Q:What types of bankruptcy protection are available?
A:Most consumer cases are filed under as either a Chapter 7 Bankruptcy, or a Chapter 13 Reorganization.
Chapter 7 Bankruptcy allows a debtor to discharge most unsecured debt, such as credit cards and personal loans. Eligibility to file Chapter 7 depends on income. Most people are entitled to file for Chapter 7 protection: if your income is at or below the median income for your family size in your state, you automatically qualify. Even if you make more than the median income, you may be qualified, but you will need your attorney to look at your finances in some detail to determine if you can file under Chapter 7.
Chapter 13 Reorganization allows debtors with regular income to restructure their debt payments. The debtor proposes a plan to pay certain debts for an extended period of time, usually either three or five years. Each month during the plan, the debtor sends a single payment to the trustee, who pays debt in keeping with the plan. At the conclusion of the plan, most unsecured debts that have not been fully repaid are discharged.
Chapter 13 also allows debtors some options not available in Chapter 7 cases. Many car loans that are over 910 days old can be reduced to the fair market value of the vehicle. Second mortgages that are completely underwater can be stripped off the property and treated as unsecured debts. For this reason, Chapter 13 is often a desirable option even for debtors who would qualify to file a Chapter 7 case.
Q:Do I lose my property if I file for bankruptcy?
A:In fact, most people who file for bankruptcy do not lose any property. In each case, the debtor is given a set of exemptions to use for the protection of their real and personal property. If property is exempted, it cannot be taken by the bankruptcy trustee.
Debtors who have lived in California for at least two years prior to filing can choose between two sets of exemptions. One set protects up to $175,000 of home equity, depending on the debtor’s age and whether the case is being filed individually or with a spouse. The other set of exemptions provides a generous “wild card” exemption, which allows the debtor to protect up to $23,250 of any property, including cash.
In addition, both sets of exemptions allow for the protection of most household goods and furnishings, clothing, qualified retirement accounts, some vehicles, and other specific categories of property. You should speak with an attorney to determine if your property can be protected. A large majority of filers do not surrender any property when they file for bankruptcy.
Q:What is the process of filing for bankruptcy? Will I have to go to court?
A:Bankruptcy is a very front-loaded process; most of the work will be done prior to filing the case. Once you have retained an attorney, the next step is to gather the financial information your attorney requests to prepare your petition and schedules. It is absolutely crucial that you provide complete and accurate information so that the court filing will be correct.
In addition, you will need to complete a mandatory credit counseling class. This class is typically completed online and takes less than an hour. This course has been a mandatory part of the bankruptcy process since 2005. Your attorney can direct you to the right class to complete this requirement.
Once you have completed your credit counseling and provided your financial information to your attorney, the next step is to review and sign your petition and schedules. You will need to review these documents very carefully to ensure that they are accurate. These documents are filed under penalty of perjury, so you must make sure they are correct to the best of your knowledge.
Approximately one month after your petition is filed with the Court, there will be a Meeting of the Creditors. In the vast majority of cases, this is a misnomer, as creditors seldom attend these hearings. Instead, the hearing involves you, your attorney, and the trustee appointed to oversee your case. Trustees are not judges. Their role is to examine your documents and ensure that you are not committing fraud on the court. In addition, they are looking for any assets you cannot protect with exemptions.
The Meeting of the Creditors typically takes less than five minutes. The trustee will administer an oath, and then ask a combination of standard and case-specific questions to ensure that they understand your filing, and that you can vouch for its truthfulness.
At some point between the filing of your case, and 60 days after the first Meeting of Creditors, you will need to complete a second online class, entitled “Personal Financial Management”. This class, which is a federal requirement, will provide you with information about managing your budget post-bankruptcy.
For most people, the conclusion of the Meeting of Creditors, as well as completion of the second class, will conclude their active participation in the bankruptcy process. For Chapter 13 filers, they will begin making their monthly payments to the trustee on the 25th day of the month after the case is filed, and they will continue to do so for the duration of the plan. Chapter 7 filers will typically receive their discharge approximately 60 days after the Meeting of Creditors.
Q:What types of debt cannot be discharged in bankruptcy?
A:Generally speaking, bankruptcy allows you to discharge most unsecured debts. However, there are some categories of debt that cannot be discharged.
- Debts procured by fraud
- Debts arising from willful or malicious injury
- Debts arising from damage caused while driving drunk
- Student loans, unless you can show that the loans cause an “undue hardship”.
- Tax debt, although some older tax debts can be eliminated through bankruptcy
- Liens arising from secured debt (typically a home or vehicle).
- Alimony, child support, or court ordered divorce creditor payments
Your attorney can advise you on which debts will be discharged in a bankruptcy.
Q:How will bankruptcy affect my credit?
A:Many people avoid filing for bankruptcy protection because they do not want to ruin their credit, and this concern is usually misplaced. Make no mistake, bankruptcy is a big hit to your credit. However, most people who are heavily in debt or are behind on their bills already have bad credit, and filing for bankruptcy will not necessarily make it worse.
Information about your bankruptcy will be on your credit report for up to ten years. However, this does not mean you will have ten years of bad credit- the bankruptcy will be just one factor affecting your creditworthiness.
If you plan to purchase a home in the future, you should be aware that FHA guidelines state that you are eligible if your bankruptcy discharge occurred at least two years ago. For Chapter 13 filers, you can obtain an FHA loan if you have been current on your trustee payments for at least one year.
In many cases, bankruptcy is the best step a person can take to rebuild their credit. Bankruptcy provides a clean start from most debt, which allows you to begin establishing positive credit. If you do not address your debt, and continue to miss payments, your credit cannot begin to heal, and it may be much longer before you are considered creditworthy.
Q:What steps can I take to rebuild credit after bankruptcy?
A:The bankruptcy discharge provides a clean break from most pre-petition debt. While many people think it best to avoid credit card debt after their bankruptcy is over, it is important to re-establish credit through the responsible use of debt.
If you have a secured debt, such as a car loan or a home loan, making payments and keeping current will help you build a positive credit record. In addition, you can obtain a secured credit card, which is secured by either your bank account or a separate escrow account into which you deposit a set amount of money. If you keep making timely payments, these accounts will help you establish positive credit history.
It may surprise you to learn that after bankruptcy, you will likely be inundated with credit card offers. This is because the credit card companies know that you no longer have any debt to service, and you are ineligible for several years from filing for bankruptcy again. In some ways, you have become a very good credit risk for them.
There is nothing wrong with applying for one or two credit cards, or using them for small purchases. The pitfall to avoid is revolving a balance. As long as you pay off your cards in full each month, you will be establishing responsible use of credit, and can quickly be in a better position than you were before you filed for bankruptcy.
Q:Will filing for bankruptcy make it harder to get a job?
A:There is a popular misconception that employers use credit checks to avoid hiring people who have filed for bankruptcy. In fact, federal law prohibits hiring discrimination based on filing for bankruptcy protection. It is illegal to deny employment based on bankruptcy, or to deny professional licensing.
Part of this misconception is based on the widespread use of credit checks in hiring. It is true that many employers conduct credit checks. However, their goal is to look for debts based on fraud, embezzlement, or other misfeasance, and to review your address history to see if you tend to move locations frequently. Both of these factors may cause them to deny employment. Discrimination based on bankruptcy filing, however, is against the law.
Q:How will filing for bankruptcy affect my loan modification?
A:Loan modifications and bankruptcy often complement each other, as part of an overall strategy to escape from financial stress.
First, it is important to understand that filing for bankruptcy will not disqualify you from a loan modification. If you are in a Chapter 13 Reorganization, you will need to get the court’s approval before your permanent modification can go into effect, but this is a relatively simple step your attorney can handle, and the court will have no reason to disapprove the modified loan.
One important step in the loan modification process is demonstrating an ability to pay. Your lender is not going to agree to modify your loan if you cannot show them how you will afford the new payment. Eliminating credit card debt can often free up enough money in your budget to show the lender that you have the money available to keep your modified loan payments current.
Q:Will bankruptcy stop creditors from harassing me?
A:When you get behind in paying your debts, creditors begin to take various actions to collect. These actions often include:
- Threatening mail from collection agencies and attorneys;
- Telephone calls to your home, your work, your family, even your neighbors and friends;
- Personal visits to your home and work by bill collectors creating embarrassment in front of family, friends, fellow employees or your employer;
- Foreclosure proceedings may be started to take your home away;
- Automobiles, furniture, jewelry, appliances or other personal items may be repossessed;
- Lawsuits may be filed against you, and judgments obtained;
- Your wages and checking or savings accounts can be garnished or seized;
- The IRS or other taxing agency may put a lien on all of your property and seize anything you have. If you own a business, they can even close your business without first obtaining a court order.
If you file for protection under the United States Bankruptcy Code, all of these collection efforts can be stopped. The Bankruptcy Court, upon your filing, will issue a restraining order called an automatic stay that will stop all further collection activities. No more abusive phone calls, letters, and other harassment by bill collectors. No foreclosures, repossessions, garnishments or seizures by the IRS, lawsuits or judgments are allowed while you are under the protection of the Bankruptcy Court.
If you file a Chapter 7 or “straight Bankruptcy” you will probably keep most or all of the things you own. Most debts are unsecured and dischargeable – that means that the creditor doesn’t have a lien or a security interest on anything. When the bankruptcy case is over, these unsecured creditors will be wiped out and can never harass you again. In some cases, even tax debt can be eliminated.
Secured creditors can be stopped from foreclosing or repossessing anything without first obtaining bankruptcy court permission to do so. If you want to keep a secured item, you will have to bring the payments current within a reasonable time which may vary depending on the item that is secured, or you may redeem, that is buy the item from the creditor for its present value, even if less than you owe. Otherwise, you may give up a secured item to the creditor holding the lien on it and be free of any further obligation or harassment by that creditor.
If the primary problem creditor is taxes or an arrearage on a mortgage for a house you want to keep, filing for Chapter 13 Reorganization will allow you the opportunity to set up a payment plan you can live with.
Yes, the protection of the Bankruptcy Court probably can get the creditors off your back and give you control of your life.
Q:What should I expect during my free consultation?
A:The consultation is an opportunity for you to meet with an attorney, discuss your financial situation, and explore your legal options. We set aside ample time for these meetings to discuss your situation in detail. You will get information and guidance about how bankruptcy fits in to your short- and long-term goals, based on your unique situation.
Unlike some other law firms, we do not view the consultation as an opportunity to give you a 20 minute sales pitch. We set aside up to an hour and a half to discuss the bankruptcy process in detail, and we do not pressure you to sign up with our firm. If bankruptcy is a good option for you, we will tell you. If bankruptcy doesn’t make sense in your situation, we will let you know.
The consultation is also an opportunity for you to ask questions. We especially encourage you to ask about anything you have “heard” about bankruptcy, since there is a great deal of false information out there. You are entitled to have your questions answered.
Q:What should I bring with me to the consultation?
A:We provide you with a brief questionnaire to complete in advance of your office appointment. In it, we ask that you provide some information about your income, you debts, and your property. In addition, you should bring a copy of your most recent paystubs from each source of income you have had in the last six months.
Finally, if you have been sued, or you have received documents related to foreclosure, be sure to bring those notices with you for our review. The more complete and accurate information you provide to us at this meeting, the better the advice we will be able to give you.