Frequently Asked Bankruptcy Questions (FAQ)

ABL: Bankruptcy is here to assist you in getting a fresh start and overcoming the bankruptcy blues.

If your financial difficulties arise from business debts, we can help you. As we prepare your bankruptcy, we can simultaneously, included within our flat fee, protect your interests in collection lawsuits or other legal claims related to your business and serve as a single point of contact for all creditors. ABL’s goal is to reduce your stress by answering your most commonly asked questions and preparing you for the bankruptcy process.[divider]

What is chapter 7 bankruptcy?

Chapter 7 bankruptcy is the most common type of bankruptcy and is often referred to as a “liquidation bankruptcy.”

In Chapter 7, all of the debtor’s assets, other than those types of assets specifically exempt from liquidation by statute, are turned over to a bankruptcy trustee for sale. Sale proceeds, if any, are distributed among the creditors. Chapter 7 bankruptcy is used to eliminate, or discharge, primarily unsecured debts such as credit cards or medical bills. Chapter 7 does not eliminate secured debts, such as vehicles (unless the secured item is surrendered).

Chapter 7 will not save a house from foreclosure or a car from repossession if you are delinquent in payments.

Under the new bankruptcy law, only people who pass the “means test” may file a Chapter 7 bankruptcy. People who fail the means test have to file Chapter 13 bankruptcy provided you are under Chapter 13 debt ceilings. The means test is a complicated mathematical formula. Your bankruptcy attorney can run a means test using bankruptcy software after he collects necessary information from you.

What is chapter 13 bankruptcy?

Chapter 13 bankruptcy results in a plan to repay all or part of your debts and can be used to discharge certain debts.

Chapter 13 is used most often to save a house from a foreclosure sale. You can use Chapter 13 to “strip” a second mortgage and treat the second mortgage as you would any other unsecured debt. Chapter 13 is also useful to minimize some tax debts and to establish an affordable plan to pay tax debt that cannot be eliminated. Chapter 13 bankruptcy is available to debtors with regular income. A business cannot file Chapter 13. In addition, there are upper limits on the amount of the individual’s secured and unsecured debts in Chapter 13 cases.

Who can file bankruptcy?

Any person residing, domiciled, or having property or a place of business in the United States may file Chapter 7. A business may also file a Chapter 7. The new bankruptcy law includes a “means test” which applies an income vs. expense test in order to file Chapter 7 bankruptcy. If the means test indicates you have enough disposable income to pay a significant portion of your unsecured debts you have to file under Chapter 13, provided you meet Chapter 13 debt ceilings. There are currently no minimum or maximum income limits or other income requirements or limitations for people whose unsecured debts are primarily non-consumer debts such as investment liability, business losses, taxes, or student loans.

Do I have to take a credit counseling course before I file bankruptcy?

The new bankruptcy law requires all debtors to fulfill two education requirements: a credit counseling course prior to filing and a financial management course after the filing date. Failure to complete either of these courses and file the appropriate certificates with the court will prevent a successful bankruptcy. The Chapter 13 Trustee will offer the required courses to Chapter 13 debtors, but Chapter 7 debtors are required to take the courses on their own. All bankruptcy education courses are available in person, by phone, or over the internet and are approved for the district in which you are filing. Most courses take less than one hour to complete and the cost is usually less than $50.

Can you file Bankruptcy jointly if married?

Married debtors can file a joint bankruptcy petition for a single filing fee, and most attorneys charge the same legal fee for joint cases as they do for individual cases. Married couples who are jointly liable on most debts should file a joint bankruptcy. On the other hand, if only one spouse is liable for most of the debts, the indebted spouse may file an individual bankruptcy, and in most cases, the individual debtor’s bankruptcy will have no adverse effect on the non-filing spouse.

Do I need an attorney to file bankruptcy?

Bankruptcy law does not require that you hire an attorney to prepare a bankruptcy petition or to represent you in your bankruptcy case. If you enjoy doing things yourself, or if you really cannot afford an attorney, you can find forms on the internet needed to file your own petition. However, bankruptcy is a complicated area of the law, and the bankruptcy law gives no special treatment to debtors who file their own petition. The new bankruptcy law makes filing bankruptcy substantially more complicated and the practice of bankruptcy law is therefore more specialized. I strongly believe that the financial risk of filing your bankruptcy incorrectly under the new bankruptcy law is much greater than the amount of a reasonable fee paid to the experienced bankruptcy attorneys at Bankruptcy – by ABL.

What is the “Means Test?”

Under the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” a new test is required to qualify for Chapter 7 bankruptcy. Congress’ intent was to force more people to pay back at least some of their debts through Chapter 13. Despite this, most people who want to file Chapter 7 bankruptcy still can.

The means test has two parts. The first looks only at your gross income. People who earn less than the average earner in that state are considered to have passed the test automatically.

For people whose gross income is above the median, a complicated set of calculations is required, which is intended to determine how much disposable income you have each month. People who have less than $100 of disposable income pass the test, and are allowed to file under Chapter 7.

People with a gross income above the state median, and more than $100 in disposable income, must be especially careful, however. It is presumed to be an abuse of the process for such a person to file a Chapter 7 bankruptcy. It is only a presumption; it is possible to rebut it, but it can be costly. If you fall into this classification, you will probably have to file under Chapter 13 instead of Chapter 7.

Will bankruptcy ruin my credit forever?

No. It is true that your bankruptcy will go on your credit rating, and may have an effect on your rating for several years. However, a bankruptcy cannot legally remain on your credit report for more than 10 years.

Another thing to consider, if you’re considering bankruptcy, you’re likely already behind in many payments. If that’s the case, those creditors have probably begun reporting your delinquencies to the credit bureaus, and your rating is already sinking.

Credit can be rebuilt after bankruptcy, and after 10 years, there will be no record of your bankruptcy whatsoever in your report. Even during those 10 years, as long as you stay current on your bills after bankruptcy, your rating will improve steadily.

Can I keep my car?

The law allows you to “reaffirm” a debt on secured property, and thus keep both the property and the duty to pay back the loan, if you choose. This right usually applies, however, only if you have no equity in the property. (If you owe less than what the property is worth, the trustee may take the property to repay your creditors with the difference in value. If this is the case, however, you can usually buy the equity from the trustee using exempt property.)

Note that some trustees recently have been ordering surrender of expensive new cars, finding it unfair to creditors that their debts are dismissed while the debtor drives around in a new car. If you have an older car, this probably won’t be an issue.

If you don’t want to keep the car, of course, you are free to “surrender” it. This might be the smarter move financially if you owe more than the car is worth, and can get a reliable used car to replace it.

What happens to friends and relatives who co-signed on a loan for me?

Technically, bankruptcy doesn’t really “erase” your debts. Bankruptcy is actually a permanent injunction against the enforcement of those debts. The difference is only theoretical in most contexts, but it has an important impact: If there was a co-debtor on your debt, that co-debtor will likely still be on the hook for whatever is owed – except in the case of certain Chapter 13 Reorganization filers who may take advantage of special co-debtor powers.

The practical effect of this is that your co-signers will have to repay the debt even though you won’t have to. Assuming you want to keep your friend (and any other friends that friend complains to), or peace in the family, you may want to warn the co-signer ahead of time what you’re doing, and make an informal agreement to continue paying what you owed on that particular debt. The law cannot force you to do so, but it also in no way forbids you from doing so.

Note that if your co-signer is your spouse, and you file a joint bankruptcy, this issue about co-signers won’t apply with respect to your spouse. Both of you will be part of the same case, and if both co-signers to a loan get a discharge, there’s no one left for a creditor to go after.

“What is the “Automatic Stay?”

Immediately after your bankruptcy petition is filed with the court, the “automatic stay” takes effect. The automatic stay prohibits any creditor from proceeding with any further collection efforts against you for the duration of the case. They can contact you only to send your regular monthly bills. To get out from the automatic stay, a creditor has to file a special motion to the court to get permission to proceed.

The automatic stay is a powerful protection from the harassment of creditors, but it does come with a cost; your assets technically become the property of the US Government during your bankruptcy case; you are not allowed to sell “your” property without the trustee’s permission, and the trustee will sell any non-exempt property he can find, in order to repay your creditors.

Note, however, that if you have had a previous bankruptcy case dismissed recently, you may not get any automatic stay protection at all for your new case. This can complicate efforts to get the fresh start you need, so it is important to disclose everything in your petition and avoid dismissal for abuse.

What can cause my bankruptcy petition to fail?

In essence, bankruptcy exists only to protect honest people, who get in over their heads. It does not allow dishonest people to cheat creditors. For this reason, the trustee and the court will be looking at the particulars of your case for signs of bad behavior, and may dismiss your petition if they find it.

A non-exhaustive list of the types of things they frown on would include:

  • Charging a large amount of debt right before filing for bankruptcy
  • Making bigger than normal charges
  • Making an unusually large number of small charges
  • Charging over your credit limit
  • Making non-essential (luxury) types of purchases
  • Charging while you know you can’t repay
  • Charging expensive items
  • Charging multiple expensive items on the same day
  • Expensive charges made after visiting an attorney, followed by a bankruptcy filing afterwards
  • Charging even after a creditor orders you to stop using the card

What debts survive bankruptcy?

When you get your bankruptcy discharge, it will (not very helpfully) tell you that all debts subject to discharge are discharged. Without knowing what debts are dischargeable and which are not, how is one to know which debts have been discharged?

As a general rule, all debts are discharged, except a certain limited class of “Non-dischargeable” debts. These debts usually include:

  • Student loans.
  • Back child support or alimony payments and related debts.
  • Any restitution a court orders you to pay to the court or a crime victim.
  • Judgments for injury or death caused by a vehicular DUI/DWI.
  • Back Income Tax obligations.
  • Association fees for your condo or other homeowners association.

The court can also force certain debts caused by certain conduct to survive bankruptcy, such as:

  • Debts you incurred through fraud, such as but not restricted to lying on a credit application, or bouncing a check.
  • Debts you incurred through certain crimes you committed, such as theft.
  • Debts caused by an intentional tort, such as: assault, libel, slander, trespassing, or intentional infliction of emotional distress (but not simple negligence)
  • Debts owed to a spouse ordered by a court in a settlement agreement or judgment.

Some debts, even if they are on this list, can still be discharged, but only in extreme situations; you effectively have to show that you cannot survive if you are still required to pay the debt. Since most of these creditors will allow you to continue paying over time, it’s an extremely hard threshold to clear.

Can I hide property?

This is a very bad idea. When you file bankruptcy, the trustee’s office will do a very extensive search of the public records throughout the United States (and some foreign countries as well!). If you fail to disclose a piece of property you own, and the trustee discovers it, he may have your petition kicked out for fraud, preventing you from gaining important bankruptcy protection in the future.

Meanwhile, all your creditors will be on alert that you’re in financial trouble, and will be rushing to get whatever they can from your assets. This is a bad situation to be in, so it is essential to be honest with the bankruptcy court, so you will be protected by the automatic stay and the discharge process.

Also note that changing the title to property will not protect it. For example, changing the title to your vacation home, boat, or other valuable property to be in your spouse’s name, or a relative or best friend, in the time right before filing bankruptcy will almost always be spotted by the trustee, and voided as a fraudulent transfer. You may sell such property, but you must get fair market value for the property, and be prepared to account for the money you received.

Can a creditor come after me after bankruptcy?

Technically, bankruptcy doesn’t really “erase” your debts. Bankruptcy is actually a permanent injunction against the enforcement of those debts. The difference is only theoretical in most contexts, but it has an important impact: If there was a co-debtor on your debt, that co-debtor is still on the hook for whatever is still owed.

A creditor who knowingly attempts to collect a debt that has been discharged in bankruptcy is, in effect, violating a court order. Continuing to do so after being informed of the bankruptcy violates federal law.

Note that creditors who hold non-discharged debts (debts you reaffirmed, debts that are not dischargeable at all, etc.) are perfectly entitled to collect as if you had not filed bankruptcy at all, so you must pay attention to which debt is being collected before taking aggressive action against such a creditor.

Also note that some debt collection agencies are actively trying to collect debts which they have no legal right to collect; debts barred by a statute of limitations, debts discharged in bankruptcy, et cetera.

Do not allow such debt collectors to intimidate you!

Federal law regulates how debt collectors can behave. In particular, they are not allowed to harass you, and must stop contacting you after you inform them to stop such contact. If they refuse to do so, they may be liable under federal law to pay you damages, plus pay your attorney’s fees for the action forcing them to stop.

Consult our office immediately for further instructions if you find yourself in this situation.

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