Following are some of the more frequently asked questions about bankruptcy and other debt relief options, with brief answers.
GENERAL INFORMATION ABOUT YOUR OPTIONS
Q. WHAT ARE MY OPTIONS IF I OWE MORE DEBT THAN I CAN EASILY REPAY?
A. Generally, there are four main options: (a) Do nothing (ignore the debt) (b) file a bankruptcy, (c) settle the debt, or (d) pay the debt in full.
Q. WHEN IS â€œDOING NOTHINGâ€ THE BEST OPTION?
A. If you have no income or assets that a creditor can take from you, AND you don’t mind getting telephone calls and/or lawsuits from creditors. For example, if your only income is social security (which is exempt), and if you have only minimal bank accounts and have no equity in real estate, then you may be considered â€œjudgment proof,â€ and doing nothing might be your best option.
Q. WHAT IS A BANKRUPTCY?
A. A federal court proceeding which can either discharge (eliminate) all or part of your debt, or force your creditors to take a payment plan on all or part of your debt.
Q. WHAT IS "DEBT SETTLEMENT”?
A. Also known as "debt negotiation," or a "workout," it is a voluntary repayment plan under which your creditors agree to reduce the amount owed.
GENERAL BANKRUPTCY INFORMATION
Q. DO I NEED AN ATTORNEY TO FILE A BANKRUPTCY?
A. You have the right to file a bankruptcy by yourself. You also have the right to cut your own hair, prepare your own taxes, or remove your own tonsils. This doesn’t mean that you should. You’re better off using the services of someone who has filed bankruptcies before.
Q. WHAT IS A CHAPTER 7?
A. A bankruptcy proceeding in which most of your debts are discharged and your non-exempt property is "liquidated," i.e., sold with the proceeds distributed to creditors.
Q. WHAT IS A CHAPTER 13?
A. A bankruptcy proceeding in which you make monthly payments to a court appointed trustee for a period of three to five years, during which all or part of your debts will be paid.
Q. HOW DO I DETERMINE WHETHER TO FILE A CHAPTER 7 OR A CHAPTER 13?
A. The choice may not be yours. You may not qualify for a Chapter 7. Determining whether you qualify for a Chapter 7 requires going through some complicated formulas, but the bottom line is that if you can afford to pay more than $160 per month to your creditors, you will probably not qualify for a Chapter 7, and will have to file a Chapter 13 if you file a bankruptcy at all.
Q. WHAT ARE THE BENEFITS OF A CHAPTER 7 COMPARED TO A CHAPTER 13?
A. If you qualify for a Chapter 7, the benefits are:
a. It is a fairly quick process, usually completed within 6 months after you file;
b. Your debts are eliminated (at least your dischargeable debts are discharged), and you donâ€™t have to make continuing payments.
Q. WHAT ARE THE BENEFITS OF A CHAPTER 13 COMPARED TO A CHAPTER 7?
A. A Chapter 13 is preferable when:
a. You want to save your home from foreclosure.
b. You have sizeable non-dischargeable tax debts on which you want a no-interest payment plan.
c. You have other non-dischargeable debts.
Q. HOW WILL A BANKRUPTCY AFFECT MY CREDIT?
A. If you’re at the point of considering bankruptcy, your credit is probably already pretty bad, and won’t get much worse with a bankruptcy. A bankruptcy stays on your credit report from 10 years after you file. Most other debts only stay on your credit report for 7 years. However, many people have a better credit score after completing a bankruptcy because future lenders know that the person can’t file another bankruptcy for a period of several years.
Q. WILL MY FRIENDS FIND OUT I’VE FILED A BANKRUPTCY?
A. All your creditors will find out that you’ve filed a bankruptcy when they get the notice from the court. If one of your friends or relatives is a creditor listed on the petition then they will get a notice from the court.Those who are not creditors can find out about your bankruptcy if they happen to read the legal notices in your daily newspaper when your case is filed. Otherwise they are not likely to find out.
Q. DO I HAVE TO LIST ALL MY PROPERTY AND ASSETS?
A. Unless you want to have perjury charges filed against you, yes. When you file a bankruptcy, you are required to answer all questions on the forms truthfully. The forms ask for 35 different categories of property plus any not included above.
Q. DO I HAVE TO INCLUDE ALL MY DEBTS IN THE BANKRUPTCY?
A. Yes. You must LIST all your debts when you file a bankruptcy. You are required by law to do so. If you intentionally omit a debt or an asset, that could be considered perjury.
Q. WHAT IS THE "AUTOMATIC STAY"?
A. As soon as you file any type of bankruptcy, the court issues an order that none of your creditors can take any action to collect any debts from you. This includes telephoning you or filing a lawsuit. If a lawsuit has already been filed, it is put on hold while the stay is in effect.
Q. WHAT IS A "DISCHARGE?"
A. A court order providing that creditors may no longer attempt to collect your debts, through legal proceedings or otherwise. The debts still technically exist after the discharge, but are legally uncollectable. So for all practical purposes if a debt has been discharged, it is eliminated.
Q. CAN ALL DEBTS BE DISCHARGED?
A. Not all debs can be discharged. There are complicated rules on what types of debt are non-dischargeable. The most common examples include:
a. Taxes (but there are exceptions)
b. Student loans
c. Alimony and child support
d. Debts incurred through fraud, intentional wrongdoing, malicious injury or driving while intoxicated, and
e. Government fines and penalties
Q. ARE STUDENT LOANS DISCHARGEABLE?
A. Generally not. To discharge a student loan, you would have to file a separate court proceeding to prove that being required to repay the student loan would be an undue hardship on you or your dependents.
Q. WHAT TAXES CAN BE DISCHARGED?
A. A personal income tax can be discharged if:
a. The date the tax return was due to be filed is more than 3 years before the bankruptcy is filed.
b. The tax return was filed at least 2 years before the bankruptcy is filed.
c. There was an "assessment" by the taxing agency (a statement that the taxes were owed), and
d. The tax return is not fraudulent.
Q. IF TAXES CANNOT BE DISCHARGED, CAN ANY BENEFIT BE ATTAINED THROUGH A BANKRUPTCY?
A. Yes. A bankruptcy filing will start the "automatic stay," under which the taxing agency cannot use legal procedures to collect from you.In a Chapter 13 you can force the taxing agency to take a payment plan without additional interest or penalties being added. This could save you thousands of dollars. With all of your payment going to principal rather than interest, this could potentially save you thousands of dollars.
Q. CAN I KEEP ONE OR MORE CREDIT CARDS IF I FILE A BANKRUPTCY?
A. Probably not. When you file a bankruptcy, you must LIST all of your creditors, meaning everyone you owe money to at the time of filing. All of these creditors will find out that you have filed by getting a notice from the court. If you have a credit card on which you don’t owe any money, you do not have to list them in the bankruptcy papers, so they won’t get notice from the court. They are likely to find out about your bankruptcy from other sources, however, and may cancel your credit card when you file the bankruptcy, notwithstanding that you don’t owe anything on that account.
Q. WHAT WILL HAPPEN TO MY AUTOMOBILES?
A. If you are still making payments on the car, you have the choice of (a) returning the car to the lender, in which case you will not be liable for any deficiency you may owe, or (b) keeping the car and continuing the payments. If you choose to keep the car, the lender may require you to sign a "affirmation agreement," meaning that you promise to make the payments notwithstanding the bankruptcy.If you own the car outright, whether you can keep it will depend on the applicable exemptions.
Q. WHAT IF I WANT TO PAY MY RELATIVES BACK?
A. Chapter 7: There is nothing stopping you from repaying any creditor you want to. You will still have to LIST your brother on the bankruptcy forms.Chapter 13: All of your creditors must be treated the same. In other words, your friend or relative must receive the same percentage that your other creditors receive. If your other creditors receive 30 cents on the dollar, so will your brother. However, once your plan is done, there is nothing stopping you from paying your brother back in full.
Q. WILL I LOSE ALL MY PROPERTY IF I FILE BANKRUPTCY?
A. You are allowed by law to keep a certain amount of property called "exempt" property. The amount of exemption you are entitled to claim depends on the state you live in. If you have moved from another state within two years before filing the bankruptcy petition, there are complicated rules for determining which state’s exemptions will apply.We plan to soon have posted on our website the exemptions allowed in each of the states where we file bankruptcies. In the meantime, one of our attorneys will let you know which property is exempt.
Q. WHAT IF SOME OF MY PROPERTY IS ABOVE THE ALLOWABLE EXEMPTION?
A. If some of your property is worth more than the exemption you are entitled to claim, that does not automatically mean that you will lose the property.The procedure by which you would lose property in a bankruptcy proceeding is: (a) the trustee determines that you have non-exempt property, (b) he asks you to turn it over or takes it from you, (c) he sells it, either through a privately arranged sale or at an auction, and (d) the proceeds of the sale are divided among the creditors.There may be instances where there would simply not be enough value to an item of property for it to be worth the trustee’s effort to take it and sell it. If, for example, you have a car that is worth $1,200 over the exemption you are entitled to claim, it is unlikely that the trustee is going to take it.
CHAPTER 13 INFORMATION
Q. HOW MUCH WILL MY CHAPTER 13 PLAN PAYMENT BE?
A. We can’t give a definite answer to that question until we have gotten your complete income, expenses, assets and liabilities. But we can give you formulas to estimate the range that the payment will be in.The MAXIMUM your payment will be, if you are paying 100% to your unsecured creditors, will be: the amount of total debt, plus any unpaid attorney fees to be paid through the plan, plus the trustee’s fees of 11% of the total payments, divided by the number of months of the plan.The MINIMUM that the payment will be, if you are filing a Chapter 13 to keep your home, will be: the amount of the arrears (i.e., past due mortgage payments) plus any unpaid attorney fees to be paid through the plan, plus the trustee’s fees of 11% of the total payments, divided by the number of months of the plan.If you can’t afford the MINIMUM payment as described above, then Chapter 13 is not an option for you.
If you can afford the MINIMUM payment, but not the MAXIMUM, then you will do what is called a "BEST EFFORTS PLAN," under which you pay as much as you can afford to pay for a period of 36 to 60 months. At the end of that period, the remaining amount you owe your creditors is discharged.
Q. CAN I HAVE SOME EXAMPLES OF HOW THESE PAYMENTS MIGHT BE CALCULATED?
A. For the MAXIMUM (or 100%) payment, let’s say that you owe $50,000 in unsecured debt, and you are $10,000 in arrears in your mortgage payment and that you want to save your home. This comes to $60,000. Add to this $1,000 for attorney fees, which comes to $61,000. To get the trustee’s fee, multiply this times 11% and you get $6,710. Add these together and your total plan payments come to $67,710. Divide this by the number of months in the plan. If it is a 60 month plan, your monthly payments will be $1,128.50.For the MINIMUM payment, let’s take the example above, but assume that you have no unsecured debt, and that you are only going to be paying the arrears on the mortgage, which is $10,000. Add $1,000 for attorney fees. Add 11% for the trustee’s fee ($1,210), and the total you are paying comes to $12,210. Divide this by 60 months, and your monthly payment is $203.50.For the BEST EFFORTS PLAN, your payments will be the amount you can AFFORD to pay each month, so long as that figure is somewhere between the MINIMUM and MAXIMUM payments above. Let’s assume that you can afford $500 per month. This is between the above minimum and maximum, so that’s what you’d pay. $500 times 60 months is $30,000. The way that will be distributed is: $10,000 to pay your mortgage arrears, $1,000 to the attorney fee, $3,300 to the trustee’s fees. The remaining $16,700 will go toward the $50,000 in unsecured debt, meaning that each of your unsecured creditors will get approximately 33 cents on the dollar.
Q. HOW IS IT DETERMINED HOW MUCH I CAN AFFORD TO PAY IN A "BEST EFFORTS PLAN?"
A. This part gets complicated, but a simplified formula is: determine your take home (after tax) pay; subtract from that your reasonable and necessary living expenses, and the amount left over is what is paid to the plan.
Q. IF I FILE A BANKRUPTCY, WILL I HAVE TO GO TO COURT?
A. Yes, there is at least one hearing you must attend, called the "341A hearing," or the "Meeting of Creditors." Technically, this is not a "court hearing," since no judge is present. It is presided over by the court appointed bankruptcy trustee. In some districts, it will be at the federal courthouse. In others, it will be at the trustee’s office. Depending on the circumstances of your case, there may be additional hearings that you must attend.
Q. WHAT CAN I EXPECT TO HAPPEN AT THE COURT HEARING?
A. At the 341A hearing, the trustee will "swear you in," (have you take an oath to tell the truth), then will ask you a series of standard questions, and then will ask any questions that he/she may have about your particular case. If any creditors choose to attend (which they do in less than 5% of the cases), they can also ask you questions.These hearings typically last less than 5 minutes.Before you attend one of these hearings, we will give you an information sheet with more detailed information on what to expect, and you will have at least once conference with an attorney, who will let you know what to expect, and go through the questions most likely to be asked.The standard questions usually include:
Did you read your bankruptcy papers before you signed them?
Is all the information contained therein true and correct?
Did you accurately list all of your debts and all of your assets?
Are there any debts or assets that were omitted from the papers?
Are there any that you would like to add at this point?
Did you accurately list all of your income and expenses?
Have you given away or transferred any property in the last two years?
Does anyone owe you any money?There is no way to predict all the questions that the trustee will ask, but some specific questions that might be asked about your case could include how you came up with the valuation of various items of property, or about expenses that seem unusual.
Q. DO I NEED TO HAVE A SOCIAL SECURITY NUMBER?
A. No. When filing bankruptcy, you are required to sign a form giving your social security number if you have one, or stating that you do not have one.
Q. IF I HAVE A SOCIAL SECURITY NUMBER BUT DON’T HAVE A CARD WITH ME, WHAT CAN I DO?
A. You can get another card from the Social Security Administration. In some cases, a Trustee will accept other proof of your social security number, such as copies of tax returns or pay stubs.
Q. WHAT IF SOMEONE CLAIMS I OWE A DEBT THAT I DON’T REALLY OWE?
A. If someone claims you owe them, this should be listed as a debt in your bankruptcy papers even if you think you don’t owe the money. It’s better to be safe than sorry. If it you don’t actually owe the debt, there’s no harm in listing it. If it turns out that you do owe it, but don’t list it, then you will still owe it after the bankruptcy.Besides that, under the bankruptcy law, any debt a creditor claims is owed is presumed to be valid unless you can prove it isn’t owed, or that the amount is wrong. This is the opposite of the old "innocent until proven guilty" principle.There are procedures for objecting to a creditor’s claim, but in most cases it isn’t worth the effort, since the amount of the creditor’s claim won’t change the amount you pay under the bankruptcy, if anything.