Bankruptcy FAQ

Bankruptcy laws serve two main purposes. First, bankruptcy law may give creditors some payment on their debts. Second, bankruptcy law gives you a fresh start by canceling many of your debts through an order of the court called a discharge.

There are four types of bankruptcy available to individuals:

– Chapter 7 (a liquidation-style case for individuals or businesses);
– Chapter 13 (a payment plan or rehabilitation-style case for individuals with a regular source of income);
– Chapter 12 (a payment plan or rehabilitation-style case for family farmers and fishermen);
– and Chapter 11 (a more complex rehabilitation-style case used primarily by business debtors, but sometimes by individuals with substantial debts and assets).

The two most important types of cases for consumers are chapter 7 and chapter 13. Both provide for some possible payments to creditors, a discharge for you and supervision by a trustee. Chapter 7 involves surrendering some of your property (at least in theory) in return for a discharge of many of your debts. The trustee sells any non-exempt property and pays your creditors. In chapter 13, you keep your property but must commit to a three- to five-year repayment plan. You then obtain a discharge of most of the debts not paid in the plan.

In both types of bankruptcy, most creditors must stop efforts to collect debts after you file your case. This protection is called the “automatic stay.” In a chapter 7, this relief is often temporary since you must still pay for your secured property (usually a home and/or car) or the creditor may ask the court to remove the automatic stay.

Chapter 7: A Brief Overview Chapter 7 is designed as a liquidation. Under this model, a trustee may sell certain property that you own at the time you file the bankruptcy case. The trustee uses the proceeds of the sale to pay creditors. However, the sale of assets in a typical chapter 7 case is unusual. In most cases, you will not have any assets over and above what the law allows you to keep. Thus, in most chapter 7 cases, you do not have any property that the trustee may sell.

About 90 days after you file chapter 7, most of your debts will be discharged, if yours is the typical case. This means you are no longer liable to pay the debt. Some debts are not discharged, however, and you still must pay them. Examples include past-due child support payments, some taxes and student loans. Debts for which you have pledged collateral for the loan (such as cars, homes and household goods) also do not go away in a bankruptcy.

The bankruptcy case addresses only the debts you list at the time of the bankruptcy case. You must pay debts you incur after the filing the bankruptcy case as usual. You may keep the money that you earn after filing a chapter 7 bankruptcy case, as well as most other property that you obtain after the filing.

Chapter 13: A Brief Overview Chapter 13 is very different. If you file under chapter 13, you may keep your property and you agree to pay your debts over time from your current income, pursuant to a court-approved plan. The amount that you will repay to creditors under the plan will vary based on your particular circumstances.

The payments made to creditors under the plan must total at least as much as creditors would have received if you filed a case under chapter 7. The payments are made to a trustee, who distributes the payments to the creditors.

The plan lasts either until you pay your debts in full or until the end of a three- to five-year period. You receive a discharge at the completion of the plan.

This was just an overview. More detail is provided throughout this FAQ.

Chapter 7 Eligibility – After October 17, 2005, access to chapter 7 is more limited than it was in the past. If you are an individual with primarily consumer debts and you want to file a case under chapter 7, you will have your finances examined to determine if you can afford to pay creditors. If you can, based on a set formula known as the “means test,” you will not be eligible to file a chapter 7. So, the court will either dismiss your bankruptcy case, or you may choose to convert your case to chapter 13.

The means test compares your excess monthly income to the amount of unsecured debt to determine how much you could repay to creditors if you were in a chapter 13. Because this calculation is hypothetical and does not necessarily reflect your true financial condition, you may appear to be able to repay the minimum portion of your debts but you, in reality, cannot. In that situation, the court may permit you to stay in chapter 7. Unfortunately, the means test is quite complicated and it is wise to seek professional assistance when choosing the chapter under which to file.

Chapter 13 Eligibility – There are two principal requirements for eligibility in a chapter 13 case. First, you must have regular income, although this need not be from a job; regular benefit payments or rental income would qualify. Second, you must not have debts over a certain amount. The debt limits are $1,010,650 in secured debt (like home mortgages and auto loans), and $336,900 in unsecured debt (like most credit card debt). These numbers go up periodically.

The filing of bankruptcy automatically imposes an injunction against all collection efforts by creditors, which means creditors must stop calling, sending letters or suing you over your debts. This is called the automatic stay, discussed in more detail below.

If a debt is discharged, you no longer have an obligation to pay the debt, and the creditor may not make any effort to compel you to repay. However, if some other person (such as a relative or friend) also has an obligation to pay, his/her obligation is not discharged. In addition, if you have property that is collateral for a loan, the creditor may still be able to repossess that collateral.

No, not all debts will be discharged through the bankruptcy, even if you have satisfactorily performed all your duties in your case. First, a bankruptcy case only discharges debts that you owed and scheduled at the time you filed the case, not those you incurred after filing the case.

Debts that are not discharged include debts for certain taxes, certain unscheduled debts (creditors with debts not listed in your paperwork), alimony, maintenance or support debts, pre-petition fines or restitution, debts for injury or death caused by use of drugs or alcohol, most student loans and certain condo or co-op fees.

Other debts that may not be discharged include debts you may have incurred through fraud or by willful or malicious actions. If the creditor does not ask the court to rule on these debts, they will be discharged.

The current filing fee for a chapter 7 case is $335 and for a chapter 13 case is $310. Some courts also impose an additional administrative fee. You may pay the filing fee in installments. The court may waive the filing fee in a chapter 7 case if your income is below specified levels and the court finds that you cannot pay the filing fee in installments.

You will probably find it necessary to hire an attorney to assist you with filing bankruptcy. Attorneys usually charge a fixed fee for certain services in a bankruptcy case and the fees typically differ depending on the chapter under which you file.

Today, you simply need to consider carefully whether bankruptcy is the right choice for you, and then gather the paperwork we talk about later in these FAQs.

In order to be eligible to file bankruptcy, you must receive credit counseling within the 180 days prior to filing. Specifically, the law requires you to receive, from an approved agency, a briefing outlining the opportunities for credit counseling and help with a budget analysis. You may do this alone or in a group, and in person, on the phone, or even on the Internet. If, due to an emergency, you are unable to obtain credit counseling services from an approved agency during a 5-day period, the court may excuse the requirement temporarily but you still must fulfill it within 30 days (or in some instances 45 days) after filing. If you use a bankruptcy attorney, he/she will most likely be able to help you complete this requirement.

You can find a list of approved non-profit budget and credit counseling agencies at the office of the United States Trustee or Bankruptcy Administrator, at the bankruptcy court Clerk’s office, or online at the links we provide under Resources.

You need to file these forms, all of which are best prepared by an attorney:

• the bankruptcy petition;
• a list of creditors;
• a schedule of assets and liabilities;
• a schedule of current income and current expenditures;
• a statement of your financial affairs;
• a certificate from the attorney or bankruptcy petition preparer (if there is one) indicating that you received a notice describing the different bankruptcy chapters and the services available from the credit counseling agencies as well as a statement specifying that anyone who knowingly or fraudulently conceals assets or makes a false statement under oath is subject to fine, imprisonment or both (if no one assisted you, then you must file a certificate that such notice was received from the court and read by you);
• copies of all pay stubs received by you within 60 days before filing;
• a statement of your monthly net income itemized to show how it is calculated;
• a statement disclosing a reasonably anticipated increase in income or expenditures over the following 12 months;
• if you have property that secures a debt, such as a car or home, a statement of intention with respect to treatment of the property in bankruptcy;
• a certificate from the approved non-profit budget and credit counseling agency that describes the services provided to you and a copy of the debt repayment plan, if any, developed by that agency; a record of any interest that you have in an individual retirement account;
• and an analysis of the means test.

If you fail to file all information noted above, with the exception of the last four, within 45 days of filing the petition, the case will be automatically dismissed.

Your attorney will need certain information from you to file these documents with the court, which is listed below.

Information to Take With You When Consulting a Bankruptcy Attorney

• A copy of every bill or letter you have received from a collection agency;
• A copy of any lawsuit or pleading you have received in a case in which you are involved;
• Two pay stubs representing an average pay period (include pay stubs for your spouse, even if he/she is not filing bankruptcy with you);
• Deeds to real estate in which you have any (even a partial) interest (including real estate you are purchasing or that you already own);
• The original or memorandum title for any cars, trucks, trailers, boats, motorcycles, mobile or motor homes you own or are purchasing, or other documents showing the value of your assets;
• Appraisals of your home, jewelry, etc., if you have them;
• Any policies of life insurance you have on your life, and/or the life of your spouse or children (where possible, you should contact the agent who sold you the policy and find out if the policy has any “cash surrender value.” If your policy has “cash surrender value,” please provide your attorney with that value);
• and Income Tax Returns filed in the previous two years.

Chapter 7 cases are pretty simple for the most part. In most cases, you will attend one creditors’ meeting and just wait for your discharge notice to come in the mail.

The bankruptcy trustee runs the creditors’ meeting, which is also called a 341 meeting (named after the section of the bankruptcy law that requires the meeting), and will question you under oath about all the information contained in your bankruptcy documents.

If you and your spouse file a joint petition, you must both attend the creditors’ meeting and answer questions. It is important to cooperate with the trustee and to provide any records or documents requested.

In a simple case, the meeting will usually last just five minutes or so. While all creditors may attend, very few actually do. Be sure to bring a form of identification to the meeting, as well as proof of your Social Security number (usually your Social Security card). The trustee may ask you to provide additional documentation during the meeting and give you a few days to produce it.

The discharge notice will arrive in the mail about 60 days after you attend the creditors’ meeting. This piece of paper is proof that most of your debts have been discharged. You should keep it in a safe place.

If you are filing a chapter 13 case, rather than a chapter 7, in addition to the documents mentioned above, you must file a plan that describes how much you will pay your creditors and over what time period. Your plan must provide that you pay creditors at least what they could have received in chapter 7 liquidation case, which basically means creditors must receive payments equal to the value of your non-exempt assets.

In addition, the plan must provide that you contribute all your “disposable income” to the plan. Disposable income is the income above what is necessary for the support of you and your family. However, in many cases the means test formula determines that amount.The means test is a very complicated test, but essentially requires that you average your income over the past six months (from any source including regular gifts from family members), then deduct a series of allowed expenses, and see what is left to pay creditors. You will most likely need an attorney to complete this analysis.

The chapter 13 plan lasts either until you pay your debts in full or until the end of a three- to five-year period. For certain low income debtors the maximum plan period without court approval is three years. For other debtors, creditors may be able to insist that the debtor pay a five-year plan.

Within 30 days of filing your petition, you must begin making payments under your plan. You make the payments to a trustee, who distributes the payments to the creditors.

Like in a chapter 7 case, after filing the bankruptcy petition, you must attend a creditors’ meeting (also known as a 341 meeting, named after the section of the bankruptcy law that requires the meeting). The chapter 13 trustee will conduct the meeting and will question you under oath about the paperwork you filed in your case. This creditors’ meeting will last longer than a meeting in a chapter 7 case. The trustee will likely question you about your income and your expenses, and may also require additional documentation at the meeting.

After the meeting of creditors, you, the chapter 13 trustee, and those creditors who wish to attend will come to court for a hearing on your chapter 13 plan. If there are no problems, the court will approve (“confirm”) your plan.

After completing payments under the plan and completing any financial counseling required, you will receive a discharge of any debts not paid under the plan.

You must provide the trustee and/or any creditor with copies of any federal tax return that you filed for the year prior to filing. If you do not comply with this request, the court may dismiss your bankruptcy case.

You must also file copies of any federal tax returns filed during the case with the bankruptcy court.

Any taxing authority may request dismissal of a bankruptcy case if you fail to file all required tax returns.

You must list all your debts, with the name and address of the creditors. This is so creditors receive notice of the bankruptcy and get their fair share of any money paid to creditors. You may think that you should omit a creditor because you want to continue to pay the debt. This would violate the law, and it is unnecessary because you can always choose to pay a debt voluntarily, even though the debt has been discharged and there is no legal obligation to make payment. However, creditors are prohibited from taking any action to collect discharged debts.

As soon as you realize that you have ommitted a creditor, you should notify your attorney and provide him or her with all the information necessary to complete the schedule (the amount of the debt, the type and value of any collateral, and the name and address of the creditor).

In some cases, failure to list a creditor will result in harm to the creditor, such as if the creditor missed an opportunity to participate in the bankruptcy and/or receive payments. If this happens, your attorney can advise you about what additional action, if any, is necessary.

If an omitted creditor demands payment of the debt, you should inform the creditor of the bankruptcy, as discussed below.

Most efforts by a creditor to collect a pre-petition debt (one that you owe as of the filing of your case) or to obtain your property without the permission of the bankruptcy court are violations of the automatic stay.

The court may punish a creditor who knowingly violates the automatic stay and the creditor is liable to the debtor for harm caused. If you did not list a debt on the schedules filed with the court, the creditor may not be on notice of the bankruptcy. Therefore, you should inform the creditor of your bankruptcy and request that the creditor stop the collection efforts.

If you are represented by an attorney, you should give the creditor your attorney’s name and telephone number. If you are not represented by an attorney, you should give the creditor additional information about the case—the date of filing, the court in which the case was filed and the case number. If improper collection action continues, you should consult with an attorney, notify the trustee or seek protection from the court.

Probably the most important thing you need to know is that once you have decided to file for bankruptcy, you need to stop using your credit cards. Anything that you charge knowing you will not pay the money back is fraud under the bankruptcy law and the debt may not be discharged. Also, if you charge luxury goods before the filing or take out cash advances right before your case, the debt is presumed to be non-dischargeable even if you did not know you were filing for bankruptcy when you charged the items or took out the cash advances. Consult with experienced bankruptcy counsel before deciding when to file for bankruptcy.

Chapter 7

Every state has “exemption” laws that allow you to keep some assets, free from creditors’ claims, even if you do not pay your creditors. The idea is that it would do little good to take all of your assets because you would not have a place to live, clothes to wear or a way to get to work. Most exemptions allow you to keep clothes, household goods, a car of some limited value, tools of trade, as well as other property. Some exemptions allow you to keep some equity in a house.

In addition, bankruptcy law contains federal exemptions, which you can use when you are in bankruptcy, at least in some states. Georgia Homestead Exemption. 44-13-100(a)(1) – Real or personal property, including co-op, used as a residence, up to $21,500 (up to $43,000 if married whether the spouse is filing or not). Unused portion up to $5,000 can be applied to any other property. An experienced bankruptcy attorney will be able to help you choose the appropriate exemptions.

As we described above, you must give all your non-exempt assets (the ones that do not fit within the exemptions) to the bankruptcy trustee. However, many people do not have property in excess of the allowed amount of exempt property, and if that is the case, you do not need to surrender any property. Despite the exemptions, you always need to pay debts owed to secured creditors in order to keep the collateral securing the debt. Your exemptions do not affect their claims.

Chapter 13

Under chapter 13, you enter into a payment plan in exchange for keeping even non-exempt property. Again, you must still pay for secured property in order to keep it. You may not have to pay the full amount of the debt in some circumstances, however. Also, it is possible that a bankruptcy judge may not allow you to keep and pay for certain secured property, such as an unnecessary luxury good.

You may use a chapter 13 to save your home from foreclosure. The automatic stay stops the foreclosure proceeding as soon as you file bankruptcy. Chapter 13 allows you to catch up on overdue pre-petition payments over time, while keeping up with current payments.

A “secured creditor” is a creditor that has a lien on property. A lien is an interest in property that a creditor can use to satisfy a debt. Some liens are voluntary, for example a mortgage or a security interest in a car. Other liens are involuntary, for example a lien on property resulting from unpaid taxes or a judgment.

An “unsecured creditor” is a creditor who has no interest in any of your particular property. Outside of bankruptcy, there are only two ways an unsecured creditor can get paid. First, you can pay the debt voluntarily. This is the way most debts are paid. The other way unsecured creditors get paid is much harder. They must sue you, get a judgment against you, and ask the sheriff to seize your particular property and sell it to satisfy the creditor’s claim.

Even in bankruptcy, the secured creditor has greater protection because its lien on your property is usually honored. The bankruptcy does not remove it.

No, not at all. Secured creditors get extraordinary rights in a bankruptcy case. Bankruptcy may temporarily delay secured creditors, but most voluntary liens (those granted by agreement on houses, cars and household goods) have to be satisfied one way or another.

However, you have some opportunities to remove or avoid involuntary liens and a small category of voluntary liens. “Avoid” is the term used in the Bankruptcy Code for removing liens.

Chapter 7 – You can avoid some involuntary liens (except for liens securing alimony or support obligations) that are on property that you could exempt. You can also avoid some voluntary liens on property that you could exempt. For these voluntary liens, you can only remove liens on certain household goods, “tools of the trade” and professionally prescribed health aids. Moreover, the term “household goods” includes only certain types of items (for example, clothing, one radio, one television, one VCR).

Chapter 13 – If you file chapter 13, you have the additional ability to remove liens by completing payments under the plan. In some cases, the plan will reduce the amount that you must pay or change the time period over which you must pay the debt. In the case of homes and cars, the ability to change the payment terms is very limited.

Just by filing a bankruptcy petition, an “automatic stay” against all collection efforts is put in place. This is a powerful tool of bankruptcy and one of the law’s primary protections for debtors. Most creditors have to stop all efforts to collect from you. Creditors must stop making calls to you, stop sending letters, stop all lawsuits to collect, etc.

The automatic stay also stops foreclosures, repossessions or sales of property from going forward. If you don’t pay your house payments, however, the creditor will have the right to continue the foreclosure once the dust settles. Thus, the benefits of the automatic stay may be temporary when the creditor is a secured creditor.

There are a number of exceptions to the automatic stay. For example, attempts to establish or collect alimony or support obligations are not stayed, nor are criminal suits or suits by governmental agencies to protect the public.

Moreover, the automatic stay does not arise if you are filing a case within a year of filing two other bankruptcy cases that were dismissed because you did not file all the paperwork or otherwise follow through in your cases. If this happens, the stay is not automatic, but you can still request the protection of a stay.

Just remember that as to secured creditors, the automatic stay is temporary. It means only that creditors must ask the court before taking action. No bankruptcy filing allows you to keep property that is security for a loan without making payments on the loan. If you are behind on the payments and the property is of insufficient value to satisfy the debt, or there is risk of loss of the property, a secured creditor may obtain court permission to seize and sell the property.

In addition, in a chapter 7 case, as soon as the bankruptcy case is closed, the automatic stay terminates, and the creditor can proceed with foreclosure or repossession if you are behind on the payments.

If you have problems with secured debt, you may be better off filing a chapter 13 case than a chapter 7 case because the chapter 13 will allow you to pay off the past-due secured debt over time.

In chapter 13, the automatic stay also protects people other than you who are “co-debtors.” Co-debtors are people who also have an obligation to pay the same consumer debt as you do. That includes people who have guaranteed the debt for you.

Chapter 7 – Soon after filing the petition, you must declare whether you will return the property, purchase the property or enter into a reaffirmation agreement with the creditor. However, if you do not do one of these things, the stay will terminate and the creditor may take the property.

Chapter 13 – Depending upon the plan, you may be able to keep property despite secured claims. You can modify some obligations, for example by stretching out payments and reducing interest rates (where interest rates have fallen since you created the obligation).

Generally, in a chapter 13 you must pay in full all loans secured by your residence. The good thing is that the case gives you time to pay this off during the term of the plan, unlike a chapter 7. But, while overdue payments must be repaid over the course of the plan, regular monthly payments must still be made on time. Practically speaking, this means that if you were behind on the mortgage payment, you will be making a larger mortgage payment to make up for the past due debt.

Cars purchased for your personal use within 910 days (approximately 2½ years) prior to the filing of the bankruptcy are required to be paid in full through the bankruptcy. You also must pay in full the debt for any other secured property of value that you purchased in the year before filing. However, you still may be able to reduce the interest rate on these secured debts.

The terms of a confirmed plan bind you and each creditor. If you have an unexpected financial problem during your chapter 13 case, you should immediately consult with your attorney. It is often possible to deal with changed circumstances by amending the chapter 13 plan. Also, it is sometimes possible to add debts that you incurred after filing chapter 13 to the plan, so that they will be discharged with other debts at the completion of the plan.

A reaffirmation agreement is an agreement providing that you will pay a creditor’s debt even though the debt would otherwise be discharged in bankruptcy. In theory, the debt can be renegotiated, but most reaffirmation agreements simply require you to pay the debt as originally agreed.

While unsecured debts can be reaffirmed, this is usually not a good idea. Thus, most reaffirmation agreements deal with secured debts, and debtors enter them to keep the creditor from repossessing or foreclosing on the property securing the debt. A valid reaffirmation agreement puts you under a legal obligation to repay the otherwise dischargeable debt. If you default on the payments required under the reaffirmation agreement, the creditor can repossess or foreclose on the property and seek a personal judgment against you.

In order for a reaffirmation to be valid, the parties must sign the agreement and file it with the court before you receive a discharge. In addition, either your attorney or the court must determine that the agreement does not impose an “undue hardship” on your family. There are other requirements as well, including extensive disclosures to you.

If the parties do not comply with all the requirements for a reaffirmation, the agreement may not be binding. In that event, you would have no personal obligation to make payments under the agreement.

As a rule, you should think very carefully about whether to reaffirm debt, as this limits your bankruptcy discharge.

Yes. You can make a voluntary payment of the debt. This often happens, for example, with debts to family members or friends. However, the key to this kind of payment is that it must be entirely voluntary; you have no legal obligation to pay a discharged debt, and the creditors can take no action to pressure or persuade you into making the payments.

You may not be able file a bankruptcy petition if a prior case was dismissed because of your failure to abide by a court order. In addition, you cannot file again if, within the last six months, you requested dismissal of the prior case after a creditor sought relief from the automatic stay. The law in effect after October 17, 2005 also imposes the following rules if you have filed prior bankruptcy cases:

Chapter 7 – You can file another chapter 7 case, but there might not be a right to discharge. If the prior bankruptcy was in chapter 7 and you filed the case less than eight years ago (six years before October 17, 2005) and obtained a discharge, you cannot obtain a discharge in a case filed today.

Finally, having filed a recent previous bankruptcy may affect the automatic stay. This is true in some situations where the prior case had been dismissed or a creditor had obtained relief from the automatic stay.

Chapter 13 – You can file another chapter 13 case, but there might not be a right to discharge. On or after October 17, 2005, if the prior bankruptcy was in chapter 7 and you filed less than four years ago and obtained a discharge, you cannot obtain a discharge in a chapter 13 filed today. If the prior bankruptcy was in chapter 13 and you filed the petition less than two years ago and obtained a discharge, you cannot obtain a discharge in a chapter 13 filed today.

Finally, having filed a recent previous bankruptcy may affect the automatic stay. This is true in some situations where the prior case had been dismissed or a creditor had obtained relief from the automatic stay.

You must now complete an instructional course in personal financial management from an approved agency prior to receiving a discharge, with limited exceptions.

In a chapter 13 case, if you owe a domestic support obligation, you must also certify to the court you have paid all amounts due.

At the conclusion of an individual’s bankruptcy case, the court enters an order closing the case, and a copy of this order is sent to you. Unless the trustee has assets to distribute to creditors, case closing takes place fairly quickly in chapter 7 cases. In a chapter 13, the court will not close the case until after you finish making payments under the plan or the court dismisses the case. A court will dismiss your case if you do not make payments to the trustee on time. If this happens, you will not receive a discharge unless the court grants your special request for a “hardship” discharge.

Issuers of credit (like banks and credit card companies) are free to consider the fact of a bankruptcy filing in deciding whether to extend credit. Credit reports may list bankruptcy filings for up to 10 years. Some issuers of credit may decide to extend credit regardless of a bankruptcy. Others may be willing to extend credit only after a number of years have passed, or until the bankruptcy filing is no longer on the credit report.

Some creditors will offer you credit more freely than to other people in financial difficulty because you may not be able to file another bankruptcy for many years to come. For the most part though, for obvious reasons, it is best for you to avoid incurring new debt as much as possible after bankruptcy. Using debit or prepaid cards allows the convenience of not carrying and paying with cash, but without incurring any debt.

In some jurisdictions there may be debtor education programs offered in connection with chapter 13 cases that can help you reestablish credit. Where such programs are not available, you may be able to obtain a “secured” credit card, which requires that the you deposit funds with the credit card issuer. This provides the opportunity to show responsible use of credit, which is a major factor in any lender’s credit decisions. Other major factors are length of employment and length of residency.

All persons are entitled to one free credit report per year, from each of the three approved credit agencies. Additionally, whenever your application for credit is denied, the credit issuer is required to give you a copy of any credit report that was used in making the decision.

If there are errors in a report, such as an incorrect Social Security number or a debt that is not owed, you should make a request for correction in writing to the bureau, enclosing copies of any documents that would establish the correct facts.