Here are answers to some of some frequently asked questions about bankruptcy. The Blog page has (or will soon have) additional information on each of the questions. You’ll also find links to other resources, such as the Bankruptcy Court’s filing instructions (there is a wealth of information on the Bankruptcy Court’s website).
Just reading these instructions might be enough to tell you that a do-it-yourself bankruptcy filing is not an easy task. If you want help, there are lots of options. You can hire an attorney and pay several thousand dollars for legal advice and preparation and filing of your petition, and representation at the 341(a) examination.
Or you can hire a “petition preparer” who will take the information you provide and fill in the petition and give it to you to file with the court. In addition to the filing fees (currently $338), you will generally pay between $150 and $250 to have your petition prepared for you to file yourself.
Or you can schedule a free consultation with the Bankruptcy Sage (see below).
- What is chapter 7? Chapter 7 is a liquidation proceeding. If you qualify, chapter 7 liquidates your non-exempt assets (most chapter 7 debtors do not have any non-exempt assets and can keep what they own) and uses them to pay your creditors on a pro rata basis. See more: https://bankruptcysage.com/what-is-chapter-7
- What is chapter 13? Chapter 13 is a reorganization plan for debtors that do not qualify for chapter 7. A chapter 13 plan provides for partial repayment of debts over a 3 to 5 year period. If you are behind on your house or car payments, it allows you to bring those payments up to date (reinstate) over the course of the plan. It has very strict rules that must be followed in order to receive a chapter 13 discharge. It is difficult to file and confirm a chapter 13 plan without the assistance of an attorney.
- What is a means test? A means test determines if you qualify to file a chapter 7. It compares your income and normal monthly expenses for your geographical area to determine if you have the means to pay some portion of what you owe. If your income is less than the median income for your area, you do not need to take or pass the means test. You are eligible to file a chapter 7 bankruptcy case. If you have to take the means test, check out this blog post https://bankruptcysage.com/how-do-i-pass-the-chapter-7-means-test/.
- What are the pros and cons of filing bankruptcy? If you are unable to repay your debts (in full or in part), filing bankruptcy can eliminate some or all of your debts, stop lawsuits, levies and garnishments, and stop creditors from attempting to collect from you. The purpose of bankruptcy is to give people who file (debtors) a “fresh start.” It is a legal proceeding that is set out in the U.S. Constitution and while some people may disparage it, it is an honest means for dealing with an otherwise impossible situation. The reasons people file bankruptcy are many. Most common reasons are job loss, uninsured medical bills, and lawsuits. Most debtors are not deadbeats; they are honest people who find themselves in an impossible situation. There are, however, some negative outcomes including a hit on your ability to obtain future credit.
- How do I qualify to file a chapter 7? In order to file a chapter 7, you either need to pass the means test, or be exempt from taking it. See #3 above.
- What happens if I don’t pass the Means Test? If your income is more than is necessary for you to pay your expenses (as contained in the means test), you are not eligible to file a chapter 7 (there is a mechanism to seek an exception) and if you still wish to file a bankruptcy, you must file a chapter 13 and pay a portion of your income to your creditors
- Who is the bankruptcy trustee? In a chapter 7 case, a bankruptcy trustee will be appointed at the time of your filing. The trustee’s job is to liquidate your non-exempt assets and use the sale proceeds to pay your creditors. Most chapter 7 debtors do not have any non-exempt assets. Your trustee will conduct your 341(a) meeting (see below) and will ask you questions about your assets. The 341(a) exam is sometimes referred to as the first meeting of creditors, but creditors usually do not attend. A trustee is also appointed in chapter 13 cases but functions differently. Because the goal of a chapter 13 case is to keep your assets in exchange for paying a portion of what you owe, a chapter 13 trustee is not as concerned with your assets. The main function of the chapter 13 trustee is to evaluate your proposed plan and monitor the payments that you agree to make. If you do not make timely payments, the chapter 13 trustee will likely ask the Bankruptcy Court to either convert your case to chapter 7 or dismiss it.
- What is a 341(a) hearing? The 341(a) examination is run by your chapter 7 trustee and is an opportunity for the trustee to ask you questions and ascertain if you have any non-exempt assets that can be sold (liquidated) to pay your creditors. Is is also referred to as the first meeting of creditors (although creditors rarely attend). If you do not have any non-exempt assets (as determined by your Schedules A, B and C), the hearing will be short and is not something that you should stress about.
- Do I need to hire an attorney? It depends. Start by reading the information on the Bankruptcy Court’s website under Bankruptcy Basics and Filing Without an Attorney (https://www.uscourts.gov/services-forms/bankruptcy). When you’ve read that information, you should have a pretty good idea if you are up to the task of filing the bankruptcy yourself. If you want help, there are several avenues. First, of course, is to hire an attorney if you can afford to do so. Most bankruptcy attorneys offer a free or low-cost consultation where they will discuss your financial situation, make recommendations, and let you know who much they will charge you. I offer a free half-hour phone consultation (fill out and submit the Contact form to request a consultation). A lower cost option is to use a petition preparer who will use the information you provide to fill out the paperwork. Because a petition preparer is not a licensed attorney, they cannot answer your legal questions or give you any advice. If you qualify, there are also reduced fee and free services offered by most Bankruptcy Courts and local bar associations.
- How long does the bankruptcy process take? The minimum time period is approximately 90 days, but it usually takes longer. The 341(a) examination date is usually between 30 and 45 days after your bankruptcy is filed. Creditors have 60 days after the 341(a) examination to file suit against you to determine that what you owe to them should not be discharged because you engaged in fraud (this is extremely rare for most debtors). Once that deadline has passed without any lawsuit being filed, the court will enter your discharge (but it may take a month or two). The average time from start to finish is 4 to 6 months.
- What assets are exempt? Federal law and the law of most states allow you to exempt certain assets from being sold in a bankruptcy, based on the value of the asset. If an asset is exempt, it means that you can keep it. Exemptions are available to protect most clothing, furniture and personal items, limited equity in a car and your residence. If you want to file bankruptcy without any assistance, you will need to research the applicable exemptions so that you can protect your exempt assets.
- How much does it cost to file bankruptcy? The filing fee is currently $338. If you cannot afford to pay the filing fee, you can apply to pay it in installments or to have it waived. If you use a petition preparer, they will charge you between $150 and $250 (depending on location). An attorney will generally charge a flat fee of $3,000 or more, depending on your location and the complexity of your case.
- What debts are dischargeable? In most cases, all debts are dischargeable except: (a) child support and alimony; (b) most taxes (generally, only those that are more than two years old are dischargeable); (c) student loans (unless you can show undue hardship, which is a very high bar); (d) governmental fines and penalties; (e) debts incurred through fraud; (e) personal injury damages if incurred while intoxicated. Also, any obligations secured by an asset such as your home or car unless you surrender the asset.
- Are student loans dischargeable? The easy answer is “no.” However, if you can demonstrate that paying back the loan would cause you undue hardship, then the Bankruptcy Court may allow you to discharge some or all of the obligation. The “undue hardship” test depends on the facts of your case and the law keeps changing. If you are trying to discharge a student loan, you should talk to an attorney to find out if you qualify. But even if it looks like you qualify, it is ultimately up to the judge in your case so there is no guaranty.
- How much credit card debt can I discharge? As long as the credit card debt was not incurred fraudulently, there is no limit. However, you should be careful about maxing out your credit cards on things like travel or entertainment right before filing bankruptcy. A creditor might seek to bar the discharge of such an obligation on the basis of fraud (fairly rare). If you are concerned, consult with an attorney
- Can I keep my home? If you own a home, you are entitled to exempt any equity up to the prescribed amount (under either federal or state law). However, if you want to keep your home, and you have a mortgage, you will need to keep making payments. If you are behind on your payments, you will probably need to file a chapter 13 so that you can make up the back payments over the course of your chapter 13 plan. If your equity exceeds the amount of your homestead exemption, the trustee will sell you house unless you are able to negotiate a means for paying the excess equity into the bankruptcy estate. If the trustee sells your house, you will get to keep any amount equal to the homestead exemption out of the net sale proceeds. If this sounds complicated, it is. You will probably need an attorney to handle this situation.
- Can I keep my car? This answer is essentially the same as for your home. You can protect (exempt) a limited amount of equity in a car, provided that you keep making payments. In some states, you may be asked to reaffirm the loan, which means that if something should happen in the future where you can’t make the payments, you would still be obligated for the full amount of the loan (and you cannot file another chapter 7 for 8 years). If you live in California, a new law provides that you do not need to reaffirm a car loan in order to keep your car so long as you keep making payments. In most other states, you may need to reaffirm the loan in order to keep your car.
- Can Bankruptcy stop a foreclosure? Yes (for a time). Once you file a bankruptcy petition, an automatic stay goes into effect that stops a pending foreclosure from continuing. In order to proceed with the foreclosure, your lender will have to file a motion for relief from the automatic stay asking the court to lift the stay so that the foreclosure can continue. There are number of factors that the court will consider in determining the outcome. The most important factor is whether you have any equity in the property. If you do not have equity, the court will likely allow the foreclosure to continue. You will need to keep your payments current. If you are behind on your payments when the bankruptcy is filed, a chapter 7 will not give you time to make up the payments and reinstate the loan. If you are behind, you will likely need to file a chapter 13, unless you are able to negotiate a payment plan with your lender.
- Can Bankruptcy stop me from being evicted? Yes, but the time period may be very short. The laws regarding eviction vary from state to state and the length of time that you will be protected depends on applicable state law and the status of the eviction proceeding when you file your bankruptcy. The Bankruptcy Court has procedures that allow landlords to get relief from the automatic stay on an expedited basis so unless you have other reasons to file bankruptcy, filing bankruptcy to stop an eviction is probably not a good idea.
- Can I keep my tax refund? It depends. Historically, more chapter 7 bankruptcy cases are filed in March than any other month. It has become apparent that people who are expecting a large refund file their taxes and wait until they receive their refund. Oftentimes, the refund is used to pay for the attorneys fees to file the bankruptcy. However, under certain circumstances, if the anticipated refund is listed as an exempt asset, you will be able to keep it once it is received. You should talk to an attorney to see if you can exempt it.