Bankruptcy is a federal program established to provide debt relief to persons and organizations suffering from financial difficulties. Different types of bankruptcy relief are available under various chapters of the United States Bankruptcy Code. The two primary forms of bankruptcy relief available for individuals are under Chapters 7 and 13.
Filing bankruptcy under any chapter of the United States Bankruptcy Code will immediately get creditors off your back. Creditors, including collection agencies and attorneys, must immediately cease all further communication with you and may not take any further action to collect a debt from you. Creditors may not file, pursue or collect any lawsuit or judgment against you, garnish your wages or take, repossess or foreclose on any of your property. Any court hearings in any existing lawsuits will be canceled. Most civil court judgments entered against you at any time prior to filing bankruptcy will be null and void upon the conclusion of your bankruptcy proceeding.
In times when consumer debt is at an all time high, even the affluent can be confronted with overwhelming debt as a result of a job loss, death of a family member, illness or other reasons. For many of us, this debt is insurmountable and causes family problems, feelings of hopelessness and even suicide. With credit card interest rates of 18-30% and the relentless bombarding of seductive messages cajoling us to “charge, consume, buy”, it is not surprising that so many people are drowning in debt. In establishing our bankruptcy laws, Congress recognized that responsible, well-intentioned people could from time to time run into financial difficulties. By allowing you to recover from your debt burden, you will be able to start fresh, look to the future and become a more productive member of society. This is good for you and your family and good for society as a whole.
A bankruptcy proceeding is initiated by filing a bankruptcy petition in the United States Bankruptcy Court. A bankruptcy petition contains information about your assets, liabilities, income and other financial information.
When you file bankruptcy under Chapter 7 all or most of your debts are completely forgiven or “discharged”. You do not have to pay anything to your creditors. A Chapter 7 bankruptcy proceeding is the most common type of bankruptcy and can completely eliminate credit card debts, medical debts, personal loans, lawsuits, court judgments, deficiency balances due on automobile loans, debts related to automobile accidents, federal income taxes that are more than three years old and most other types of debts. A Chapter 7 bankruptcy will not eliminate student loans except in undue hardship cases, certain types of taxes, alimony or child support payments, fines, penalties, criminal restitution, debts incurred through fraudulent conduct, debts incurred through intentional injury to person or property or debts from personal injuries caused while intoxicated. A Chapter 7 bankruptcy can be filed every 8 years.
When you file bankruptcy under Chapter 7 you are allowed to keep all of your “exempt” assets. In most cases, this includes everything you own. Exempt assets are those assets that the law specifically allows you to keep when you file bankruptcy. This differs from state to state, but usually includes your primary residence, motor vehicle (including a motorcycle), household goods and furnishings, clothing, jewelry, life insurance policies, retirement accounts and pensions, bank accounts, social security benefits, disability benefits, spousal or child support, etc. If you owe money on your home or motor vehicle and want to keep these assets you must reaffirm these debts and keep making your regular payments or, alternatively, you must pay the creditor the fair market value of the property.
When you file bankruptcy under Chapter 13 your debts are consolidated and you propose a payment plan to repay all or a portion of your debts over a 3 to 5 year period. Payments under the plan are made to a bankruptcy trustee who disburses payments to your creditors. The amount of your monthly payment is determined based on the type of debt included in your repayment plan, the value of your non-exempt assets and your disposable income (the amount you have left over each month after paying your normal living expenses). While your Chapter 13 plan is in effect, your creditors cannot contact you, sue you or repossess or foreclose on any of your property. Chapter 13 allows you to catch up on delinquent mortgage and motor vehicle payments. If you owe more on a mobile home, motor vehicle or other property than it is worth (other than real property which is your primary residence), Chapter 13 also allows you to restructure your loan based on the fair market value of the property. In many cases, car payments can be reduced by as much as 50%. Unsecured debts, such as credit cards and medical bills, are normally discharged (forgiven) after 36 months, regardless of the remaining balance owed. Unlike Chapter 7 bankruptcy, cosigners and codebtors are also protected. Even if you have filed a Chapter 7 bankruptcy within the past 8 years or have non-exempt assets, you can file a Chapter 13 bankruptcy.
To file an individual or joint bankruptcy a court filing fee in the amount of $335 (Chapter 7) or $310 (Chapter 13) must be paid to the United States Bankruptcy Court at the time of filing or within 4 monthly installments. If your annual gross household income is less than 150% of the federal poverty guideline for your family size the Chapter 7 filing fee can be waived altogether.
Most people qualify to file bankruptcy under either Chapter 7 or 13. If your annual gross family income (including your spouse’s income, unless separated) is not more than the median family income for your state and family size, then you qualify to file under Chapter 7 or 13, whichever you prefer. Even if your annual gross family income exceeds the median family income for your state and family size, you probably still qualify to file under Chapter 7 but will need to complete a “means test” to know for sure. You will almost always qualify to file under Chapter 13, regardless of your income.
While you are not required to participate in a debt management or repayment program, you are required to consult with an approved nonprofit budget and credit counseling agency as to your available options before you file bankruptcy. The consultation can be done by phone, over the Internet or in person. The credit counseling agency must provide you with a certificate acknowledging that you completed such pre-bankruptcy counseling. The certificate must be filed in the United States Bankruptcy Court when you file bankruptcy. A pre-bankruptcy counseling certificate can be obtained online in one hour for $10 at moneysharp.org.
No. However, prior to obtaining a final discharge in your bankruptcy case you will have to complete an approved instructional course in personal financial management. The instructional course typically takes about 1 1/2 to 2 hours and can be completed over the Internet, in person or through the mail. In a Chapter 7 case, the instructional course must be completed no later than 60 days after your trustee meeting. In a Chapter 13 case, the instructional course will not be needed until the end of your repayment plan. An approved instructional course can be completed online in 2 hours at moneysharp.org for $10 or from any other approved debtor education provider.
Yes, you may file individually or jointly as husband and wife. You may file jointly even if you are currently separated or have filed for divorce, as long as the divorce is not yet final.
It is very unlikely that you will ever appear in court or in front of a bankruptcy judge on a Chapter 7 bankruptcy. However, about 4 to 6 weeks after filing bankruptcy you will have to meet with a bankruptcy trustee at a meeting known as a “341(a) meeting” (also known as a “meeting of creditors”). A typical 341(a) meeting lasts about 3-4 minutes and is usually held at the U.S. Trustee’s Office in your area. The trustee will usually ask you whether everything in your bankruptcy petition is true and correct, whether you would like to add or change anything in your bankruptcy petition and may ask a few questions about your financial situation. Creditors virtually never attend the 341(a) meeting. Approximately 60-70 days after the meeting you should receive your final discharge order in the mail. Your debts will be formally discharged and your bankruptcy proceeding will be closed. In a Chapter 13 case, you will need to attend a 341(a) meeting and may also have to attend a confirmation hearing in court to have your proposed repayment plan approved.
A bankruptcy petition must be filed in the federal bankruptcy court district where you have resided for the majority of the past 180 days.
If you already have bad credit, filing bankruptcy will probably not make your credit any worse than it already is. Your FICO® credit score may initially decrease after your bankruptcy filing but will gradually start to improve after your bankruptcy discharge. This is because the amount of outstanding debt, including current and delinquent accounts, presently appearing on your credit reports will be eliminated or substantially reduced. Approximately 30% of your FICO® credit score is based on the amount you owe on outstanding debt. Debt owed on revolving lines of credit, such as credit cards, negatively impacts your FICO® credit score more than other types of debt. In order to obtain future credit you will likely need to re-establish a good credit history. This can be done by obtaining one or more secured credit cards, using them wisely and establishing an excellent payment history. If you reaffirm any existing debts, such as a mortgage or an automobile loan, making your payments on time will also help to re-establish your credit. In most cases, you can re-establish credit in 1 or 2 years. Your ability to obtain credit also depends on various other factors, such as your income, employment history, etc. Some creditors may actually consider you to be a better credit risk after bankruptcy than before because you will essentially be “debt free” and will likely have more disposable income to pay future debts.
A bankruptcy filing can appear on your credit report for up to 10 years. However, this does not mean that you will have bad credit for 10 years. You can start re-establishing your credit immediately after filing bankruptcy. Even without filing bankruptcy, most negative items appear on your credit report for at least 7 years.
Federal bankruptcy laws were established by United States Congress to provide individuals and organizations with a “fresh start” by allowing them to legally eliminate all or a portion of their debts and to start anew. Federal bankruptcy laws were designed to help those in financial distress—not to further burden or hinder them. Despite the many rumors propagated for years by creditors, debt collectors, debt counseling organizations and the like for their own self-interest, there are very few negative consequences to filing bankruptcy. To the contrary, various bankruptcy laws have been enacted to ensure that no person is discriminated against because of a bankruptcy filing. By federal law, no person can be denied employment, a student loan or grant, or a license or permit by reason of a bankruptcy filing. If you have good credit and file bankruptcy your credit will, of course, be negatively impacted. But if your credit is already bad, filing bankruptcy can only improve your life and your ability to re-establish a good credit history. If you are suffering from financial problems and are considering filing bankruptcy, you should also consider the consequences of not filing.
Creditors rarely have grounds to object to your bankruptcy discharge and almost never do unless a particular debt was fraudulently incurred.
When you file bankruptcy, all wage garnishments (other than child support garnishments) must stop immediately. Some payroll departments require a release from the creditor. Bankruptcy case law requires creditors to promptly release a wage garnishment when a bankruptcy is filed and they can be held in contempt of court if they fail to do so.
Funds that were taken from you pursuant to a wage or bank garnishment within 90 days prior to your bankruptcy filing date may constitute “preferential transfers” and you may be able to get the funds back.
You are required to list all of your debts on your bankruptcy forms. However, you may voluntarily reaffirm and repay some debts such as a mortgage, automobile loan, personal loan, credit card, etc. When you choose to reaffirm a particular debt, that debt will not be discharged or otherwise affected by your bankruptcy.
Yes. You can amend your bankruptcy forms to include debts that were not included when you originally filed. However, the debt must have been incurred prior to the date you filed bankruptcy. You cannot add new debts incurred after the date you file bankruptcy. The bankruptcy court will charge you a one-time amendment fee of $30.00 regardless of how many debts you add.
When you file bankruptcy your mortgage lender cannot foreclose or otherwise attempt to collect mortgage payments from you unless it first obtains permission from the bankruptcy court after filing a motion for relief from the automatic stay. However, your mortgage lender can accept voluntary payments from you. If you want to keep your home, your lender may require that you sign a reaffirmation agreement which will essentially exclude your mortgage from your bankruptcy proceeding. Reaffirmation agreements are typically prepared by the lender on a standard official form either before or after the trustee meeting (341a meeting). If your mortgage is past due, your lender will likely not agree to a reaffirmation unless you bring the mortgage current or work out a modification or other payment arrangement.
With few exceptions, the U.S. Bankruptcy Code specifically prohibits the bankruptcy court from modifying a mortgage on a primary residence. Therefore, the bankruptcy court has no legal authority to reduce your mortgage balance, lower your payments or interest, or change any other terms in your mortgage contract. However, if you have a second or third mortgage or other lien on real property that is totally “underwater” (no equity), the bankruptcy court can completely eliminate (strip off) the underwater mortgage as a lien against your property. Lien stripping cannot be done in a Chapter 7 bankruptcy proceeding.