What is bankruptcy?
We often hear the word "bankruptcy," but what does it really mean? Bankruptcy is a legal process designed to help consumers and businesses eliminate or repay their debts in an organized, orderly manner without the threat of collection, repossession, or lawsuit.
How can a bankruptcy help me?
If you are behind on payments or simply in debt beyond your ability to pay, a bankruptcy allows you to eliminate some or all of your unsecured debt (credit cards, payday loans, etc.) and allows you to get caught up on payments to those lenders holding secured claims (mortgage, car loan, etc.).
Can I eliminate all of my debts?
While most unsecured debts are dischargeable in bankruptcy, certain debts cannot be eliminated. The following are examples of debts that may not be eliminated by bankruptcy: 1) student loans; 2) taxes; 3) domestic support; 4) criminal fines, penalties, and restitution; and 5) liability for injuries to another inflicted as a result of your driving under the influence. Please ask an attorney if you have debts that may fall into one of these categories.
In most cases, secured debts cannot be eliminated. If you wish to keep property secured by a loan, then you will have to pay for it. However, there are numerous options with secured property, including surrender and redemption, which may eliminate your obligation upon turnover of the property or may reduce the amount you have to pay to keep the property. Please consult with your attorney for specific options applicable to your set of circumstances.
What is the difference between a secured and an unsecured debt?
An unsecured debt is a debt incurred without the provision of a security interest in the item purchased. For instance, if you use your Chase Visa card to purchase a television, Chase does not assume a security interest in the TV that would allow them to come and take the TV if you missed a monthly credit card payment.
A secured debt is a debt in which there is such a security interest given. The most obvious example of a secured debt is a house loan. A home mortgage involves two (2) separate obligations. First, you sign a "note" when you buy the house. This is your written promise to the lender to repay the borrowed money. Second, you give the lender a lien (a property right) in the house to secure repayment of the note. The lien gives the lender the legal right to foreclose or repossess the property and to sell it if you fail to pay as required under the note. Secured debts, however, are not limited to large purchases such as a house. Stores like Best Buy and RC Willey and online providers such as Dell also receive a security interest in certain purchased items. Please consult with an attorney to determine if a creditor is secured and how that debt can be addressed in a bankruptcy.
Can I declare bankruptcy?
Most individuals are eligible to file some form of bankruptcy. So long as you reside or own property the United States and you have not been granted or denied a Chapter 7 discharge in the last eight (8) years, you may be eligible for a Chapter 7 bankruptcy. Likewise, if you have not received a discharge in a Chapter 13 bankruptcy in the last six (6) years, you may be eligible for either a Chapter 7 or Chapter 13 bankruptcy.
What is the difference between a Chapter 7 and a Chapter 13?
There are several types of bankruptcies. In most consumer cases, however, a Chapter 7 or Chapter 13 bankruptcy is most appropriate. The following descriptions briefly explain the pros and cons of both Chapter 7 and Chapter 13 bankruptcies and describe the most common factors that lead to the filing of one or the other.
Chapter 7 - This is usually what people think of when they think about a bankruptcy. A Chapter 7 bankruptcy gives you a fresh start. It essentially involves taking all of your assets (with certain exceptions), selling these assets, and dividing the money equally among all of your creditors. Creditors each get a percentage of what they are owed, and you get to start over.
- Pros - A Chapter 7 bankruptcy is usually completed within 4 to 6 months.
- Cons - In a Chapter 7, you may lose assets, including your home. Further, you may not be eligible to file for Chapter 7 if your monthly income is above a certain level (see "means test" information below).
- Factors - If you have few assets and either no job or a low income, a Chapter 7 may be your best option.
Chapter 13 - In a Chapter 13 your repayment, if any, is based on your assets, the type of debt you have, and your monthly income. Once you complete a monthly budget, you work with all of your creditors to come up with a fair and equitable plan to pay them at least what they would receive in Chapter 7 liquidation over a 3- to 5-year period.
- Pros - You are able to pay off creditors without losing important assets. A chapter 13 also may allow you to eliminate mortgages and change loan terms for cars.
- Cons - A Chapter 13 is a long-term solution that requires budgeting over a 3- or 5-year period. However, if your income is too high, it may be your only option.
- Factors - A Chapter 13 is beneficial to individuals who have a monthly income and are behind on payments on a home or car.
How does a bankruptcy affect my credit?
Over time, you are better able to rebuild credit score by filing for bankruptcy and getting finances under control rather than continuing to struggle to pay on growing debts. In most cases, you are in a better position to obtain credit after a bankruptcy than you were before.
Can I keep my house and car?
Generally, yes. If you are current on your mortgage and car payments, a bankruptcy will allow you to retain both, provided that you meet certain other criteria. If you are behind on your mortgage or car payments, a bankruptcy may allow you to catch up those payments in order to save your house or car.
What is the "means test"?
Under the 2005 changes to bankruptcy law, you have to qualify to file a Chapter 7 bankruptcy. In order to qualify, your monthly income must be below the average income for people in their area. This is called the "means test." If your income is above the average, you will be required to file for Chapter 13 instead of Chapter 7. We can usually determine if you are eligible to file a Chapter 7 during your free initial consultation with an attorney.
How much will a bankruptcy cost?
Every bankruptcy is different. Simply stated, the more complex the case, the more it will cost. Generally, the total cost of a Chapter 7 (including fees, filing fee, and costs) will be $1,200-$1,500. However, for more complicated cases, fees may be $2,000 or more. When you meet with an attorney, he or she will quote you a firm price for your bankruptcy filing based upon the circumstances of your case.
How do I make the calls stop?
Once you retain our firm, you can tell creditors that you are planning on filing for bankruptcy. At that point, creditors generally realize that the debt may be uncollectible and may stop calling. Once we file your bankruptcy, a creditor is prohibited from contacting you and may be subject to sanctions if they attempt to collect on the debt.
Do I have to go to court?
Yes. When you file bankruptcy you are required to make an appearance at a Meeting of Creditors. Your creditors are allowed to attend and may ask questions, but in most cases, no creditors appear. Generally, you will only be required to answer some simple questions from the bankruptcy trustee. The entire meeting rarely lasts more than 5 or 10 minutes.
Does my spouse have to file, too?
No. You can file together, you can each file individually, or only one of you can file. It is your choice. If you are married, your attorney will advise you of the best options for you and your family.
What do I have to list?
Everything. Under bankruptcy law, you have to list all the debts that you owe and all the assets that you own or are buying. Nothing can be left out.
What will my attorney need?
A few documents are necessary to get the process started.
- Proof of income. If you are employed, provide documentation of the last six months of income. This is best done through pay stubs from your employer. If you are self-employed, provide a profit and loss statement, invoices, or bank statements to substantiate income.
- A list of creditors. We will pull a copy of your credit report as part of our service, but if there are creditors not listed on that report, you will need to let us know so that each can be added.
- Bank statements for the six (6) months prior to filing. For instance, if you are filing in July, we will need your bank statements for January through June.
- A list of any lawsuits or judgments against you.
- Tax returns for the past three years.
- Regular bills. We will need a list of your regular household expenses for gas, electric, telephone, and estimates of your monthly spending for groceries and daily expenses.
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