What is bankruptcy?
“Bankruptcy” is a nationwide debt relief program established by United States Congress which provides various forms of debt relief to individuals and organizations suffering from financial difficulties. The United States Constitution provides that Congress shall have power to establish uniform laws on the subject of bankruptcies throughout the United States. The federal bankruptcy program is governed by federal laws, procedures, and rules which are uniform throughout the United States and its territories.
What type of relief does bankruptcy provide?
Different types of bankruptcy relief are available under different chapters of the United States Bankruptcy Code. The two primary forms of debt relief available for individuals are under Chapter 7 and Chapter 13 of the Bankruptcy Code.
What is Chapter 7 bankruptcy?
Chapter 7 bankruptcy is the most common type of bankruptcy and completely “discharges” (forgives) all or most of your debts. You do not have to pay anything to your creditors. A Chapter 7 bankruptcy can completely eliminate credit card debts, medical debts, personal loans, lawsuits, court judgments, deficiency balances due on repossessed automobile loans, debts related to automobile accidents, state and federal income taxes that are more than three years old, and most other types of debts. A Chapter 7 bankruptcy will not eliminate student loans except in undue hardship cases, certain types of taxes, alimony or child support payments, fines, penalties, criminal restitution, debts incurred through fraudulent conduct, debts incurred through intentional injury to person or property, or debts from personal injuries caused while intoxicated. A Chapter 7 bankruptcy can be filed every 8 years.
What is Chapter 13 bankruptcy?
Chapter 13 bankruptcy allows individuals to consolidate their debt into an affordably monthly payment to a bankruptcy trustee. Past due mortgage, automobile, tax and other payments can be caught up over 3 to 5 years. When you file bankruptcy under Chapter 13 your debts are consolidated and you propose a payment plan to repay all or a portion of your debts over a 3 to 5 year period. While your Chapter 13 plan is in effect, your creditors cannot contact you, sue you or repossess or foreclose on any of your property. If you owe more on a mobile home, motor vehicle or other property than it is worth (other than real property which is your primary residence), Chapter 13 also allows you to reduce ("cramdown") your loan to the value of the property. In many cases, car payments can be reduced by as much as 50%. Unsecured debts, such as credit cards and medical bills, are normally discharged (forgiven) after 36 months, regardless of the remaining balance owed.
How do I file bankruptcy?
You file bankruptcy by completing the Official Bankruptcy Forms and filing them with the United States Bankruptcy Court in the district and state where you have resided for the majority of the past 180 days. Every U.S. Bankruptcy Court throughout the United States and its territories use the same official forms and is governed by the same federal laws and substantive procedures. Each bankruptcy court district also has its own “local rules” and some "local forms" which apply to certain procedural matters on a local basis.
Will I be able to keep my property?
When you file bankruptcy under Chapter 7 you are allowed to keep all of your “exempt” assets. In most cases, this includes everything you own. Exempt assets are those assets that the law specifically allows you to keep when you file bankruptcy. This differs from state to state, but usually includes all, or a certain amount of equity, in your primary residence, motor vehicle (including a motorcycle), household goods and furnishings, clothing, jewelry, life insurance policies, retirement accounts and pensions, bank accounts, social security benefits, disability benefits, spousal or child support, etc. If you owe money on your home or motor vehicle and want to keep these assets you must reaffirm these debts and keep making your regular payments or, alternatively, you must pay the creditor the fair market value of the property.
Is there a court filing fee?
To file an individual or joint bankruptcy a court filing fee in the amount of $338 (Chapter 7) or $313 (Chapter 13) must be paid to the United States Bankruptcy Court at the time of filing or within 4 monthly installments. If your annual gross household income is less than 150% of the federal poverty guideline for your family size the Chapter 7 filing fee can be waived altogether.
Do I qualify to file bankruptcy?
Most people qualify to file bankruptcy under either Chapter 7 or 13. If your annual gross family income (including your spouse’s income, unless separated) is not more than the median family income for your state and family size, then you qualify to file under Chapter 7 or 13, whichever you prefer. Even if your annual gross family income exceeds the median family income for your state and family size, you probably still qualify to file under Chapter 7 but will need to complete a “means test” to know for sure. You will almost always qualify to file under Chapter 13, regardless of your income.
Am I required to complete credit counseling before filing bankruptcy?
While you are not required to participate in a debt management or repayment program, you are required to consult with an approved nonprofit budget and credit counseling agency as to your available options before you file bankruptcy. The consultation can be done by phone, over the Internet or in person. The credit counseling agency must provide you with a certificate acknowledging that you completed such pre-bankruptcy counseling. The certificate must be filed in the United States Bankruptcy Court when you file bankruptcy. A pre-bankruptcy counseling certificate can be obtained online in one hour for $10 at moneysharp.org.
Am I required to complete a debtor education course prior to filing bankruptcy?
No. However, prior to obtaining a final discharge in your bankruptcy case you will have to complete an approved instructional course in personal financial management. The instructional course typically takes about 1 1/2 to 2 hours and can be completed over the Internet, in person or through the mail. In a Chapter 7 case, the instructional course must be completed no later than 60 days after your trustee meeting. In a Chapter 13 case, the instructional course will not be needed until the end of your repayment plan. An approved instructional course can be completed online in 2 hours at moneysharp.org for $10 or from any other approved debtor education provider.
Can I file jointly with my spouse?
Yes, you may file individually or jointly as husband and wife. You may file jointly even if you are currently separated or have filed for divorce, as long as the divorce is not yet final.
Will I have to attend any court hearings?
It is unlikely that you will ever appear in court or in front of a bankruptcy judge on a Chapter 7 bankruptcy. However, about 4 to 6 weeks after filing bankruptcy you will have to meet with a bankruptcy trustee at a meeting known as a “341(a) meeting” (also known as a “meeting of creditors”). A typical 341(a) meeting lasts about 5 minutes and is held over the phone or online meeting. The trustee will ask a few questions about your financial situation. Creditors rarely attend the 341(a) meeting. Approximately 60-70 days after the meeting you should receive your final discharge order in the mail. Your debts will be formally discharged and your bankruptcy proceeding will be closed. In a Chapter 13 case, you will need to attend a 341(a) meeting and may also have to attend a confirmation hearing in court to have your proposed repayment plan approved.
Will filing bankruptcy affect my ability to obtain credit or a mortgage in the future?
If you already have bad credit, filing bankruptcy will probably not make your credit any worse than it already is. Your FICO® credit score may initially decrease after your bankruptcy filing but will gradually start to improve after your bankruptcy discharge. This is because the amount of outstanding debt, including current and delinquent accounts, presently appearing on your credit reports will be eliminated or substantially reduced. Approximately 30% of your FICO® credit score is based on the amount you owe on outstanding debt. Debt owed on revolving lines of credit, such as credit cards, negatively impacts your FICO® credit score more than other types of debt. In order to obtain future credit you will likely need to re-establish a good credit history. This can be done by obtaining one or more secured credit cards, using them wisely and establishing an excellent payment history. If you reaffirm any existing debts, such as a mortgage or an automobile loan, making your payments on time will also help to re-establish your credit. In most cases, you can re-establish credit in a year or two. Your ability to obtain credit also depends on various other factors, such as your income, employment history, etc. Some creditors may actually consider you to be a better credit risk after bankruptcy than before because you will essentially be “debt free” and will likely have more disposable income to pay future debts.
Are there any negative consequences to filing bankruptcy?
Federal bankruptcy laws were established by United States Congress to provide individuals and organizations with a “fresh start” by allowing them to legally eliminate all or a portion of their debts and to start anew. Federal bankruptcy laws were designed to help those in financial distress—not to further burden or hinder them. Despite the many rumors propagated for years by creditors, debt collectors, debt counseling organizations and the like for their own self-interest, there are very few negative consequences to filing bankruptcy. To the contrary, various bankruptcy laws have been enacted to ensure that no person is discriminated against because of a bankruptcy filing. By federal law, no person can be denied employment, a student loan or grant, or a license or permit by reason of a bankruptcy filing. If you have good credit and file bankruptcy your credit will, of course, be negatively impacted. But if your credit is already bad, filing bankruptcy can only improve your life and your ability to re-establish a good credit history. If you are suffering from financial problems and are considering filing bankruptcy, you should also consider the consequences of not filing.
Can my creditors object to my bankruptcy discharge?
Creditors rarely have grounds to object to your bankruptcy discharge and almost never do unless a particular debt was fraudulently incurred.
Will filing bankruptcy stop a wage garnishment?
When you file bankruptcy, all wage garnishments (other than child support garnishments) must stop immediately. Some payroll departments require a release from the creditor. Bankruptcy case law requires creditors to promptly release a wage garnishment when a bankruptcy is filed and they can be held in contempt of court if they fail to do so.
After I file bankruptcy can I add debts that I forgot to include?
Yes. You can amend your bankruptcy forms to include debts that were not included when you originally filed. However, the debt must have been incurred prior to the date you filed bankruptcy. You cannot add new debts incurred after the date you file bankruptcy. The bankruptcy court will charge you a one-time amendment fee of $32.00 regardless of how many debts you add.
How will filing bankruptcy affect my mortgage?
When you file bankruptcy your mortgage lender cannot foreclose or otherwise attempt to collect mortgage payments from you unless it first obtains permission from the bankruptcy court after filing a motion for relief from the automatic stay. However, your mortgage lender can accept voluntary payments from you. If you want to keep your home, your lender may require that you sign a reaffirmation agreement which will essentially exclude your mortgage from your bankruptcy proceeding. Reaffirmation agreements are typically prepared by the lender on a standard official form either before or after the trustee meeting (341a meeting). If your mortgage is past due, your lender will likely not agree to a reaffirmation unless you bring the mortgage current or work out a modification or other payment arrangement.
How will filing bankruptcy affect my automobile loan?
When you file bankruptcy your automobile lender cannot repossess your vehicle without permission from the bankruptcy court. You have the options to: (1) "reaffirm" your automobile loan, retain the vehicle and continue making regular payments to the creditor; (2) "redeem" the vehicle by paying the creditor the fair market value of the vehicle and discharging (eliminating) the remaining balance of the loan; or (3) "surrender" the vehicle to the creditor approximately 45 days after your meeting of creditors and discharge any further liability on the loan.
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