Common Questions About Bankruptcy

Bankruptcy is a legal proceeding that helps some people who cannot pay their bills get a fresh financial start by temporarily, or permanently, preventing creditors from collecting debts from you. Bankruptcy is generally considered the debt management tool of last resort because the results are long-lasting and far-reaching. A bankruptcy stays on your credit report for 10 years, making it difficult to acquire credit, buy a home, get life insurance, or sometimes get a job.

However, it is a legal procedure that offers a fresh start for people who can no longer satisfy their debts. Individuals who follow the bankruptcy rules receive a discharge: a court order that says they do not have to repay certain debts.

What Can Filing for Bankruptcy Do for Me?

Filing for bankruptcy may help you eliminate the legal obligation to pay most or all of your debts; stop foreclosure on your house or mobile home and give you a chance to catch up on missed payments; prevent repossession of a car or other property (or sometimes force the creditor to return property even after it has been repossessed); stop garnishment, debt collection letters, and other creditor actions to collect a debt; and restore or prevent termination of utility service.

What Can Bankruptcy Not Do?

Bankruptcy cannot cure every financial problem. For example, it usually will not eliminate debts owed to "secured" creditors (i.e., creditors who hold an interest in collateral, such as a mortgage or a car note), though it may allow for a restructuring of that debt. It also will not discharge debts that fall into the following categories: some debts incurred within 180 days prior to filing bankruptcy; child support; alimony; court fines and penalties; some taxes, especially those accrued over the past three years; debts not listed on your bankruptcy petition; loans obtained through fraud; student loans owed to a school or government body which became due less than 7 years before the bankruptcy was filed, unless payment would be an undue hardship; debts that arise after bankruptcy has been filed; or protect co-signers on your debts (when the primary debtor on a co-signed loan discharges the loan in bankruptcy, the co-signers may still have to repay all or part of the loan).

How Much Debt Do I Have To Have Before Filing For Bankruptcy?

Some experts suggest that you should not file for bankruptcy unless you have at least $15,000 to $20,000 in debt. In theory, you can file with less debt, but the damage to your credit rating may outweigh the benefit of discharging a smaller debt load and it may be more difficult to persuade the court that a discharge is warranted.

Are There Different Types Of Bankruptcies?

There are two common kinds of bankruptcies for individuals: Chapter 7 and Chapter 13.

In Chapter 7, debts are discharged, usually by forfeiting property to the bankruptcy trustee to attempt to satisfy the outstanding debts. Debtors are allowed to keep a certain amount of property, called "exemptions." Exempt property cannot be seized during the bankruptcy procedure.

The big drawback to Chapter 7 is that property subject to a security interest, like a home or a car, is not exempt and can almost always be seized to satisfy the indebtedness related to that particular item. So if you can afford to make payments on items subject to a security interest and still want to keep them, even though you are behind on your payments, then Chapter 7 is probably not the best choice because it does not prevent secured creditors from taking your property to satisfy your debt.

Chapter 13 "reorganization" is a special kind of repayment or debt adjustment plan. In Chapter 13 bankruptcy you file a repayment plan in court showing how you will pay off your debts over the next three to five years. The big benefit to Chapter 13 is that it prevents your creditors from harassing you and allows you to keep property subject to a security interest, as long as you make the payments required under your repayment plan. In most cases, these payments must be at least as much as the monthly payments required by the contract establishing the original debt, plus whatever extra amount is required to get caught up. Chapter 13 may be the best choice for you, if you are behind on debt payments but can catch up given enough time.

Of course, for most people in this situation it is usually possible to work out a payment plan directly with the creditors rather than ever filing bankruptcy. It is much more advisable to handle things that way, if possible, because you save your court and attorney fees for filing the bankruptcy and do less damage to your credit.

What Property Is Exempt in Chapter 7?

In a Chapter 7 bankruptcy, you can keep all property which is exempt under bankruptcy law from the claims of creditors. In determining which property is exempt, you can use either state law or federal law. In many cases the federal exemptions are more generous. They include:

$16,500 in equity in your home
$2,575 in equity in your car
$425 per item in any household goods up to a total of $8,625
$1,625 in job-related tools, books, etc.
$850 in any property, plus part of the unused exemption in your home, up to $8,075
Your right to receive social security, unemployment, VA benefits, welfare, and pensions, regardless of the amount
The exemption amounts above are doubled when a married couple files together.

For more information on whether you should elect to use federal or state bankruptcy exemptions, contact a local bankruptcy attorney in your jurisdiction.

What Will Happen To My Home And Car If I File Bankruptcy?

In most cases you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt. Even if your property is not fully exempt, you will be able to keep it, if you pay its non-exempt value to creditors in chapter 13. However, some of your creditors may have a “security interest” in your home, automobile, or other personal property. This means that you gave that creditor a mortgage on the home or put your other property up as collateral for the debt. Bankruptcy does not make these security interests go away. If you do not make your payments on that debt, the creditor may be able to take and sell the home or the property, during or after the bankruptcy case.

There are several ways that you can keep collateral or mortgaged property after you file bankruptcy. You can agree to keep making your payments on the debt until it is paid in full. Or you can pay the creditor the amount that the property you want to keep is worth. In some cases involving fraud or other improper conduct by the creditor, you may be able to challenge the debt. If you put your household goods up as collateral for a loan (other than a loan to purchase the goods) you can usually keep your property without making any more payments on that debt. The answer depends on the type of bankruptcy you are filing and the status of any indebtedness on the property in question. Again, if you have any questions, contact a local bankruptcy attorney.

Can I Own Anything After Bankruptcy?

Yes. You can keep all exempt property. You can almost always keep anything obtained after the bankruptcy is filed, too. The main exception is that if you receive an inheritance, property settlement, or life insurance payment within 180 days after filing for bankruptcy, that money or property might have to be turned over to your creditors, unless it qualifies for an exemption.

Will Bankruptcy Affect My Credit?

Yes, but probably not as much as you might expect. If you are already so far behind on your bills that you are contemplating bankruptcy, then your credit is probably pretty bad, and may actually improve by filing for bankruptcy. Of course, a bankruptcy can usually be shown on your credit record for ten years, while bad debts can usually be shown only for seven. However, since bankruptcy wipes out your old debts, you are likely to be in a better position to pay new bills and may actually have better credit immediately after the bankruptcy than immediately before the bankruptcy.

Will Bankruptcy Affect My Security Clearance?

If you have a security clearance or may want to get one in the future, you should know that it can be affected, but it is not automatic. The outcome depends on the circumstances that led up to the bankruptcy and a number of other factors. Again, speak with your local attorney for more information.

I am Getting Divorced. What Should I Do About My Bankruptcy?

If the debts are in both names, you should probably file a joint petition for bankruptcy. That way both of you can get a discharge for the price of one. If the debts are in your name only, you should consider filing for bankruptcy after the divorce becomes final. If you have to pay any spousal or child support, that can be used as a factor in determining your ability to pay.

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Disclaimer: Every effort has been made to ensure the accuracy of this publication at the time it was written. It is not intended to provide legal advice or suggest a guaranteed outcome as individual situations will differ and the law may have changed since publication. Readers considering legal action should consult with an experienced lawyer to understand current laws they may affect a case.

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