Commonly Asked Personal Bankruptcy Questions
ANSWER: Chapter 7 is what most people think of when they hear the word "bankruptcy." Chapter 7 is designed to help people who have simply become overwhelmed by debt by giving them a fresh start. In short, Chapter 7 allows you to inform the Court of your assets, liabilities and debts, and, if you meet the criteria for filing a Chapter 7, all debts you no longer wish to repay will be discharged.
ANSWER: You must be eighteen years old and a legal resident of the U.S. You must have a certificate from a federally approved credit counseling agency. There are no debt limits in Chapter 7. You cannot file Chapter 7 if you received a Chapter 7 discharge within the past eight (8) years.
Answer: Possibly. Chapter 7 is not designed to stop a foreclosure. In Chapter 7, you may ask to keep a home and continue making mortgage payments following the case – BUT- it is always the mortgage company's decision. Despite what you wish to do (keep the home or give it back), the mortgage company can veto your request and take the home. Make no mistake – people routinely file Chapter 7 under the appropriate circumstances and successfully reaffirm their mortgage debt and keep their homes. Consider the following scenarios to determine the likelihood that you will be able to keep a home in a Chapter 7:
- Is your home scheduled for sale at a future foreclosure auction? If so, then it is extremely unlikely that your mortgage company would allow you to keep your home. If your mortgage company has already gone to the trouble and expense of starting formal foreclosure proceedings, then they are not likely to give you another chance to catch-up. You should strongly consider Chapter 13.
- Are you barely behind on your mortgage (no foreclosure is scheduled yet)? If so, then there is an even chance your mortgage company will let you keep your home. To maximize this chance, you MUST catch your mortgage up before filing the case.
- Do you owe significantly less than your home is worth, meaning you have equity in the home? If so, then you may not be able to keep your home in Chapter 7. The trustee assigned to your case has the power to sell any asset that contains equity and use the proceeds to pay back a portion of your creditors.
- Are you current on your mortgage? If so, then it is extremely likely that your mortgage company will allow you to keep your home. Again – very likely, but not absolutely guaranteed. Contact your mortgage company before filing and ask if they will allow you to keep the home.
Answer: If you do not receive your discharge, then none of your debt is wiped out by the Court.
Answer: Think of Chapter 13 as a debt consolidation / repayment plan. It is designed to help people save a home from foreclosure or a car from repossession. In short, Chapter 13 establishes a monthly payment-plan that will catch up your mortgage and/or pay off your car note. Chapter 13 also prevents your creditors from taking any action against you while you complete the payment plan. At the end of the case, after having completed the payment-plan successfully, your mortgage will be current and your car paid-in-full. Chapter 13 may also wipe out all or a portion of your unsecured debt, depending upon your income and other factors.
Answer: Chapter 13 is designed to help you stop a foreclosure or repossession, so that you can keep your house and car, and Chapter 7 is not. Chapter 13 gives you the added benefit of stopping a foreclosure and repossession in return for additional responsibility during the case – namely you must be able to service the monthly payment plan established by Chapter 13 and you must commit to the case for three to five years. Chapter 7 neither provides such a benefit nor requires such responsibility, and is therefore relatively short by comparison. Chapter 7 cases only last four to six months and do not require monthly payments to the Chapter 13 Trustee.
Answer: You must be eighteen years old and a legal resident of the U.S. You must have a certificate from a federally approved credit counseling agency. Your debt must fall within a certain range. This range is adjusted periodically. In general, you cannot have more than approximately $1 million in secured debt, debts for which you have pledged collateral, and you cannot have more than approximately $330,000 in unsecured debt, debts for which you did not pledge collateral . . . credit cards, medical bills, etc.
Answer: Generally, yes you can. But the answer really depends on a number of factors.
Answer: Generally you can, but a car lease is treated very differently than a car purchase. Keep the following points in mind:
- There is no guarantee that you can keep a leased car. It is ultimately the Court's decision. Generally, if you can show the Court that you can afford to pay the lease with your other obligations, then you will be allowed to keep the lease.
- The balance of the lease does not become part of your Chapter 13 plan payment. You must be able to afford the lease payments on top of your other obligations under the case.
- Chapter 13 will not be able to reduce the terms of your lease. Usually car leases will end before your 3-to-5-year Chapter 13 completes. If so, you must return the vehicle as required by the lease. If you wish to lease another vehicle, you must first get permission from the Court. If the new lease is reasonable and necessary, and if your budget can support the payments, then the Court may grant permission.
Answer: You MUST complete all payments required under you Chapter 13 plan within 5 years in order to receive your discharge. If you fall behind, you should contact your attorney immediately. Generally you will have to either catch your payments up or increase your monthly Chapter 13 payment to cover the months you missed. If you miss too many payments then your case will be dismissed.
Answer: Your ability to keep your home during a Chapter 13 depends upon your ability to make both your Chapter 13 plan payments AND all monthly mortgage payments that come due during your case. If you fall behind on your mortgage payments, even though you may be current on your Chapter 13 plan payments, your mortgage company has the right to ask the Court for permission to foreclose on your property. If your mortgage company makes such a request, it can typically be defeated – but only if you can afford to catch up on the mortgage payments you missed.
Answer: If your Chapter 13 fails then there are several key points to understand:
- No debts will be wiped out by the Court
- You will receive credit for any money paid to creditors through your Chapter 13 plan, but you will be responsible for the balance
- Any foreclosure, repossession or garnishment stopped by the Chapter 13 may be resumed
- If your car note was being treated through your Chapter 13 plan, then, as discussed above, it was likely being repaid at reduced terms. Further, the monthly amount your car creditor received varied during the Chapter 13 plan and may be well below your contract payment. If your case had completed successfully, repayment under those reduced terms would be final. If your case fails before completion, then your original contract terms snap back into place and you can be held responsible for the difference between what the car creditor received during your Chapter 13 and what it was due under the original contract.
Answer: Chapter 11 is a reorganization plan typically used by businesses and corporate entities. Think of it as a Chapter 13 for a business or corporation. Individuals generally do not use this chapter.
Answer: The Trustee is an independent fiduciary, usually an attorney, appointed to administer your case. It is the job of the Trustee to collect your Chapter 13 plan payments, to review the feasibility of your petition and plan, to monitor claims filed by your creditors, and to make recommendations to the Court regarding the stability of your case. Think of the Trustee as the gatekeeper to completing a successful bankruptcy.
Answer: That depends on which chapter you file. The average Chapter 7 case lasts between four and six months. Chapter 13 cases, by law, must last between three and five years.
Answer: Unlikely. However, in both Chapter 13 and Chapter 7 cases, the Court will automatically schedule a hearing referred to as a "341 Meeting of Creditors" as soon as the case is filed. You must attend this hearing to complete your case. In Chapter 13 cases, the Court will schedule one additional automatic hearing referred to as a "Confirmation Hearing." Generally, only your attorney will attend this hearing.
Answer: Credit counseling is a requirement added to the bankruptcy code in 2005. Basically, before anyone may file bankruptcy they must undergo credit counseling with a federally-approved agency and receive a completion certificate. During the case you must then undergo a second credit counseling course, known as "Financial Management", and receive a completion certificate. If you do not take the second course before the end of your Chapter 13 or no later than 45 days following your first court date in Chapter 7, your case will fail.
Answer: No. You are required by law to list all assets, liabilities and debts.
Answer: Yes. You are required to report any ownership you have in property, regardless of whether it is full ownership or partial.
Answer: Yes. Many people routinely file this type of case. Just understand that your spouse will have to report his/her income in your petition because, in the eyes of the Court, you two are a combined household unit. However, reporting your spouse's income does not make them a party to the case. Also, the bankruptcy will only discharge your portion of any joint debts. If the two of you are jointly obligated on the mortgage to a home you want to surrender, then the bankruptcy will absolve you of any obligation to pay, but your spouse will still be responsible. Similarly, if you are servicing a car under your case at reduced terms, then the case will render the repayment final as far as you are concerned, but will be able to seek the difference between what you paid under the case at reduced terms and what was owed under the original contract from your spouse.
Answer: No. However, If you are both joint debtors on debts you are servicing through your case, then they may be reported as "in bankruptcy" on both your credit report and his – but, again, he will not have a bankruptcy filing on his personal record.
Answer: No. They cannot call or write or otherwise contact you.
Answer: By law they MUST stop all collection efforts while your case is active.
Answer: Yes, you do.
Answer: Yes – you MUST report all income, of any kind, to the Court.
Answer: Bankruptcy will negatively affect your credit and will remain on your report for 7 to 10 years. However, most people that require bankruptcy usually have credit scores low enough that the impact from the bankruptcy makes little difference.
Answer: Yes. A common misconception about bankruptcy is that you cannot use credit after a case is over. On the contrary, you are free to use credit just as you were before you filed the case as soon as the case is completed. You must simply (1) do so responsibly, and (2) accept the fact that some lenders (not all) may treat you differently because of the bankruptcy.
Answer: Yes. The filing of either chapter automatically suspends most other legal proceedings. That suit must remain suspended until your bankruptcy concludes, or until the Court allows the suit to resume. If the debt in question is discharged, then the suit will not resume.
Answer: Your creditors cannot sue you to collect on your debt while you have an active bankruptcy case pending.
Answer: Yes. As mentioned above, a bankruptcy will suspend most active legal proceedings – including garnishments.
Answer: Only in extremely limited circumstances.
Answer: No. Your alimony/child support will not stop you from filing bankruptcy, but it will survive the case.
Answer: Not in a Chapter 7. However, under Chapter 13 you may be able to cramdown your secondary mortgages.
Answer: You will be required to notify your Trustee if you become entitled to an inheritance within six (6) months of filing a bankruptcy. If it is enough to pay off your case, then your case will complete and any excess will be returned to you. If it is not enough to pay off your case, then it will be taken and applied to your case.
Answer: These types of accounts must be listed on your bankruptcy petition but are exempt, completely immune from seizure by the Trustee.
Answer: A "discharge" occurs when your bankruptcy completes successfully (i.e. – you have met all requirements). In Chapter 13, the discharge is an order from the Court wiping out and absolving you of all debts you were not required to pay through your Chapter 13 plan (except student loans), and rendering all debts repaid under the plan paid-in-full. In Chapter 7, the discharge is an order from the Court wiping out and absolving you of all debts other than taxes, alimony/child support, student loans and any debt you successfully reaffirmed. On the other hand, a "dismissal" occurs when you fail to complete your bankruptcy successfully. A dismissal is an order from the court terminating your case without a discharge – meaning no unpaid debt is wiped out or absolved.
Answer: That depends on the chapter you filed and whether you finished your case successfully (receiving a discharge) or unsuccessfully (receiving a dismissal). Consider the following scenarios:
- You filed a Chapter 7 and completed the case successfully. In this event the Court issues a discharge (which is an order wiping out your debt). The only debts that survive this discharge are taxes, alimony/child support, student loans and any debt you successfully reaffirmed.
- You filed a Chapter 7 and failed to complete the case successfully. In this event the Court issues a dismissal (which is an order terminating your case with no discharge). All of your debts survive the case.
- You filed a Chapter 13 and completed the case successfully. In this even the Court issues a discharge wiping out all debt you were not required to repay through your Chapter 13 plan. All debts you paid through your plan (your house note and your car note) survive the case either paid-in-full or current. Any delinquent tax or alimony/child support debt will have been paid though your Chapter 13 plan and you will be current. Any student loan debt you may have will survive the case.
- You filed a Chapter 13 and failed to complete the case successfully. In this event the Court issues a dismissal of your case with no discharge. Your creditors will give you credit for all amounts paid through your Chapter 13 plan, but you will be responsible for the balance. A specific danger here is your car note. As mentioned above, Chapter 13 usually repays car notes at reduced terms. If the case completes successfully, then that repayment is final. However, if the case terminates prematurely then the contract terms snap back into force and you will be responsible for the difference between what the creditor received under the Chapter 13 plan (at reduced terms) and what the creditor was entitled to receive under the original contract.