The purpose of this overview is to answer the questions about bankruptcy asked most frequently by our clients and to provide an overview of the bankruptcy process. The information contained herein will help you decide whether to file bankruptcy or not. If you do file bankruptcy, this overview will help you understand the process.
WHAT IS BANKRUPTCY?
Bankruptcy is a proceeding under federal law whereby you are granted partial or complete relief from the payment of your debts. This relief is provided in the form of an “automatic stay” issued automatically and immediately upon the filing of the bankruptcy petition which stops all creditor collection activities. The Bankruptcy Court enters an order at the end of the case relieving you from responsibility for paying certain debts. This final order is called the “discharge.”
WHAT TYPES OF BANKRUPTCY ARE THERE?
For individual debtors the two types of bankruptcy proceedings available are Chapter 7 and Chapter 13. Explanations of Chapter 7 and Chapter 13 are set out below.
Chapter 7 is often referred to as “straight bankruptcy”. In a Chapter 7 proceeding you are relieved from the responsibility to pay your debts (“discharged”), with certain exceptions. In exchange for having your debts wiped out, you must give up any property that is not protected or “exempted” from the chapter 7 trustee. The property that you exempt is free from the claims of all your pre-bankruptcy creditors. If you have nonexempt assets that are worth more than any loans on the property, the trustee can sell them to pay on your debts. In more than 90% of the cases that we file, all our client’s property is exempt, so the client gives up no property. Such cases are called “no asset” cases because no assets are turned over to the trustee. More detailed explanations of the exemptions and “exceptions to discharge” are set out in this brochure.
Chapter 13 is often referred to as a “wage earner plan.” The concept behind a Chapter 13 bankruptcy is that you and your spouse, if any, make sufficient income to pay all of your current living expenses (e.g., rent, food, utilities, transportation, clothes, etc.) and have some money left over to apply to your debts. You submit a Chapter 13 Plan in which you set out a budget detailing your take-home pay and monthly living expenses. You pay the excess income to the bankruptcy trustee who then pays the money to your creditors. The plan lasts for at least 36 months unless your debts are paid in full in a shorter time. The payment period may be extended beyond 36 months (but not over 60 months), if you need the extra months to pay enough on your debts to have the plan approved by the Court. At the end of the chapter 13 plan, any amounts still owing on your unsecured debts are forgiven. In certain cases, chapter 13 allows us to lower the amount of your loans or give you a lower interest rate on certain loans. If you have a secured loan like a mortgage, deed of trust, or car loan that you are behind on, chapter 13 allows you to catch up the amount you are behind over time. Chapter 7 does not offer this option.
Some attorneys have TV or Radio ads advertising “Debt consolidation under federal law,” without clearly stating that the “federal law” is bankruptcy law. There is only one way in which to get relief from debt under federal law and that is bankruptcy.
WHO CAN FILE BANKRUPTCY?
An individual, a partnership or a corporation may file a Chapter 7 bankruptcy. Only individuals may file a Chapter 13 bankruptcy. The information contained herein is for the individual debtor. If you are married you can file by yourself or file a joint petition with your spouse. If you have filed a bankruptcy petition that you voluntarily dismissed in the last six months, you may not be able to file until the six months has elapsed
WHAT HAPPENS TO MY PROPERTY IN A CHAPTER 7?
In Chapter 7 cases your right to keep your property is controlled by the answer to two questions. The first question is “Does a secured creditor have the right to take the property because I am not paying on the debt?” The second question is, “Can I claim the property as exempt?” If the answer to the first question is “no”, and the answer to the second, “yes”, then you can keep the property. The next two sections will help you answer these questions.
IS IT POSSIBLE TO BE DENIED A DISCHARGE OF ALL MY DEBTS?
You can be denied a bankruptcy discharge if the Court determines that you committed any of the following acts:
You have been granted a discharge in a prior bankruptcy filed less than six years ago.
With the intent to delay or defraud a creditor or the bankruptcy court, you transfer, destroy, or conceal property within one year prior to filing bankruptcy or at any time after filing bankruptcy.
Without justification, you conceal, destroy, falsify, or fail to keep books, records and documents related to your financial condition and business transactions.
You knowingly and fraudulently in the bankruptcy proceeding:
make a false oath, claim or account (i.e., lie about your property, debts, or financial affairs);
give or receive money for taking certain action or agreeing not to take certain action;
withhold books, records, documents or other records from the bankruptcy court;
You fail to explain satisfactorily any loss of assets or deficiency of assets to meet your liabilities;
You refuse to obey an order of the bankruptcy court, or refuse to answer a material question.
The lesson to be learned is that if you are open and honest with your creditors and the bankruptcy court, you will be granted your discharge
WHAT EFFECT WILL BANKRUPTCY HAVE ON
SOMEONE WHO COSIGNED A LOAN WITH ME?
Another person who is jointly liable with you on a debt is known as a “co-debtor”. When you file bankruptcy the co-debtor remains liable on the debt (unless the co-debtor is your spouse and you file a joint petition). The mere fact that you file bankruptcy will not negatively impact your co-debtor’s credit. Of course, if the co-debtor fails to maintain the payments on the debt, the failure to pay the debt will likely be reported by the creditor to the credit bureau.
In a Chapter 7 case the creditor is free to pursue collection from the co-debtor immediately. In a Chapter 13 case the creditor may be prevented from collecting from the co-debtor during the term of the Chapter 13 Plan. If you file a Chapter 13 and the status of a co-debtor is important to you, we will need to discuss the circumstances of the debt in order for me to advise you of the likely impact on the co debtor. It may be possible to put the debt in a special class to be paid in full to protect the co-debtor from collection activities.
WHEN WILL MY CREDITORS STOP BOTHERING ME?
When you file a bankruptcy, the court sends out an order to all the creditors listed in your petition forbidding them from taking any action to collect the debt. They are not to call you at home or at work. However, up to the time that you file, creditors are free to pursue lawful collection efforts. The filing takes place when the bankruptcy petition is received by the Bankruptcy Clerk. The petition is sent to the Bankruptcy Clerk after you come to our office and review and sign the bankruptcy petition and schedules, which we prepare from the information forms that you complete.
If you are concerned about relief between now and filing the bankruptcy, our experience has been that when our clients have informed unsecured creditors that they have retained us to file bankruptcy, the creditors have stopped the harassing telephone calls. However, do not tell creditors that you have retained our services until you have paid us the $300.00 nonrefundable retainer.
Furthermore, do not tell a bank in which you have funds or deposit, because the bank may take funds from your account to pay your debt to it. If you owe a debt to a creditor to whom you do your checking or savings with, that bank has the option to freeze your account upon receiving notice of the filing of the bankruptcy petition.
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