demystifying debt

What is bankruptcy?

Bankruptcy is a legal proceeding typically initiated by a person or business that is unable to repay debts owed to creditors. The person or business initiating the bankruptcy is called a Debtor and they file said bankruptcy seeking court-ordered relief from some or all of their debts. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court. Filing bankruptcy immediately stops all your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law.

Who can file for bankruptcy?

With few exceptions, any person or sole proprietor business owner that owes money to creditors can file a bankruptcy. Debtors are eligible for a bankruptcy discharge every 8 years. A bankruptcy discharge will eliminate all the debtor’s unsecured debts, like credit card debt, medical bills and unsecured personal loans.

What documents/information do I need to file bankruptcy

A bankruptcy attorney usually needs the following documents/information to draft your bankruptcy petition:

1. A recent credit report
2. Your last 6-12 months of bank statements
3. Your most recent mortgage statement(s)
4. Your pay-stubs/proof of income for any/all income received during the last 6 months
5. Your spouse’s pay stubs/proof of income for the same period
6. A copy of your federal tax returns for the last 2-3 years
7. Your most recent 401 K and/or pension statement(s)
8. Your most recent life insurance policy statement(s)
9. A copy of your current auto insurance binder
10. A copy of your current property insurance binder for any/all real property owned by you
11. A broker’s price opinion on the value of any/all real property owned by you

Do I need to take a course before I file for bankruptcy?

In most cases, you must get credit counseling within 180 days before filing for bankruptcy protection with an approved provider. Additionally, you must complete an educational course on financial management before you are eligible to have your debts discharged. The bankruptcy counseling and financial management course requirements were enacted to ensure that consumers have exhausted all other options, and to reduce the likelihood of a second visit to bankruptcy court. Your attorney will provide you with a list of approved credit counseling and financial management course providers.

Your pre-bankruptcy counseling course must be taken within 180 days before filing for bankruptcy protection. The course should, at the very least, cover the following topics:

• A thorough review of your personal finances;
• A discussion of bankruptcy alternatives; and
• A personal budget plan.

Credit counseling sessions usually last roughly an hour or so and may be done online, over the telephone, or in-person. If you can’t afford to pay for its services, you may request a fee waiver before the session starts. Credit counseling organizations are required to provide free services to those who can’t afford it. Credit counseling providers typically charge between $10-$35 for their services.

After completing the credit counseling course, the provider will supply you with a certificate. You must file this certificate with the court to show that you completed the course requirement.

Before you have your debts discharged, you are required to complete a financial management course with an approved provider. These courses usually cover the following topics:

• Developing a budget;
• Using credit responsibly; and
• Money management.

As with pre-bankruptcy credit counseling, you may attend the financial management courses in person, over the telephone, or online. These classes usually take about two hours to complete and cost between $10 and $35, but the fee may be waived if you can’t afford it. Also, as with pre-bankruptcy counseling, you will receive a certificate when you complete the course and you are required to file the certificate with the court in a timely manner.

What Chapter of bankruptcy should I file?

Once you’ve determined that bankruptcy is the best fit for you, you need to decide what chapter of bankruptcy to file. This really depends on your goal. Are you trying to save your home from foreclosure or a car from repossession? Then, maybe a Chapter 13 bankruptcy is the answer. Or, are you trying to get rid some of unsecured creditors (credit cards, medical bills, unsecured personal loans, etc…). Then, a Chapter 7 bankruptcy would likely be your best option.

When we meet, we can review the pro and cons of each chapter, the eligibility rules and provide you with some basic information on the bankruptcy process.

What’s the difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy?

Most consumers file either a Chapter 7 or a Chapter 13 bankruptcy. To determine which chapter is the best fit for you, we must evaluate your financial goals, your current income and monthly expenses, and your assets. After reviewing these factors, we can decide the best course of action for you. 

Chapter 7 Bankruptcy

Chapter 7 allows consumers to eliminate most, if not all, of their general unsecured debts. General unsecured debts are typically credit card debt, medical bills and unsecured personal loans. Not all consumers qualify for Chapter 7 protection though. To qualify, we must evaluate your present level of income and your monthly expenses and determine that you have little to no disposable income. In other words, you have no additional funds left over after you’ve paid all your monthly bills. If you have disposable income, you may have to file a Chapter 13 bankruptcy.

After you file a Chapter 7, the Court will appoint a trustee to oversee your case. The trustee’s job is review your bankruptcy petition and supporting documents and to liquidate any non-exempt assets and use those funds to pay your creditors. Typically, all your assets are protected by exemptions, but some assets can be exposed in the bankruptcy. For example, if you own a car with no lien on it and the car has a Kelley Blue Book value of $10,000 and we use the Federal automobile exemption of $3,775, $6,225 may be exposed in the bankruptcy. In this case, the trustee can sell your car and use up to $6,225 to pay some or all your creditors. Conversely, if you have no non-exempt assets, your creditors receive nothing. Consequently, it is very important to evaluate your assets to determine whether or not they are covered by an exemption before filing for bankruptcy.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy allows debtors with sufficient disposable income to reorganize their debt through a 3-5 years payment plan. The payment plan is usually beneficial to Debtors who are trying to save their home from foreclosure or a car from repossession, because it enables them to catch up on their missed mortgage and/or car payments over a 36-60 month period. If the Debtor is able to make the Chapter 13 plan payments and also make timely monthly mortgage and/or car payments, they get to keep their house and/or car. So, you can stop the foreclosure or repossession by filing a bankruptcy and you do not have to pay the full balance owed to the creditor up-front. 

Please note that you can also temporarily stop a foreclosure auction by filing a Chapter 7 bankruptcy. However, you are likely just delaying the inevitable foreclosure, because, unlike Chapter 13, Chapter 7 does not allow you to catch up on missed mortgage and the court cannot make your mortgage company work out a repayment plan with you.

Additional benefits of filing a Chapter 13 bankruptcy include:

• In Chapter 13, you get to keep all your assets, including your non-exempt assets.
• In some cases, you can also eliminate a second mortgage or home equity line on your home. 
• You may be able to avoid further tax liens or levies when you include your IRS debt in Chapter 13 plan. Although most tax debt is not dischargeable in bankruptcy, you do get an “automatic stay” from all your creditors, even the IRS, after you file bankruptcy. The automatic stay prohibits your creditors from continuing to pursue any/all collection efforts against you or your assets once the bankruptcy is filed unless they get an order from the Bankruptcy Court. Consequently, you can pay off your tax debt through the Chapter 13 payment plan without worrying about the IRS attaching your bank account.

What type of debts are discharged in bankruptcy and what debts or not dischargeable?

The bankruptcy court will issue a discharge order at the end of your bankruptcy case. The discharge order eliminates your legal obligation to pay any/all debts that are eligible for a discharge in your bankruptcy.

The following debts are dischargeable:

• Credit card debts
• Medical bills
• Lawsuit judgment
• Unsecured personal loans
• Obligations under a lease or a contract
• Any unsecured debt

Once the debt is discharge, a creditor is barred by law from taking any further action against you to collect on the discharged debt. In other words, the creditor can no longer contact you, send threatening letters, or sue you to collect on the debt. The debt is for all intents and purposes forgiven.

Please note that secured debts, like your mortgage and car payment, are not dischargeable in bankruptcy unless you want to surrender the collateral (i.e., your house or car) to the creditor. So, you cannot eliminate your mortgage in your bankruptcy unless you want to give your house back to the bank. 

Not all debts are dischargeable in bankruptcy. Like secured debts, the following debts are not dischargeable:

• Alimony and child support obligations
• Debts and certain fines, penalties and restitution resulting from criminal activity
• With few exceptions, most tax debt
• Court costs
• Debts from a DUI
• Retirement plan loans
• With few exceptions, most student loan obligations
• Any debts you failed to list in your bankruptcy petition

How long does it take to get a discharge?

Chapter 7 debtors typically receive a discharge from the court about four months after the case is filed and Chapter 13 debtors are eligible for a discharge after they have made all their Chapter 13 plan payments, which typically takes three to five years.

Please note that if you fail to complete your financial management course in a timely manner, the court can deny your discharge and dismiss your case. If you complete the course after your case is dismissed, your attorney can file a motion to reopen the case and file your course completion certificate. You will ultimately receive your discharge, but it will cost you more money to do so. The court charges $235 to reopen a Chapter 13 case and $260 to reopen a Chapter 7and your attorney may also charge you an additional fee for his services.

Once your debts have been discharged, a copy of the discharge order will be mailed to all your creditors, the U.S. trustee, and the trustee in your bankruptcy case. This order includes a notice informing creditors that they cannot attempt to collect on the debts or else they face punishment for contempt. Make sure you keep a copy of the order of discharge along with all the other bankruptcy paperwork, so you don’t have to pay to get a copy later on. You can use a copy of these papers to correct credit report issues or deal with creditors who try to collect from you after the bankruptcy discharge.

If any creditor tries to collect a discharged debt from you, you can file a motion with the court and have the case reopened. The creditor can be fined if the court finds that the creditor violated the discharge injunction. Before going that route, try sending a copy of your order of discharge to stop collection activity and if that doesn’t work, talk to a bankruptcy attorney about taking legal action.