About Bankruptcy

Bankruptcy Myths

If your debts are dominating your financial future, filing a bankruptcy case may be an option.  Although it may sometimes appear that bankruptcy is mostly about filling out forms and paperwork, it’s much more than that.

There are a lot of myths and misunderstandings about filing a bankruptcy case.  For example:

  • Many people think that various factors disqualify them outright from filing a bankruptcy case.  They worry that they earn too much, have too much in their savings or retirement accounts, have too much equity in their homes, have too much personal property, or that a previous bankruptcy filing will disqualify them.  The reality is that many of these worries can be easily addressed by an attorney who is knowledgeable about bankruptcy law and who is familiar with the eligibility requirements.
  • Many people think that when you file a bankruptcy case, the court takes everything you own and gives it to your creditors.  The reality is that the purpose of filing for bankruptcy is to get a fresh start financially.  Taking everything you have wouldn’t serve that goal of getting a fresh start, so the bankruptcy law allows exemptions for various types of property.  An attorney who is knowledgeable about bankruptcy law can properly apply exemptions to your property so that when your case is closed you exit with what you need to get that fresh start.
  • Many people think that debts owed for taxes are not dischargeable in bankruptcy.  This can be a complex area of bankruptcy law, but the reality is that some tax debts can be discharged.  An attorney who is knowledgeable about bankruptcy law can help determine if your tax debts may be eligible for discharge.
  • Many people think that they will never get credit extended to them again after filing a bankruptcy case.  Filing a bankruptcy case will almost certainly affect your credit score adversely and can make it difficult to obtain credit in the period immediately following your filing.  But what you do after your bankruptcy case is closed can have a significant impact on your credit also.  Paying your bills in full and on time after filing a bankruptcy case can help build up your credit over time, and you may be able to obtain a mortgage provided you meet certain requirements.

These are only a few of the many issues an attorney knowledgeable with bankruptcy law can address, and there are many more.  Don’t let your fear or anxiety about the future prevent you from discussing your options with your attorney.  The more you know about the bankruptcy process, the more you’ll know if filing a bankruptcy case is right for you.


Chapter 7 Bankruptcy

The majority of consumer bankruptcy case filings are cases filed under Chapter 7 of the bankruptcy law.  When you file a Chapter 7 case, your debts can be discharged and the case is generally closed in about four to six months.  A Chapter 7 case is also known as a “liquidation” because the court determines if you have any assets that can be liquidated (turned into cash), so that your creditors can receive payment for some of what you owe.

However, for many Chapter 7 filers their assets can be protected from the liquidation process completely by proper use of the exemptions allowed under the bankruptcy law.  These cases are referred to as “no asset” cases because the court determines that there is no property available for distribution to creditors.  An attorney knowledgeable with the bankruptcy law can apply exemptions to your real estate and your personal property so that you get the maximum protection allowable for your assets.

Once you file a Chapter 7 case, the court will schedule a “Meeting of Creditors,” also commonly referred to as a “341 Meeting” after the section of the bankruptcy statute that requires it.  At the Meeting of Creditors, an individual appointed by the court to represent the interests of all your creditors, the Chapter 7 Trustee, will examine you regarding your circumstances and the information you have provided in your Chapter 7 petition.  Among the questions asked, it is typical for the trustee to inquire as to the circumstances of how your debt accumulated.  For the many of the people who file bankruptcy cases, reductions of household income through temporary or permanent job loss, incurring large debts through costly medical problems, and changes in marital status such as divorce or separation frequently precipitate the need to file a Chapter 7 case.

Most people receive a discharge for their debts about two months after their Meeting of Creditors has concluded.  The effect of the Chapter 7 discharge is to eliminate your personal liability to pay your debts.  The debt itself does not “go away,” but your legal obligation to repay the debt does.  After the discharge is issued, the case typically will close in a few weeks.

It’s important to note that not all debts are eligible for discharge under the bankruptcy law.  A partial list of these includes: debts for domestic support obligations, such as child support and alimony; debts for fraud, embezzlement or larceny; debts for restitution or criminal fines; and most recently assessed tax debts.  The list in the preceding sentence is not complete and this can be a complex legal area.  You should consult an attorney knowledgeable in bankruptcy law to review whether you have any debts that may not be eligible for a discharge.

There are many other legal and technical details involved in a Chapter 7 case.  The description above is not intended to be comprehensive, but only to provide an overview of the process.  An attorney knowledgeable and experienced in bankruptcy law can explain the Chapter 7 process in more detail and answer the questions you may have.


Chapter 13 Bankruptcy

The essential goal of a Chapter 13 bankruptcy filing is to repay part or all of your debts over an extended period while under the supervision of the bankruptcy court.  A Chapter 13 bankruptcy case provides for adjustment of the debts of an individual with regular income.  If an individual has enough disposable income, they can submit a Chapter 13 plan proposing how much they can afford to repay their creditors over either a three-year or five-year period.  The court will review the Chapter 13 plan with the help of the Chapter 13 Trustee and address any objections that creditors or the trustee may have with the plan.  Once approved, the individual must make monthly payments to the court for the approved amount for the duration of the plan.

If an individual wants to file a bankruptcy case, they may be required to file a Chapter 13 case instead of a Chapter 7 case if their household income is greater than a specific threshold amount that is based on the individual’s household size and many other factors.  The calculations required to determine if an individual’s household income is above the threshold can be very complex, but an attorney knowledgeable in bankruptcy law can help make this determination.

A bankruptcy case filed under Chapter 13 can also provide distinct advantages, especially for homeowners who have fallen behind on their mortgage payments and who may be facing foreclosure under state law.  Under a Chapter 13 plan, individuals may pay any mortgage arrearages over the course of the plan and emerge from the case current on their account.  In addition, in some cases where the value of a primary residence owned by the individual has decreased substantially, it may be possible to “strip off” second or third mortgages using a procedure that renders these secured debts into unsecured debts.  This procedure requires a proper valuation of the real property that secures these claims, but stripping off these liens may be possible if there is no equity to attach to them.  An attorney knowledgeable and experienced in bankruptcy law should be consulted to review these circumstances if they exist.  When the Chapter 13 plan has been completed and the individual has made the required payments, a discharge is issued, similar to that in a Chapter 7 case. 

As with a Chapter 7 bankruptcy case, there are many other legal and technical details involved in a Chapter 13 case.  The description of Chapter 13 cases above is not intended to be comprehensive, but only to provide an overview of the process.  An attorney knowledgeable and experienced in bankruptcy law can explain the Chapter 13 process in more detail and answer the questions you may have.