Bankruptcy is a legal process through which people and businesses can obtain a fresh financial start when they are in such financial difficulty that they cannot repay their debts. The fresh start is achieved by eliminating all or a portion of existing debts and/or by stretching out monthly payments under the protection and supervision of a court.
During your bankruptcy case, creditors (with some limited exceptions) generally cannot try to collect their debts from you directly. Nor can they try to collect from you after the conclusion of the case for any discharged debts. Again, there is an enumerated list of debts that are not dischargeable, e.g., domestic support obligations; fraudulently incurred debts; DUI obligations; certain taxes; student loans; and others.
As of 2005, significant changes were made to the bankruptcy law. All debtors now have to get credit counseling before they can file a bankruptcy case — and additional counseling on budgeting and debt management before their debts can be wiped out.
Before you can file for bankruptcy under either Chapter 7 or Chapter 13, you must complete credit counseling with an agency approved by the United States Trustee’s office. (To find an approved agency in your area, go to the Trustee’s website, www.usdoj.gov/ust, and click “Credit Counseling and Debtor Education”.) The purpose of this counseling is to give you an idea of whether you really need to file for bankruptcy or whether an informal repayment plan would get you back on your economic feet.
Counseling is required even if it’s obvious that a repayment plan isn’t feasible or you are facing debts that you find unfair and don’t want to pay. You are required only to participate, not to go along with any repayment plan the agency proposes. However, if the agency does come up with a repayment plan, you will have to submit it to the court, along with a certificate showing that you completed the counseling, before you can file for bankruptcy.
Toward the end of your bankruptcy case, you’ll have to attend another counseling session, this time to learn personal financial management. Only after you submit proof to the court that you fulfilled this requirement can you get a bankruptcy discharge wiping out your debts.
The new law also imposes some additional requirements on lawyers, chief among them that the lawyer must personally vouch for the accuracy of all of the information their clients provide them. This means attorneys have to spend more time on bankruptcy cases, and charge their clients accordingly. This combination of new requirements have driven some bankruptcy lawyers out of the field altogether.
These changes and others are explained in The New Bankruptcy: Will It Work for You?, by Attorney Stephen Elias (Nolo).
Bankruptcy, Good Idea?
Is bankruptcy a good idea or not? Here are some things to consider.
1. Learn about it. For individuals, there are two main kinds of bankruptcy:
-Chapter 7 — a bankruptcy where many, if not all, of your debts are cancelled outright in a short three- to six-month process. (See An Overview of Chapter 7 Bankruptcy.)
-Chapter 13 — a bankruptcy where you use your income to make payments on your debts over the next three to five years. (See An Overview of Chapter 13 Bankruptcy.)
2. Consider simpler alternatives. Things may not be as bad as you think. You may be “judgment proof” or you may have options you aren’t aware of. See Alternatives to Bankruptcy.
3. Make sure you are you eligible. You may be prevented from filing for Chapter 7 bankruptcy if you have enough income to repay your debts in a Chapter 13 plan. (See Who Can File for Chapter 7 Bankruptcy?) Or you may not qualify for Chapter 13 bankruptcy if your debts are too high or your income too low. (See Are You Eligible for Chapter 13 Bankruptcy?)
What Bankruptcy Can and Cannot Do
5. Consider what will happen to your home. Bankruptcy won’t relieve you of your obligation to pay your mortgage, but it might make your mortgage easier to pay by getting rid of other debts. If you have substantial equity in your home, you might lose it if you file for Chapter 7, depending on how generous the exemptions laws are that are available to you. If you file for Chapter 13, you can keep your home and pay off any mortgage arrears through your repayment plan.
6. Will you lose your car or other property? How much property you get to keep depends whether you’ve pledged the property as collateral for a debt, and on the “exemption” laws that are available in your state. If you file for Chapter 7, you might lose your car if you have substantial equity that isn’t protected by your state’s exemption laws.
7. Will your credit cards be paid off? Bankruptcy is good at wiping out most credit card debt and unsecured loans, unless you spent extravagantly or lied on your credit application. See What Bankruptcy Can and Cannot Do for more information.
8. Is your pension, IRA, or 401(k) safe? In most states, you will not lose pensions, retirement accounts, or life insurance in bankruptcy. If you have a pension, a 401(k), an IRA, or life insurance, find out what’s protected in your state.
9. Will cosigners be stuck with your debt? If a friend or relative helped you get financing by cosigning a loan agreement, Chapter 13 bankruptcy will protect your cosigner, but Chapter 7 will stick them with any debt you don’t pay.
10. Consider your personal life. Bankruptcy can be intrusive — you have to disclose every last detail of your finances to the court, and other people may find out about your bankruptcy. In a Chapter 7 bankruptcy, you can have property taken away, or, under a Chapter 13 plan, you might spend three to five years having to ask permission to spend your own money.
What Bankruptcy Can and Cannot Do
Bankruptcy is a powerful tool for debtors, but some kinds of debts can’t be touched.
Bankruptcy is good at wiping out credit card debt, but you may have trouble eliminating some other kinds of debts, including child support, alimony, most tax debts, student loans, and secured debts.
What Bankruptcy Can Do
If you are facing serious debt problems, bankruptcy may offer a powerful remedy. Here are some of the things filing for bankruptcy can do:
Wipe out credit card debt and other unsecured debts. Bankruptcy is very good at wiping out credit card debt. Unless you have a special “secured” credit card, your credit card balance is an unsecured debt — that is, the creditor does not have a lien on any of your property and cannot repossess any items if you fail to pay the debt. This is precisely the kind of debt that bankruptcy is designed to eliminate. Besides credit card debt, you may have other unsecured debts, and bankruptcy can wipe these out as well.
If you file for Chapter 13 rather than Chapter 7, you may have to pay back some portion of your unsecured debts. However, any unsecured debts that remain once your repayment plan is complete will be discharged.
Stop creditor harassment and collection activities. Bankruptcy can stop creditor harassment, but if the “harassment”‘ is simply phone calls and letters, there are simpler ways to stop it. If the harassment is more serious — if the creditor is about to repossess your car or foreclose your mortgage, bankruptcy can help, at least in the short term, and perhaps longer if you just need a little time to get through a temporary crisis.
Eliminate certain kinds of liens (but not others).A lien is a creditor’s right to take some or all of your property. A bankruptcy court’s discharge of your debts wipes out your direct obligation to pay your creditors, but if the creditor has a lien on your property, the lien will survive — unless you invoke certain procedures during your bankruptcy case. If the creditor has taken you to court and slapped a judgment lien on your property, you may be able to remove it.
What Bankruptcy Can’t Do
Bankruptcy will not help you hold onto property you haven’t paid for or avoid paying child support or alimony, and it will offer only limited help if you are trying to get rid of tax debt or student loan debt. Here’s what bankruptcy cannot do for you:
Prevent a secured creditor from repossessing property. A bankruptcy discharge eliminates debts, but it does not eliminate liens. So, if you have a secured debt (a debt where the creditor has a lien on your property and can repossess it if you don’t pay the debt), bankruptcy can eliminate the debt, but it does not prevent the creditor from repossessing the property. But after the repossession, bankruptcy does prevent the creditor from coming after you for additional money if the sale of the collateral did not generate enough cash to pay off the amount you still owed.
Eliminate child support and alimony obligations. Child support and alimony obligations survive bankruptcy — you will continue to owe these debts in full, just as if you had never filed for bankruptcy. And if you use Chapter 13, your plan will have to include repayment of these debts in full.
Wipe out student loans, except in very limited circumstances. Student loans can be discharged in bankruptcy only on a showing of “extreme hardship” — a standard that is very tough to meet. You must be able to show not only that you cannot afford to pay your loans now, but also that you have very little likelihood of being able to pay your loans in the future. The court will also consider whether you’ve made a good faith effort to repay at least some of what you owe, taking advantage of the partial-payment options offered under various laws.
Eliminate most tax debts. Eliminating tax debt in bankruptcy is not easy, but it is possible in some cases. There are many requirements to be met.
Eliminate other no dischargeable debts. The following debts are not dischargeable under either Chapter 7 or Chapter 13 bankruptcy. If you file for Chapter 7, these debts will remain when your case is over. If you file for Chapter 13, these debts will have to be paid in full during your repayment plan. If they are not repaid in full, the balance will remain at the end of your case.
· Debts you forget to list in your bankruptcy papers, unless the creditor learns of your bankruptcy case
· Debts for personal injury or death caused by your intoxicated driving
· Fines and penalties imposed for violating the law, such as traffic tickets and criminal restitution, and
· Recent income tax debts and all other tax debts.
In addition, some types of debts may not be discharged if the creditor convinces the judge that they should survive your bankruptcy. These include debts incurred through fraud, such as lying on a credit application or passing off borrowed property as your own to use as collateral for a loan.
What Only Chapter 13 Bankruptcy Can Do
Chapter 7 can’t help you with these situations, but Chapter 13 can:
Stop a mortgage foreclosure. Though bankruptcy can delay a foreclosure, a Chapter 7 bankruptcy won’t stop it for long. Chapter 13, however, was designed with foreclosure problems in mind. A typical foreclosure scenario is where, because payments have been missed, the lender demands immediate payment of a huge sum of money — perhaps the entire loan amount — and there is no way you can come up with it. Filing for Chapter 13 bankruptcy will stop the foreclosure and can force the lender to accept a plan where you make up the missed payments and the loan amount through monthly payments over the next three to five years. To make this plan work, you must be able to demonstrate that you will have enough income in the future to support such a repayment plan.
Another way bankruptcy can help with mortgage problems is to free you of other debts so you will have more disposable income available to stay current on your mortgage.
Allow you to keep nonexempt property. In Chapter 7, you must give up your valuable nonexempt property so that the trustee can sell it and use the proceeds to pay off your creditors. If you have nonexempt property that you really want to keep, and a steady source of income, Chapter 13 might make more sense. You don’t have to give up any property in Chapter 13 because you use your income to fund your repayment plan
“Cram down” secured debts that are worth more than the property that secures them. You can use Chapter 13 to reduce a debt to the replacement value of the property securing it, then pay off that debt through your plan. For example, if you owe $10,000 on a car loan and the car is worth only $6,000, you can propose a plan that pays the creditor $6,000 and have the rest of the loan discharged. Under the new bankruptcy law, you can’t cram down a car debt you purchased the car during the 30-month period before you filed for bankruptcy. You also can’t cram down a secured debt on other personal property you purchased within one year preceding your bankruptcy filing.