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FREQUENTLY ASKED QUESTIONS
REGARDING BANKRUTPCY
The following is a collection of common questions people have relating to the bankruptcy process. This information is provided for general information only and should not be contrued as formal legal advice nor the formation of a lawyer / client relationship. If you have further questions, please call us today to schedule your free bankruptcy consultation!
Q: What does it mean to file for bankruptcy?
A: Bankruptcy is a legal process that allows
people to be freed from burdensome debt while providing an orderly process to repay creditors from the available portion of the debtor’s property. The goal of bankruptcy is to give honest but unfortunate individuals a “fresh start” by relieving them of most of their debts. A person “files for bankruptcy” when he files with the bankruptcy court a petition for relief under one of the available chapters (typically Chapter 7 or 13 for individual consumers) of the Bankruptcy Code.
Q: What is the difference between a Chapter 7 and a Chapter 13 bankruptcy?
A: In a Chapter 7 bankruptcy the debtor turns over to the court-appointed bankruptcy trustee all of his property (excluding any property that is “exempt” under applicable laws) to be sold at auction. If the debtor has any property that serves as collateral to secure the repayment of a debt (meaning that the creditor has the right to take possession of the property if the debt is not repaid) the debtor must decide whether to surrender that property to the secured creditor or to keep the property and either pay off the applicable debt or agree to continue making payments on that debt. The court then grants the debtor a discharge of his debts (excluding debts which cannot be discharged in bankruptcy and debts that the debtor has agreed to keep paying on), which means that creditors are prohibited from ever trying to collect on the discharged debts.
In a Chapter 13, the person filing for bankruptcy proposes a plan to restructure and repay his debts over a period of three to five years. Once the plan has been approved by the bankruptcy court, the debtor is required to pay virtually all of his disposable income earned during the life of the plan to the bankruptcy trustee for debt repayment. As long as the debtor makes all of his payments under the plan he is allowed keep his property and, at the end of the plan period, receives a discharge of most of his remaining debts.
Q: How does a person decide whether to file under Chapter 7 or Chapter 13?
A: Most consumer debtors choose to file a Chapter 7 bankruptcy because they don’t have very many non-exempt assets and are willing to turn what little they do 
have over to the trustee or their creditors in exchange for having their debtsforgiven.
A Chapter 7 case allows these individuals to make a fairly clean break from their debts. A person usually will file a Chapter 13 bankruptcy only because either: (1) he is ineligible to file a Chapter 7 case because his income is too high, or (2) he has significant non-exempt assets he wants to keep. Often, people who initially file for bankruptcy under Chapter 13 find it difficult to make their plan payments over the entire three to five years that is required and end up converting their case to a Chapter 7. Whether to file a Chapter 7 or a Chapter 13 bankruptcy is a decision that involves a detailed analysis of a person’s debts, assets and financial situation, and should be made on a case-by-case basis only after consultation with a knowledgeable bankruptcy attorney.
Q: If people file a Chapter 7 bankruptcy, can they keep their house, their car or any of their other valuable property?
A: Remember, the general rule in a Chapter 7 case is that the debtor turns all of his assets over to the trustee to be sold, and the proceeds are distributed to creditors. However, there are ways that a debtor can keep a significant amount of his property. This depends on several factors though, such as whether the property has been used as collateral to secure repayment of a debt or whether the property fits into one of the categories of property that are exempt from collection by creditors. If the property, such as car, has been used as collateral to secure repayment of a loan, the debtor is permitted keep that property after either: (a) paying the creditor the value of that property, which upon filing may be less than the amount of the debt owed, or (b) reaffirming the debt and agreeing to continue making payments, during and after the bankruptcy, on the loan secured by that property. In addition, current federal and state laws allow bankrupt debtors to keep certain categories of property (often referred to as “exempt property” or “exempt assets”) that will help the debtor achieve his fresh start following bankruptcy, such as a vehicle, some equity in the debtor’s home, furniture and household items, clothing, some jewelry, food and other provisions, and retirement savings. Most of these exemptions are subject to limitations, such as caps on the value of the exempt property, but a knowledgeable attorney can help people determine what exemptions are available and, with some careful planning prior to filing a bankruptcy case, can help them maximize their available exemptions.
Q: Is there any way for a person to keep property that is non-exempt?
A: It certainly is possible. Normally, the trustee sells the property he receives from debtors at a public auction. The debtor, as well as the debtor’s family and friends, are free to bid on that property at the auction. Additionally, trustees are often willing to negotiate a price at which the debtor can purchase the property from the trustee. Since the trustee will incur costs associated with the sale of any property, a debtor might be able to purchase the property from the trustee at a discounted price which takes into account the avoided costs associated with a sale at auction.
Q: How can people get creditors and bill collectors to stop harassing them?
A: Generally, once a person files for bankruptcy all creditors and bill collectors are prohibited from taking any further action to collect debts from that person. This prohibition, called the “automatic stay”, arises immediately upon the filing of a bankruptcy case and is very broad. All debt collection efforts, including phone calls, law suits and foreclosure proceedings, should stop immediately. Following the automatic stay, creditors and bill collectors who continue their debt collection efforts without permission from the bankruptcy court and, if applicable, before the automatic stay expires, risk being held in contempt of court.
Q: Can a person have all of his debts discharged, or are there some debts that the person will still have to repay following bankruptcy?
A: Generally, the court cannot discharge debts for taxes, debts that were incurred under false pretenses or due to fraud or embezzlement, debts not listed in the bankruptcy filing (unless the applicable creditor learns of the bankruptcy case in time to file a claim), debts for child support or spousal support, HOA fees that accrue after the bankruptcy case is filed, debts for intentional injuries caused by the debtor or for judgments resulting from car accidents in which the debtor was driving under the influence, student loans, debts for certain cash advances or the purchase of luxury items in the months preceding the bankruptcy filing, fines payable to governmental 
entities, and debts that could have been discharged in a prior bankruptcy but the discharge was either denied by the court or waived by the debtor. This is a general list of debts that will not be discharged. Prior to filing for bankruptcy people should discuss each one of their debts with an attorney to determine whether their debts can be discharged. If a significant portion of a person’s debts are the type that cannot be discharged, bankruptcy may not be the best option.
In addition to the individual debts that cannot be discharged because of the nature of the debt, there are some circumstances in which the court will refuse to grant a discharge of any debts. A debtor will not receive a discharge if the debtor fraudulently transferred or concealed property within one year before filing bankruptcy in an effort to hinder, delay or defraud creditors, the debtor failed to keep adequate financial records, the debtor fails to satisfactorily explain any losses or deficiencies of assets, or the debtor received a discharge in a previous bankruptcy case in the last six to eight years. Again, any person who is considering bankruptcy should consult an attorney who can help determine whether he will be eligible for a discharge of his debts. It is extremely unfortunate when a person pays the costs of filing bankruptcy, turns over all of his non-exempt assets to the trustee to be auctioned off, but then fails to receive a discharge of his debts.
Q: How long does a bankruptcy case take, and what should a debtor expect?
A: For a Chapter 7 case where the debtor has no non-exempt assets to turn over to the bankruptcy trustee, a debtor should expect his bankruptcy case to take about four months to complete. The case might take longer if the debtor has significant assets to turn over to the trustee or if issues arise, such as a dispute over the value of the debtor’s assets or an objection to the discharge of any debts. The debtor is required to attend a meeting with the bankruptcy trustee, which usually takes place several weeks after the bankruptcy case is filed. At that meeting, called the “meeting of creditors”, the bankruptcy trustee and any creditors who choose to attend have the opportunity to question the debtor, under oath, regarding the debtor’s financial affairs. If there are no issues raised in the case, the court will issue an order granting the discharge of debts and close the case within a few weeks following the meeting of creditors. Typically, a Chapter 7 debtor is not required to appear in court.
Because a Chapter 13 case involves a plan to repay debts over time, a Chapter 13 case will last a minimum of three years, and a maximum of five years, from the date that the court approves the debtor’s repayment plan.
Q: How does filing bankruptcy affect a person’s credit rating?
A: A person’s credit rating will drop significantly as a result of filing for bankruptcy, and the bankruptcy will stay on the person’s credit report for 10 years. Keep in mind, however, that by the time a person files for bankruptcy their credit rating is usually already severely damaged because they have not been able to pay their debts on time. But this doesn’t mean that a person won’t be able to get credit following their 
bankruptcy. Many lenders are willing to extend credit to people who are emerging from bankruptcy because they know that their other debts have just been discharged and there is no possibility of another bankruptcy discharge for a at least eight more years. Often, with careful planning and disciplined payments, debtors are able to increase their credit rating fairly quickly after a bankruptcy.
Q: How much does it cost to file for bankruptcy?
A: Currently, the cost to file a Chapter 7 petition is $299.00. This includes the filing fee, an administrative fee, and a trustee’s fee. The cost to file a Chapter 13 petition is $274.00. These amounts do not include the attorneys’ fees a debtor will be charged for preparing the bankruptcy petition and representing the debtor in the bankruptcy case. Most attorneys charge a fixed fee to prepare and file a bankruptcy petition and charge an hourly rate if additional work is required.
Q: Does a person have to hire an attorney to file a bankruptcy petition?
A: Anyone who wishes to file for bankruptcy may do so without hiring an attorney. However, neither the court-appointed trustee nor any court employees or personnel are permitted to give any legal advice. The bankruptcy court will assume that any debtor who represents himself is familiar with the complex bankruptcy laws and procedural rules. Some individuals try to save money by hiring bankruptcy document preparers to draft their bankruptcy petition. These individuals should remember that bankruptcy document prepares are not lawyers and are prohibited from giving legal advice. Bankruptcy laws are extremely complex, and a misunderstanding of the law could result in a debtor losing property that should be exempt, not obtaining a discharge of his some or all of his debts, or having his case dismissed. An experienced bankruptcy lawyer can navigate the debtor through the complex bankruptcy laws and procedures to ensure that a debtor receives a discharge of debts, maximizes his available exemptions and preserves as much of his property as possible.
Q: Is it true that the bankruptcy laws have been changed to make it harder for people to declare bankruptcy?
A: In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act. The purpose of this act, which was sponsored in large part by credit card companies, was to limit number of people who are eligible to file a Chapter 7 bankruptcy and instead force more debtors to try to repay their debts under a Chapter 13. Now, an individual wanting to file a Chapter 7 case must satisfy a “means test”, which measures the person’s average monthly income for the six-month period prior to filing for bankruptcy. If the person’s income during this six-month period exceeds a certain amount, the court will presume that the debtor is abusing the bankruptcy process by filing a Chapter 7 case. These high income debtors who fail the means test are ineligible to file a Chapter 7 case, and their only bankruptcy option is to file a Chapter 13 case. Again, a knowledgeable bankruptcy lawyer can help a person determine how they can become eligible to file under Chapter 7.
Q: Are HOA fees dischargeable in bankruptcy?
A: HOA fees that accrue before the date of the bankruptcy petition are dischargeable. However, fees or assessments that become due after the date the bankruptcy petition is filed are not dischargeable. Thus, the debtor will still be obligated to pay post-petition HOA fees and assessments that accrue after the filing as long as the debtor retains a “legal, equitable or possessory ownership interest” in the property that is subject to such fees or assessments. Of course, if the debtor elects to keep the home (either as a claimed exemption or by reaffirming of the underlying debt) the debtor must also pay all future HOA fees and assessments.
Q: How quickly will I have to be out of my house if I decide to give it up in bankruptcy?
A: In a Chapter 7 case, a debtor who has elected to surrender his home to the mortgage lender is required to turn the home over to the lender no later than 30 days after the date that is first set for the meeting with the bankruptcy trustee (which is typically 4-6 weeks after the filing of the bankruptcy petition). This means that the debtor may be able to remain in the home for one or two months after he or she files for bankruptcy.