Bankruptcy Basics
What is Bankruptcy?
Bankruptcy can give you a fresh financial start by discharging (canceling) most of your debts. Bankruptcy also stops your creditors from taking actions to collect debts. Federal law guarantees the availability of bankruptcy protection, and all bankruptcies are filed in federal courts.
Benefits of Bankruptcy:
- Stop lawsuits
- Stop foreclosure
- Prevent repossession of a car or other property
- Stop wage garnishment
- Avoid judgment liens
- Stop harassing phone calls, letters, etc. from creditors
- The automatic stay (see below)
- Cancel legal obligation to pay most debts (see below)
Protections Provided by Bankruptcy
Two of the most important aspects of bankruptcy are the automatic stay and the discharge.
The Automatic Stay
The automatic stay takes effect immediately upon filing bankruptcy, and requires that creditors immediately cease all collection activity. Creditors cannot make harassing phone calls or send demand letters. Creditors cannot continue a lawsuit or sell a property in foreclosure. If a creditor wants to take any of these actions after a bankruptcy is filed, a creditor must ask the Court for permission first, and the creditor will have to show good reasons why such permission should be granted.
The Bankruptcy Discharge
The discharge is usually granted at the conclusion of the case. Stated simply, the bankruptcy discharge causes all of your debts (with a few exceptions) to be canceled. For a Chapter 7 bankruptcy, debts excepted from discharge include most student loans, most taxes, child support, alimony, and debts for willful or malicious acts. The discharge in a Chapter 13 is broader and includes some of these items. Generally, however, the discharge does not remove liens on property. The discharge is probably the best benefit of filing bankruptcy (with the automatic stay a close second); it means that most, if not all, of your debts are wiped away.
Bankruptcy Options
The three most common types of bankruptcy are Chapter 7, and Chapter 13. (There are three additional types that are less common: Chapter 9 (for municipalities), Chapter 11 (individual/businesses with large assets) and Chapter 12 (for family farmers).
Chapter 7 - Liquidation
Chapter 7 is known as "liquidation" bankruptcy. The Debtor is allowed to keep enough property to make a fresh start, and the remainder of the Debtor's property (if any) is liquidated to pay creditors. Chapter 7 is the most common type of bankruptcy and a discharge is often granted within 6 months of filing the bankruptcy petition.
Chapter 13 - Payment Plan
In Chapter 13, the debtor pays back at least part of debts owed through a payment plan that usually lasts 3 to 5 years. Chapter 13 provides some advantages over Chapter 7, including a broader discharge and the ability to pay mortgage arrearages (preventing foreclosure) through a Chapter 13 Plan.
What Type of Bankruptcy Should You File?
Each type of bankruptcy has its own advantages and disadvantages, and a thorough discussion of the merits of each is far beyond the scope of this page. While bankruptcy can provide effective debt relief, bankruptcy law contains many traps for the unwary. A competent bankruptcy attorney from McDonald Law Firm can help you avoid these traps. You should consult a bankruptcy attorney before deciding whether to file bankruptcy and what type of bankruptcy is right for you.
Frequently Asked Questions
Will I lose any assets or property?
In a Chapter 7 Bankruptcy, the applicable laws in California allow debtors a specific set of exemptions. Over 90% of our clients keep everything and lose nothing when they file a Chapter 7 Bankruptcy (this is largely a result of sound advise and effective preparation of your case). In Chapter 13 - Debt Consolidation you keep all assets you choose as debts are paid "as if in full".
How often can I file Chapter 7 or 13?
Chapter 7 - Bankruptcy allows 1 discharge every 8 years. Chapter 13 - Debt Consolidation lets you file as often as needed, if filed in good faith and 70% of unsecured debts were paid in a previously discharged Chapter 13.
Must my spouse file with me?
No, while you have the option of filing a joint petition, both spouses are not required to file. However, a discharge of one spouse's debts does not provide relief for the obligation of the other spouse. Thus, creditors may pursue the non-filing spouse (or ex-spouse) for debt incurred together.
How do I check my credit?
What happens to my credit?
First of all, if you are considering bankruptcy, your credit is probably not all that good to begin with. Secondly, most clients report their credit rating scores actually IMPROVE upon filing their case! Clients typically start receiving multiple offers of credit about 90 days after filing Chapter 7. Credit card companies begin to see them as inviting targets for credit card solicitations because they recognize the filing individual's debt-to-income ratio has gone to zero after filing and that the filing individual is prevented from filing another Chapter 7 for six years. Consequently, a bankruptcy can help you rebuild a credit rating. That being said, a Chapter 7 or Chapter 13 bankruptcy will remain on your credit report for 8 to 10 years.
Can I refinance or sell my home? When can I purchase a new home?
While in a bankruptcy you must obtain court permission to sell or refinance. After discharge, you may immediately assume a sellers loan or, after two (2) years, qualify for a new home loan with some re-established credit and other normal credit characteristics.
Can you stop my home foreclosure?
Because your home is a secured debt, Chapter 7 - Bankruptcy can only temporarily stop foreclosure until your case is discharged or your creditor lifts the "automatic stay". Chapter 13 - Debt Consolidation completely stops foreclosure if back payments are kept current in the payment plan and regular payments are kept current after filing.
Does Bankruptcy eliminate all debts?
No. Chapter 7 - Bankruptcy will eliminate most all unsecured debts but not secured debts such as your home or car. To retain secured assets, payments must be made or modified. In Chapter 13 - Debt Consolidation you pay all or only a portion of your debts. Moreover, certain debts such as student loans, most taxes, and past due child/support payments are not dischargeable in a bankruptcy.
Do I have to list all my creditors?
You must list all creditors at filing except creditors with zero balance. Chapter 7 - Bankruptcy allows you to pay a desired creditor directly if you choose through reaffirmation. A Chapter 13 has restrictions on who you pay, how much, and when.
Can you remove a lien?
If the lien was not incurred to purchase the asset, was not consensual, and impairs an exemption, it may be removed by lien avoidance techniques.
Why try to payback creditors in Chapter 13, why not just file Chapter 7?
If mandated by the "Means Test" or If there is enough money left over after monthly living expenses the court may require full or partial payment to your creditors in Chapter 13 - Debt Consolidation. Other reasons are listed on the webpage entitled "Which Chapter is For You".
Can my co-signor be protected?
All consumer co-signors are protected under Chapter 13 - Debt Consolidation but not under Chapter 7 - Bankruptcy.
Will my employer be notified?
No, unless you owe your employer money or stop making timely Chapter 13 - Debt Consolidation payments.
Will my bank account be affected?
If your bank or credit union is an unsecured creditor, close your account and move to a bank where you owe nothing. Otherwise, at time of filing, your bank could offset or freeze your account.
Does Chapter 7 or 13 stop lawsuits and judgments?
Yes, immediately when we file your case.
Can you stop wage garnishment?
Yes. We make most creditors stop garnishing wages when your case is filed. This doesn't apply to current child support payments.
Can you stop auto repossession?
Yes, immediately upon filing. Once the bankruptcy case is filed, a federal court order goes immediately into effect, preventing a car from being repossessed. In a Chapter 7 bankruptcy, the client simply continues to make the payments on the loan. In a Chapter 13, a monthly payment is worked out with the court, which in turn pays the car lender. That monthly payment is often hundreds of dollars less than the original payment, and can be imposed upon the lender regardless of how many months the client may have missed prior to filing bankruptcy.
Can I use credit while in Chapter 7 or 13?
No, not until you receive a discharge. In Chapter 13 - Debt Consolidation you must get court permission to incur debt over $250, except in emergencies.
Will I have to go to court?
Generally only one trustee hearing appearance is required approximately 30 days after filing. This is normally a short hearing. Your creditors may be present to ask questions. Our attorney will be present to represent you.
How long will I be in Chapter 7 or 13?
Chapter 7 - Bankruptcy takes about 4 months, although your dischargeable debts are gone the day we file your case. Chapter 13 - Debt Consolidation takes 3 to 5 years to repay debts unless you decide to pay faster.
Can I keep my vehicles if I file bankruptcy?
Yes. If you are behind on payments a bankruptcy will allow you to keep the vehicles and reorganize your payments.
What is a reaffirmation agreement?
A reaffirmation agreement is a new agreement to pay the debt, usually an automobile loan. If a client wishes to reaffirm a particular debt, the creditor usually sends a proposed reaffirmation agreement, which will be reviewed and filled out with an attorney. There are some risks in signing a reaffirmation agreement which can be discussed before making the decision as to whether or not to reaffirm a particular debt.
What can I expect at the bankruptcy hearing?
Approximately 30 days after your case is filed you will need to attend the "meeting of creditors", which is a hearing conducted by the bankruptcy trustee. You will likely be surprised at how informal and stress free your hearing will be once your case has been prepared correctly. The bankruptcy trustee will ask you a series of simple question the information provided in the bankruptcy paperwork.