When you owe money, you are a debtor, and the people or companies you owe money to are your creditors. "Bankruptcy" is a federal law that establishes an orderly process to provide protection to debtors and fair treatment to creditors. Bankruptcy proceedings, though not for everyone, can be very helpful to solve a financial crisis.
There are five different types of bankruptcy proceedings. The two most common types are referred to as Chapter 7 and Chapter 13 bankruptcies. Usually when people talk about filing for bankruptcy, they mean Chapter 7. Chapter 7 is a roughly 90-day process that gives you the opportunity to wipe the slate clean, avoiding almost all of your debts without having to make any future payments. "Discharge" is the legal term that means you no longer have a legal obligation to repay a debt. In a Chapter 7 bankruptcy, your assets can be at risk and some debts will not be discharged. In addition, some transfers of property can be undone in bankruptcy.
A Chapter 13 bankruptcy is a three- to five-year repayment proceeding. In Chapter 13 you gain protection for your assets, and you are able to repay certain debts such as child support arrearages, taxes, car payments and home mortgage arrearages over a three- to five-year time period rather than having your wages garnished or your assets seized. In exchange for this added benefit, you must agree to make a monthly payment of your disposable income to repay a portion (sometimes all) of your debts. Chapter 13 is often an excellent alternative when consumer credit counseling or Chapter 7 are not available options.
Will bankruptcy help my situation?
Bankruptcy can give you a fresh financial start on life and can seem very attractive to people who cannot afford to pay their bills as they become due. However, the process is not for everyone. Timing of the bankruptcy filing is very important. Filing for bankruptcy may affect your credit for years to come or have other serious consequences that you will need to consider.
You may wish to consult a lawyer to assess the pros and cons of filing in your particular situation. Perhaps you will be able to work out a debt repayment plan on your own. Possibly you will do best to get help from consumer credit counseling services. Or perhaps bankruptcy will be your best solution later on down the road, but not necessarily at this time. Whatever route you take, you will need to gather some basic information before proceeding further. Many attorneys will give a free consultation to discuss the benefits and risks of a bankruptcy and what alternatives to bankruptcy are available.
Some factors to consider
What are your total living expenses?
Calculate the total monthly expenses for you and your dependents such as food, housing, utilities, transportation, insurance, clothing, medical care and some reasonable reserve for the unexpected. You will need an accurate list of these monthly expenses as well as a list of your total monthly income.
Whom do you owe money to?
Make a list of all of your creditors. Identify those creditors you have pledged property to, the value of the property your creditors have an interest in and the monthly payments that you currently owe each creditor, as well. You can find many of your creditors on your credit report. You can get a free copy of your credit report once each 12 months from Equifax, Experian and TransUnion. You can get your credit reports at www.annualcreditreport.com. It is a good idea to have a printer available so that you can print and save each report for future use.
Unless a creditor has a security interest in a particular item of property (such as your car), a creditor cannot take any of your property or income with obtaining a judgment against you.
Are you "judgment-proof"?
When a creditor sues you, the creditor is seeking a "judgment." A judgment is generally not a court order that you have to pay a debt, but rather a court determination that you owe a certain amount of money. The creditor has to determine how to collect the debt reflected by the judgment. A creditor with a judgment can garnish bank accounts or wages or file liens against your real property (such as your house). You may be judgment-proof if you only have a few assets and they are not worth much; if your only income is from unemployment insurance, Supplemental Security Income or some other type of government benefits; or if you work and your wages are low enough. The effect of being judgment-proof is that creditors may not bother to sue you because they will not be able to "satisfy" their judgments against you. Creditors cannot take any property or garnish the income of a person who is truly judgment-proof. However, even judgment-proof people can and do file for bankruptcy relief — perhaps to stop harassing phone calls.
If your debts were erased, would your financial problems be over?
Bankruptcy will give you a fresh financial start and will work best if you will have an income after the bankruptcy that is adequate to support you and your family. On the other hand, bankruptcy will only be a temporary fix if you go right back into debt again with no way of paying off any new debts. Chapter 7 is only available once every eight years. It is usually best to wait until you have reached the end of your financial problems before filing bankruptcy. Even if you have filed a previous bankruptcy, the court may allow you to file a Chapter 13 bankruptcy to deal with any new debts you may have incurred; however, this depends on the particular circumstances of your case.
Bankruptcy does not discharge all debts
It is important to realize that bankruptcy does not necessarily allow you to avoid paying back every kind of debt. For public policy reasons, several kinds of debts are specifically excluded from discharge in bankruptcy. The most common debts which cannot be discharged are child support obligations, spousal support, criminal restitution and fines. Some other types of debts are dischargeable in some circumstances but not others — for example, debts from taxes, bad checks and the fraudulent use of a credit card may not be erased (depending on the circumstances). Personal income taxes are dischargeable if you have filed a tax return and certain time periods have passed. The rules for discharging taxes are complicated. Student loans are sometimes but very rarely discharged, and if they are discharged, it does not happen automatically. The details of your own particular situation should be discussed with a lawyer or other knowledgeable person before you begin bankruptcy proceedings.
Will I have to give up all my property?
When you file your bankruptcy, all of your property and income that you have on the date you file becomes part of your "bankruptcy estate" and subject to the claims of your creditors. Other property, such as the right to an inheritance or proceeds from a divorce decree or divorce settlement acquired within 180 days after the date you file, may also be included in your bankruptcy. Under certain circumstances, your right to tax refunds for prior years or the current year, may also be included in the estate, even though you have not yet received the refunds.
Although Chapter 7 is a "liquidation proceeding," you will be allowed to keep certain property, as long as the fair market value of each item does not exceed certain amounts. (Fair market value is not your original purchase price. It is sometimes described as "garage sale value," or how much actual cash you would receive by selling the item to an unrelated party.) Certain property such as your working tools, household furnishings, radio, television, musical instruments, some savings and checking accounts, your car and the equity in your home may be entirely protected, or "exempt," through bankruptcy. Unlike a Chapter 7 bankruptcy, a Chapter 13 case usually allows you to retain all of your "non-exempt" assets, and over a three- to five-year period of time you pay to the court the value of those non-exempt assets for distribution to your creditors.
Some of your transactions prior to filing bankruptcy may also create an issue. For instance, if you have sold, transferred, given away or otherwise disposed of any property (including money) within two years (and under some circumstances four years) prior to filing bankruptcy, and did not receive reasonably equivalent value in return, the trustee may have the option to recover the property or money from the recipient. Under some circumstances, if you have paid $600 or more on a debt to a creditor within 90 days prior to filing bankruptcy, the trustee may have the option to recover the money from the creditor. If you have paid $600 or more on a debt to a relative, and in some circumstances to a person who is not a relative, within one year prior to filing bankruptcy, the trustee may have the option to recover the money from the relative or person.
Do I have to go to court?
In almost all situations the answer is no. However, in both Chapter 7 and Chapter 13 you have to attend the meeting of creditors, which is usually scheduled about 30 days after you file the case. This meeting is held by the bankruptcy trustee who is the administrator of the process. You will be sworn in under oath, and the meeting will be recorded. Most of the questions will pertain to information in the bankruptcy papers you file with the court. The meeting typically only takes five to 10 minutes, and most creditors never come.
How long does the bankruptcy process take?
Once a Chapter 7 bankruptcy is filed, it generally takes three months to complete. However, you are protected from your creditors on the day the bankruptcy is filed — they may not repossess your car, foreclose your house, garnish your accounts or take any other collection activity. If all of your assets are exempt, and no one objects, you will receive your discharge from the debts about 60 days after the meeting of creditors.
Timelines for Chapter 13 are different. Chapter 13 cases run between three to five years, depending on the circumstances.
What is the fee to file bankruptcy?
The fee to file a Chapter 7 bankruptcy is currently $306. However, you have the option to pay this fee in three installments over a 90-day period, and you do not need to pay any fee at the time you file the bankruptcy. If your income is low enough, you may be eligible for a full waiver of the filing fee.
What will happen to my credit rating?
A Chapter 7 bankruptcy case will be reported by credit reporting agencies for 10 years. A Chapter 13 bankruptcy case will be reported by credit reporting agencies for seven years. Creditors are sometimes willing to approve credit after bankruptcy, because they know that a financial burden has been lifted and that you may now be able to make regular payments on any new debt. Also, they know that if you filed a Chapter 7 proceeding, you will not be able to declare Chapter 7 bankruptcy again for eight more years, so in some ways you are a better credit risk after filing bankruptcy. If you have completed a Chapter 13 plan, then you have demonstrated that you can handle regular payments on your debt obligations. Keep in mind that credit is a privilege, not a right, and some creditors will require an extended period of time after bankruptcy before extending further credit. This is certainly one reason to be cautious about filing bankruptcy.
Do I need a lawyer to file a bankruptcy case?
The law does not require individuals and sole proprietors to hire a lawyer. However, you may want to consult a lawyer to make sure that bankruptcy is the best option for you at this time, and if so, that you are taking the correct steps to file. Also, know that filling out all the required documents can be difficult. If you wish to pursue this on your own, you can obtain a packet of information by contacting the bankruptcy court.
Are there alternatives to bankruptcy?
Yes. There are many credit counseling agencies that exist to help people who have money problems. Most are nonprofit services offering free advice on how to get out of debt and how to use credit wisely. There is no charge to have a counselor review your financial situation and help analyze your problem. If the service handles your payments to creditors under a debt-management plan, a small monthly contribution may be requested. This fee would be waived if the counselor finds it is not possible because of a very tight program. Note that if you do not have enough money to make even partial payments to your creditors, then most counseling services will be unable to help you and may refer you to bankruptcy.
Legal Editor: Richard Slottee, Lewis & Clark Legal Clinic, October 2013