A decision to file for bankruptcy should be made only
after determining that bankruptcy is the best way to deal with your
financial problems. This information page cannot explain
every aspect of the bankruptcy process. If you still have questions
after reading it, you should speak with an attorney familiar with
bankruptcy.
What Is
Bankruptcy?
Bankruptcy is a legal proceeding in which a person who
cannot pay his or her bills can get a fresh financial
start. The idea of a “fresh start” for debtors goes
back to the Old Testament and current bankruptcy laws can
be traced to England in 1542 under King Henry
VIII. The right to
file for bankruptcy is provided by federal law, and all bankruptcy
cases are handled in federal court. Filing bankruptcy immediately
stops all of your creditors from seeking to collect debts from you,
at least until your debts are sorted out according to the law.
What Can
Bankruptcy Do For You?
Bankruptcy may make it possible for you
to:
• Eliminate
the legal obligation to pay most or all of your debts. This is
called a ‘‘discharge’’ of debts. It is designed to give you a fresh
financial start.
• Stop
foreclosure on your house or mobile home and allow you an
opportunity to catch up on missed payments. (Bankruptcy does not,
however, automatically eliminate mortgages and other liens on your
property without
payment.)
• Prevent
repossession of a car or other property, or force the creditor to
return property even after it has been repossessed.
• Stop wage
garnishment, debt collection harassment, and similar creditor
actions to collect a
debt.
• Restore or
prevent termination of utility
service.
• Allow you
to challenge the claims of creditors who have committed fraud or who
are otherwise trying to collect more than you really
owe.
What Bankruptcy Cannot
Do
Bankruptcy cannot, however, cure every financial
problem. Nor is it the right step for every individual. In
bankruptcy, it is usually not possible
to:
• Eliminate
certain rights of ‘‘secured’’ creditors. A ‘‘secured’’ creditor has
taken a mortgage or other lien on property as collateral for the
loan. Common examples are car loans and home mortgages. You can
force secured creditors to take payments over time in the bankruptcy
process and bankruptcy can eliminate your obligation to pay any
additional money if your property is taken. Nevertheless, you
generally cannot keep the collateral unless you continue to pay the
debt.
• Discharge
types of debts singled out by the bankruptcy law for special
treatment, such as child support, alimony, certain other debts
related to divorce, most student loans, court restitution orders,
criminal fines, and some
taxes.
• Protect
cosigners on your debts. When a relative or friend has co-signed a
loan, and the consumer discharges the loan in bankruptcy, the
cosigner may still have to repay all or part of the
loan.
• Discharge
debts that arise after bankruptcy has been filed.
What Different Types of Bankruptcy Cases
Should I Consider?
There are several types of bankruptcy cases
provided under the law:
• Chapter 7
is known as ‘‘straight’’ bankruptcy or ‘‘liquidation.’’ It
requires a debtor to give up property which exceeds certain limits
called ‘‘exemptions,’’ so the property can be sold to pay
creditors.
•
Chapter 9 is reserved for municipal
governments.
• Chapter
11, known as ‘‘reorganization’’, is used by businesses and a few
individual debtors whose debts are very
large.
• Chapter
12 is reserved for family
farmers.
• Chapter 13
is called ‘‘debt adjustment’’. It requires a debtor to file a
plan to pay debts (or parts of debts) from current income. Most
people filing bankruptcy will want to file under either chapter 7 or
chapter 13. Either type of case may be filed individually or by a
married couple filing jointly.
The two most
common Chapters of bankruptcy for consumers are Chapter 7 and
13:
Chapter 7
In a
bankruptcy case under chapter 7, you file a petition asking the
court to discharge your debts. The basic idea in a chapter 7
bankruptcy is to wipe out (discharge) your debts in exchange for
your giving up property, except for ‘‘exempt’’ property which the
law allows you to keep. In most cases, all of your property will be
exempt. But property which is not exempt is sold, with the money
distributed to creditors.
If you want to keep property like a home or a car and are
behind on the payments on a mortgage or car loan, a chapter 7 case
probably will not be the right choice for you. That is because
chapter 7 bankruptcy does not eliminate the right of mortgage
holders or car loan creditors to take your property to cover your
debt.
Chapter 13
In a chapter
13 case you file a ‘‘plan’’ showing how you will pay off some of
your past-due and current debts over three to five years. The most
important thing about a chapter 13 case is that it will allow you to
keep valuable property—especially your home and car—which might
otherwise be lost, if you can make the payments which the bankruptcy
law requires to be made to your creditors. In most cases, these
payments will be at least as much as your regular monthly payments
on your mortgage or car loan, with some extra payment to get caught
up on the amount you have fallen behind. You should consider filing
a chapter 13 plan if you (1) own your home and are in danger of
losing it because of money problems; (2) are behind on debt
payments, but can catch up if given some time; (3) have valuable property
which is not exempt, but you can afford to pay creditors from
your income over time. You will need to have enough income in
chapter 13 to pay for your necessities and to keep up with the
required payments as they come
due.
What Does It Cost to File for
Bankruptcy?
It now costs $209 to file for bankruptcy under Chapter
7 and $194 to file for bankruptcy under Chapter 13, whether for one
person or a married couple.
If you hire an attorney you will also have to pay the
attorney’s fees you agree to.
How Quickly Can I
File Bankruptcy?
The answer to this question depends in large measure on how
quickly you can provide the attorney with the
information needed to prepare your bankruptcy paper work. The
typical bankruptcy filing takes one to seven days. However, in
an emergency the attorney may be able to file the same day if you
can supply him with sufficient information to do so. This is called
an emergency-filing. If you ask your attorney to do
an emergency-filing it is very important that you give him all
of the information that he needs to prepare the balance of your
paperwork as soon as possible. The court will only give you 10-15
days to file the remainder of your pleadings. Failure to do so will
result in dismissal of your case.
Does My Spouse Need
to File Bankruptcy With Me?
It is not always necessary for both spouses to
file bankruptcy. The question that must be asked is whether both
spouses are responsible for the debt that is being sought to be
discharged. Under current law debts are divided into separate and
marital obligations. You are not responsible for the separate debts
of your spouse. However, you may be responsible for the martial
debts incurred by them even though you did not sign the contract.
Thus if your spouse has an obligation for food, clothing, shelter,
utilities, or medical expenses you will probably be responsible for
those debts. If only your spouse files bankruptcy, these creditors
are then able to pursue you to collect the debt. Because it is often
cheaper and easier to file a joint bankruptcy then to fight the
claims of marital debt creditors it may be better to both file
bankruptcy.
What Will Happen to My Home and Car If I
File Bankruptcy?
In most cases you will not lose your home or car
during your bankruptcy case as long as your equity in the property
is fully exempt. Even if your property is not fully exempt, you will
be able to keep it, if you pay its non-exempt value to creditors in
chapter 13. However,
some of your creditors may have a ‘‘security interest’’ in your
home, automobile or other personal property. This means that you
gave that creditor a mortgage on the home or put your other property
up as collateral for the debt. Bankruptcy does not make these
security interests go away. If you don’t make your payments on that
debt, the creditor may be able to take and sell the home or the
property, during or after the bankruptcy
case.
There are several
ways that you can keep collateral or mortgaged property after you
file bankruptcy. You can agree to keep making your payments on the
debt until it is paid in full. Or you can pay the creditor the
amount that the property you want to keep is worth. In some cases
involving fraud or other improper conduct by the creditor, you may
be able to challenge the debt. If you put up your household goods as
collateral for a loan (other than a loan to purchase the goods), you
can usually keep your property without making any more payments on
that debt.
What are
exemptions?
The U.S. Congress has
determined that individuals filing for bankruptcy should be able to
retain certain basic items of property. The theory being that you
need certain basic items to sustain your life and start over
economically. Exemptions typically include things such as clothing,
a minimal amount of household goods, and equity in a
home.
While congress has establish federal
exemptions, they have also given each state the right to set their
own exemptions that apply to bankruptcies filed within their state,
in Utah these exemptions are found in the Utah Code. Some of the
exemptions available for a married couple include $40,000 of equity
in real property ($20,000 of equity in real property for an
individual), a washer, dryer, fridge, freezer, stove, microwave,
sewing machine, all beds and bedding, almost all clothing, a 12
months supply of food, up to $1000 of dining/kitchen tables and
chairs, up to $1000 of additional household furnishings and
appliances, up to $1000 of items with sentimental value, up to $1000
of books, animals, and musical instruments, up to $3500 of the tools
if used in ones trade, and up to $2500 in a motor
vehicle.
Do All
Creditors Have to Be Listed in My
Bankruptcy?
The short answer to this
common question is yes. All debts must be scheduled with the name
and address of the creditor. This is so all creditors can
receive notice of the bankruptcy and get their fair share of any
money distributed by the trustee. The failure to list a creditor may
mean that those creditor's rights are not affected by that
bankruptcy. Therefore they may still be entitled to sue and collect
their obligation against you.
Sometimes you may wish to omit a debt
because it is to a relative or you do not wish the party to know you
have filed. While the attorney sympathizes with this desire, it
should clearly be understood that it is a violation of the law not
to list each of your creditors. When you sign the bankruptcy
statements and schedules you sign that they are true, accurate, and
complete. In addition when you appear for your first meeting of
creditors you must assert under oath in answer to the trustee's
questions that you have listed all of your creditors and all of you
assets.
Can I Own Anything After
Bankruptcy?
Yes! Many people believe they cannot own anything for
a period of time after filing for bankruptcy. This is not true. You
can keep your exempt property and anything you obtain after the
bankruptcy is filed. However, if you receive an inheritance, a
property settlement, or life insurance benefits within 180 days
after filing for bankruptcy, that money or property may have to be
paid to your creditors if the property or money is not
exempt.
Will Bankruptcy Wipe Out All My
Debts?
Yes, with some exceptions. Bankruptcy will not
normally wipe out:
(1) money
owed for child support or alimony, fines, and some
taxes;
(2) debts
not listed on your bankruptcy
petition;
(3) loans
you got by knowingly giving false information to a creditor, who
reasonably relied on it in making you the
loan;
(4) debts
resulting from ‘‘willful and malicious’’
harm;
(5) student
loans owed to a school or government body, except if the court
decides that payment would be an undue
hardship;
(6)
mortgages and other liens which are not paid in the bankruptcy case
(but bankruptcy will wipe out your obligation to pay any additional
money if the property is sold by the
creditor).
Will I Have to Go to
Court?
In most bankruptcy cases, you only have to go to a
proceeding called the ‘‘meeting of creditors’’ to meet with the
bankruptcy trustee and any creditor who chooses to come. Most of the
time, this meeting will be a short and simple procedure where you
are asked a few questions about your bankruptcy forms and your
financial situation. Occasionally, if complications arise, or if you
choose to dispute a debt, you may have to appear before a judge at a
hearing. If you need to go to court, you will receive notice of the
court date and time from the court and/or from your
attorney.
Is it Possible to
Discharge My Student Loans?
The
general rule is that student loans are non-dischargeable. However,
if you can prove to the bankruptcy court that repayment of the loan
would create "undue hardship" your student loans may be discharged.
It is very difficult to show undue hardship. You must prove that you
lack the physical or mental ability to earn sufficient funds to
repay the debt. The discharge of student loans in a chapter 7
requires a special legal proceeding called an adversary proceeding
that must be filed separate and apart from the
bankruptcy.
Will Bankruptcy Affect My
Credit?
There is no clear answer to this question.
Unfortunately, if you are behind on your bills, your credit may
already be bad. Bankruptcy will probably not make things any worse.
The fact that you’ve filed a bankruptcy can appear on your credit
record for ten years. But since bankruptcy wipes out your old debts,
you are likely to be in a better position to pay your current bills,
and you may be able to get new
credit.
Can I Give Away
Property Prior to Filing?
As part of a bankruptcy filing the court requires you
to disclose any transfers of property made during the last year. Any
transfers made within this time period, if they are substantial
(meaning over $600) can be set aside by the court. Thus if you were
to give a $1000 car to a relative prior to filing, that transfer
would have to be disclosed, and the trustee would have the option of
setting aside the transfer, obtaining the vehicle and selling it for
the benefit of your creditors.
If a transfer occurs more than one year prior
to filing, you may still lose the property if you are continuing to
use it. The bankruptcy court requires you to disclose any property
which you are using that belongs to another person. Thus, if you
transferred your $1000 car over a year ago but continue to use it,
make repairs on it, and pay for the insurance, the trustee could set
aside the transfer and sell the property.
Can I Sell Property
Prior to Filing?
You can sell any property that you wish prior to
the filing of a bankruptcy as long as you sell it for its actual
value. If you sell property for less than its fair market value, the
bankruptcy trustee can set aside that transaction, obtain the
property, and sell it to help pay unsecured creditors. If you sell
property and have not yet been fully paid for the property, the
payments are an asset that belongs to the court and can be used to
pay your creditors.
An additional consideration in the sale of
property is the dollar amount of the proceeds. If you receive more
than $2000 the court may require you to account for the use of those
funds. If you have retained a share of it in cash the court will
take those funds. If you have paid any creditor more than $600
within the 90 days prior to filing, that creditor may be required to
refund the money to the court.
Can I Pay Off
Certain Creditors Prior to Filing?
There
are a number of rules in connection with making pre-petition
payments to creditors. If these rules are violated the creditor can
be required to give the money back to the court so that it may be
redistributed pro-rata to your unsecured creditors. First, you may
make any payments on regularly scheduled debts as they come due.
Therefore if you have a $1100 monthly mortgage payment, you may make
your monthly payments without any harm coming to that creditor.
Second, you may pay less than $600 on any bill. As long as you do
not exceed this amount the bankruptcy court will not require the
creditor to give the money back. However, if you pay more than $600
and the debt is an obligation that is past due, the court could ask
for surrender of those funds.
How Do I Find a Bankruptcy
Attorney?
As with any area of the law, it is important to
carefully select an attorney who will respond to your personal
situation. The attorney should not be too busy to meet you
individually and to answer questions as necessary. The best way to find a
trustworthy bankruptcy attorney is to seek recommendations from
family, friends or other members of the community, especially any
attorney you know and respect. You should carefully read retainers
and other documents the attorney asks you to sign. You should not
hire an attorney unless he or she agrees to represent you throughout
the case. In
bankruptcy, as in all areas of life, remember that the person
advertising the cheapest rate is not necessarily the best. A
reputable attorney will generally provide counseling on whether
bankruptcy is the best option. This avoids the double charge of
having to pay a counselor and then an attorney. If bankruptcy is not
the right answer for you, a good attorney will offer a range of
other suggestions. Document preparation services also known as
‘‘typing services’’ or ‘‘paralegal services’’ involve non-lawyers
who offer to prepare bankruptcy forms for a fee. Problems with these
services often arise because non-lawyers cannot offer advice on
difficult bankruptcy cases and they offer no services once a
bankruptcy case has begun. There are also many shady operators in
this field, who give bad advice and defraud consumers. When first
meeting a bankruptcy attorney, you should be prepared to answer the
following questions:
• What
types of debt are causing you the most
trouble?
• What are your current household
income?
• What
are your current household
expenses?
• What
are your significant
assets?
• How
did your debts arise and are they
secured?
• Is any
action about to occur to foreclose or repossess property or to
shut off utility service?
NOTICE The Law Office of Douglas L. Barrett, LLC, is
a limited liability company engaged in the practice of law.
This information web page is not intended as, and does not
constitute, either legal advice or a solicitation of any particular
prospective client. An attorney/client relationship with The Law
Office of Douglas L. Barrett, LLC, cannot be formed by reading or
responding to this information page as such a relationship
may be formed only by specific and explicit agreement with The
Law Office of Douglas L. Barrett, LLC.