Bankruptcy Questions. FAQ > Bankruptcy Questions WHAT IS CHAPTER 7 BANKRUPTCY?

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1 FAQ > Bankruptcy Questions Bankruptcy Questions WHAT IS CHAPTER 7 BANKRUPTCY? Chapter 7 bankruptcy is sometimes called a straight bankruptcy or a liquidation proceeding. The number one goal in an individual s Chapter 7 case is to get a fresh financial start by discharging debt. There is no repayment plan. In the vast majority of cases the debtors can protect and keep whatever property they own, and the whole process take approximately four months from beginning to end. Although the Chapter 7 discharge discharges debt, it does not get rid of consensual liens against property such as with a home mortgage loan or auto loan, so if you want to keep the property secured by the loan, generally you will need to keep the loan. There are also certain types of debts that are given a special status and are not dischargeable in a Chapter 7. The main special status debts that are not subject to the Chapter 7 discharge are child support obligations, most student loans, and certain tax debt. HOW DIFFICULT WILL IT BE TO FILE CHAPTER 7 UNDER THE NEW BANKRUPTCY LAWS? Perceived difficulty in filing a Chapter 7 petition centers around the bankruptcy means test. The means test is a mechanical test that has two parts an income part and an expense part. If you flunk the first (income) part because your income is too high, you may still pass the second part and thereby pass the test. In my experience, the vast majority of clients who need Chapter 7 relief will pass the test. Even if a person flunks the means test this mechanical test only creates a presumption that filing a Chapter 7 case would be an abusive filing and in the right circumstances, a good attorney can overcome that presumption. I have obtained Chapter 7 discharges for several clients who flunked the means test and been told they could not file Chapter 7. WILL MY CREDITORS STOP HARASSING ME? Yes, they will. By federal law, all actions against a debtor must cease once a bankruptcy petition is filed. Creditors cannot initiate or continue any lawsuits, wage garnishees, or even telephone calls demanding payments. In fact, garnished funds being held by an employer at the time of filing must be returned, and repossessed cars which have not been re-sold at the time of filing must be returned. WILL MY SPOUSE BE AFFECTED? Your wife or husband will not be affected by your bankruptcy if they are not responsible (did not sign an agreement or contract) for any of your debt. In community property states such as Washington, either spouse can contract for a debt without the other spouse s signature on anything, and still obligate the marital community. So usually, both spouses will want to file together. Exceptions would be couples who have keept their finances separate with a separate

2 property agreement, newly married couples, or couples where the big problem debt was incurred by one spouse prior to the marriage and is their separate obligation. WHO WILL KNOW? Bankruptcy filings are public records. However, under normal circumstances, no one will know you filed except the creditors you list with mailing addresses, who are mailed a notice of the filing at the address you list.. The Credit Bureaus will record your bankruptcy and it can remain on your credit history for a maximum 10 year period. WHAT ARE THE MOST COMMON REASONS FOR A CHAPTER 7 BANKRUPTCY? The most common reasons for filing bankruptcy are: 1. Unemployment: Large medical expenses; Seriously overextended credit; Marital problems, and; 2. Other large unexpected expenses, such as an auto accident where there was no or inadequate insurance coverage. Whatever the reason for the financial difficulty, the goal again is to provide a fresh financial start to people who need it, so the focus is on the need for a financial fresh start, and not on how the need came about. WHAT PROPERTY CAN I KEEP? In a Chapter 7 bankruptcy, the goal is to give people a fresh financial start, and if you were to lose all your property in a Chapter 7 it would be very hard to get a meaningful fresh start. Consequently, you are allowed to protect a lot of property in a Chapter 7 and the vast majority of people who file are able to keep all of their property. But there is a limit on how much you can keep. For persons who may be close to or over the limit, working with a competent, experienced bankruptcy lawyer is critical to keeping the maximum amount of property without running afoul of the bankruptcy process. I FILED YEARS BEFORE. WHEN CAN I FILE AGAIN? A person can file Chapter 7 again if it has been more than 8 years since he or she filed the previous Chapter 7 bankruptcy. The 8 year bar on successive Chapter 7 filings does not apply to a Chapter 13 filing, so if you need bankruptcy relief and you are within the 8 year Chapter 7 bar, you may still obtain relief through Chapter 13 (see below). CAN I KEEP ANY CREDIT CARDS? Yes. While it rarely makes sense to keep a card with a significant balance, you can normally keep a card with a small balance or obtain a new card with a zero balance. WHEN WILL I BE DISCHARGED FROM BANKRUPTCY?

3 One of the major purposes of bankruptcy legislation is to afford the opportunity to a person hopelessly burdened with debt to erase his or her debt and thereby get a fresh financial start. A bankrupt s debt is erased when he or she is discharged. The discharge is normally granted 3-4 months after bankruptcy is filed. At that time all debts (with some exceptions) are written off. IF I USE A CREDIT COUNSELOR WON T I GET A BETTER CREDIT RATING THAN IF I OBTAIN A BANKRUPTCY DISCHARGE? No, you will not. It will cost you less money and you will rebuild your credit rating faster if you file Chapter 7 or Chapter 13. Be cautious if you are considering using a credit counselor. Also read about the problems of unscrupulous companies in the credit counseling industry and the action the IRS has taken against non-profit credit counseling groups following widespread abuse. WILL I EVER GET CREDIT AGAIN? Yes! A number of banks now offer secured credit cards ( Debit cards) where a debtor puts up a certain amount of money (as little as $200) in an account at the bank to guarantee payment. Usually the credit limit is equal to the security given and is increased as the debtor proves his or her ability to pay the debt. Offers for new, normal, unsecured credit cards are typically made to debtors before they have even received their discharge. Two years after a bankruptcy discharge, debtors are eligible for mortgage loans on terms as good as those of others, with the same financial profile, who has not filed bankruptcy. The size of your down payment and the stability of your income will be much more important than the fact you filed bankruptcy in the past. The fact you filed bankruptcy stays on your credit report for 10 years. It becomes less significant the further in the past the bankruptcy is. The truth is that if you need Chapter 7 relief you will almost certainly be a better credit risk after you receive your Chapter 7 discharge than than you were before filing due to the discharge of indebtedness. CAN MY BOSS FIRE ME FOR FILING BANKRUPTCY? No. Federal law, 11U.S.C. Sec. 525, prohibits any employer from firing you because you filed bankruptcy. HOW MUCH AM I ALLOWED TO KEEP? The idea is to allow people to keep enough property to allow them to obtain a meaningful fresh financial start. SO the limit on how much you can keep is high. There is no set dollar amount of property you are allowed to keep, it is a matter of matching exemptions to property and the type and value of property held. The important point to remember is that in the vast majority of individual Chapter 7 cases, the debtors are able to keep all of their property. WHAT IS CHAPTER 13 BANKRUPTCY?

4 Chapter 13 Bankruptcy, also known as a reorganization bankruptcy. Involves a repayment plan. It is used in cases where a Chapter 7 filing is either not an option (e.g., because of a prior Chapter 7 filing within the last 8 years) or will not solve the problem (e.g., where a plan for catching up on mortgage arrears to save a home from foreclosure is needed). Chapter13 plans run from a minimum three to maximum five years. Typical situations for filing a Chapter 13 are: a. The Debtor is not eligible for Chapter 7 b. The Debtor s debt is primarily special status debt that is not dischargable in a Chapter 7 (e.g. recent tax debt) c. The Debtors with a drivers license that has been suspended for too many unpaid (and non-dischargable in Chapter 7) traffic tickets who need their license back. d. Debtor s trying to save a home from foreclosure who need a plan for catching up on the mortgage arrears. WHAT DEBTS ARE ERASED BY A BANKRUPTCY? Most unsecured debt is erased in a bankruptcy except for: Child support and alimony; Debts for personal injury or death caused by your drunk driving; Student Loans. Income tax debt. More Detailed information about debt that might survive bankruptcy The following debts are not erased in both Chapter 7 and Chapter 13. If you file for Chapter 7, these will remain when your case is over. If you file for Chapter 13, these debts will have to be paid in full during your plan. If they are not, the balance will remain at the end of your case: 1. Debts you forget to list in your bankruptcy papers, unless the creditor learns of your bankruptcy case; Child support and alimony; Debts for personal injury or death caused by your intoxicated driving; Student loans from government organizations, unless it would be an undue hardship for you to repay; Fines and penalties imposed for violating the law, such as traffic tickets and criminal restitution, and Recent income tax debts and all other tax debts. 1. This is a complicated area of the bankruptcy law and an attorney should be consulted. You can discharge (wipe out) debts for federal income taxes in Chapter 7 bankruptcy only if all of these five conditions are met:

5 1. The IRS has not recorded a tax lien against your property. (If all other conditions are met, the taxes may be discharged, but even after your bankruptcy, the lien remains against all property you own, effectively giving the IRS a way to collect.) You didn t file a fraudulent return or try to evade paying taxes. The liability is for a tax return (not a Substitute or Return) actually filed at least two years before you file for bankruptcy. The tax return was due at least three years ago. 2. The taxes were assessed (you received a notice of assessment of federal taxes from the IRS) at least 240 days (eight months) before you file for bankruptcy. (11 U.S.C. 523(a)(1) and (7).) In addition, the following debts may be declared non-dischargeable by a bankruptcy judge in Chapter 7 if the creditor challenges your request to discharge them. These debts may be discharged in Chapter 13. You can include them in your plan, and at the end of your case, the balance is wiped out: 2. Debts you incurred on the basis of fraud, such as lying on a credit application; Credit purchases of $500 or more for luxury goods or services made within 90 days of filing; Loans or cash advances of $750 or more taken within 70 days of filing; 3. Debts from willful or malicious injury to another person or another person s property; Debts from embezzlement, larceny or breach of trust, and 4. Debts you owe under a divorce decree or settlement unless after bankruptcy you would still not be able to afford to pay them or the benefit you d receive by the discharge outweighs any detriment to your ex-spouse (who would have to pay them if you discharge them in bankruptcy). WHAT DOES IT COST? The court filing fee for Chapter 7 cases is $299.00; for Chapter 13 it is $ Individual Chapter 7 cases are almost always handled by attorneys on a set fee basis, where the attorney quotes a set dollar amount designed to cover all the work in the case (excluding contested or adversarial matters, which are rare and not amenable to set fee representation). Many consumer bankruptcy lawyers (including our firm) offer a free half hour consultation to assess the situation and explore options. We have been charging on average around $1, currently as a set fee some case will warrant a higher amount and some a lower amount, but $1, is the charge for most. Chapter 13 cases are handled primarily on an hourly basis (our general hourly is currently $300.00) since these cases often do involve contested hearings and are much more difficult to determine in terms of a set fee the hourly fee provides assurance that the fee will be the right, reasonable amount for both attorney and client.