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COMMON QUESTIONS ABOUT CHAPTER 7 BANKRUPTCY, Part 1Q - "What's the difference between chapter 7 and chapter 13?" A -- In a chapter 7, or "liquidation", a debtor only is allowed to keep exempt property. The rest of their assets are liquidated (turned into cash) and distributed to creditors based on their claim priority. In chapter 13 or "wage earner plan" a debtor is allowed to keep their assets and property and their debts are paid off through "future earnings." While not all creditors in a chapter 13 plan may be paid, they generally cannot be given less than they would received in a chapter 7 proceeding. A chapter 13 bankruptcy is primarily for debtors earning regular income who want to keep their assets and payoff their debts as best they can. If a debtor files for chapter 7 and the court decides that the debtor could have to some extent paid creditors through a chapter 13 plan, the chapter 7 plan may be dismissed as "abuse" of bankruptcy protection laws. Q -- "Where do I file a bankruptcy petition?" A -- A bankruptcy petition is filed at the bankruptcy court in the district where the debtor has resided or operated a business for the greatest portion of the last 180 days. REMEMBER -- Bankruptcy court is always open! Q -- "What are the filing fees for a chapter 7 case?" A -- As of this writing, the filing fees are $80 for either a individual or joint case. Q -- "If I file for bankruptcy, will my name be published in the newspaper?" A — GENERALLY NOT. Although some local business journals may publish legal notices, which include recent bankruptcy listings, most local newspapers do not. Q -- "Do I lose any legal rights by filing bankruptcy?" A — NO. Bankruptcy is a civil, not a criminal proceeding. You do not lose any civil or constitutional rights. Q -- "How will bankruptcy affect my paycheck?" A -- Because the bankruptcy laws consider 25 percent of a debtor's accrued wages, salary, commissions and benefits as nonexempt, you will be required to turn that portion over to the bankruptcy court. For example: When you file your bankruptcy petition you have worked five days and not yet been paid, plus you have five days of accrued vacation time. If, after deductions required by law are made, there is $1,000 remaining, you must give the trustee $250. Q -- "What should I do with my checking and savings accounts?" A -- Debtors who are filing chapter 7 are allowed to keep only nominal exempt property. If they have funds in excess of the exempt amount, they would be directed to turn them over to the trustee in bankruptcy. Generally, it is recommended that bankrupts close out all bank accounts on the day the order of relief is issued. This will keep and post-bankruptcy matters separate. Doing so also can have a positive mental effect on the bankrupt by starting the "fresh start" process. Q -- "Can I keep my house?" A -- If you are filing chapter 13 the answer is "yes," provided you keep your mortgage payments current. In chapter 7 bankruptcy you can keep your house provided you keep your mortgage payments current and any equity, if any, is exempted, or you pay the trustee the "cash equivalent" of any non-exempt equity you have in the property. This is a "catch 22" since equity in a house could be tens-of-thousands of dollars and such payments would have to be made with exempt cash. In theory, a relative could pay the "cash equivalent" of your equity and hold party to the title so that you could keep your house. Another possibility is a "homestead exemption," which in many states is substantial (up to $100,000). It should be remembered that filing bankruptcy WILL NOT stop a creditor from foreclosing on real estate. If you want to keep your property, mortgage payments must be kept current. Also, if you have substantial equity and you cannot keep your payments current, it is preferable for the trustee to liquidate your house than the creditor. This is because the trustee will usually sell the property for a higher price, then distribute the equity to creditors. A bank or lender will generally "snap sell" the property for a price that will recover their security. Q -- "What should I do if I move before I receive my discharge?" A -- Because most correspondence between the debtor and the court occurs by mail, the debtor must notify the trustee in writing that they have moved. Failure to do so can result in a case being dismissed because the debtor missed important correspondence from the court. Q — "I have a bank credit card with a $1000 credit limit. I've never used the card and don't owe any money on it. Can I keep and use the credit card?" A -- YES. If the credit card has a "zero balance" it technically is not a debt and therefore need not be claimed by the bankrupt. This is an effective way of establishing new credit after bankruptcy. However, a trustee has the power, and in rare cases may require a debtor to surrender all credit cards to the court. Q -- "Are my student loans dischargeable in bankruptcy?" A — GENERALLY NOT. Federal law disallows the discharge of a student loan unless the loan became due more than five years before the filing of the bankruptcy petition, or the debtor can prove a hardship. To prove a hardship, the bankruptcy court will use four questions to test discharge ability: Will the debtor be below the poverty line? Is the debtor financially responsible? Is the discharge of the loan the main reason for the bankruptcy? Has the education been of little or no value to the debtor? If the answer to all four questions is "YES," a hardship will be considered to exist and the debt will be discharged. Q -- "How will bankruptcy affect my credit?" A — GENERALLY ADVERSELY. Even if you've had a good credit rating, a bankruptcy will have a negative on your future financial affairs. Most bankrupts have a recent history of "derogs" or derogatory remarks on their credit reports and lenders will base their decision on your recent performance and not your overall performance. While logic will argue that recent bankrupts with a good job and previously sound credit rating represent a "good credit risk," most lenders will not subscribe to that theory. It is possible to rebuild good credit, but like most things, it will take time and patience. Many people enjoy a good credit standing for years and then experience unfortunate circumstances beyond their control. Q -- "How long does a chapter 7 case take?" A -- Provided there are not any extensions to the case, a normal Chapter 7 takes about six months from filing to discharge. |
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