Filing for Bankruptcy: FAQ

People file bankruptcy when they can no longer pay their debts. Typically, loss of income or health issues will be the leading factor in deciding to file for bankruptcy.

You can consider negotiating your debts which will have less impact on your credit - if done correctly. You should not attempt debt negotiations if you do not have adequate funds to pay a settlement or reduced payoff. Filing for bankruptcy may be a good option if you have no income and can not qualify for a debt management program. 

How long does it take to file for bankruptcy?

The process of filing for bankruptcy can take anywhere from 3 months to 2 years. The average time is about 4-5 months. Your attorney will handle the entire process, but you will need to be involved.

What is the bankruptcy process? Four Steps

Federal courts have exclusive jurisdiction over bankruptcy cases. Bankruptcy cases cannot be filed in state court. Each of the 94 federal judicial districts handles bankruptcy matters. The primary purposes of the law of bankruptcy are: (1) to give an honest debtor a "fresh start" in life by relieving the debtor of most debts, and (2) to repay creditors in an orderly manner to the extent that the debtor has property available for payment. 

The bankruptcy process is a complicated legal process that involves the court system. The following steps outline the typical bankruptcy process:

1) The debtor files for bankruptcy protection with a federal or state court. The debtor must demonstrate that they cannot repay their debts and submit a list of their assets and liabilities.

2) If approved, the debtor will be granted an automatic stay on collection efforts from creditors while they work through the bankruptcy process.

3) A trustee is appointed by the court to review all of the debtor’s assets, including property and investments, and determine which ones can be liquidated to pay off debts.

4) Once all the assets have been liquidated, any remaining money is distributed to creditors based on priority levels assigned by law.

What are the different kinds of bankruptcy?

Bankruptcy is a legal process of declaring one's inability to pay debts. Bankruptcy is usually the last resort for individuals and businesses that cannot repay their debts.

There are three types of bankruptcy in the United States: Chapter 7, Chapter 11, and Chapter 13.

• Chapter 7 bankruptcy is a liquidation process where all assets are sold to pay off creditors.

• Chapter 11 bankruptcy reorganizes the business or individual's assets and debts under a court-approved plan.

• Chapter 13 bankruptcy involves paying off all or part of one's debt over three to five years through monthly payments set by the court.

What is the automatic stay?

Code 362 of the Bankruptcy Code. It is enforcement to disallow creditors the attempt to collect certain debts (pre-petition or possibly post-petition debts) included in the bankruptcy. Any attempt to collect a debt involved in bankruptcy can violate the automatic stay or discharge injunction.

The automatic stay prohibits:

(1) Creditors can not attempt to collect debts listed in the bankruptcy or risk violating the automatic stay. Even an attempt to collect post-petition debts may be prohibited while the debtor is in bankruptcy. Judgments that are pre-petition (filed before BK) are uncollectable. No repossession or selling of property is allowed until the automatic stay is lifted or the BK is discharged. 

(2) The starting or continuing of any administrative or Judicial actions against the debtor that was started before the BK petition was filed. All action must cease the second the petition is filed with the courts.

(3) Enforcing a pre-petition judgment against the debtor or anything considered property of the estate is prohibited. (11 USC Section 362 (a) (2).

(4) Any action to obtain possession or exercise control is prohibited.

(5) Any act to attempt to perfect a lien or enforce a lien against the estate's property. The purpose of the automatic stay is to give the debtor breathing room to liquidate or protect his assets under Chapter 7 or to set up a plan under 13,12 or 11.

The automatic stay is in effect at the beginning of filing a Bankruptcy petition and lasts until the discharge is granted, a dismissal occurs, or a motion for relief is granted. A creditor may try to obtain relief from the stay if the debtor has no equity in the property involved and the property is not necessary for a successful reorganization of the debtor's finances or if there is a lack of adequate protection for the creditor. 

Lack of adequate protection can be several things. Without insurance on a vehicle or inadequate insurance such as comp and collision, the creditor may ask for relief because his security interest is unprotected—no equity in the property. The property you are trying to protect has no equity, and the creditor can seek relief. 

Delinquency.  This can be a car or secured loan that is delinquent, causing a depreciation and no payments being made. This can be a valid reason for asking for relief from the stay—no registration or driver's license for the vehicle. If a creditor violates the automatic stay, a judge can award attorneys fees and actual damages along with punitive damages. 

If a creditor gets a notice of bankruptcy, they can send a reaffirmation request to your attorney. If the attorney does not acknowledge the request, the creditor can show up at the 341 hearing and ask. Many times creditors will ask a debtor to reaffirm with them. 

This is allowed if approved by the courts. Creditors cannot enforce a reaffirmation that the courts have not approved. That would be considered attempting to collect a BK debt. If you take out debt for the sole purpose of paying taxes, That debt may be non-dischargeable. 

Debts that may not be dischargeable in a Bankruptcy:

• -Child support or alimony.

• -Student Loans, unless the court agrees, will cause undue hardship to the debtor or his family. This is rare see more about This topic here.

• -Taxes unless they are over three years old or more.

• -Fraud. You lied on an application, or some type of fraud was involved. False financial statements etc.

• -Debts not listed may not be dischargeable if the debtor was fully aware of them and did not list or notify the creditor.

• -Debts incurred to pay federal taxes.

• -Credit cards are used within 60 days for anything other than absolute necessities. This is typical mistake consumers make.

• -Debts that were included in a previous bankruptcy that was dismissed within the preceding 180 days.

• -Unexplained or disappearance of assets.

• -Abuse of the bankruptcy process.

• -Other creditors can try to have your bankruptcy dismissed if they find you showed preference to other creditors over them.

Non-dischargeable debts generally fall into the following categories:

• -Individual income taxes are assessed within three years of the filing but remain unpaid.

• -Debts that have been incurred by the use of false financial statements or by the use of other false pretenses.

• -Unscheduled debts; in other words, debts that the debtor failed to schedule as required at the start of the bankruptcy case.

• Debts arising from fraud or embezzlement or the misuse of funds when the debtor acted as a fiduciary. For example, embezzling money from a relative's trust fund over which the debtor had control.

• -Alimony maintenance and child support.

• -Any debt incurred from willful or malicious injury is generally Nondischargeable.

• -Fines and penalties are Nondischargeable.

• -Most educational loans cannot be discharged, although a hardship exception allows a debtor to avoid certain educational loans.

• -Debts for luxury goods or services over $1,000 incurred within 60 days of the court's relief order. 

• -Debts for cash advances over $1,000 on Credit cards incurred within 60 days of the court's relief order. 

• - Debts arising from a judgment incurred from drunk driving.

The three R's are actions you take regarding a particular debt.

• Redeem: you pay the balance in one lump sum to the creditor.

• Rescind: you give back the property to the creditor.

• Reaffirm: make a new court-approved contract and repay.

You can make a voluntary repayment plan with a creditor without the court’s approval if it is not considered a preference. This may benefit you because, unlike the reaffirmation, you can stop paying at any time, and the creditor cannot attempt to collect. That is because it was solely voluntary and not a court-approved reaffirmation. 

If you plan on reaffirming, make sure you want this. Once the court approves it, it is considered a new debt! Creditors risk a lot by doing reaffirmations not approved by the courts. Sears was sued for $400 million over a $300.00 debt. All because they did not get court-approved reaffirmation and then proceeded to collect when the debtor stopped paying. 

Although most debts can be discharged in bankruptcy, certain debts are not dischargeable by individuals in a chapter 7 liquidation. Other debts that are typically dischargeable may be denied a discharge, generally because of the debtor's actions.

Cross Collateral Clauses

Many banks and credit unions have enacted the CCC- Cross Collateral Clause. If you are subject to one, it must be displayed in your contract terms and disclosures. A CCC is a clause that allows the creditor to secure your unsecured debts with other secured loans that the creditor may hold for you. Everyday use is if you have an auto loan and a line of credit or visa. 

While it does not stand up well against Visa because of regulation Z, it does stand up against most unsecured debts. That means if you file bankruptcy and think you will reaffirm the car, the creditor can also demand that you reaffirm the visa, or they can hold your title hostage. This method, however, can not be used with mortgages, or the creditor will lose all future rights to offset the mortgage should they attempt to offset payments by enforcing the CC clause.

What if I filed for Bankruptcy and it was dismissed?

A dismissed bankruptcy means you will again be liable for your debts.

There is a big difference between your debts being discharged and a bankruptcy dismissal. If bankruptcy is dismissed, all bets are off. You'll have to figure out how you'll pay your creditors or if you will re-file your bankruptcy.

Dismissal can happen for many reasons, but typically, it's because the court found problems with the filing or the debtor violated the terms. Once the bankruptcy is dismissed, that information will also be reported to the credit bureaus.

How does bankruptcy affect your credit score?

The bankruptcy process is often the last resort for those struggling financially. Bankruptcy can be an effective solution for those who cannot pay off their debts and need a fresh start.

Bankruptcy will hurt your credit score, and it will stay on your credit report for 7 to 10 years. It can also affect your ability to get loans or find housing in the future. However, bankruptcy can help you recover from financial setbacks and get back on track with your life.

Is bankruptcy a good way to fix your credit?

Bankruptcy is a legal procedure in which the court declares that a person or company cannot pay its debts. It’s often used as a last resort to solve financial problems and get back on track. When it comes to bankruptcy, there are many misconceptions about what it means and how it can help you. Bankruptcy can be a good way to fix your credit if you use it correctly. Wiping away the debt rather than multiple collection accounts, charge-offs, and repossessions filling your credit report can help. Upon discharge, all those debts will be wiped. The bankruptcy itself will remain for ten years.

What are the advantages and disadvantages of bankruptcy?

The advantages of bankruptcy are that it helps relieve the debt burden and restores the credit score. The disadvantages of bankruptcy are that it can have a negative impact on your financial life, as well as your social life. It also has a negative impact on one’s credit score and future borrowing power.

What are the legal implications of being bankrupt?

The term “bankruptcy” is a legal term that defines a person or company who cannot pay their debts and has been declared insolvent. The country’s government sets bankruptcy laws, varying from one country to another.

In the United States, bankruptcy is governed by the Bankruptcy Code, administered by the U.S. Trustee Program of the Department of Justice. The Bankruptcy Code provides for different types of bankruptcy filings depending on the size of a debtor’s assets and debts. The code also sets forth provisions for the dischargeability of certain debts and provisions governing creditors’ rights in bankruptcy proceedings.

How does bankruptcy affect your taxes?

Bankruptcy is a legal process that allows people or businesses that cannot pay their debts to discharge (or cancel) them. It's an option to help get a fresh start when you can't pay your debts.

In general, bankruptcy does not affect your taxes. However, it may affect some tax credits and deductions you may be eligible for if you're in bankruptcy proceedings. For example, the interest deduction may be limited or unavailable in some cases.

The Internal Revenue Service (IRS) has a special office for taxpayers who are considering bankruptcy: The Taxpayer Advocate Service (TAS). TAS is independent of the IRS and helps taxpayers who are experiencing economic hardship because of being in debt or having lost their job. TAS can help you understand your rights as a taxpayer,

Some contributed material by James R. Vann VANN & SHERIDAN, LLP Attorneys at Law