General Information About Bankruptcy
The following is an overview of some of the issues relating to consumer or small business Chapter 7 and Chapter 13 bankruptcies. It is solely for the purpose of giving the reader generalized information as to what most consumer bankruptcies are like and what is required of each individual filing bankruptcy.
If you are making an appointment for an initial free consultation, please either complete or at least review the questionnaire which we use in our office to draft a debtor’s bankruptcy. While it is not necessary that it be completed before you come in, the more you complete the better our office can advise you regarding your personal financial situation. Try to rough out your answers to at least the questions about your income and expenses, the total amount of your debt, and the nature and extent of your most recent loans or charges on your credit cards, particularly cash advances. While I can readily provide you with answer to your questions about bankruptcy in general, specific questions about your individual situation cannot be answered without the information about you contained in the questionnaire.
Chapter 7 vs. Chapter 13
The purpose of a Chapter 7 bankruptcy is to eliminate or discharge debts which you owed prior to filing. Some debts are not discharged in a bankruptcy and you would still owe them even after filing. Secured debts, such as mortgages or car payments, have to be paid even after the filing of a Chapter 7 if you intend to keep the property which secures the debt. A Chapter 13 bankruptcy is essentially a repayment plan; you make payments to a trustee who makes payments to your creditors. A Chapter 13 plan requires you to pay your creditors all or a portion of their claims within 36 to 60 months under court supervision. Once the plan is completed, dischargeable debts are eliminated, even if you did not pay all your creditors in full.
Chapter 13 bankruptcies are usually filed instead of a Chapter 7 when you are behind on your mortgages or car payments, when you need to pay non-dischargeable debts such as taxes, child support or maintenance, or when you have a temporary debt problem and you need protection while you realize income or when you need time to sell assets to pay your debts. While a Chapter 13 is supposed to not be as damaging on your credit report as a Chapter 7, it is my experience that debtors are usually better off financially filing a Chapter 7 and their credit reports are repaired more quickly with a Chapter 7. Every situation is different and it can change over time, so please see an attorney before deciding whether to file a Chapter 7 or a Chapter 13.
In the great majority of the consumer bankruptcies, all of your property is protected by exemptions, the word that is used in the Bankruptcy Code to mean the property that you are allowed to keep. Under a Chapter 13 bankruptcy, you may be allowed to retain assets that are not exempt, such as equity in your home in excess of the $40,000 homestead exemption. Information on the dollar amounts of exemptions can be found by clicking here.
For any type of bankruptcy you must file truthful and complete schedules of assets and liabilities, current income and expenses and a statement of financial affairs. There are no exceptions to this requirement. If you intentionally leave any requested information out of your documents you file with the court, you may loose your discharge of a specific debt or even be denied a discharge of any of your debt. Worse yet, you are subject to felony criminal prosecution. There is simply no valid reason to leave out any debt.
If your discharge is denied, your bankruptcy case may nevertheless continue and your non-exempt assets will be administered by the Chapter 7 Trustee. You will not be eligible to file a Chapter 7 bankruptcy again for six years and your creditors will be entitled to continue their collection efforts. Alternatively, the court may dismiss your case, and you may lose the benefit of the automatic stay and discharge.
Types of debt
Certain types of debts are not dischargeable in bankruptcy. Recent or ‘trust fund’ taxes, spousal maintenance (alimony), child support, and virtually all student loans are not dischargeable. These debts pass through the bankruptcy as if it had not occurred. People considering bankruptcy as an option should not make any attempt to determine for themselves which debts are dischargeable as even many taxes and other supposedly non-dischargeable debts are dischargeable in certain circumstances.
There are other types of debts which may only be discharged if the creditor to whom the debt is owed fails to commence litigation in order to determine the dischargeability of a debt. Debts incurred through fraud, embezzlement, theft or assault give rise to such debts. If a particular creditor holding such a claim files suit in the bankruptcy court within the time prescribed by the court, a trial will be held to determine whether or not the debt should be discharged. Student loans are now never dischargeable unless a relatively extreme ‘hardship’ is proven in trial by the person owing the student loan. Under Chapter 13, you may be able to discharge certain debts which would be non-dischargeable in Chapter 7. In many ways a Chapter 13 is more powerful than a Chapter 7.
A debt is ‘secured’ by property that you own if you give the creditor a right to take your property away if you do not pay that debt as agreed. House mortgages and car loans are the most common type of secured debt. While you are personally discharged from the obligation to pay a secured debt, if you wish to retain the property (called ‘collateral’) securing the debt, you must continue to pay the debt pursuant to its terms. If you do not wish to retain the secured property, you do not need to repay the debt and should make arrangements to return the property to the creditor. You may also want to ‘reaffirm’ a debt. Signing a reaffirmation document recommits you to paying that debt even after you receive a discharge in your bankruptcy. Unless there is some clear benefit to the debtor to sign a reaffirmation agreement, this law office’s practice is to not agree to a reaffirmation. In most situations there is no benefit to the debtor to sign the reaffirmation agreement.