Consumer Bankruptcy FAQ
There are two main types of bankruptcy designed for consumers, Chapter 7 and Chapter 13.
Chapter 7 is also known as liquidation. This bankruptcy discharges, or removes, your unsecured debt. This means if you own property that is not exempt under your state's laws, it may be sold, or liquidated, to pay back some of your debt. In order to be eligible, you may not have previously received a bankruptcy discharge in the last eight years and you must pass the “means test,” a formula that subtracts your allowed expenses and debt payments from your current monthly income. If the income left over is below a certain amount, you may be eligible to file for Chapter 7. If you do not pass you will need to consider Chapter 13.
Chapter 13 bankruptcy is also known as reorganization. This means you may keep all of your property, as long as you make monthly payments over three to five years to repay all or some of your debt. In order to be eligible, you must prove to the bankruptcy court that you can afford to meet your payment obligations. If your income is irregular or too low, the court might not allow you to file for Chapter 13. In order to be eligible, you may not have previously received a bankruptcy discharge in the last six years.
It costs approximately $300 to file for Chapter 7 and 13 bankruptcies, which covers the administrative fees. You can check your state’s bankruptcy court website for a specific list of fees. If you cannot afford the fee, you may be able to pay installments or secure a waiver as determined by the local bankruptcy court.
You do not have to hire an attorney, but bankruptcy is a complex legal process and an attorney can be very helpful. If your goal is to prevent a home foreclosure or repossession of property, an attorney is strongly recommended.
It is best to ask family and friends for a referral. If you do not have a referral, contact your local bar association for names. You will want to specifically ask for attorneys who specialize in bankruptcy. Interview more than one, as it is important that you are comfortable with the attorney who represents you. Ask for a fixed price for advisement and filing.
Prices will vary depending on where you live and the issues that you face. A general estimate would be from $1,000 to $2,000. Most bankruptcy attorneys will provide a free consultation to help you decide whether bankruptcy is a good option for you. If you cannot afford an attorney, ask those you consult with if there are other options for repayment, or free legal assistance in your state or jurisdiction.
Before filing, you must obtain a certificate from an authorized credit counseling agency indicating that you successfully completed a course on the implications of bankruptcy (you can contact Take Charge America for this education). The fee for this should be no more than $50 for an individual or a couple filing jointly.
Before final discharge, you must successfully complete a course in financial management. There are many providers of this course and they can be found at the Federal Bankruptcy Trustees’ Web site, www.justice.gov/ust/eo/bapcpa/ccde/de_approved.htm. The fee for this should be no more than $100. Fee waivers are available for both services for those demonstrating need.
Bankruptcy does not eliminate “non-dischargeable debt.” This includes items such as unpaid child support and alimony, most taxes, student loans, damages for convicted crimes, and secured debts backed by collateral such as a home mortgage or car loan.
Chapter 13 filers must pay certain debts called "priority debts." These include wages you owe to employees, and certain tax obligations. The Chapter 13 repayment plan must include secured debts, such as a car loan or mortgage, as well as repayment of any payments that are past due. In addition, any disposable income left after making the required repayment must go towards repaying unsecured debts, such as credit cards or medical bills.
A Chapter 7 bankruptcy remains on your credit report for ten years and a Chapter 13 remains for seven years. Depending on your credit rating and score prior to the bankruptcy filing may reduce your score by 20% to 50%.
You may find it difficult to obtain credit after filing. However, if you had good credit at one time, some lenders may view filing as an advantage since your other debts are now discharged and you cannot file for bankruptcy again for many years. Some lenders may choose to offer you credit, but at higher than average interest rates.
Generally, filing for bankruptcy will make it difficult to obtain a mortgage. It may also affect your insurance premiums, job searches, and security clearances.
If you are at risk for home foreclosure and are unable to obtain a loan workout plan, bankruptcy may stall or avoid foreclosure with an automatic stay. The stay postpones the sale of a home while bankruptcy is pending. However, a lender may be able to obtain a motion to lift the stay from the bankruptcy court. If your foreclosure notice was issued before you were in bankruptcy, the automatic stay will not stop the clock.
The Chapter 7 bankruptcy effect on your mortgage is dependent on several factors including the amount of equity you have in the home and how much your state’s laws allow you to keep. Contact an attorney in your state to clearly understand your specific circumstances. Once the Chapter 7 bankruptcy is discharged, the lender is still able to foreclose on your home if you do not make your payments and keep them current.
Chapter 13 bankruptcy enables you to pay off late and unpaid mortgage payments during the repayment plan. You will need to continue to make your mortgage payments. If you make all the payments up to the end of the repayment plan, you can avoid foreclosure and keep your home. This may or may not include second mortgages or home equity loans, depending on your individual situation. Consult with an attorney about your specific circumstances.
In a Chapter 7 bankruptcy, certain types of property are exempt from being liquidated in most states. This usually includes, motor vehicles, necessary clothing, necessary household furnishings and goods (a second large HDTV may have to go), household appliances, jewelry up to a certain value, personal effects, life insurance up to a certain value, pensions, part of the equity in your home, tools of your trade or profession up to a certain value, and public benefits (welfare, Social Security, unemployment compensation) accumulated in a bank account.
Items that are nonexempt (property that may be liquidated) include: a second or vacation home, a second car or truck, expensive musical instruments (unless you're a professional musician), stamp, coin, and other collections, family heirlooms, high valued jewelry, cash, bank accounts, stocks, bonds, and other investments.
You can try to negotiate with your creditors for a workout plan to restructure and payoff the debt. You can seek help from a nonprofit credit counseling agency, which may be able to help you find other options to repay your debt. You may be able to agree to a settlement, which will lower your debt if you agree to pay certain fees.
You can file for bankruptcy more than one time unless:
- In the preceding 180 days a prior bankruptcy petition was dismissed due to your willful failure to appear before the court
- You did not comply with orders of the court
- Your case was voluntarily dismissed after a creditor asked the court to lift the automatic stay
- You did not receive credit counseling from an approved credit counseling agency
- You have not waited the required time between filings
Generally, most tax debts cannot be wiped out in bankruptcy. In Chapter 13 you are able to include your tax debt in the repayment plan. If the following conditions exist the taxes may be discharged:
- Taxes are for federal and state income tax
- Tax return was due at least three years prior to the bankruptcy filing
- Tax assessment took place at least eight months before the bankruptcy filing
- Tax return was not fraudulent and there was no attempt to evade the tax
If you have explored all possible alternatives and none of the alternatives, such as renegotiation with your creditors, a debt management plan, or debt settlement, then bankruptcy may be your only solution.