Frequently Asked Bankruptcy Questions

What is Bankruptcy?

Bankruptcy is a legal process intended to protect people (or companies) who are in debt and do not have the ability to substancially repay those debts (or who need additional time to pay off the debts).  Bankruptcy proceedings are controlled by federal law and have been in existence for over two hundred years.  the goal of the United States Bankruptcy law is to offer those who are in debt beyond a reasonable means to repay the opportunity to obtain a fresh financial start.  Under this law, a person is entitled to such a fresh start as long as they did not get into debt in a dishonest or fraudulent way.

What happened to bankruptcy law after October 17, 2005

After October 17 it became much harder to completely discharge one's debts under Chapter 7 of the bankruptcy code.  The intent is to require people who can afford to make some kind of payment on their debt to do so.  After October 17,  debtors will be required to take a financial counselling course prior to filing bankruptcy.  Then they will undergo a complicated means test to determine whether they are qualified to file under Chapter 7 or must file under Chapter 13.  The Court will require more extensive documention of the debtor's income including tax returns and W-2's.   After filing, the debtor will be required to take an approved financial management course in order to receive a full discharge.

Will I lose my home, car, or personal possessions?

The general answer to this question is NO.  However, care must be taken to protect assets through the use of legal, pre-bankruptcy planning, and through exemptions during the bankruptcy process.

When will the creditors stop calling?

Creditors will usually stop calling when you give the name and phone number of your bankruptcy attorney.  Once your bankruptcy has been filed, they must stop calling you to collect.  However, they can continue to contact the attorney's office for re-affirmation or other information regarding your account with them.

Will my employer find out I filed for bankruptcy?

There are only a few ways that your employer can find out if you have filed: 1) There was a wage garnishment pending at the time of the filing and they were subsequently notified to stop withholding money from your paycheck.  2) Your employer is a creditor and had to be listed as a creditor in your filing.  3) Your employer saw your bankruptcy published in a newspaper (bankruptcies are not usually published in general interest newspapers like the Bakersfield Californian, but may be published in certain legal publications like The Daily Report).

What is the difference between chapters?

Chapter 7, often called the "liquidation chapter," is used by individuals, partnerships, or corporations who have no hope for repairing their financial situations.  In Chapter 7, the debtor's estate is liquidated under the rules of the Bankruptcy Code.  Liquidation is the process through which the debtor's non-exempt property is sold for cash by a trustee and the cash is distributed to the creditors.  If your attorney is able to exempt all of your personal property,  then you will be able to keep it.  This is the most common type filed and provides for a "fresh start" for many people.

Chapter 11, often called the "reorganization chapter,"  allows corporations, partnerships, and individuals to reorganize, without having to liquidate all assets. 

Chapter 13 is for an individual with a regular income who is overcome by debts, but believes such debt can be repaid within a reasonable period of time.  Chapter 13 permits the debtor to file a plan in which the debtor agrees to pay a certain percentage of future income to the Bankruptcy Court for payment to creditors.  If the Court approves the plan, the debtor will be under the Court's protection while repaying such debts.  Chapter 13 is also used to discharge debts that are not dischargeable under Chapter 7 and to repay non-dischargeable taxes under the protection of the Bankruptcy Court.

Chapter 12 is for farmers who need bankruptcy protection.

Chapter 9 is for municipalities and governmental units, such a schools, water districts, and so on.

Do I have to go to court?

With limited exceptions, everyone who files for bankruptcy has to attend the first meeting of creditors.  If a creditor files an adversarial proceeding in the bankruptcy case, the debtor may be required to go to court to contest the creditor.

Do I have to include all of my debts in bankruptcy? 

YES.  All debts must be listed in the bankruptcy papers.  A debtor who does not include all of his or her creditors is committing fraud.  However, if a credit card has a zero balance, it is not listed on the bankruptcy papers because at that point, no money is owed to the credit card company.

Are all of my debts dischargeable?

NO.  Secured creditors retain some rights, which may permit them to seize property, even after a discharge is granted.  Spousal and child support obligations are usually not dischargeable, and most tax debts are not dischargeable.

Will the trustee come to my home?

It is possible, but highly unlikely that the trustee will come to a debtor's home.  At the time of the bankruptcy filing, all of the debtor's assets become the property of the bankruptcy estate and subject to administration by the bankruptcy trustee.  However, in most instances, the law opffice has been able to exempt the debtor's assets.  As a result, the trustee usually has little interest in a debtor's personal possessions.

How long does it take for a bankruptcy to be over?

It depends on how busy the Bankruptcy Court is, but commonly a Chapter 7 bankruptcy takes about four to six months until the discharge is received.

Can assets be transferred before filing bankruptcy?

Certain transactions can be set aside for fraud.  If an asset is transferred to a friend or relative without receiving fair market value, the transaction is voidable as fraud.  Also a debtor cannot pay off an unsecured debt to one creditor in the months before filing bankruptcy because the other unsecured creditors can complain that the payment is a preferencial payment.

Can bankruptcy change the terms of my mortgage?

NO.  However, an Chapter 13 bankruptcy can allow a debtor to pay off the arrearages over a period of time, but the regular payments must be made as they come due.

Can the Bankruptcy Court deny my Bankruptcy?

YES.  There are a number of reasons that the bankruptcy can be denied.  If a debtor does not cooperate with the trustee or provide an adequate explanation as to assets and liabilities, a bankruptcy can be denied.

What is the effect of bankruptcy on my credit rating?

The effect of a bankruptcy on one's credit rating is usually to make it worse.  However, if a debtor is currently several months behind on payments, his or her credit rating may actually improve by filing for bankruptcy.  Some credit card companies have actually targeted people who have completed a bankruptcy because they know that a person cannot obtain another Chapter 7 discharge for at least another six years.

 How do I get the bankruptcy removed from my credit report?

The Bankruptcy Court has no jurisdiction over credit reporting agencies.  The Fair Credit Reporting Act states that the credit reporting agencies may not report a bankruptcy case on a person's credit report after ten years from the date the bankruptcy case was filed.

Will my landlord evict me?

If a renter is current on his or her rent payments and files for bankruptcy, it is unlikely that the landlord will find out.  however, if the renter is behind in the rent, there is a good chance that the landlord will begin eviction proceedings to get the renter out.  The automatic stay will buy some time, but the landlord can go into bankruptcy court to have the stay lifted, which the bankruptcy judge will normally grant.

How is Credit Card Fraud Determined?

Usually, the creditors that are most likely to object to the discharge of a debt are credit card issuers.  There are few specific rules about what constitutes credit card fraud in bankruptcy, but the Bankruptcy Courts will look at the following factors in determining fraud:

1. Time between charging on the credit card and filing for bankruptcy.
2. If the debtor made credit card charges after consulting a bankruptcy attorney.
3. If the debtor made recent charges over $1,075.00.
4. If the debtor made many charges under $50 (to avoid pre-clearance) after reaching credit limit.
5. If debtor made charges after being asked to return the card or after receiving several "past due" notices.
6. If the debtor has made changes in their pattern of use of the card.
7. If the debtor made charges after he or she became insolvent, such as after losing a job or income.  A debtor may be able to overcome this by showing a diligent search for employment.
8. If debtor has charged luxury items.
9. If debtor has made multiple charges on the same day.