Bankruptcy Primer

What is bankruptcy?

Bankruptcy is a way in which people, or businesses, with unmanageable debts can discharge or reorganize their debts. Individuals or married couples generally want to consider using either Chapter 7 or Chapter 13 of the bankruptcy laws. Businesses which are incorporated generally consider using either Chapter 7 or Chapter 11.

Bankruptcies are conducted in Federal Court. It is possible to do your own legal work for a simple bankruptcy filing. Even if you decide to do your own paperwork, though, it is a good idea to get some professional advice before proceeding.

Common Questions

Will I lose my house or car if I file for bankruptcy protection?
Secured debts like houses or cars (where the lender can get the collateral back if you do not pay) are not dischargeable in bankruptcy. However, as long as you continue to keep the payments on those debts current, you can keep the collateral.

If I give my car or house up, will my creditors come after me for unpaid balances?
Without bankruptcy, if you return a car, or give up a house, the lender can sell the collateral and sue you for the difference between what he collects and what you owe. That amount is called a "deficiency". A deficiency is dischargeable in bankruptcy.

Will someone come and look around my house if I file a bankruptcy?
When you file a bankruptcy a "trustee" is appointed to manage your case. The trustee has the right to investigate your filing and it is possible, but very unlikely, that the trustee would look at your assets. When house prices are rising rapidly, the trustee may seek an appraisal.

Will I lose everything I own if I file?
The law allows you many "exemptions" when you file for bankruptcy protection. If you have a home and are married, you can exempt up to $75,000 of the equity in your residence; more if you are over 65. If you do not have a house, you can exempt up to almost $16,000 in cash or other assets. Other exemptions are available for such things as furnishings, clothing and cars. Many retirement accounts are exempt although IRA’s may pose some special exemption problems. The Supreme Court is currently considering whether IRAs should be exempt.

Do I have to go to court if I file?
About 30 days after you file for bankruptcy protection, you have to attend a "meeting of creditors". The meeting is sometimes called a "341(a)" meeting. Creditors can come and ask you questions at the meeting but most do not. The meeting is run by the trustee who is appointed in your case. It is held in a meeting room. There is no judge and you are not in a courtroom. If you use our Law Offices, we will attend the meeting of creditors with you and that is part of the cost of the legal work on your case.

How long does a bankruptcy take?
For a Chapter 7, once we have all your paperwork, it takes us about a week to have the petition ready for your signature. After everything is signed, it is filed with the bankruptcy court and your creditors’ meeting is set about 30 days from the filing date. Sixty days after the conclusion of your creditors’ meeting you will receive your discharge and your case is finished. On occasion, there are special problems which might keep your case open longer. Chapter 11 and Chapter 13 cases are more complicated and take longer to complete. In emergencies, we can file a bankruptcy petition in a matter of hours.

Will a bankruptcy stop a wage garnishment?
Yes. Once a bankruptcy is filed, all wage garnishments must be halted.

Will a bankruptcy filing stop an eviction?
A bankruptcy filing will stop an eviction but this is just a temporary solution and not an effective way to deal with the problem.

Will a bankruptcy filing stop a foreclosure?
Yes. A foreclosure can not go forward if a bankruptcy has been filed. However, the lender can get permission from the court to continue the foreclosure. A Chapter 7 is not usually a good way to stop a foreclosure and keep a house. A Chapter 13 might be effective however.

Will a bankruptcy filing stop a law suit?
Yes. Once a bankruptcy is filed, lawsuits must be suspended. In many cases, a bankruptcy discharge will discharge the debt the caused the lawsuit.

How much will a bankruptcy cost?
Our offices charge $800 for the legal work on the simplest Chapter 7 case. In the typical case, there is simply a lot of credit card debt. As the case becomes more complicated, the cost of the legal work increases.

The charge for the legal work on a Chapter 13 is $2,500.

A Chapter 11 is generally more expensive and the charge depends on the exact facts of the case.

In addition to the charge for the legal work, the court charges $209 for a Chapter 7 filing, $185 for a Chapter 13 and $800 for a Chapter 11.

Types of Bankruptcies

Chapter 7

When most people think of bankruptcy, they are thinking of a bankruptcy using Chapter 7 of the Bankruptcy Code. Some people call this a "straight bankruptcy." In a Chapter 7, the filer – an individual, married couple, or business – simply discharges debts. There are not currently any dollar limits on who is eligible to file a Chapter 7. Some people think that they may make too much to file for a Chapter 7 but the test really is whether the filer can meet his obligations as they become due and whether the filer’s liabilities exceed his assets.There is generally no reason for a corporation to file a Chapter 7 and corporations do not receive discharges.Not all debts are dischargeable. Some things, like spousal support or child support are not dischargeable. Other debts, like taxes or student loans may only be dischargeable in very specific situations.

Chapter 11

A Chapter 11 bankruptcy is generally used by a business. An individual or married couple with a great deal of assets may also use the Chapter. Chapter 11 is a reorganization. In a Chapter 11, the filer proposes a plan under which the filer’s creditors are repaid. Often, the creditors receive only a fraction of the total owed them.Chapter 11 cases are generally long and complicated cases which require a good deal of planning. Most Chapter 11 cases do not succeed. Alternative work-out remedies should be considered before filing a Chapter 11.

Chapter 13

A Chapter 13 bankruptcy is a personal reorganization. In a Chapter 13, the filer proposes a Plan through which creditors will be repaid over a period of time. It may be possible to repay unsecured creditors, such a credit cards, only a fraction of what they are owed.The typical Plan runs for three years although it is possible to extend that to five years. During a Chapter 13 the filer makes monthly payments to a Chapter 13 Trustee who then pays creditors. A Chapter 13 is an ideal way to bring mortgage payments current over a period of time, or deal with non-dischargeable State or Federal taxes.In order to qualify for a Chapter 13, the filer's monthly income must be greater than monthly expenses. The money which is not used for regular expenses is paid into the Plan. Proposed changes in the Bankruptcy Code may force more filers to use Chapter 13 rather than Chapter 7.

Once a Chapter 13 is completed, unpaid debts are discharged.