Q: What is Bankruptcy?
A: Bankruptcy law is aimed at giving persons burdened by debt the chance to get a fresh start. The reasons for filing are many–and not necessarily anyone’s fault–including job loss, divorce, illness or death of a spouse or breadwinner, debts created by a co-debtor, or excessive credit card charges built up from years of earning less than that person’s living expenses.
Q: What types of bankruptcy are there?
A: Although there are five types of bankruptcy, most consumers and small businesses file under either Chapter 7 bankruptcy or Chapter 13 bankruptcy. Under Chapter 7 (liquidation) bankruptcy, the debtor is excused from most debts in return for giving up his or her property to creditors. However, since the law also allows the debtors to keep necessary property, such as a home, automobile or other personal property, most debtors, if they have proper planning, will keep most, if not all, they already own. For debtors with significant property, Chapter 13 (debt reorganization) is an option. Under Chapter 13, the debtor proposes a plan of affordable monthly payments for three to five years paying back some or all of the debt, depending. This choice is useful for persons who are behind in mortgage or automobile payments, or those that owe past-due income taxes or child support. Chapter 13 allows debtors to repay such debt over a period of three to five years.
Q: How long does a bankruptcy take?
A: Once you file your bankruptcy, you will have a creditor’s meeting within 30 to 45 days. After the creditor’s meeting, you will receive you discharge order in about 90 days in Chapter 7, if there are no objections. Chapter 13 usually takes three to five years, depending on the plan proposed by the debtor, but it could be less if you pay 100% to creditors and can afford the higher payments.
Q: What is a creditor’s meeting?
A: At a creditor’s meeting you meet with the trustee, and any creditors who decide to attend, and go over your bankruptcy filing under oath. The trustee is going to want to look through your finances and see whether he can get any money for the creditors. The trustee is not your friend and has broad powers to initiate litigation against you in the event he/she is able to ascertain non-exempt assets in your bankruptcy estate.
Q: Will I have to give up all my property?
A: No. The law will not permit leaving the debtor destitute. California law allows debtors to exempt certain assets. Most bankruptcy cases in California, when planned, are “no asset” cases, in which the debtors have claimed an exemption in everything they own. Thus, there are no assets to distribute to your creditors.
Q: Will I lose my house?
A: No, not if properly planned. In a Chapter 7, if there is no equity in the house (value of the house today minus costs of sale and payoff balances on all liens) the trustee (a private attorney or accountant appointed by the court to oversee the case) will not bother with attempting to sell your home to pay off your creditors. However, you must make sure that you continue to make your mortgage payments. Even when you are in bankruptcy in California, a lender keeps the right to foreclose on the property if you don’t make the monthly payments. If there is un-exempt equity in the house, then you can come up with a lump sum to pay that to the trustee in a Chapter 7 case, a procedure known as “buying the equity.” Or you might want to consider a Chapter 13. In a Chapter 13 you will pay the amount of equity in your home to your creditors, plus catch up if you’re behind on payments to the mortgage lender, over a period of three to five years.
Q: Can I keep my car?
A: Yes. Most people owe more on their car than what the car is worth, especially if you bought it new with a small down payment. Thus, because there is no equity in the car, the trustee will not bother to take your car and sell it. If you owe less on your car than it is worth, you can generally protect most of the equity using your exemptions.
Q: Can the lender take my car back?
A: If you still owe money on the car, you can choose to reaffirm the debt to the secured lender, keep the car, and continue paying under the existing terms; or you can “buy” the car for its present value from the secured creditor in a single payment using your right of redemption. In many states, including California, you can even keep the car and continue to make your regular payments under the terms of the original agreement without having to reaffirm. If you choose, you can surrender the car and be free of any obligation to pay for it.
Q: Will someone from the court come to my house?
A: No one will come to your home to examine your personal belongings, unless there is a suspicion that you have hidden assets or undervalued what you own. That is very rare and should not worry you.
Q: In what other ways can bankruptcy help?
A: Bankruptcy is also helpful in giving debtors valuable time to work out solutions. Immediately upon filing, the bankruptcy law’s powerful automatic stay goes into effect halting all enforcement actions such as foreclosures on a home, repossessions of an automobile, garnishments of wages or bank accounts, and harassing phone calls from collectors.
Q: Can I discharge my student loans in bankruptcy?
A: Student loans are no longer dischargeable in any chapter of bankruptcy unless you can prove that repaying the loan creates an undue hardship on you or your family. Proving hardship usually requires showing that you can’t provide a minimum standard of living for yourself and your dependents if you have to repay the loan. Some courts will discharge part of the loan on a showing that repaying it all would be a hardship. However, this is an extremely difficult showing to make in court. A Chapter 13 bankruptcy can get the debtor out of default by paying the delinquent amount over three to five years.
Q: Can I keep a credit card out of the bankruptcy for use later on?
A: If you owe money on a credit card at the time you file bankruptcy, you must list the card as a debt. However, if you don’t owe anything on the card, you don’t have to give the credit card company notice of your bankruptcy. Note however that they may find out through other means and cancel the card as a precaution. Most credit card companies will allow you to keep their credit card for use after bankruptcy if you agree to reaffirm the balance on the card and enter into a new agreement. The decision is up to the creditor, but most creditors will want to avoid the loss when the debt is discharged.
Q: What happens to my credit after I file bankruptcy?
A: Generally, bankruptcy is not significantly more harmful than the financial history that led to the bankruptcy filing in the first place. Most debtors, prior to bankruptcy, could not get new credit from a lender who looked closely at their financial condition anyway. Bankruptcy at least makes all the debt shown in the negative history unenforceable. You want to make sure that the bankruptcy discharge also shows on the credit report so that creditors understand that those old creditors have no legal claim remaining. The bankruptcy can be on your credit report for up to ten years. However, you are not barred from borrowing. The bankruptcy is only one factor in determining credit-worthiness. Lenders take a practical approach looking at a person’s post-bankruptcy ability to re-pay. In fact, for many lenders, persons who have been through bankruptcy are a better risk because they are now debt-free, and are determined to get a new start.
Q: Can I buy a house after filing bankruptcy?
A: Yes. There are many lenders that have “day out of bankruptcy” loans. Of course, those loans are typically at higher interest rates and costs. However, the longer you rebuild your credit after the bankruptcy, the more likely you will qualify at reduced rates.
Q: Do I have to disclose all of my assets?
A: Yes. Intentional failure to disclose all of your assets may subject you to criminal liability. It is highly recommended that you disclose everything. Your freedom is worth much more than any asset.
Q: Can I get rid of a second mortgage or junior lien secured against my home?
A: Possibly. In a Chapter 13 bankruptcy petition, it is possible to do so, depending on the current fair market value on your home. For example, if your home is currently worth $200,000.00 and you have 1st mortgage of $200,000.00 and a 2nd mortgage of $100,000.00, the 2nd mortgage (junior lien) may be avoided and converted from secured debt to unsecured debt. (Secured debts are not subject to bankruptcy discharge and will remain with you so long as you own the asset that is being used as collateral for such debt.) Depending on the proposed Chapter 13 Plan and your disposable income, you may be entitled to reduce or possibly eliminate this 2nd mortgage altogether. Each person’s financial condition varies. As such, your finances must be properly analyzed before such a determination can be made.