chapter 11 payments.
- Your income is insufficient to execute a reorganization plan within the court's guidelines.
- The asset in question will not be needed to reorganize.
- The value of the asset is rapidly eroding.
Up 32. What if I can't make any payments, should I file Chapter 13 or Chapter 7?
If you truly cannot make payments on your home or other assets you're probably better off filing Chapter 7 and using the money you would have spent on Chapter 13 to survive on.
Up 33. Should I leave some debts out of my bankruptcy?
No, you should include all debts.
Up 34. Can I change from a Chapter 13 to a Chapter 7 or vice versa later?
Yes, it's called "motion to convert" and can be done after you've filed for either chapter, be advised that the trustee can also request a conversion!
For instance, if your chapter 13 fails, either you or the creditor, may request a conversion to chapter 7. Likewise if the trustee thinks money might be available for unsecured creditors they may make a motion to convert your chapter 7 to a chapter 13.
Up 35. Can I keep my house, cars or pets?
After filing you can exempt certain items such as a house or pedigree dog. However, in order to keep these items you'll need to stay current on payments such as a mortgage or car payment.
Up 36. What if I run out of exemptions but still want to keep some items?
After all exemptions have been exhausted, you may still be able to buy back from the trustee certain assets.
Up 37. Does my spouse and I have to file jointly?
No! The decision to file individually or together depends on your situation. For instance . . .
- If only one partner owns all or most of the debt then only that person should file;
- If both partners own the debt, and want to file a Chapter 7 then both should file;
- If you're trying to stop a foreclosure, only one person, on the title to the home, need file a Chapter 13.
Up 38. If only my spouse files, what am I liable for and what happens to my credit?
As long as there was no joint debt, your credit will not be affected. However, any future join credit purchases will depend upon the member with the worst credit history. On the other hand, if there was joint debt and only one member filed, then the member who did not file will be help responsible for the entire debt.
Up 39. Can I file without my family, friends, or spouse having to know about it?
Yes! You can file without telling family and friends. Free Forms
Up 40. Is going Bankrupt a bad thing to do?
In calendar year 1999, approximately 1.3 million individuals sought the relief from debts and claims of creditors by filing for bankruptcy, down slightly from the 1.4 million in calendar 1998. With that huge number of people seeking relief from their debts and the claims of their creditors, much of the stigma of "going bankrupt" has gone away. In addition to providing relief from debts and obligations for individuals, hundreds of such long established blue chip companies as Dow Corning, Montgomery Ward, Penn Central and Texaco have used the provisions of the bankruptcy laws.
Up 41. Lots of people are filing for Bankruptcy, why shouldn't I?
Bankruptcy is not something that should be entered into just for the heck of it. Very often there are intelligent alternatives to bankruptcy that may produce a far better result than going into bankruptcy. Bankruptcy also goes on your credit records, and may make it difficult to obtain new credit for years. Before anyone files for bankruptcy he or she should consult with a bankruptcy lawyer. There are critically important issues as to timing and disclosure that you had better address before, not after, you file for bankruptcy.
Up 42. Are there different types of bankruptcy?
Yes, and they are known by the title of the Chapter of the Federal Bankruptcy Act in which they appear. Each "Chapter" contains a different set of laws and rules.
Up 43. What is chapter 7, 11, 12, and 13?
Chapter 7 is the most frequently used chapter because it involves the complete liquidation of a debtor's property, with the proceeds used to pay off the debts. However, the debtor can retain certain exempt property under Federal law and/or State law, such as tools of one's trade, limited equity in a car and house, and some personal effects. If you use Chapter 7 you may lose your home (depending on your state) but it does enable you to get out from under the burden of debt more quickly.
Chapter 11 is typically used for business bankruptcies and restructuring. It is not commonly used by individual consumers since it is far more complex and expensive to pursue. It allows businesses to reorganize themselves, giving them an opportunity to restructure debt and get out from under certain burdensome leases and contracts. Typically a business is allowed to continue to operate while it is in Chapter 11, although it does so under the supervision of the Bankruptcy Court and its appointees.
Chapter 12 allows farmers with real estate debts to pay off the debts from the profits generated by future crops.
Chapter 13, which has also been known as a wage earner's plan, is used by about 25% of consumers. In Chapter 13, consumers work out a periodic payment plan with their creditors to pay off their debts, or at least substantial portions of the debt. Generally the creditors expect to get more than they would have received from the debtor's estate if the debtor had sought a complete liquidation under Chapter 7.
One of the important benefits of Chapter 13 is that debtors generally continue to live in their home so long as they comply with the terms of the Chapter 13 arrangement. If the debtor fails to comply, the Court treats the matter as a Chapter 7 liquidation. The disadvantage of Chapter 13 to the debtor is that the debts can linger for years, burdening future income.
Up 44. Can all my debts be discharged in bankruptcy?
No. (See question 45 below) There are exemptions and depending on your circumstances bankruptcy may or may not make sense for you. You must decide whether, after the bankruptcy, you will be better or worse off.
Up 45. What debts cannot be discharged in bankruptcy?
In general:
- Liens, such as mortgages and security interests in cars are non-dischargeable as are some other types of obligations including: Federal, State and local tax claims (subject to specific time rules)
- Customs duties
- Spousal and Child support
- Most student loans
- Secured debts
- Fines and penalties imposed by government agencies
- Debts incurred due to false statements made with the intent to deceive
- Fraud committed in a fiduciary capacity, such as embezzlement or larceny
- Punitive damage claims for "willful and malicious" acts
- Debts not list on the forms filed with the Court
- Drunk driving obligations
A non-dischargeable debt is one that will survive the bankruptcy proceeding. The debtor still has the obligation to pay this debt; the creditor has every right to collect.
Up 46. What if I committed fraud, would my debts still be discharged in bankruptcy?
No! The Bankruptcy Code has long prohibited debtors from discharging liabilities incurred on account of their fraud, carrying forth a basic policy of affording relief only to an "honest but unfortunate debtor." Congress did not favor giving perpetrators of fraud a fresh start (by allowing them to wipe out their debts in bankruptcy) over the interest in protecting victims of fraud when it wrote the Bankruptcy Laws.
Accordingly, Section 523(a)(2)(A) of the Bankruptcy Code excepts from discharge in bankruptcy "any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud." 11 U.S.C. § 523(a)(2)(A).
Up 47. I have statutory penalties and punitive damages for fraud, can they be discharged in bankruptcy?
No. It is not only the actual value of the "money, property, services, or . . . credit" the debtor obtained through fraud that is non-dischargeable in bankruptcy, but also treble "punitive" damages and attorneys fees and costs related to the fraud.
This was made clear in a March 25, 1998 decision of the Supreme Court of the United States in Cohen v. de la Cruz. The case involved a landlord who had overcharged his tenants. The trial court found that the landlord had committed "actual fraud" within the meaning of the Bankruptcy Act and that his conduct amounted to an "unconscionable commercial practice" under New Jersey’s Consumer Fraud Act. As a result, the court awarded the tenants treble damages plus reasonable attorney's fees and costs.
Up 48. Can the creditor ask to have me reaffirm the debt?
Yes, this means that the creditor is asking that the debtor pay the debt anyway, even after it has been discharged. A debtor may be willing to do this if there is a co-signer or guarantor of the debt (such as a family member, friend or employer) that the debtor does not wish to leave saddled with the debt.
Also, a debtor may want to reaffirm a debt in order to avoid having a secured creditor take the collateral provided for the debt. A creditor may also ask a debtor to reaffirm the debt before he (the creditor) will agree to do business with the debtor again.
Up 49. Which is the best option; Chapter 7 or 13?
The answer really depends on your financial picture. An individual with serious financial difficulties would most likely find Chapter 7 "straight" bankruptcy proceeding as the preferred type. A Chapter 7 proceeding, used by approximately 70% of all consumers filing bankruptcy petitions, is faster to complete, giving the debtor a financial "fresh start" without the years of sacrifice.
On the other hand, a Chapter 13 plan offers an alternative if you have a steady income, a stable job, and want to pay off most or all of your debts.
Summary of the Bankruptcy Advantages and Disadvantages
Up 50. Can I really file bankruptcy without a lawyer?
If you're like me and cannot afford to hire an expensive attorney or do not have an attorney friend to help you. Believe it or not, over 90 percent of bankruptcies can be filed without an attorney. If you have no real assets or property then filing on your own makes sense. Free Forms
Up 51. What are the tax obligations of a person filing a bankruptcy?
The tax obligations of the person filing a bankruptcy petition vary depending on whether you file a Chapter 7 or Chapter 13. The filing of a Chapter 7 bankruptcy petition creates a separate taxable bankruptcy estate, consisting of property that belongs to you before the filing date, and is completely separate from you as an individual taxpayer.
The trustee is responsible for preparing and filing the estate’s tax returns (Form 1041) and paying its taxes. The individual debtor remains responsible for filing returns (Form 1040) and paying taxes on any income that does not belong to the estate. The filing of a Chapter 13 bankruptcy petition does not create a separate taxable estate for federal tax purposes. You file the same federal income tax return (Form 1040) that was filed prior to the bankruptcy petition.
Up 52. What happens to my Federal Tax Debts?
It depends whether you file a Chapter 7 or a Chapter 13. A Chapter 7 debtor can wipe out federal income taxes if all the following are met:
the IRS had not filed a prior tax lien on the assets you own (if they have, the lien survives bankruptcy, which means that the government may still seize property to collect the discharged tax debts);
you didn't file fraudulently or try to evade paying your taxes;
your liability is for a tax return filed at least two years prior to the bankruptcy;
the tax return was due more than three years ago; and
tax deficiencies that were assessed on prior returns were assessed at least 240 days prior to the filing of the bankruptcy.
In a Chapter 13 filing, you'll pay the IRS as part of your repayment plan.
Up 53. My spouse is declaring bankruptcy; should he/she file alone or together?
Whether married couples should file a joint petition or a single one depends on various factors: type of property, the amount of community debt involved, and how the property is held (e.g., community, joint tenancy, or an estate-by-the entirety--see "Real Estate").
Filing together eliminates the separate debts of you and your spouse and all the jointly-held marital debts. Filing alone leaves the non-bankrupt spouse still liable for his or her share of joint debts, but wipes out the spouse's separate debts and his/her share of the joint debts.
If you are legally separated, have divided your property, and taken care of all the financial considerations, your best option may be to have your spouse go it alone. If all the debts were incurred before you were married, there is no point in having you both file.
Community property) and common law (also called "equitable distribution") are the two types of martial property ownership. The vast majority of states apply the equitable distribution rules; nine states apply the community property rules. If you live in a common law property state, your spouse's bankrupt estate will include his/her separate property and half of the jointly-held marital property. The non-bankrupt spouse will not have to worry about the effects of the bankruptcy on his or her separate property.
However, the bankruptcy court takes a dim view if the non-bankrupt spouse is merely holding the property or has received the property from the bankrupt spouse within one year of filing bankruptcy. In this case, this transaction is considered fraudulent, and the property will be turned over to the bankruptcy trustee.
In community property states, spouses equally own all property earned or received during the marriage, splitting 50-50. In bankruptcy, then, all the community property you and your spouse own jointly is part of the bankruptcy estate, regardless whether you join in the filing. Your separate property -- property you owned before the marriage -- is not effected by your spouse's bankruptcy. Property held by your spouse will be used to settle debt first, and then non-exempt community property will be used.
Up 54. What is Community Property?
There are nine community property states - Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In addition, Puerto Rico is a community property jurisdiction.
These states generally regard as community property all property that has been acquired during the marriage, other than a gift or inheritance. Even if one spouse earns all the money to acquire the property, all the property acquired is considered to be community property. While there are a number of differences in each state, all states have special laws that operate on the theory that both spouses contribute equally to the marriage; thus all property acquired during the marriage is the result of the combined efforts of both spouses. In community property jurisdictions, spouses equally own all community property (fifty percent owned by the husband and fifty percent owned by the wife).
Up 55. What is "Equitable Distribution"?
Most states employ "equitable distribution" in dividing marital (community) property as a result of the dissolution of marriage (divorce). Instead of a strict fifty-fifty split (in which each spouse receives exactly one-half of the marital or separate property), equitable distribution looks at the financial situation that each spouse will be in after the termination of the marriage. While equitable distribution is more flexible, it is harder to predict the actual outcome, since the various factors are subjectively weighed. Factors considered in equitable distribution include:
Earning power of the spouses (one might be much greater than the other)
Separate property of the spouses (one might be greater in value than the other)
One spouse having done all the work to acquire the property
The value that one spouse contributed as the home-maker for the family
Economic fault of one spouse in wasting and dissipating marital property
Duration of the marriage
Age and relative health of the spouses
The responsibility for providing for children of the marriage
Spousal abuse or marital infidelity (to penalize the offending spouse)
See the top 10 Frequently Asked Bankruptcy Questions
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