Frequently Ask Question About Bankruptcy: Answering the Most Common Bankruptcy Questions
There is a lot of concerns and questions associated with bankruptcy. Many people have the same questions. We have consolidated a lot of the most common bankruptcy questions below. But, remember even a common bankruptcy question can change under specific facts and circumstances. It is important to note these answers to common bankruptcy questions are just a starting point, for legal advice speak to an experienced bankruptcy attorney.
How much does it cost?
There are $335.00 in court costs for a Chapter 7; conversely, there are $310.00 in court costs for a Chapter 13. There are also additional fees for credit counseling and credit reports.
Lawyer fees vary depending on the complexity of the case. All fees are subject to court oversight. Chapter 7 attorney fees typically range from $1,300.00 to $3,500.00. Chapter 13 attorney fees are approximately $5,434.00 in the Eastern District of Virginia. The bankruptcy court allows fees to either be paid hourly or to take the “no-look fee” for that jurisdiction. The court in Virginia has determined that $5,434.00 is a reasonable fee for all Chapter 13 bankruptcy cases. This price is adjusted annually. The majority of this is paid through a confirmed repayment plan with the Court.
Why do I need a lawyer?
Filing bankruptcy is a legal and financial decision that can have long term affects on the individual or business that files. It is important for the debtor to have a full understanding of all the rights and consequences involved with filing for bankruptcy. Additionally, all documents need to be submitted properly and necessary steps need to be taken. Failing to do the proper tasks can result in a case being dismissed without a discharge.
How do I qualify for bankruptcy?
Most individuals qualify for one chapter of bankruptcy or another. The issue comes down to what Chapter of bankruptcy they must file. In order to qualify for a Chapter 7, or liquidation bankruptcy, the debtor either has to be below the median income for the household size and state in which they are filing the case or they have to pass what is called The Means Test.
The Means Test is the court’s way of making sure that the debtor is truly in financial trouble and cannot afford to pay back their creditors. If a debtor has more income than expenses in the means test, they may be forced to file a Chapter 13 case and repay some of their debt.
How long does a bankruptcy case take?
A typical no-asset Chapter 7 case can take between 3 to 5 months from filing date to discharge of the case. If there are assets to be distributed during the case it can be open much longer, depending on the assets involved and whether the Trustee overseeing the case can find buyers for the assets. A Debtor would still receive his or her discharge at the normal time, even if there are assets to sell.
The biggest thing that prolongs a Chapter 7 case is the selling of real estate.
A Chapter 13 case is a repayment of debts that lasts between 3 and 5 years, depending on the specifics of the confirmed plan.
Where do I file bankruptcy?
You file bankruptcy where you have lived for the majority of the last 180 days or where your largest assets is located.
Do I have to list all my assets?
Yes. The court needs to know if you have anything of value that can be used to pay your creditors. Just because an asset is listed, it does not mean it is at risk. It will depend on what exemptions/protections apply to your situation.
What asset can I keep in bankruptcy?
This can vary widely depending on what state you are filing your case in. Every state passes laws that determine what assets are protected in a bankruptcy case. These protections are called exemptions. In a Chapter 7 you can keep any asset that has an exemption. If there is not a law that can protect the asset, then it may be at risk in a Chapter 7. In a Chapter 13 case, you can keep all your assets, just having to pay your creditors up to the value of any non-exempt assets.
Can I keep my car?
Possibly. You have the right to keep paying on your current vehicle loan/lease post bankruptcy. The court does review the the equity in the car. If your car has no liens on it, you may keep it and have no worry about turning it over to the Trustee if the value is less than your exemptions in the state in which you filed your case. The exemptions apply to equity in the car. For example, if you have a $20,000.00 car with a $10,000.00 lien, you have $10,000.00 in equity. To keep the car without issue, you would need $10,000.00 in exemptions that could apply to your car. If you have a $15,000.00 car with $18,000.00 in liens, then there is no equity, and you should be able to keep the car as long as you keep making your payments.
Can I keep my house? Do I have to include my house?
Any real estate you own must be disclosed to the court during your bankruptcy. Whether that real estate is subject to surrender depending greatly on what state you are filing in, what chapter of bankruptcy you are filing, and the status of any loans/liens on the property. Some states have exemptions that can protect an unlimited equity in your primary residence, other states only allow for $20,000.00. Currently, Virginia allows a Debtor to protect $25,000.00 in equity of their primary residence, plus an additional $5,000.00 wildcard. Various additional exemptions may protect your property; it is important to review your situation with an experienced attorney to ensure your home is protected.
How much debt do I need to file bankruptcy?
There is no minimum amount that is needed to file bankruptcy. If the amount of debt is less than $10,000.00, we suggest looking at the nature of the debt and if there are better alternatives than a bankruptcy case. Anything less than $10,000.00 becomes a cost benefit analysis. The other factor we like our clients to consider is whether they could repay a substantial portion of the debt during a three to five-year period; if the answer is no, then bankruptcy may be appropriate.
Can I file for bankruptcy if I am unemployed?
Yes. There is no requirement that you be employed to file a bankruptcy. The issue with employment comes into play if you file a Chapter 13 repayment plan case. The court needs to know that you can fund a repayment plan to pay back at least a portion of your creditors during a Chapter 13, and if you are unemployed that may be an issue that leads to your case not being approved. In a Chapter 7, the court considers the lack of income a reason for filing. The major concern our office has with filing bankruptcy while unemployed is whether you will be able to live without incurring new debt going forward. If you will need to incur more debt going forward, then filing bankruptcy at that time is likely not appropriate.
Can I keep my retirement account?
This one is completely based on what state you are filing your case and what chapter you file. If you file a Chapter 7 case, your retirement account may be at risk of liquidation depending on the state in which you file. Here in Virginia, retirement accounts are 100% protected from liquidation. As a result, you would be able to keep your retirement funds here, even it was more than what you owe your creditors. In many state, retirement accounts have some protections, but it depends on the type of retirement account you have and the amount of money in the account.
For a Chapter 13 case, once again depending on what state you file your case, you may have to pay back your creditors the equity in your retirement that is not protected by local/state exemptions.
Do I have to list all my creditors? Can I keep one of my credit cards open?
You need to list all creditors that have a balance on the date of filing. There is no way to get around that; the court does not allow picking and choosing of debts in bankruptcy. If you want to keep a credit card open there is a chance that if it has a zero balance when your case is filed, the credit card company may not close that account. There is no way to guarantee that happens.
Does bankruptcy get rid of medical debt?
Yes. Medical debt is a major reason people file for bankruptcy across the country.
Does a bankruptcy get rid of judgments?
Yes. Judgments can be zeroed out with a bankruptcy. However, if the judgment has been turned into a lien on property, you may not be able to remove the lien. Liens can only be removed in limited situations and it will depend on various factors, such as your states exemptions and the equity in the property.
When can I buy a house after bankruptcy?
This is probably one of the most common bankruptcy questions we get. You can qualify for a new mortgage fairly quickly post bankruptcy. A Chapter 7 filer can qualify for FHA or VA mortgages 2 years after filing and can qualify for conventional financing 3 years after filing. In a limited number to circumstances, you may be able to purchase a house with an FHA mortgage one year after filing, if you can show the financial difficult was caused by something completely outside of your control; only a limited number of banks allow the mortgages one year post filing.
Chapter 13 debtors can actually apply for financing while still in their Chapter 13 plan, as long as they have made 12 consecutive payments on their plan and they have to petition the bankruptcy court for approval of bringing on more debt.
Will be credit be bad for 8 years after bankruptcy?
Not if you take the necessary steps after filing to start building your credit. Most clients have so many accounts in default that filing bankruptcy and clearing those accounts out actually makes improving credit soon after filing a real possibility. Being in the mid-600s shortly after bankruptcy is a reasonable goal. Getting a secured credit card or having family or friends add you as an authorized user on a card can go a long way to helping rebuild your credit. With the bankruptcy on your credit, do not expect an 800 plus score, but if you take the right process after filing you can be in the high 600s to 700s.
Can I keep my wedding ring?
Depends once again on the state in which you file your case. In Virginia there is a 100% exemption for wedding/engagement rings. That means that the asset is protected from having to be turned over, no matter the value. Other states do not have this protection. If you have a ring with substantial value, make sure to discuss it with your attorney.
Will they take my dog?
Short answer, not usually. Family pets must be listed as property on your bankruptcy petition and Fido must be given a value, but the court does not want your family dog. If your dog is used for breeding or considered a show dog, it may not be considered a family pet and a money earning asset. However, many states have exemptions specially for pets. For example, in Virginia, there is an unlimited exemption for family pets.
I have a timeshare, what can we do with it?
Timeshares are just another debt, but how they are handled in bankruptcy can vary on the type of timeshare. Most timeshares have little to no value; we recommend that all Debtors surrender their timeshares in bankruptcy. The reason your situation may vary is that timeshare have two types: deed and contract. If you have a timeshare that is just a contract with a hotel chain or company, then in the bankruptcy you may reject or cancel the contract. If the timeshare is based on a deed filed in the land records where the timeshare is listed, you can surrender/give up the timeshare in the bankruptcy. But that timeshare is still in your name until the company forecloses or provides a deed in lieu of foreclosure. Just like real property, the timeshare remains yours until the property is transferred out of your name.
I have a pending lawsuit, how does bankruptcy impact it?
Depending on the type of lawsuit, yes. Lawsuits where a creditor for a debt (i.e. contract, credit card, etc.) will go away with a bankruptcy. Certain type of lawsuits, like those claiming fraud, may not go away with a bankruptcy. The bankruptcy court may require that the creditor litigates any fraud issues to determine if the debt may be discharged.
Will a bankruptcy stop a foreclosure?
Usually. If the bankruptcy case is filed before the foreclosure officially happens, the automatic stay will usually apply. However, this protection may be limited in time, or not available at all if you have filed a previous bankruptcy. If you filed bankruptcy that was dismissed and then file another bankruptcy within one year of the dismissal of the first case, there is a presumption that you filed the second case in bad faith, and the automatic stay will expire after only 30 days . You can ask the court to extend the stay, if you can prove the new case was filed in good faith, i.e. not just to delay creditors.
If you filed two or more bankruptcies in the 12 months, and then file a third bankruptcy, the same presumption of bad faith exists, and the automatic stay will not take effect at all upon the third filing. Extending the stay after the third filing is nearly impossible absent compelling facts.
Will a bankruptcy stop a wage garnishment?
Yes. All collection activity must stop with filing of a bankruptcy, that includes active wage garnishments. This includes garnishments by the Internal Revenue Service and the state taxing authorities.
I like who I bank with, can I keep my bank?
Usually, although it may be more advantageous for you to switch banks, depending on your given circumstances. Different rules apply to credit unions; you may not continue to use the same credit union after you file for bankruptcy, if you owed them any money included in the bankruptcy.
Will I have to go to court?
You will likely never have to appear in front of a judge. You must attend a hearing called the Meeting of Creditors. In most of the country this meeting occurs at the Bankruptcy Court; but, it can take place in an office suit, which is what happens in Alexandria, Virginia.
Does my spouse have to file with me?
No. A spouse does not have to file with the other. Income for both spouses plays into the analysis of what type of bankruptcy a debtor is eligible for. The court does not consider a non-filing spouse’s income if the couple is living apart or separated. An experience bankruptcy attorney can go over the pros and cons of both spouses filing.
Does bankruptcy impact my kids?
It may. If the parent has cosigned any loan with their child, the child would then solely be responsible for that loan. Also, it would make it more difficult for a parent to get any educational loans for the children moving forward.
I have a family member who co-signed a loan for me, how does bankruptcy impact that?
Your obligation may go away with the bankruptcy, but their obligation does not. They would have to continue to make payments on the loan to keep the loan in good standing.
I have a security clearance, does this matter?
It is a factor to consider; however, bankruptcy usually will not have a negative impact on your security clearance if you are open about the filing and the reasons for the debt. It is important to know that filing bankruptcy is the best way to handle a large amount of debt. A person with financial problems, especially ones with significant debt, is at higher risk of being compromised. Having the high debt and no way to manage it creates a significantly higher risk than when you use a legal tool like bankruptcy to manage the debt.
When reviewing individuals for security clearances it is better to be handling your debt in a legal matter than leaving the debt alone and not handling it properly. The background usually considers what the primary cause of the debt was and how you handled the debt. Any investigator wants to determine that potential financial issues will not occur again.
Will my tax debt go away with bankruptcy?
Some of it may go away. Individual income tax that meets certain criteria may go away with a bankruptcy. The taxes must have been due 3 or more years ago, the returns must have been filed at least 2 years ago, and the taxes been assessed more than 240 days ago. The taxing authority also have other rules to review the history of the account to determine if there is any willful avoidance of paying the debt.
Trust Fund Penalties do not go away with bankruptcy.
Do student loans go away with bankruptcy?
99.9% of the time, no. The test that most courts apply across the country require a showing that you have no options to deal with the debt and cannot make even minimal payment. With federal student loans, if you have the option for an Income Based Repayment plan – a payment plan based solely your income – then the courts usually find you have an alternative way of dealing with the student loans outside of bankruptcy. If you have significant private loans, then you have an increased chance of getting relief.
New case law is starting to pop up in specific jurisdictions across the country that are allowing student loan debt to be discharged in a bankruptcy, but those cases are very fact specific and are currently only the presiding law in a few jurisdictions. Additionally, many of the newer cases discharging substantial debt have appeal cases pending, which may overturn the decision.
Why should I do bankruptcy instead of debt settlement?
This is a common question for individuals considering bankruptcy. First, you must understand how companies set up debt settlement plans. The companies set up a payment plan for debtors to make a monthly payment to them. These companies hold the payments until they achieve a settlement. The settlement company holds the funds until they can get a settlement offer. They will tell you to stop paying the creditors and to pay them instead. They base the payments on what they anticipate the creditors accepting.
Debt settlements are great if you only have one or two debts. Any more than that and the risk of the plan falling apart is very high. Debt settlement companies propose plans according to what they anticipate creditors accepting. If the creditors do not agree to the proposed terms, then you like may not have enough budgeted to pay off creditors. The downside to these plans is that creditors do not have to agree to the plan; as a result, you may end up pay way more than your originally anticipated.
With a bankruptcy your creditors must do what the court orders them to. They cannot choose to ignore the Bankruptcy court and its procedures. Filing a bankruptcy means handling all your debts together in one cohesive plan. Additionally, debt settlement can also be useful if you do not have enough debt to make bankruptcy worthwhile, i.e. less than $10,000.00
I filed bankruptcy before, can I file bankruptcy again?
Yes, given some specific rules. If you filed a Chapter 7 previously, you cannot file another on for 8 years from the date of the first filing. Chapter 13 cases can be filed as often as one needs, regardless of previous filings.
When should I file a Chapter 7 vs. Chapter 13?
This analysis can be done during a consultation with an experienced bankruptcy attorney. The simple answer comes down to what assets do you have, what type of debts do you have, what the goal of your case is, and what is your current income? These four questions can point someone in the correct direction 95% of the time.
Can my employer fire me for filing bankruptcy?
No. No employer can terminate you solely because you filed for bankruptcy. Additionally, your employer cannot use a bankruptcy filing as a reason to change other terms or conditions of your employment. However, employers or future employers can use credit score as a factor in their employment analysis.
I own a business, can I still file for bankruptcy?
Yes. Your business is treated as a separate entity from you. You may have to disclose information about your business and how well it is doing to make sure you are being transparent with the court. The court considers the business an asset; the court will need to review any potential value. Additionally, debts in the business’s name are not debts would not go away with a personal bankruptcy. If an owner has a personal guarantee on a business that could go away with a personal bankruptcy, but anything owed by the buisness would not.
When should I file for bankruptcy?
Depends on your circumstances. Meeting with a bankruptcy attorney when you start to feel like things are getting tight can be beneficial; you should always want to know you options and research well before you need to make a decision. You should not wait until the last minute to speak to an attorney about filing. Sometimes we want to wait to file the day before a judgment goes into effect or the day before your house is going to be sold at foreclosure, but only when the decision is made strategically and days in advance.
Other factors may contribute to when you should file. Sometime we need to consider a debts statute of limitations or the expiration of tax debt. Additionally, an experienced attorney may recommend that you complete any on-going medical treatments or find gainful employment before filing. Every person’s situation is different.
Can creditors object to my bankruptcy?
Yes. While this is rare, creditors may object to your bankruptcy for specific reasons; creditors cannot object to a bankruptcy just because they do not want to lose money. The bankruptcy code includes a section on the objections that a creditor can raise (11 U.S.C. § 523). The most common objections to discharge include recent credit card charges, recent cash advances, fraud, or lying on your bankruptcy petition.
They may claim you have acted in bad faith or are trying to commit a fraud on the court.
Can I get out of a bankruptcy after I file?
It depends. You can voluntarily dismiss a Chapter 13 at any time if you so choose.
You cannot voluntarily dismiss a Chapter 7 at any time. Even converting from a Chapter 7 to a Chapter 13 requires court approve.
When do you not recommend bankruptcy for dealing with debts?
If the debt is small, usually under $10,000.00 and if it is only one or two creditors that you are worrying about. Additionally, if you are not in a financial situation where you can make ends meet, then we are fearful you will incur additional debts going forward. For example, if you are going through significant medical treatments, we likely will not recommend filing bankruptcy until you are in a stable position for fear you will lose your income or incur substantial medical debt after filing.
While there are many common bankruptcy questions and basic answers, certain facts may change the analysis. The best answer about your situation will come from an experienced attorney who understands your facts and issues.
Attorney Ashley F. Morgan is a Virginia licensed attorney. She has been helping clients deal with debts for most of her career. It is important for her that her clients are making the best decision for their circumstances. She offers free consultations for potential bankruptcy filers.