Bankruptcy_FAQ.jpgF.A.Q.

Bankruptcy F.A.Q.


This information cannot explain every aspect of the bankruptcy process. To get answers that apply to your unique situation, you should contact Wyckoff & DeMott, P.C. There have been many news reports suggesting that changes to the bankruptcy law passed by Congress in 2005 prevent many individuals from filing bankruptcy. While it is true that these changes have made the process more complicated, the basic right to file bankruptcy and most of the benefits of bankruptcy remain the same for the overwhelming majority of those in need of debt relief.

Q: What is bankruptcy?

A: Bankruptcy is a federal legal proceeding in which, as stated in one noted case many years ago, the "honest but unfortunate debtor" gets a fresh start financially. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law.

Q: What can bankruptcy do for me?

A: Bankruptcy may make it possible for you to:

  • Eliminate the legal obligation to pay most or all of your debts. This is called a "discharge" of debts. It is designed to give you a fresh financial start.

  • Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. (Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment.)

  • Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.

  • Stop debt collection harassment and similar creditor actions to collect a debt.

  • Restore or prevent termination of utility service.

  • Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.

Q: What can bankruptcy NOT do for me?

A: Bankruptcy cannot, however, cure every financial problem. Nor is it the right step for every individual. In bankruptcy, it is usually not possible to:

  • Eliminate certain rights of "secured" creditors. A creditor is "secured" if it has taken a mortgage or other lien on property as collateral for a loan. Common examples are car loans and home mortgages. You can force secured creditors to take payments over time in the bankruptcy process and bankruptcy can eliminate your obligation to pay any additional money on the debt if you decide to give back the property. But you generally keep secured property unless you cannot continue to pay the debt.

  • Discharge types of debts singled out by the bankruptcy law for special treatment. Child support, alimony, most student loans, court restitution orders, criminal fines, and most (but not all) taxes are examples of these types of debts.

  • Protect co-signers on your debts. When a relative or friend has co-signed a loan, and the consumer discharges the loan in bankruptcy, the co-signer may still have to repay all or part of the loan.

  • Discharge debts that arise after bankruptcy has been filed.

Q: What different types of bankruptcy chapters should I consider?

A: There are two main types of consumer bankruptcy cases provided under the law:

  • Chapter 7 is known as "straight" bankruptcy. With chapter 7 there is no repayment plan. Unsecured debts are wiped out or "discharged." Debtors pay back secured debts if they wish to keep the property (such as a car, for example) securing the debt.

  • Chapter 13 is a type of "reorganization" used by individuals to pay all or a portion of their debts over a period of years using their current income.

Most people filing bankruptcy will file under either chapter 7 or chapter 13. Either type of case may be filed individually or by a married couple filing jointly.

Chapter 7 (Straight Bankruptcy)

In a bankruptcy case under chapter 7, you file a petition asking the court to discharge your debts. The basic idea in a chapter 7 bankruptcy is to wipe out (discharge) your debts. If you want to keep property like a home or a car and are behind on the mortgage or car loan payments, a chapter 7 case probably will not be the right choice for you.

Chapter 13 (Reorganization)

In a chapter 13 case you file a "plan" showing how you will pay off some of your past-due and current debts over three to five years. The most important thing about a chapter 13 case is that if you can make the payments which the bankruptcy law requires to be made to your creditors, it will allow you to keep valuable property--especially your home and car--which might otherwise be lost. You should consider filing a chapter 13 plan if you:

  • own your home and are in danger of losing it because of money problems;

  • are behind on debt payments, but can catch up if given some time;

  • have valuable property which is not exempt, but you can afford to pay creditors from your income over time.

Q: What property can I keep?

A: In a chapter 7 case, you can keep all property which the law says is "exempt" from the claims of creditors. "Exempt" means that the property is exempt (protected) from being seized by creditors. South Carolina exemptions were recently increased substantially, so debtors may now protect even more property.

Q: What will happen to my home and car if I file bankruptcy?

A: In most cases you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt. ("Exemptions" are provisions in the law which allow you to keep various amounts for certain types of property). Even if your property is not fully exempt, you will be able to keep it if you pay its non-exempt value to creditors in chapter 13. However, some of your creditors may have a "security interest" in your home, automobile, or other personal property. This means that you gave that creditor a mortgage on the home or put your other property up as collateral for the debt. Generally speaking, bankruptcy does not make these security interests go away.

Q: Will bankruptcy wipe out all my debts?

A: Yes, with some exceptions. Bankruptcy will not normally wipe out:

  • money owed for child support, alimony, or other obligations that you are ordered to pay in connection with your divorce or separate maintenance case;

  • most fines and penalties owed to government agencies;

  • most (but not all) taxes and debts incurred to pay taxes which cannot be discharged;

  • student loans unless you can prove to the court that repaying them will be an "undue hardship;"

  • loans you got by knowingly giving false information to a creditor, who reasonably relied on it in making you the loan;

  • debts resulting from "willful and malicious" harm;

  • debts incurred by driving while intoxicated;

  • mortgages and other liens which are not paid in the bankruptcy case (but bankruptcy will wipe out your obligation to pay any additional money if the property is sold by the creditor).

Q: Will I have to go to court?

A: In most bankruptcy cases, you only have to go to a proceeding called the "meeting of creditors" to meet with the bankruptcy trustee and any creditor who chooses to come. Most of the time, this meeting will be a short and simple procedure where you are asked a few questions about your bankruptcy forms and your financial situation. Occasionally, if complications arise, or if you choose to dispute a debt, you may have to appear before a judge at a hearing. If you need to go to court, you will receive notice of the court date and time from the court and/or from your attorney.

Q: Will bankruptcy affect my credit?

A: There is no clear answer to this question. Unfortunately, if you are behind on your bills, your credit may already be bad. Bankruptcy will probably not make things any worse.

The fact that you've filed a bankruptcy can appear on your credit record for ten years from the date your case was filed. But because bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills, and you may be able to get new credit. If you decide to file bankruptcy, remember that debts discharged in your bankruptcy should be listed on your report as having a zero balance, meaning you do not owe anything on the debt. Debts incorrectly reported as having a balance owed will negatively affect your credit score and make it more difficult or costly to get credit. You should check your credit report after your bankruptcy discharge and file a dispute with credit reporting agencies if this information is not correct.

Q: What else should I know?

A: Utility services--Public utilities, such as the electric company, cannot refuse or cut off service because you have filed for bankruptcy. However, the utility can require a deposit for future service and you do have to pay bills which arise after bankruptcy is filed.

Discrimination--An employer or government agency can not discriminate against you because you have filed for bankruptcy. Government agencies and private entities involved in student loan programs also can not discriminate against you based on a bankruptcy filing.

Driver's license--If you lost your license solely because you couldn't pay court-ordered damages caused in an accident, bankruptcy will allow you to get your license back.

Co-signers--If someone has co-signed a loan with you and you file for bankruptcy, the co-signer may have to pay your debt. If you file a chapter 13, you may be able to protect co-signers, depending upon the terms of your chapter 13 plan.

Q: What is Chapter 11?

A: Chapter 11 is a section of the Bankruptcy Code that enables businesses to reorganize while they stay in business. Sometimes Chapter 11 is also used by businesses who want to liquidate their assets but want to realize the most from the asset sale. Chapter 11 may also be used by individuals who exceed the debt limits imposed by the Bankruptcy Code for Chapter 13 reorganization.

Q: Who runs the business in a Chapter 11?

A: The company's management retains control over the business. The debtor business is then known as the "debtor-in-possession" and has the same powers as a bankruptcy trustee.

Q: How do creditors get paid in a Chapter 11?

A: As with Chapter 13, a plan of reorganization provides for how creditors are treated. The debtor must submit its plan within 120 days of filing the case. If it does not file a plan, creditors may do so. Likewise, if the creditors do not consent to the debtor's plan within 180 days of filing the case, creditors may submit their own plans. The plan must provide how various creditor classes will get paid. For example, there may be classes of general unsecured creditors, employees, and vendors. The plan will state how each class of creditors will be paid. The various creditor classes must approve the plan. If they do not, the debtor can ask the bankruptcy court to approve the plan over the objections of the creditors. This is called a "cram down."

Q: How does Chapter 11 work for small businesses?

A: Businesses with less than $2,000,000 in debts can elect to be treated as a "small business." The case is then managed differently than a regular Chapter 11. The deadlines discussed above are also shorter.