Answers to Common Questions
Law Offices of
O. Max Gardner III,
P.C.
403 South Washington
Street
PO Box 1000
Shelby, North Carolina
28151
maxgardner@maxgardner.com
http://www.maxgardnerlaw.com
A decision to
file for bankruptcy should be made only after
determining that bankruptcy is the best way to deal with
your financial problems. This brochure can not explain
every aspect of the bankruptcy process. If you still
have questions after reading it, you should speak with
an attorney familiar with bankruptcy.
There have been many news reports suggesting
that changes to the bankruptcy law passed by Congress in
2005 prevent many individuals from filing bankruptcy. It
is true that these changes have made the process more
complicated. But the basic right to file bankruptcy and
most of the benefits of bankruptcy remain the same for
most individuals.
What Is Bankruptcy?
Bankruptcy is a legal proceeding in which a
person who can not pay his or her bills can get a fresh
financial start. 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 of your creditors from seeking to collect
debts from you, at least until your debts are sorted out
according to the law.
What Can Bankruptcy Do for Me?
Bankruptcy may make it possible for you to:
-
Eliminate the legal
obligation to pay most or all of your debts. This
is called a “discharge” of debts. It is designed to
give you a fresh financial start.
-
Stop foreclosure on
your house or mobile home and allow you an
opportunity to catch up on missed payments.
(Bankruptcy does not, however, automatically
eliminate mortgages and other liens on your property
without payment.)
-
Prevent repossession
of a car or other property, or force the creditor to
return property even after it has been repossessed.
-
Stop wage garnishment,
debt collection harassment, and similar creditor
actions to collect a debt.
-
Restore or prevent
termination of utility service
Allow you to challenge the claims of creditors who
have committed fraud or who are otherwise trying to
collect more than you really owe.
What Bankruptcy
Can Not Do
Bankruptcy can
not, however, cure every financial problem. Nor is it
the right step for every individual. In bankruptcy, it
is usually not possible to:
-
Eliminate certain
rights of “secured” creditors. A creditor is
“secured” if it has taken a mortgage or other lien
on property as collateral for a loan. Common
examples are car loans and home mortgages. You can
force secured creditors to take payments over time
in the bankruptcy process and bankruptcy can
eliminate your obligation to pay any additional
money on the debt if you decide to give back the
property. But you generally can not keep secured
property unless you continue to pay the debt.
-
Discharge types of
debts singled out by the bankruptcy law for special
treatment, such as child support, alimony, most
student loans, court restitution orders, criminal
fines, and most taxes.
-
Protect cosigners on
your debts. When a relative or friend has co-signed
a loan, and the consumer discharges the loan in
bankruptcy, the cosigner may still have to repay all
or part of the loan.
-
Discharge debts that
arise after bankruptcy has been filed.
What Different
Types of Bankruptcy Cases Should I Consider?
There are four types of bankruptcy cases provided under
the law:
-
Chapter 7 is
known as “straight” bankruptcy or “liquidation.” It
requires an individual to give up property which is
not “exempt” under the law, so the property can be
sold to pay creditors. Generally, those who file
chapter 7 keep all of their property except property
which is very valuable or which is subject to a lien
which they can not avoid or afford to pay.
-
Chapter 11,
known as “reorganization,” is used by businesses and
a few individuals whose debts are very large.
-
Chapter 12 is
reserved for family farmers and fishermen.
-
Chapter 13 is a
type of “reorganization” used by individuals to pay
all or a portion of their debts over a period of
years using their current income.
Most people filing
bankruptcy will want to file under either chapter 7 or
chapter 13. Either type of case may be filed
individually or by a married couple filing jointly.
Chapter 7 (Straight Bankruptcy)
In a bankruptcy case under chapter 7, you file
a petition asking the court to discharge your debts.
The basic idea in a chapter 7 bankruptcy is to wipe out
(discharge) your debts in exchange for your giving up
property, except for “exempt” property which the law
allows you to keep. In most cases, all of your property
will be exempt. But property which is not exempt is
sold, with the money distributed to creditors.
If you want to keep property like a home or a
car and are behind on the mortgage or car loan payments,
a chapter 7 case probably will not be the right choice
for you. That is because chapter 7 bankruptcy does not
eliminate the right of mortgage holders or car loan
creditors to take your property to cover your debt.
If your income is above the median family income in your
state, you may have to file a chapter 13 case (the
national median family income for a family of 4 in 2006
was approximately $65,796 – your state’s figures may be
higher or lower). Higher-income consumers must fill out
“means test” forms requiring detailed information about
their income and expenses. If the forms show, based on
standards in the law, that they have a certain amount
left over that could be paid to unsecured creditors, the
bankruptcy court may decide that they can not file a
chapter 7 case, unless there are special extenuating
circumstances.
Chapter 13 (Reorganization)
In a chapter 13 case you file a “plan” showing
how you will pay off some of your past-due and current
debts over three to five years. The most important
thing about a chapter 13 case is that it will allow you
to keep valuable property--especially your home and
car--which might otherwise be lost, if you can make the
payments which the bankruptcy law requires to be made to
your creditors. In most cases, these payments will be
at least as much as your regular monthly payments on
your mortgage or car loan, with some extra payment to
get caught up on the amount you have fallen behind.
You should consider filing a chapter 13 plan
if you:
-
own your home and are
in danger of losing it because of money problems;
-
are behind on debt
payments, but can catch up if given some time;
-
have valuable property
which is not exempt, but you can afford to pay
creditors from your income over time.
You
will need to have enough income in chapter 13 to pay for
your necessities and to keep up with the required
payments as they come due.
What Does It Cost to File for Bankruptcy?
It now costs $299 to file for bankruptcy under
chapter 7 and $274 to file for bankruptcy under chapter
13, whether for one person or a married couple. The
court may allow you to pay this filing fee in
installments if you can not pay all at once. If you hire
an attorney you will also have to pay the attorney’s
fees you agree to.
If you are unable to pay the filing fee in
installments in a chapter 7 case, and your household
income is less than 150 percent of the official poverty
guidelines (for example, the figures for 2006 are
$19,800 for a family of 2 and $30,000 for a family of
4), you may request that the court waive the chapter 7
filing fee. The filing fee can not be waived in a
chapter 13 case, but it can be paid in installments.
What Must I Do Before Filing Bankruptcy?
You must receive budget and credit counseling
from an approved credit counseling agency within 180
days before your bankruptcy case is filed. The agency
will review possible options available to you in credit
counseling and assist you in reviewing your budget.
Different agencies provide the counseling in-person, by
telephone, or over the Internet. If you decide to file
bankruptcy, you must have a certificate from the agency
showing that you received the counseling before your
bankruptcy case was filed.
Most approved agencies charge between $30-$50
for the pre-filing counseling. However, the law requires
approved agencies to provide bankruptcy counseling and
the necessary certificates without considering an
individual’s ability to pay. If you cannot afford the
fee, you should ask the agency to provide the counseling
free of charge or at a reduced fee.
If you decide to go ahead with bankruptcy, you
should be very careful in choosing an agency for the
required counseling. It is extremely difficult to sort
out the good counseling agencies from the bad ones. Many
agencies are legitimate, but many are simply rip-offs.
And being an “approved” agency for bankruptcy counseling
is no guarantee that the agency is good. It is also
important to understand that even good agencies won’t be
able to help you much if you’re already too deep in
financial trouble.
Some of the approved agencies offer debt
management plans (also called DMPs). This is a plan to
repay some or all of your debts in which you send the
counseling agency a monthly payment that it then
distributes to your creditors. Debt management plans can
be helpful for some consumers. For others, they are a
terrible idea. The problem is that many counseling
agencies will pressure you into a debt management plan
as a way of avoiding bankruptcy whether it makes sense
for you or not. It is important to keep in mind these
important points:
-
bankruptcy is not
necessarily to be avoided at all costs. In many
cases, bankruptcy may actually be the best choice
for you;
-
if you sign up for a
debt management plan that you can’t afford, you may
end up in bankruptcy anyway (and a copy of the plan
must also be filed in your bankruptcy case);
-
there are approved
agencies for bankruptcy counseling that do not offer
debt management plans.
It is usually a
good idea for you to meet with an attorney before you
receive the required credit counseling. Unlike a credit
counselor, who can not give legal advice, an attorney
can provide counseling on whether bankruptcy is the best
option. If bankruptcy is not the right answer for you, a
good attorney will offer a range of other suggestions.
The attorney can also provide you with a list of
approved credit counseling agencies, or you can check
the website for the United States Trustee Program office
at www.usdoj.gov/ust.
What Property Can I
Keep?
In a chapter 7 case, you can keep all property
which the law says is “exempt” from the claims of
creditors. It is important to check the exemptions that
are available in the state where you live. (If you moved
to your current state from a different state within two
years of your bankruptcy filing, you may be required to
use the exemptions from the state where you lived just
before the two-year period.). In some states, you are
given a choice when you file bankruptcy between using
either the state exemptions or using the federal
bankruptcy exemptions. If your state has “opted” out of
the federal bankruptcy exemptions, you will be required
to choose exemptions mostly under your state law.
However, even in an “opt-out” state, you may use a
special federal bankruptcy exemption that protects
retirement funds in pension plans and IRAs.
If you are allowed to use the federal bankruptcy
exemptions, they include:
-
$18,450 in equity in
your home;
-
$2,950 in equity in
your car;
-
$475 per item in any
household goods up to a total of $9,850;
-
$1,850 in things you
need for your job (tools, books, etc.);
-
$975 in any property,
plus part of the unused exemption in your home, up
to $9,250;
-
Your right to receive
certain benefits such as social security,
unemployment compensation, veteran’s benefits,
public assistance, and pensions--regardless of the
amount.
The amounts of the
exemptions are doubled when a married couple files
together. Again, you may be required to use state
exemptions which may be more or less generous than the
federal exemptions.
In determining
whether property is exempt, you must keep a few things
in mind. The value of property is not the amount you
paid for it, but what it is worth when your bankruptcy
case is filed. Especially for furniture and cars, this
may be a lot less than what you paid or what it would
cost to buy a replacement.
You also only need to look at your equity in
property. This means that you count your exemptions
against the full value minus any money that you owe on
mortgages or liens. For example, if you own a $50,000
house with a $40,000 mortgage, you have only $10,000 in
equity. You can fully protect the $50,000 home with a
$10,000 exemption.
While your exemptions allow you to keep
property even in a chapter 7 case, your exemptions do
not make any difference to the right of a mortgage
holder or car loan creditor to take the property to
cover the debt if you are behind. In a chapter 13 case,
you can keep all of your property if your plan meets the
requirements of the bankruptcy law. In most cases you
will have to pay the mortgages or liens as you would if
you didn’t file bankruptcy.
What Will Happen to
My Home and Car If I File Bankruptcy?
In most cases you will not lose your home or
car during your bankruptcy case as long as your equity
in the property is fully exempt. Even if your property
is not fully exempt, you will be able to keep it, if you
pay its non-exempt value to creditors in chapter 13.
However, some of your creditors may have a
“security interest” in your home, automobile or other
personal property. This means that you gave that
creditor a mortgage on the home or put your other
property up as collateral for the debt. Bankruptcy does
not make these security interests go away. If you don’t
make your payments on that debt, the creditor may be
able to take and sell the home or the property, during
or after the bankruptcy case.
In a chapter 13 case, you may be able to keep
certain secured property by paying the value of the
property rather than the full amount owed on the debt.
Or you can use chapter 13 to catch up on back payments
and get current on the loan.
There are also several ways that you can keep
collateral or mortgaged property after you file a
chapter 7 bankruptcy. You can agree to keep making your
payments on the debt until it is paid in full. Or you
can pay the creditor the amount that the property you
want to keep is worth. In some cases involving fraud or
other improper conduct by the creditor, you may be able
to challenge the debt. If you put up your household
goods as collateral for a loan (other than a loan to
purchase the goods), you can usually keep your property
without making any more payments on that debt.
Can I Own Anything
After Bankruptcy?
Yes! Many people believe they can not own
anything for a period of time after filing for
bankruptcy. This is not true. You can keep your exempt
property and anything you obtain after the bankruptcy is
filed. However, if you receive an inheritance, a
property settlement, or life insurance benefits within
180 days after filing for bankruptcy, that money or
property may have to be paid to your creditors if the
property or money is not exempt.
Will Bankruptcy Wipe Out All My Debts?
Yes, with some exceptions. Bankruptcy will not normally
wipe out:
-
money owed for child
support or alimony;
-
most fines and
penalties owed to government agencies;
-
most taxes and debts
incurred to pay taxes which can not be discharged;
-
student loans unless
you can prove to the court that repaying them will
be an “undue hardship;”
-
debts not listed on
your bankruptcy petition;
-
loans you got by
knowingly giving false information to a creditor,
who reasonably relied on it in making you the loan;
-
debts resulting from
“willful and malicious” harm;
-
debts incurred by
driving while intoxicated;
-
mortgages and other
liens which are not paid in the bankruptcy case (but
bankruptcy will wipe out your obligation to pay any
additional money if the property is sold by the
creditor).
Will I Have to Go to
Court?
In most bankruptcy cases, you only have to go
to a proceeding called the “meeting of creditors” to
meet with the bankruptcy trustee and any creditor who
chooses to come. Most of the time, this meeting will be
a short and simple procedure where you are asked a few
questions about your bankruptcy forms and your financial
situation.
Occasionally, if complications arise, or if you
choose to dispute a debt, you may have to appear before
a judge at a hearing. If you need to go to court, you
will receive notice of the court date and time from the
court and/or from your attorney.
What Else Must I Do to Complete My Case?
After your case is filed, you must complete an
approved course in personal finances. This course will
take approximately two hours to complete. Many of the
course providers give you a choice to take the course
in-person at a designated location, over the Internet
usually by watching a video, or over the telephone. Your
attorney can give you a list of organizations that
provide approved courses, or you can check the website
for the United States Trustee office at www.usdoj.gov/ust/.
If you can not afford the fee, you should ask the agency
to provide the course free of charge or at a reduced
fee. In a chapter 7 case, you should sign up for the
course soon after your case is filed. If you file a
chapter 13 case, you should ask your attorney when you
should take the course.
Will Bankruptcy Affect My Credit?
There is no clear answer to this question.
Unfortunately, if you are behind on your bills, your
credit may already be bad. Bankruptcy will probably not
make things any worse.
The fact that you’ve filed a bankruptcy can
appear on your credit record for ten years from the date
your case was filed. But because bankruptcy wipes out
your old debts, you are likely to be in a better
position to pay your current bills, and you may be able
to get new credit.
If you decide to file bankruptcy, remember that
debts discharged in your bankruptcy should be listed on
your report as having a zero balance, meaning you
do not owe anything on the debt. Debts incorrectly
reported as having a balance owed will negatively affect
your credit score and make it more difficult or costly
to get credit. You should check your credit report after
your bankruptcy discharge and file a dispute with credit
reporting agencies if this information is not correct.
What Else Should I
Know?
Utility services--Public utilities, such
as the electric company, can not refuse or cut off
service because you have filed for bankruptcy. However,
the utility can require a deposit for future service and
you do have to pay bills which arise after bankruptcy is
filed.
Discrimination--An employer or
government agency can not discriminate against you
because you have filed for bankruptcy. Government
agencies and private entities involved in student loan
programs also can not discriminate against you based on
a bankruptcy filing.
Driver’s license--If you lost your
license solely because you couldn’t pay court-ordered
damages caused in an accident, bankruptcy will allow you
to get your license back.
Co-signers--If someone has co-signed a
loan with you and you file for bankruptcy, the co-signer
may have to pay your debt. If you file a chapter 13, you
may be able to protect co-signers, depending upon the
terms of your chapter 13 plan.
How Do I Find a
Bankruptcy Attorney?
As with any area of the law, it is important to
carefully select an attorney who will respond to your
personal situation. The attorney should not be too busy
to meet you individually and to answer questions as
necessary.
The best way to find a trustworthy bankruptcy attorney
is to seek recommendations from family, friends or other
members of the community, especially any attorney you
know and respect. You should carefully read retainers
and other documents the attorney asks you to sign. You
should not hire an attorney unless he or she agrees to
represent you throughout the case.
In bankruptcy, as in all areas of life, remember that
the person advertising the cheapest rate is not
necessarily the best. Many of the best bankruptcy
lawyers do not advertise at all.
Document preparation services also known as “typing
services” or “paralegal services” involve non-lawyers
who offer to prepare bankruptcy forms for a fee.
Problems with these services often arise because
non-lawyers can not offer advice on difficult bankruptcy
cases and they offer no services once a bankruptcy case
has begun. There are also many shady operators in this
field, who give bad advice and defraud consumers.
When first meeting a bankruptcy attorney, you should be
prepared to answer the following questions:
-
What types of debt are
causing you the most trouble?
-
What are your
significant assets?
-
How did your debts
arise and are they secured?
-
Is
any action about to occur to foreclose or repossess
property, to attach your wages or bank account, or
to shut off utility service?
-
What are your goals in
filing the case?
Can I File
Bankruptcy Without an Attorney?
Although it may be possible for some people to file a
bankruptcy case without an attorney, it is not a step to
be taken lightly. The process is difficult and you may
lose property or other rights if you do not know the
law. It takes patience and careful preparation. Chapter
7 (straight bankruptcy) cases are somewhat easier. Very
few people have been able to successfully file chapter
13 (debt adjustment) cases on their own.
Remember: The law often changes. Each case is
different. This pamphlet is meant to give you general
information and not to give you specific legal advice.
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