What is bankruptcy?

  • Bankruptcy refers to a federal court procedure that allows debtors to catch up on their debts by having some of them discharged and others repaid, depending on the type of bankruptcy. The process is available to both businesses (which often file for Chapter 11) and consumers (usually Chapter 7 or Chapter 13).
  • After getting court approval, the court shields you from lawsuits and some other adverse actions while you work through the procedure. For consumers, bankruptcies are almost always either “liquidations” (Chapter 7) or “reorganizations” (Chapter 13). In a Chapter 7 proceeding, property may be sold (liquidated) to pay back creditors. In a Chapter 13 proceeding, consumers typically keep most of their property but must establish a plan to repay at least some of their debt within three or five years.
  • The court issues a protective order when you file for bankruptcy called an “automatic stay,” which stops most creditors from contacting you about your debts or making any collection efforts. Only the court has the authority to lift the automatic stay and allow creditors to seek repayment of debts.

What the Automatic Stay Can Do For You

There are several things that the automatic stay can do for you and your financial situation. These include:

  • Stopping your utilities from being disconnected. Sometimes when you are behind on a utility bill, the utility company will threaten to turn off your telephone, gas, electric or water service. The automatic stay will often prevent the utility company from turning off your service for at least 20 days. Even though your utility bill is probably not high enough to justify filing for bankruptcy by itself, it may influence your decision to not have your gas and electricity if it’s the middle of winter.
  • Stopping foreclosure proceedings.  If the bank or the financial institution that holds your mortgage is starting foreclosure proceedings, the automatic stay will stop the foreclosure in its tracks. However, even if it is temporarily stopped, your bank will most likely find a way to continue the foreclosure proceedings once the automatic stay is lifted. If keeping your house is one of your primary goals, you should consider filing for Chapter 13 bankruptcy instead of Chapter 7.
  • Stopping evictions.  The automatic stay may be able to stall an eviction proceeding if your landlord is trying to evict you. However, because of recent changes to the laws regarding the automatic stay, if your landlord already has a court issued wrongful possession judgment against you, the automatic stay will not stop your landlord from evicting you. Also, even if your landlord has not started eviction proceedings against you, the automatic stay may only buy you a few days or weeks in your current home. Generally, courts will side with landlords if the landlord can show that you are misusing the property, endangering it, or selling or using controlled substances on the property. In addition, even if you have been a model tenant, courts will generally side with the landlord if he or she asks the court for permission to evict you.
  • Stopping a government agency from taking back overpayments of public benefits. If you were receiving public benefits before you filed for bankruptcy, the automatic stay will stop the agency from collecting any benefits that were overpaid to you until the automatic stay is lifted. Normally, the agency would collect the overpayment from you either by billing your or deducting from your future benefit checks. However, if you become ineligible to receive public benefits during your bankruptcy, the automatic stay will not stop the agency from collecting the overpayments from you.
  • Stopping wage garnishment. Once you file for bankruptcy, the automatic stay stops all wage garnishments until the automatic stay is lifted. If you have multiple garnishments against your wages, then you may want to consider filing for bankruptcy as it would allow you to take home your entire salary.

What the Automatic Stay Can’t Do For You

There are some situations and circumstances where the automatic stay won’t help you. These include:

  • Some tax proceedings. The automatic stay will not help you if the IRS wants to audit you or issue a tax deficiency against you. Also, the automatic stay will not prevent the IRS from demanding that you file a tax return, or from issuing you a tax assessment or demanding payment for taxes that are owed. However, if you are protected by the automatic stay, the IRS cannot issue a tax lien against your income or property.
  • Child support. The automatic stay will not stop a lawsuit against you that attempts to establish paternity. In addition, it will not stop a lawsuit that tries to establish, modify or collect child support payments.
  • Criminal proceedings. If you are involved in a criminal proceeding that involves both a debt and criminal portion, the automatic stay will only stop the debt portion of the proceeding. So, if you were convicted of petty theft and were ordered by a judge to make repayments and also conduct a certain number of hours of community service, the automatic stay will only stop the repayment portion of your sentence. You will still be required to complete your community service hours.
  • Loans from your pension. If you took a loan against your pension, the automatic stay will not prevent your wages from being garnished in order to repay the loan to your pension.
  • Filing for bankruptcy multiple times. If you filed for bankruptcy after you filed for bankruptcy in the previous year, then the automatic stay associated with your current filing will terminate after 30 days unless you, your trustee, the United States Trustee or a creditor asks for the automatic stay to continue and shows that your current bankruptcy filing was filed in good faith. However, if a creditor has filed a motion to lift the automatic stay in your previous bankruptcy matter, you will have to overcome a presumption that your current bankruptcy filing was filed in bad faith.

Creditors Can Still Get Around the Automatic Stay

  • In most situations, a creditor may be able to get around the automatic stay by asking the court to “lift the injunction” (removing the automatic stay). To do so, the creditor normally has to show that the automatic stay is not serving its intended purpose. For example, if you filed for bankruptcy the day before you were about to be evicted from your apartment, your landlord could probably go to the court and get the stay lifted by showing you have no way to pay the rent that you owe.

Who can file for bankruptcy?

  • An eligible bankruptcy filer must have a permanent residence (domicile), own property, or have a place of business located in the United States. You can file for bankruptcy if you have a complete a financial counseling course (some filers are exempt from this requirement).

Chapter 7 VS Chapter 13

  • Chapter 7 bankruptcy is filed when an individual has little to no money left over after paying basic expenses. It is typically used for the purpose of completely starting over. Although it is rare, one’s assets can be liquidated in order to pay off debts. The advantages of filing for Chapter 7 bankruptcy are that most unsecured debts can be completely eliminated and the entire process is relatively quick.
  • Chapter 13 bankruptcy is filed when an individual has a steady, regular income and can afford to pay off basic expenses, but has a difficult time keeping up with payments on debts. Chapter 13 bankruptcies are filed for the purpose of holding on to assets while discharging some, if not all of your unsecured debts. The advantages of filing for Chapter 13 bankruptcy include keeping your possessions and property, and taking 3 to 5 years to pay off your debts on a payment schedule, rather than at a quicker rate the creditors would prefer.

What will happen in my chapter 7 case after I file all these documents?

  • Chapter 7 cases are pretty simple for the most part. In most cases, you will attend one creditors’ meeting and just wait for your discharge notice to come in the mail.
  • The bankruptcy Trustee runs the creditors’ meeting, which is also called a 341 meeting (named after the section of the bankruptcy law that requires the meeting), and will question you under oath about all the information contained in your bankruptcy documents.
  • If you and your spouse file a Joint Petition, you must both attend the creditors’ meeting and answer questions. It is important to cooperate with the trustee and to provide any records or documents requested.
  • In a simple case, the meeting will usually last just five minutes or so. While all creditors may attend, very few actually do. Be sure to bring a form of identification to the meeting, as well as proof of your Social Security number (usually your Social Security card). The trustee may ask you to provide additional documentation during the meeting and give you a few days to produce it.
  • The discharge notice will arrive in the mail about 60 days after you attend the creditors’ meeting. This piece of paper is proof that most of your debts have been discharged. You should keep it in a safe place.

Chapter 7 bankruptcy

  • Quickly discharges (wipes out) certain types of debt, such as credit card balances, medical bills, and personal loans. Although you won’t need to pay into a repayment plan, you might have to give up some of your property. Also, Chapter 7 bankruptcy doesn’t help you keep a house or car if you’re behind on payments. To qualify, your income must be low enough to pass the “means test.”

Chapter 13 bankruptcy

  • Is a better choice if you need to bring your house or car loan current, or pay off non dischargeable debt, such as child or spousal support, or past-due income tax. Although you can keep all of your property, you must have enough income to fund a three- to five-year repayment plan. Additionally, your total debt cannot exceed maximum limits ($1,184,200 for secured debt, such as vehicle and real estate loans; $394,725 for unsecured debt, such as credit card and utility bills). Finally, keeping property comes at a cost—you must pay for nonexempt (property you aren’t entitled to keep) in the repayment plan.

What Are the Differences Between Secured and Unsecured Debt?

  1. Secured Debt:
  • When a lender makes a large loan—such as for a home or a car—the borrower must put up property (collateral) to guarantee payment of the debt. If the borrower falls behind (defaults) on the payment agreement, the lender can foreclose on the home or repossess the car. A collateralized debt is known as a “secured” debt.
  • When a lender makes a large loan—such as for a home or a car—the borrower must put up property (collateral) to guarantee payment of the debt. If the borrower falls behind (defaults) on the payment agreement, the lender can foreclose on the home or repossess the car. A collateralized debt is known as a “secured” debt.
  1. Unsecured Debt:

An “unsecured” debt is a credit account that the borrower didn’t guarantee with collateral. For instance, if you don’t make your credit card payment, the creditor can’t take back the sporting equipment that you bought the prior month. Instead, the unsecured creditor must file a lawsuit and obtain a court judgment for the amount you owe before it can use certain collection tactics, such as taking money out of your bank account (bank levy) or instructing your employer to deduct money from your paycheck (wage garnishment).

Examples of unsecured debt include:

  • Credit card balances
  • Medical bills, and
  • Personal loans, such as a payday loan or a loan from family or friends.
  • Be aware that certain creditors—for instance, if you owe taxes, the government—can use collection tools without first getting a court judgment.

Voluntary and Involuntary Liens: How they’re Different?

  • A lien can be either voluntary (you agreed to the lien when you purchased the item) or involuntary (the law gives the lender the right to the lien). Below, you’ll learn how to recognize one from the other.
  1. You must agree to a voluntary lien: You give a lender a voluntary lien when you agree to do one of three things:
  • Give the lender a lien on new property that you intend to buy
  • Give the lender a lien on property that you already own, or
  • Sign a security agreement.

The lien is what gives the lender the right to the collateral. A “security agreement” is the contract that documents the lien on the collateral and sets forth the terms of the lien.

  1. Involuntary liens: In some cases, the law gives the lender the right to lien your property State law governs when a lender has a right to place a lien on your property without your permission.
  • Property tax liens
  • Income tax liens
  • Mechanic’s and material man’s liens (for labor or materials used in building projects), and
  • Judgment liens.

What Is the 341 Meeting of Creditors in Bankruptcy?

  • After you file for bankruptcy, you’ll be required to verify your identity and the contents of the petition at the 341 meeting of creditors.
  • Everyone who files for bankruptcy must appear in court at a meeting called the “341 meeting of creditors.” The purpose of the meeting is to allow the trustee to verify the accuracy of your bankruptcy petition and schedules. The bankruptcy trustee—the person responsible for overseeing your case—will review your petition and “521 documents” (tax returns, paycheck stubs, and the like) before the meeting. At the meeting itself, the trustee will verify your identity and ask you a series of questions under oath, designed to confirm the contents of your petition and give you the opportunity to tell the trustee about any changes that have occurred since you filed your documents. Creditors have the right to ask questions about your financial affairs, as well, but rarely do. In fact, if you have a straightforward case, the entire process will likely take less than five minutes.

What Does a Bankruptcy Trustee Do?

  • The bankruptcy trustee is the court-appointed official tasked with overseeing your case. The trustee’s primary responsibility is to find assets that can be used to pay your creditors the debt you owe. But that’s not all the trustee does.
  • The trustee (or staff) will review your petition for accuracy, verify your identity at the 341 meeting of creditors (the meeting that all bankruptcy filers must attend), investigate your case for hidden assets, and distribute funds to creditors. The trustee’s specific duties depend on whether you file for Chapter 7 or Chapter 13 bankruptcy.
  • While it’s tempting to believe that the trustee is there to help you, it’s not the case. The more property the trustee recovers for creditors, the more the trustee gets paid. The trustee receives a flat fee of $60 per Chapter 7 case (as of August 2016). Also, trustees are entitled to a percentage of the funds they disburse to your creditors. In other words, the more assets the trustee finds, the more that goes into the trustee’s coffers. The fee rules give trustees a financial incentive to look closely at bankruptcy filings, especially if you have valuable property. In essence, the trustee can earn a “commission” if they can actually grab some property, sell it, and divide the proceeds among the creditors.

How Much Are the Filing Fees in Chapter 7 or 13 Bankruptcy?

  • When you file paperwork with the bankruptcy court—or any other court, for that matter—you’ll be required to pay a filing fee to cover the administrative costs associated with handling your case (unless you’re a low-income filer and qualify for a fee waiver). The bankruptcy fees are not the only fees you might have to pay in bankruptcy court, however. You can expect additional fees for things such as filing amendments (changes) to your petition, as well as for any motion you might make, a conversion (transfer) to another bankruptcy chapter if your situation changes, or an appeal if something doesn’t go your way.
  • Chapter 7 and 13 Petition Filing Fees
    Your bankruptcy case starts when you file a court form known as a bankruptcy “petition.” In the petition, you’ll tell the court about your income and expenses; your assets and debt; and you’ll list past financial transactions on additional forms called “schedules.” Once completed, you’ll file the bankruptcy paperwork with the clerk of the court and pay the following filing fee:

    • $335 for a Chapter 7 bankruptcy petition, and
    • $310 for a Chapter 13 bankruptcy petition.

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