FAQ - Bankruptcy

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FAQ — Bankruptcy

The information contained in these answers relates to the practices and procedures for the United States Bankruptcy Court for the Western District of Pennsylvania and is for informational purposes only. Not all districts follow the same practices and procedures. You should consult an attorney familiar with the Bankruptcy practices and procedures in the district where you will file your Bankruptcy.

What Is Bankruptcy?

Bankruptcy is a federal law by which an honest but unfortunate debtor can receive a discharge of certain debts. The main purpose of the Bankruptcy Code is to give an individual a "fresh start." A discharge in Bankruptcy is an order entered by the Bankruptcy Court which eliminates a person's personal liability for most debts.

What impact does filing for Bankruptcy have on my credit score?

In most instances, if you are considering filing for Bankruptcy, it is because you have problems with your credit. Whether your credit problems resulted from loss of income, divorce, unexpected medical issues, or various other reasons, the purpose of Bankruptcy is to give you a fresh start. While filing for Bankruptcy does not have a positive impact on your credit score, it gives you chance to start over and, through careful financial management and responsibility, you can rebuild your credit without worrying about former creditors trying to collect on a former debt.

How long does my Bankruptcy stay on my credit report?

A Bankruptcy will remain on your credit report for anywhere from 7 to 10 years. Typically, a Chapter 7 Bankruptcy that resulted in a discharge will remain on your credit report for 10 years. It is possible for a Chapter 13 Bankruptcy that is successfully completed and closed to remain on your credit score for 10 years, but it is more likely to be removed after 7 years.

I am married. Can my spouse and I file for Bankruptcy together?

Yes. You and your spouse can file a joint Bankruptcy.

I am married. Does my spouse have to file Bankruptcy with me?

No. Your spouse is not required to file with you in your Bankruptcy. However, if you and your spouse are not separated (i.e., living in the same house), your spouse's income will have to be included when calculating your income for purposes of your Bankruptcy.

Is there anything I need to do before filing Bankruptcy?

Yes. There is a course in consumer credit counseling that you must complete within 180 days prior to the filing of the Bankruptcy Petition. Almost all companies offer the course online. If you do not have access to the internet, some companies offer the course by telephone or in person.

What is the automatic stay?

The automatic stay goes into effect as soon as a Bankruptcy Petition is filed. The automatic stay prohibits creditors from taking any action to collect a debt. When a Bankruptcy is filed, all creditors and collection agencies should stop contacting you; you will stop receiving statements from creditors (including mortgage and vehicle loan statements); most legal proceedings will be stayed (such as collection lawsuits, mortgage foreclosure actions and sheriff sales); and most wage attachments and garnishments will end. If a creditor violates the automatic stay, that creditor can be found in contempt and sanctioned by the court. This includes payment for actual damages and attorney's fees.

There are times when a creditor may ask the Bankruptcy Court to grant relief from the automatic stay so that the creditor may proceed in collection efforts. This happens most frequently with secured creditors. For instance, if you fall behind on a mortgage or vehicle loan, the creditor may ask the Court to grant relief from the automatic stay and allow the creditor to foreclose on the real estate or repossess the vehicle.

However, the automatic stay does not stop all proceedings. Some of the exceptions include collection of certain tax debts, child and spousal support, and the prosecution of criminal cases.

What are the different chapters in Bankruptcy?

There are 6 different chapters in Bankruptcy. The 3 most common chapters are chapter 7, chapter 11 and chapter 13.

Chapter 7 is known as the liquidation chapter. This is the preferred chapter for most individuals because it is the quickest and cheapest way of obtaining a discharge. Listed on Schedules A and B are all assets you own or have an interest in, such as real estate, vehicles, bank accounts, household goods and furnishings, jewelry, retirement accounts and pension plans. All debts are listed on Schedules D, E and F. This includes mortgage loans, vehicle loans, credit card debt, medical bills or money owed to family members or friends. Then, on Schedule C, you claim either federal or state exemptions in the assets listed on Schedules A and B. Exemptions allow you to protect or keep assets. If you are unable to exempt an asset in its entirety, the Trustee may be able to sell that asset and distribute the proceeds from the sale to the unsecured creditors.

Chapter 7 is available to both individuals and businesses, however only individuals have exemptions available to claim.

Chapter 13 is commonly referred to as the payment plan chapter. While you prepare the same petition that is required for Chapter 7, you must also come up with a Plan by which a portion (or sometimes all) of your debt is repaid. Most chapter 13 Plans involve a person making a monthly payment to the Trustee, who then distributes the money to creditors. Some Plans involve the voluntary sale of assets. Others involve both monthly payments and the sale of assets. Plans last for either 3 or 5 years and you are to begin making payments to the Trustee under the Plan the first month after filing for Bankruptcy. At the end of the Plan, all debt that has not been repaid is discharged. Only individuals are eligible to file for relief under chapter 13.

In chapter 13, a person is known as a "debtor-in-possession" and is able to keep possession of all assets, even those that are not fully exempt. Occasionally, an individual whose income is too high cannot file for relief under Chapter 7 and is forced to file under Chapter 13.

Chapter 11 is the reorganization chapter, and is most often filed by businesses, both large and small. Chapter 11 is similar to Chapter 13 in that the business develops a plan of reorganization that allows the business to continue to operate while repaying a percentage of the debts owed to unsecured creditors. Chapter 11 is almost exclusively reserved for businesses. However, if either the secured or unsecured debts of an individual exceed the maximums for filing under Chapter 13, the individual may be forced to filed under Chapter 11.

Should I try to use whatever money I have to pay down my debts before filing for bankruptcy?

Unless you can satisfy all of your debts and ensure that no creditor will attempt to collect against you, absolutely not. Both Federal and State law provide for exemptions that allow you to protect most, if not all, of your assets once you file for Bankruptcy. Exemptions exist because, if you file for Bankruptcy, discharge your debts, and are left with nothing but the shirt on your back, then you are in no better position that before you filed. If you try to pay off your debts using checking and savings accounts, retirement accounts, or proceeds from selling your assets, and you must still file for Bankruptcy, then you have given away everything that you should be able to exempt.

How do exemptions work in Bankruptcy?

The following examples are how exemptions work in chapter 7:

Example 1: Debtor owns a home worth $100,000.00. There is a mortgage on the property with the principal balance of $90,000.00 owed on the mortgage loan, resulting in there being $10,000.00 of equity in the home. Debtor has approximately $21,000.00 available to claim in the homestead exemption. In this example, the Trustee will not look to sell the home because the debtor will be able to exempt the $10,000.00 of equity.

Example 2: Same scenario as above, except the principal balance owed on the mortgage loan is $20,000.00, resulting in there being $80,000.00 of equity in the home. In this example, the trustee will most likely attempt to sell the home because Debtor cannot exempt all of the equity in the home. Assuming there is $8,000.00 in closing costs, the trustee will net $92,000.00 from the sale of the home ($100,000.00 - $8,000.00 = $92,000.00). The trustee will then pay off the $20,000.00 mortgage, pay the debtor the $21,000.00 in equity that can be exempted, resulting in the trustee having $51,000.00 available to pay to the unsecured creditors ($92,000.00 - $20,000.00 (mortgage loan) - $21,000.00 (exemption) = $51,000.00)

In Chapter 13, exemptions do not determine which assets a person can keep. However, exemptions have an impact on how much unsecured creditors must be paid through the chapter 13 Plan. The Alternative Liquidation Test provides that unsecured creditors must be paid at least as much through the Plan as the unsecured creditors would be paid if the debtor filed under chapter 7. In example 2 above, if the debtor had filed under chapter 13, the Plan must provide for at least $51,000.00 being paid to unsecured creditors. The same Alternative Liquidation Test applies to individuals and business attempting to reorganize under Chapter 11.

Why would I file for relief under chapter 13 instead of chapter 7?

There are 3 main reasons why a person would file for relief under chapter 13 instead of chapter 7:

You make too much money. The Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"), which went into effect in 2005, implemented what is known as the Means Test. The Means Test uses a person's income for the 6 months prior to the month in which the Bankruptcy is filed to determine the person's annualized income. If your annualized income is below the applicable median family income, you will most likely be permitted to file under chapter 7. If your annualized income is above the applicable median family income, additional calculations are done to determine whether you will have sufficient disposable income to fund a chapter 13 Plan. If there is sufficient disposable income to fund a Plan, you will be required to file under chapter 13.

You want to keep an asset that cannot be fully exempted in chapter 7. If you are in need of Bankruptcy relief but are concerned that the chapter 7 Trustee will sell an asset you want to keep, filing under chapter 13 will enable you to keep the asset.

Cure a default. In chapter 7, a secured creditor is entitled to demand that a person immediately pay all arrears on a secured loan. If you fail to do so, the creditor may be entitled to obtain relief from the automatic stay and proceed to foreclose on real estate or repossess personal property. If you want to keep the property subject to the security interest, you can file under chapter 13 in order to cure the default by paying the arrears over the life of the Plan. This is accomplished by paying to the secured creditor the normal monthly payment amount plus an additional amount so that you are current at the end of the Plan.

Example: Debtor's monthly mortgage payment if $1,000.00. Debtor is behind by $12,000.00 on the loan. Debtor's chapter 13 Plan is for a period of 60 months. In order to cure the default, Debtor would have to pay to the creditor through the Plan $1,200.00 per month. This is the $1,000.00 monthly mortgage payment plus $200.00 to pay the arrears ($12,000.00 % 60 months = $200.00).

Do I need to list all of my assets and debts on my Bankruptcy Schedules?

Yes, all of your assets and debts must be listed. Bankruptcy in unlike most other legal cases, as you are obligated to fully disclose all information. If the Bankruptcy Court believes that you committed fraud in connection with your Bankruptcy, your case may be dismissed, certain debts may not be discharged, and you may even face criminal charges.

Do I need to continue paying my secured creditors after receiving a discharge?

The legal answer to this question is no. In reality, the answer depends on whether you want to keep the property that is subject to the security interest.

As stated above, a discharge eliminates an individual's personal liability for certain debts. What this means is that you cannot be sued by a creditor to collect a debt that was discharged. However, the discharge does not eliminate the security interest a creditor may have in property. If you do not pay a loan that is secured by property (such as a mortgage loan or vehicle loan), the creditor is still entitled to execute on the property that is subject to the security interest by foreclosing on the real estate or repossessing the personal property. A creditor can only take action against the property and cannot sue to get a personal judgment.

Example: Debtor owes $100,000.00 on a mortgage loan. Debtor has not made any payments on the loan for over a year. The mortgage company forecloses on the real estate and sells it at a sheriff sale for $75,000.00. The discharge prevents the mortgage company from suing the debtor for the additional $25,000.00 owed on the mortgage loan. If the debtor had not received a discharge in Bankruptcy, a mortgage company would be able to sue the debtor personally for this additional amount.

I just filed chapter 7 Bankruptcy. What happens now?

For many people, the most important thing that happens after the Bankruptcy is filed is that all creditors will stop contacting them. This means no more harassing phone calls and collection notices. Creditors that knowingly and willfully violate the Order for Relief, which is entered once you file for Bankruptcy, and continue to pursue collection of a debt listed on your Petition may face additional penalties under the Fair Debt Collection Practices Act and the Pennsylvania Unfair Trade Practices and Consumer Protection Law.

After the Bankruptcy is filed, the next thing you can expect is a notice stating the date and time for your 341 Meeting of Creditors. Even though it is called a Meeting of Creditors, chances are no creditors will appear. This is a hearing that is held before the Trustee assigned to your case and not before a Bankruptcy Court Judge. At the Meeting of Creditors, the Trustee will ask you questions about the information contained in your Bankruptcy Petition. The Trustee's main purpose for asking these questions is to determine whether there are any assets that can be recovered and used to pay back a portion of your debt.

You must also complete a post-filing course in personal financial management. This course must be completed and the certificate filed with the Court within 60 days from the date first set for your Meeting of Creditors. For example, if your Meeting of Creditors is scheduled for June 1, you have until July 31 to have the course completed and certificate filed. If for some reason you cannot make the Meeting of Creditors on June 1 and it is rescheduled for August 1, you still only have until July 31 to complete the course. You do not have to wait until your Meeting of Creditors to complete the personal financial management course. Many Debtors complete the second course immediately after filing the Bankruptcy Petition.

In most cases, after you attend your Meeting of Creditors and complete the post-filing course, there is nothing more for you to do. There is a 60 day period for any creditor to object to a discharge of its debt that starts on the date your Meeting of Creditors is closed by the Trustee. If no creditor objects to a discharge, the Bankruptcy Court will typically discharge your debts and close your case in about 90 days after your Meeting of Creditors.

While a vast majority of Bankruptcies are completed without any issues, there are cases in which complications may arise. In most instances, your attorney will be able to identify and make you aware of any potential issues before your Bankruptcy is filed.

I just filed chapter 13 Bankruptcy. What happens now?

After the Bankruptcy is filed, the most important thing for you to do is make sure that the first Plan payment is made within 30 days after the filing of your Bankruptcy. You do not want to get behind in your Plan. If you are employed, your Plan payment will be made through a wage attachment. Your employer will withhold from your income the amount you are to pay into your Plan each month and remit the money to the Chapter 13 Trustee. The amount withheld by your employer depends on your frequency of payment. Be cautious, as sometimes the first plan payment becomes due before the wage attachment order is entered or served upon your employer If that happens, you will be responsible for making the payment to the Trustee. If you are not employed or are self-employed, you will be responsible for making each monthly payment. Payments are to be made by certified check or money order and mailed to an address specified by the Trustee.

You will be scheduled for a 341 Meeting of Creditors. This is essentially the same as the Meeting of Creditors in a chapter 7 Bankruptcy, except the Trustee will address the plan and the provisions therein as well as the information contained in the Bankruptcy Petition.

A conciliation conference will be scheduled after the Meeting of Creditors, at which time the Trustee will determine whether or not your Plan is appropriate and ready for confirmation. Most times, only your attorney will need to appear at the conciliation conferences. Confirmation simply means that the Plan is feasible, meets all requirements under the Bankruptcy Code, and is accepted by the secured creditors. If there is an issue with the Plan, or if a creditor files an objection to the Plan, one or more hearings will be scheduled to try and resolve the issues. If the issues cannot be resolved, a contested confirmation hearing will be scheduled, at which time the Court will make a determination regarding confirmation.

Throughout the entire Chapter 13 Bankruptcy, you have to make sure that all monthly Plan payments are being made to the Trustee. If not all Plan payments are being made, you run the risk of your Bankruptcy being dismissed or converted to a chapter 7.

You will also have to complete a post-filing course in personal financial management. This course must be completed and the certificate filed prior to the last payment being made into the Plan.

Once your Plan is completed, you will receive a discharge of the debts that were not repaid through the Plan.

I just received a document from my creditor called a Reaffirmation Agreement. What is this, and what should I do with it?

A reaffirmation agreement is a contract that, if entered between you and the creditor, will create a new debt that survives the discharge granted in the Bankruptcy. Entering a reaffirmation agreement is not required, and is frequently discouraged by attorneys. If the purpose of filing for Bankruptcy is to discharge your debt, why enter a new agreement that "un-do's" the work of the Bankruptcy discharge? Reaffirmation agreements are often complicated. You must thoroughly review each agreement and, should you choose to enter the agreement, you must carefully consider all of the consequences that may result from entering an agreement.

Let our lawyers and staff help you feel confident about solving your legal problem. You will find our staff friendly and our attorneys approachable and responsive to your questions and concerns. Call us toll free at 866-475-0816, or use the email form on our contact page to inform us of your legal needs.

*We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.