Bankruptcy FAQ

How do I know what chapter of bankruptcy to file?

This depends on several factors, including what type of debts you have, your assets, your income level and whether you are behind on your payments to secured creditors.

If you are behind on your house or car payments and wish to retain those assets, or have substantial equity in your home, you will definitely want to consider Chapter 13.

If your assets are minimal, your income is below the median and you either have no secured debt or are current with the ones you wish to keep, Chapter 7 may be the way to go.

Every situation is different, however, so you should consult with a bankruptcy attorney before deciding which chapter to file under.

If I am married, does my spouse have to file with me?

No. Keep in mind, however, that only the person filing for bankruptcy gets the benefit of the automatic stay and the discharge. So if you and your spouse have joint debts and only you file bankruptcy, then those creditors will still be able to pursue your spouse for collection, unless you file for Chapter 13 and propose in your plan to pay those joint debts in full.

Being married, however, does not necessarily make one obligated for the debts of the spouse. Nor does merely being an authorized user on a credit card make that person personally liable. Only the person who signed the loan documents or credit application is liable for the debt.

Make sure to carefully check your documents to see who in fact signed them. One exception to this is taxes. Filing a joint tax return makes both spouses liable for the tax, regardless of whose tax it is.

If you and your spouse own property jointly, that property may be subject to liquidation in the rare case where the property is not fully exempt.

As far as your credit reports, you and your spouse each have a separate file and credit score, so your bankruptcy filing by itself should not appear on your spouse's credit report. However, in the case of joint debts, there is some uncertainty at the present time as to whether it is lawful to report the bankruptcy of one debtor on the credit report of the spouse who is not in bankruptcy. Some judges consider that to be an attempt to collect the debt and a violation of the automatic stay, while others do not.

As far as future credit, the bankruptcy of one spouse will have some effect on the ability of the non-filing spouse to obtain credit in the future if credit is applied for jointly. Otherwise, it should not.

How do I get started with filing bankruptcy?

If you are considering filing for bankruptcy, there are several things you should do:

  1. Gather all of your bills, collection letters, and other evidence of debt.
  2. Prepare a household budget for yourself.
  3. Obtain copies of your pay stubs for the last six months.
  4. Obtain copies of your tax returns for the last two years. If you cannot locate them, order a transcript from the IRS.
  5. Obtain copies of your bank statements for the past six months.
  6. Obtain copies of deeds, mortgages and titles to property you own.
  7. Stop using your credit cards.
  8. Obtain a credit report from www.annualcreditreport.com. This is a government site that allows you to obtain all three credit reports for free once per year. This is not to be confused with freecreditreport.com, which is not very useful.

Once you have gathered this documentation, make an appointment with a bankruptcy attorney like Richard Schwartz for a free consultation.

Can my bankruptcy be denied?

Although it is quite rare, there are some situations where your case can be dismissed or your discharge denied.

One way that your case can be thrown out is if you provide false or misleading information on your bankruptcy schedules. Examples of that would be a failure to list valuable assets, such as real estate, automobiles, inheritances, or personal injury claims.

Transferring assets out of your name shortly before filing bankruptcy or excessive "running up of debt," two common mistakes made prior to filing for bankruptcy, can also result in your case being dismissed or your discharge denied.

Your bankruptcy can also be dismissed as an "abuse" if you make too much money. The bankruptcy code has a means test for determining whether someone filing bankruptcy will be allowed to file Chapter 7. This means test is applicable to anyone filing bankruptcy whose debts are primarily consumer debts.

Traditional and non-traditional households alike must take the means test to determine bankruptcy eligibility.

Will I lose my house if I file bankruptcy?

Most people who file for bankruptcy are able to retain their house. There are, however, two ways that you can lose your house when you file bankruptcy in Kentucky or Indiana:

  • If you fail to make your mortgage payments. This is no different than if you had not filed bankruptcy. Failure to make your mortgage payments will result in the mortgage company starting a foreclosure process against you which will ultimately result in the sale of your house through a courthouse auction. Although a Chapter 7 bankruptcy filing will temporarily delay that process as a result of the automatic stay, once this form of bankruptcy is complete (after approximately three to four months), the creditor can start the foreclosure process or re-start it if it has been stayed.
  • If you have too much equity. Equity is what you would get for your house if you sold it, after paying off the mortgage, and any other debt against it, such as tax liens. If you file Chapter 7, you are only allowed a certain amount of equity that you can have in your house and still keep it. The amount that you are allowed is called your "homestead exemption." The amount varies by state. In Kentucky, it is $22,975 per person. In Indiana, it is $19,300 per person. If you own the house with your spouse, each of you is entitled to that amount of exemption.

If your equity exceeds those amounts, then the Chapter 7 bankruptcy trustee will sell your house and pay the excess equity to your creditors, after taking a fee for himself. Many people filing for bankruptcy do not have a lot of equity in their house, which means that if they are current on their payments, then their house is safe. Keep in mind, Chapter 7 bankruptcy is a liquidation proceeding, so there is a limit to what you can keep. If your equity exceeds those amounts, you should consider Chapter 13.

If you are not current on your mortgage payment or your equity exceeds the amounts listed above, then you should consider filing a Chapter 13 bankruptcy petition. This will allow you to keep your house even if you are not current with the payments, so long as you have the ability to resume payments after you file. Also, with Chapter 13, your property is not subject to liquidation.

Will I lose any property if I file for bankruptcy?

For the vast majority of people who file for bankruptcy, the answer is no. Although Chapter 7 bankruptcy is technically a "liquidation" proceeding, the availability of state and federal exemptions in Indiana and Kentucky allow most people to retain all or most of their property during the bankruptcy process.

If you have more property than the law allows in exemptions, then Chapter 13 may be an option. Automatic stays enforced during a bankruptcy case can also stop things like car repossession as well.

Will I lose my retirement account if I file bankruptcy?

No. Virtually all retirement accounts are exempt, regardless of value, which means that the bankruptcy trustee does not have a right to liquidate them on behalf of your creditors.

Some states, like Indiana, limit the exemption to retirement accounts that are funded with pre-tax dollars.

Will filing bankruptcy stop a wage garnishment?

Other than child support payments, the answer is yes.

Once your case is filed, creditors are prohibited from taking any legal action against you to collect debt, including wage garnishments. In fact, once they receive notice of the bankruptcy, creditors and their attorneys have an affirmative duty to take action to stop any legal action that began before the bankruptcy, including wage garnishments.

If a creditor has garnished more than $600.00 within 90 days prior to bankruptcy, you may even be able to get some of that money back after you file.

Will bankruptcy help me with my taxes?

It might. Income taxes that are over three years old may in some circumstances be able to be discharged in Chapter 7 bankruptcy. If they are not dischargeable in Chapter 7, they can probably be restructured in Chapter 13. There are very specific rules that address taxes in bankruptcy; so if you have a tax issue, consult with a bankruptcy attorney from Schwartz Bankruptcy Law Center to find out what your rights are.

If you have older taxes that may be subject to discharge, it will be very useful to obtain an "account transcript" from the IRS for the years in question.

Does filing bankruptcy result in increased taxes?

No. For most individuals, there is absolutely no tax consequence from filing bankruptcy.

The Internal Revenue Code specifically excludes the discharge of debt in bankruptcy from its definition of cancellation of debt income. This is a big benefit of filing bankruptcy. As opposed to working with a debt settlement company, that may ruin your credit further because they can cause you to have huge tax liabilities for debt forgiveness.

In the rare case where the trustee has non-exempt property to sell, the debtor's tax attributes, such as loss carry forwards, will pass to the bankruptcy estate and may be used by the trustee in the administration of the estate. If you have a complex tax situation, you should seek advice from a tax advisor before filing for bankruptcy.

Are there some debts that cannot be eliminated in bankruptcy?

Although most debts are able to be discharged in bankruptcy, there are a few that will survive. Some of the most common non-dischargeable debts are:

  • Student loans (regardless of whether they are government or private loans)
  • Alimony, spousal maintenance and child support
  • Debts arising from fraud or other wrongful conduct
  • Trust fund taxes (i.e. sales tax, payroll taxes)
  • Some income taxes
  • Debts (other than support) arising out of a divorce or property settlement agreement (non-dischargeable in Chapter 7 only).

Do I have to list all of my creditors or can I leave some out?

When you file for bankruptcy, you must list all of your debts, even those you still intend to pay. There is nothing, however, that says you can't pay a debt just because you have listed it in the bankruptcy. This is called "reaffirming."

In fact, if a debt is secured by some property that you wish to keep, then you may have to reaffirm the debt in order to avoid having the creditor repossess the collateral. You may also wish to reaffirm debts that are co-signed in order to protect the co-signor from collection. If a debt is not co-signed and there is collateral securing it, then it generally does not make sense to pay it if it can be discharged.

Will the trustee come to my house?

This almost never happens. The trustee generally relies on the information listed in your schedules.

However, the trustee will sometimes check land and motor vehicle records to make sure that you do not have any property in your name that is not listed in the schedules. The trustee may also review your homeowner's policy to see if there are any assets, like jewelry, that are separately insured but not listed on your bankruptcy schedules.

What happens when I go to court?

Everyone who files for bankruptcy must appear in court one time for what is called a "meeting of creditors."

The court will schedule and notify you about the meeting of creditors about 30-45 days after your case is filed. Although the meeting takes place at the bankruptcy court, it is not a court proceeding. It is simply a meeting presided over by a trustee who will ask you questions as may creditors who may also appear. Occasionally, the trustee will ask you to provide more documentation.

Unless you have a particularly complex case, the meeting generally takes just a few minutes and you may have a bankruptcy attorney present.

Here are some typical questions the trustee may ask:

  • Did you list all of your assets and debts in the schedules?
  • Are the schedules accurate?
  • Are you personally familiar with the information contained in the bankruptcy schedules?
  • Are you aware that there are other chapters of the Bankruptcy Code that you can file under?
  • Are you aware of the consequences of filing bankruptcy, particularly the effect it may have on future credit?
  • Are you reaffirming any debts in this bankruptcy and if so, are you aware that reaffirming a debt means that you will remain legally obligated on that debt?
  • Have you filed all of your tax returns?
  • Do you owe alimony, maintenance or child support? Are you current with your payments?
  • Have you transferred any property out of your name in the last two years?
  • Have you paid back any loans or transferred any property to family members?
  • Have you paid any creditor more than the regular monthly payment in the last 90 days?

If you own real estate or other valuable assets, the trustee may also ask how you arrived at the values of those assets.

Will I be able to get credit after bankruptcy?

Obtaining credit after bankruptcy is much easier than many people would lead you to believe. For those with poor credit, filing for bankruptcy may actually improve one's credit as soon as the discharge is received. The reason is that by eliminating your debt through bankruptcy, the balances are then reduced to zero on your credit report.

Although a bankruptcy filing will stay on your credit report for some time, even the most stringent lenders will generally extend credit to someone who has filed for bankruptcy.

For example, FHA and VA mortgage loans are available to individuals who have filed bankruptcy in two short years after their discharge.

How many times can one file for bankruptcy?

This depends on the type of bankruptcy you file for.

A Chapter 7 bankruptcy petition:

  • Can only be filed once every eight years. The eight years starts from the filing date, not the discharge date.
  • Can be filed anytime after the completion of a Chapter 13 case, unless the unsecured creditors in the Chapter 13 case received less than 70 percent of their claims, in which case there is a six year waiting period.

A Chapter 13 bankruptcy petition:

  • Can be filed anytime after the completion of a Chapter 7 case. Although, if it is filed less than four years after the Chapter 7 filing, the debtor will not be eligible for a discharge at the end of the case.
  • An additional Chapter 13 bankruptcy petition can be filed at anytime after the completion of a Chapter 13 case, unless the case lasted less than two years, in which case the debtor would have to wait until the two years is up.

All of these scenarios assume that the first case was completed and discharged. If the first case was dismissed, as opposed to discharged, then there is no time bar to re-filing, except in certain situations.

If you have had a case dismissed within the last year, there may be some issues with re-filing, depending on the circumstances. If you have this situation, contact our firm, Schwartz Bankruptcy Law Center, to schedule a free initial consultation and discuss your situation and debt-relief options.