If you are struggling with debt and considering bankruptcy, you probably have questions. You have every right to get clear answers to each of your questions before moving forward with the bankruptcy process. Below, we have provided answers to some of the most frequently asked questions.
Bankruptcy is the legal method for a debtor to discharge or relieve debt. Bankruptcy is a way for people or businesses that owe more money than they can pay to either work out a plan to repay the money over time or to have their debt wiped out. While no debtor is guaranteed a total discharge, most debtors who file for bankruptcy are given such relief.
One of the primary purposes of the bankruptcy code is to relieve the honest debtor from the weight of oppressive indebtedness and to provide the debtor with a fresh start. A bankruptcy case is initiated by the filing of a petition for relief. Once the petition is filed, an automatic stay goes into effect preventing creditors from taking any collection action against the debtor, including harassing phone calls, collection letters, lawsuits and wage garnishments.
Any person, partnership or corporation may file bankruptcy, although Chapter 13 bankruptcy is limited to individual debtors.
In a Chapter 7 bankruptcy, most debts can be eliminated, including credit cards, medical bills, personal loans, repossession debt and most judgments. The types of debts that cannot be eliminated in Chapter 7 include student loans, child support, fraud, certain taxes and certain debts arising from personal injury to others.
Although most debts are able to be discharged in bankruptcy, there are a few that will survive. Some of the most common nondischargeable debts are:
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.
Every case is different. In some situations, loss of the home is a possibility. However, this is rare, and most people are able to keep their house.
Probably not. Each state has laws that determine which items or property is exempt from being taken away. Most people who file bankruptcy do not lose those items, but it depends on their value and the exemptions allowed in the state in which you 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 pretax dollars.
Yes. However, most individuals are able to rebuild their credit within a few years. If you are currently contemplating bankruptcy, then it is likely that your current credit rating has already been affected. A discharge of your current debt may provide the opportunity to rebuild your credit with steady, regular payments on a new account.
The Fair Credit Report Act, 6 U.S.C. Section 605, is the law that controls credit reporting agencies. The law states that credit reporting agencies may not report a bankruptcy case on a person’s credit report after 10 years from the date the bankruptcy case is filed. Other bad credit information is removed after seven years.
The larger credit reporting agencies belong to an organization called the Associated Credit Bureaus. The policy of the Associated Credit Bureaus is to remove Chapter 13 cases from the credit report after seven years to encourage debtors to file under this chapter.
As soon as you file for bankruptcy, creditors must stop calling.
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.
No. Filing bankruptcy jointly is not required simply because you are married. However, only the person filing the bankruptcy will get the protection of the automatic stay. So if you and your spouse have significant joint debts, it probably makes sense for both to file.
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 and 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 nontraditional households alike must take the means test to determine bankruptcy eligibility.
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 within 90 days prior to bankruptcy, you may even be able to get some of that money back after you file.
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.
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 nonexempt property to sell, the debtor’s tax attributes, such as carryforward losses, 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 adviser before filing for bankruptcy.
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.
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 homeowners policy to see if there are any assets, like jewelry, that are separately insured but not listed on your bankruptcy schedules.
Yes. You will need to attend what is called a 341 Meeting of Creditors, which your attorney will attend with you. At this meeting, you will be examined by a trustee and any creditors, which have questions. However, creditors rarely attend these meetings.
The prospect of going to court can be very stressful for people filing bankruptcy. Being prepared and knowing what to expect can be helpful.
Being struck by overwhelming debt is bad enough. It is even worse when it happens again. Thankfully, there may be the opportunity to file bankruptcy again.
The court filing fee for Chapter 7 is $335, Chapter 13 is $310 and in most cases, this fee must be paid upfront to the bankruptcy court. In the case of an emergency, a Chapter 13 petition can sometimes be filed for less than the full amount upfront. The amount of your legal fees and payment arrangements are based upon the facts of your particular case.
If you are considering filing for bankruptcy, there are several things you should do: