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Common Bankruptcy Questions

 

            A decision to file for bankruptcy (BK) should be made only after determining that it is the best way to deal with your financial problem.  This handout cannot explain every aspect of the BK process.  If you still have questions after reading this, you should call our office at 814-693-0500 or 888-249-9660.

 

What is bankruptcy?

 

            BK is a legal proceeding in which a person who cannot pay his or her bills can get a fresh financial start.  The right to file for BK is provided by federal law, and all BK cases are handled in federal court.  Filing BK 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 Me?

 

            BK 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. (BK does not, however, get rid of 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 actions to collect a debt.

 

·       Restore or prevent termination of utility services.

 

·       Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than what you really owe.

 

What Bankruptcy Cannot Do For Me?

           

            BK cannot, however, cure every financial problem.  Nor is it the right step for every individual.  In BK, it is usually not possible to:

 

·       Eliminate certain rights of “secured” creditors.  A “secured” creditor has taken a mortgage or other lien on your 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 BK and BK 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 certain types of debts singled out by the BK law for special treatment, such as child support, alimony, or other debts related to divorce, student loans, court restitution orders, criminal fines and certain taxes.

 

·       Protect co-signers on your debts.  When a relative or friend has co-signed a loan and you discharge the loan in BK, the co-signer may still have to repay all or part of the loan.

 

·       Discharge debts that arise after BK has been filed.

 

What Different Types of Bankruptcy Cases Should I Consider?

 

·       Chapter 7 is known as “straight” BK 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 11 is known as “reorganization” and 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 BK will want to file under either a Chapter 7 or a Chapter 13.  Either type of case may be filed individually or by a married couple filing jointly.

 

Chapter 7 (“Straight” Bankruptcy)

 

            In a Chapter 7 BK case, you file a petition asking the court to discharge your debts.  The basic idea in a Chapter 7 BK 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 your 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 BK does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt.  If you are behind on your mortgage or car loans, if you file a Chapter 7, you will have to come up with the amount that you are behind in a certain amount of time after filing the Chapter 7.

 

            An individual cannot file a Chapter 7 if their income is too high.  Gross family or household income for the last 6 months is used.  If your income is below the PA Median Income, you will be able to file.  If you are above the Median, there is a complicated formula that will determine whether you can file.

 

            Median income in Pennsylvania as of March 17, 2008 is as follows:

 

Household Size

Annual Income

Monthly Income

1

$43,166

$3,597

2

$50,628

$4,219

3

$63,491

$5,291

4

$76,182

$6,349

5

$83,082

$6,924

Each additional person

$6,900

$575

 

Chapter 13 (reorganization)

 

            In a Chapter 13, you file a “plan” showing how you will pay off some of your past-due and current debts over 3 to 5 years.  Most importantly, a Chapter 13 will allow you to keep valuable property, especially your home and car, which might otherwise be lost, if you can make the payments on your plan.  In most cases, these payments will be at least as much as your regular monthly payments on your mortgage and car loans, plus an extra payment to pay the past due amounts for your mortgage and car loans, plus whatever percentage of “unsecured” debts you may have to pay back depending on your monthly income and expenses.

 

            You should consider filing a Chapter 13 if you:

 

·       Own your home and are in danger of losing it because of money problems;

 

·       Are behind on secured debt payments, but can catch up if given some time;

 

·       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 your Chapter 13 to pay all your expenses and bills each month.

 

What Property Can I Keep?

 

            In a Chapter 7 case, you can keep all property which the law says is “exempt” from the claims of creditors.  You can choose your exemptions under PA law or federal law.  In most cases, the federal exemptions are better.  The amounts are adjusted each year and for 2008, for a single individual, they are:

 

  • $10,775 for household goods
  • $1,350 for jewelry
  • $3,225 in equity for a motor vehicle
  • $20,200 in equity in your home
  • $2,025 for the tools of your trade for your job (tools, books, etc.)
  • Your right to receive certain benefits such as social security, unemployment compensation, veteran’s benefits, public assistance, and pensions – regardless of the amount.

 

The amounts of the exemptions are double when a married couple files together.

 

            In determining whether property is exempt, you must keep a few things in mind.  The value of property is not the amount you paid for it, but it’s “yard sale value,” unless it was a recent purchase.  This may be a lot less than what you paid for the item or what it would cost to buy a replacement.

 

            You also only need to look at the equity in your property if you are intending to keep it.  This means that you count your exemptions against the full value minus any money that you owe on mortgages or liens.  For example, if you own a $50,000 house with a $40,000 mortgage, you count your exemptions against the $10,000 which is your equity if you sell it.

 

            While your exemptions allow you to keep property even in a Chapter 7, your exemptions do not keep your mortgage company or car loan company from taking the property if you are behind in your payments.  In a Chapter 13, you can keep all of your property if your plan meets the requirements of the BK law.  In most cases, you will have to pay the mortgages or liens as you would if you didn’t file BK.

 

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 BK 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 a chapter 13.

 

            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 or put up some other property as collateral for the debt.  BK 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 BK case.

 

            These are several ways that you can keep collateral or mortgaged property after you file BK.  You can agree to keep making your payments on the debt until it is paid in full or you can pay the creditor the value of the property you want to keep.  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 property without making any more payments on that debt.

 

Can I Own Anything After Bankruptcy?

 

            Yes! Many people believe they cannot own anything for a period of time after filing BK.  This is not true.  You can keep your exempt property and anything you obtain after the BK is filed.  However, if you receive an inheritance, property settlement, or life insurance proceeds within 180 days after filing for BK, 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 exemptions. BK will not normally wipe out:

 

            (1)       money owed for child support, alimony, fines, and some taxes;

 

(2)       debts not listed on your BK petition;

 

(3)            loans your got by knowingly giving false information to a creditor, who reasonably relied on the info to make you the loan

 

(4)            debts resulting from “willful and malicious” harm

 

(5)            student loans owed to a school or government body, unless the court decides that payment would be an undue hardship

 

(6)            mortgages and liens which are not paid in the BK case (but BK will wipe out your obligation to pay any additional money if the property is not sold by a creditor).

 

Will I Have to Go to Court?

 

            In most BK cases, you only have to go to a proceeding called a “341 hearing” or “meeting of creditors” to meet with and be sworn in by the BK trustee.  In a few cases, creditors may choose to come. You will need to bring your driver’s license and social security card as proof of your identity.  Most of the time, the meeting will be short and simple and you will answer a few questions about your BK 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.

 

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.  BK will probably not make things any worse.

 

            The BK can appear on your credit record for 10 years, but since BK wipes out your old debts, you will likely in a better position to pay your current bills and you may be able to get new credit.

 

What Else Should I Know?

 

            Utility Services: Public utilities, such as the electric company, cannot refuse or cut off service because you have filed BK.  However, they can require a deposit for future service and you do have to pay your current bills which arise after your BK is filed.

 

            Discrimination: An employer or governmental agency cannot discriminate against you because you have filed for BK.

 

            Driver’s License: If you lost your license solely because you couldn’t pay court-ordered damages caused in an accident, BK will allow you to get your license back.

 

            Co-signers: If you had someone co-sign a loan for you and you file BK, they may have to pay your debt.

 

            Remember: The law changes often and each case is different.  This handout is meant to give you general information and not to give you specific legal advice.