What are my options when seeking bankruptcy protection?
For consumers, the U.S. Bankruptcy Code offers different
types of personal bankruptcy protection: Chapter 7 bankruptcy, which
is used to discharge unsecured debts like credit cards and medical
bills via the liquidation of the debtor’s non-exempt assets,
and Chapter 13 bankruptcy, which is typically filed to stop home foreclosure
or vehicle repossession through the development of a 3-5 year repayment
plan in which the debtor maintains monthly payments and catches up
on past-due secured debts. This FAQ examines Chapter 7, read our Chapter
13 FAQ to learn more about that option.
Q. What types of debts are generally dischargeable
Debts that are generally dischargeable in Chapter 7
bankruptcy include credit card debts, medical bills, most personal
loans, judgments from car accidents, deficiencies on repossessed vehicles,
some older tax debts, payday loans and garnishments.
What types of debts are not dischargeable in bankruptcy?
Generally speaking, student loans are not dischargeable
in bankruptcy; nor are taxes, child support and alimony, marital debts,
intentional torts, recent credit purchases and cash advances, and
any debts incurred through a fraudulent act.
Q. Your answer to my question did not mention mortgage debt or auto loan
debt prior to repossession, how does Chapter 7 bankruptcy affect those?
Imagine the debt and security interest the creditor
has in an asset as two distinctly different things. In plain English
take an auto loan: you signed a promissory note saying that you promised
to pay back the money you borrowed. In addition to that you signed
a security agreement stating that the bank had a lien on the car and
could repossess the vehicle if you failed to pay money due on the
note. Chapter 7 bankruptcy can discharge your obligations under the
note. The automatic stay might affect the banks rights to act, but
keep that information aside for now.
Q. So if I file a Chapter 7 and discharge my debts,
those debts I get discharged can include mortgage obligations and
auto loan debt?
Yes, the debt may be gone but the creditors security
interest will remain with the asset. To go back to our auto loan question:
you can have your obligations under the car loan note discharged and
you will no longer owe the money, but if you do not pay the bank may
come take the car.
How does that work to my advantage in bankruptcy?
If you had a car you did not like or a vehicle with
a very high payment or a loan for more that the auto’s value
where you needed to walk away from the car and the loan, a Chapter
7 bankruptcy filing allows you to give the car up without a deficiency
due. It works the same with a house and a mortgage.
Q. What if I want to keep my house or car in a
Chapter 7 bankruptcy?
In most promissory notes or security agreements the
creditor gets the right to call the note due if you declare bankruptcy.
In everyday practice, however, banks want their money. If you file
a Chapter 7 you must understand that the creditor will have the right
to take the asset, but I rarely saw cases where a bank took that route
if the debtor stayed current on the loan.
Q. So if I stay current and I file a Chapter
7, I just keep my property and the bank does nothing?
Maybe, or they can try to take the property or they
can ask you to reaffirm the debt. It can be a roll of the dice or
sometimes your bankruptcy lawyer can reach an agreement with the creditor
prior to the bankruptcy filing. Make sure you know all the information, ask the right questions and if you take such a gamble do it with full knowledge of the risks and benefits.
Q. What does it mean to reaffirm the debt?
A Chapter 7 bankruptcy filing discharges the obligation
of the debtor to pay back the money they owe. An agreement to reaffirm
the debt means you agree you owe the money again as if the bankruptcy
never took place for the specific debt you reaffirm.
Q. Why would I reaffirm debt if I went to so
much trouble to wipe out my debts?
In some cases a creditor will give you an ultimatum
of either reaffirming the debt or having them take the asset. So for
example you may need to reaffirm a mortgage or lose the house. If
you had a many credit card debts and they were the true cause of the
Chapter 7 case anyway, you might agree to reaffirm the mortgage debt,
keep the home and let the Chapter 7 just release you from the credit
Q. What items are typically exempt from bankruptcy
A. Using Chapter 7 bankruptcy as an example, the bankruptcy
trustee has the option of liquidating, or converting into cash, your
non-exempt assets in order to pay off your creditors. However, most
Chapter 7 filers do not have any non-exempt assets, and there is usually
no liquidation during these cases.
With that said I'll answer the question, exempt items in consumer bankruptcy
cases typically include your residence, primary vehicle, certain items
of personal property, tools, work equipment, and numerous other items.
Each state sets it own amounts in determining a monetary value for
these exemptions. There are also “Federal” exemptions
set by the US government. Some states give you the choice of using
the state exemptions or the federal exemptions.
Q. Where can I get information on exactly what my state allows?
Q. Where I can pick either the state or federal
exemptions can I choose some from each?
No. Take a state where the home exemption allows more
than the state exemption but the state allows a greater auto exemption.
You must choose a full set of exemptions and then take all the state
exemptions or all the federal exemptions. You cannot mix and match.
Q. Is there a way to keep something I cannot
In most cases, yes. Remember most debt cases revolve
around money, not particular items. So creditors want their cash as
per their original agreement, not the seizure of the collateral. The
same goes for the bankruptcy trustee, they want money not your things.
Imagine a car worth $5000 in a state that allows a $3000 exemption
for a personal auto. Potentially the trustee could sell that car for
$5000 and realize $2000 for the other creditors. On the other hand
the trustee knows it will take time and be a pain in the neck and
after all that maybe the car can only be sold for $4000, if that.
Your lawyer might offer the trustee $1000 cash to let you just keep
the car and save all the bother. Keep in mind this information - you must have exempt
money to use or family or friends to come up with cash for this plan
Q. Can I work a deal with the trustee to pay
that over time?
I personally never saw that happen, expect you need
lump sum of cash or give up the item if it’s value exceed the
bankruptcy exemption limit.
Q. How should I value my assets for bankruptcy
For household items figure tag sale value. For cars
use trade in price. For a home use a quick sale estimate. Ask other people for help on the question of value because you may attach some emotional value to items.
Q. What happens to non-exempt assets in bankruptcy?
The trustee sells them and, after taking the trustee’s
fee, splits the money amongst the creditors. You get nothing. From answers to the previous questions, remember the bankruptcy trustee will only bother to liquidate assets worth enough to make it worth the time to auction.
Q. What is the automatic stay in bankruptcy?
Whether you are filing Chapter 7 or 13 bankruptcy,
an automatic stay is entered upon the filing of your bankruptcy petition.
The automatic stay is a court order which prevents any further collection
action against you during your bankruptcy case. This means that credit
collectors can no longer hassle you with threatening phone calls or
Q. When will the creditors stop hounding me?
As soon as creditors get notice of the bankruptcy filing.
Keep your bankruptcy docket number or case number handy, if anyone
calls to collect a debt give them the number and tell them to stop
Q. What does the automatic stay stop? What can’t
Generally speaking, the automatic stay stops foreclosure,
repossession, utility shut-offs, lawsuits, wage garnishment, and tax
levies. It does not stop criminal proceedings or legal actions against
you for support (such as paternity testing or child support).
Q. I heard a Chapter 7 bankruptcy would not stop
home foreclosure or auto repossession?
Lets get very specific on this. The filing of a Chapter
7 will, indeed, stop foreclosure or auto repossession upon submission
to the court. The critical part comes next. After a relatively short
period of time, unless you have an agreement with the creditor, or
in cases where you may be current with a particular obligation, the
creditor will file for relief from the automatic stay. For most Chapter
7 debtors no defense exists, the court grants relief to the creditor,
and the foreclosure or repossession continues. So while a Chapter
7 does stop foreclosure and repossession, it does not stop them for
the long term in the absence of an additional agreement with the creditor
or in some cases where the loan remains current.
Q. Can there be some middle ground where I am
a few payments behind as of the time of the bankruptcy filing and
I can still keep the property?
It can be negotiated with the creditor. No law prohibits
that, but no law gives you the right to do it either. I used to like
my clients to be current with assets they wanted to keep before we
filed bankruptcy for them.
Q. If I am married does my spouse have to file
It depends on whose name the debt is in, talk to your
bankruptcy attorney and get that question answered on an individual basis, but no law says you have to.
Q. If I file do I have to tell my spouse?
I used to get this question quite a bit, believe it
or not. If you plan to stay married you need to have an honest discussion
with your spouse ASAP. Even for those of you saying, “of course
my spouse knows”, let me take this moment to say that financial
trouble can break a relationship. Try to tackle the problems as a
team, try to avoid finger pointing and blame, to the extent possible,
try to let the experience bring you closer together. I had one case
where a woman feared a vicious beating if her husband learned of her
debt. While the she needed to review if her plans included staying
married, I must report in unique cases like that she might have been
able to file without the knowledge of her husband. On the other hand,
chances that the other spouse will not learn at some point in the
near future, like when you need a car loan or mortgage, remain very
small. Now that you have all that information, the technical answer to the question would be "no", but I do not suggest most people file bankruptcy without the knowledge of their spouse.
Q. Will the fact that I filed bankruptcy appear
in the local papers?
I never saw too much of that, but no law prohibits
it. Check your own local paper to see if they make a habit of publishing
Q. Will I lose my job if I file bankruptcy?
Not in most cases. I have seen some cases with government
employees with high security clearance or people at high levels of
financial institutions who had legitimates worries, but for most average
folks the answer is no. If you are worried see if you can get this information
annonomously from someone at your workplace who could answer the questions with some degree of acuracy.
Q. I just moved, do I have to wait to file bankruptcy?
That question can get complicated. Be aware certain restrictions
apply. In states with high or unlimited home exemptions like Texas,
Florida, Kansas, Iowa and South Dakota you need to own the home 40
months to qualify for the super exemptions. You can still file, but
just not get the full exemption. In some cases where you just moved
you might have to wait 6 months. If you just moved and can’t
wait to file you may be able to file in your old state.
Q. How does it feel emotionally to file for bankruptcy?
It really depends on you. For some debtors it means
nothing, for others it hangs over them for quite some time. I generally
found it more like a serious accident. At the moment it can be very
nasty, but in time, you heal. You may end up with scars that no one
knows even exist but you. Once again, how much you notice the scars
remains a personal thing. You can read more about the emotional side
of being in debt in the Debtor
Q. Is it harder to file bankruptcy nowadays?
Yes and no. The Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 (BAPCPA) brought on new requirements when seeking
to file bankruptcy, including a means test for people looking to file
Chapter 7 bankruptcy, and a mandatory credit counseling briefing prior
to filing bankruptcy and a stipulated debtor education course after
filing but before receiving a discharge for all consumer debtors.
While these stipulations have brought on more work for both debtors
and bankruptcy attorneys, most people have found that they have still
qualified for bankruptcy after the new law.
Q. Can I file a bankruptcy myself without a lawyer?
By law, yes. Is it a good idea? I would answer no. People
often ask this question because it seems possible, but a bankruptcy filing
can be one of the most important financial events in your life, you
do not want to do it wrong. You would never think of removing your
own appendix, I would think of filing your own bankruptcy in the same
Q. If I have decided to file a Chapter 7 bankruptcy
when should I actually submit the papers to the bankruptcy court?
It depends on what you want to achieve. You may wish
to file bankruptcy just before a foreclosure auction date to stop a sale, even if it is
only a temporary delay. You may want to file before a lien on your
property becomes permanent after the bankruptcy preference time limit.
You may want to file before a certain stage of a court case against
you. Sometimes you may want to wait until certain events have fully
played out, other times you may want to start your bankruptcy as soon
as you can so you can get started right away on the credit rebuilding
process. Timing usually becomes a very personal thing you need to
work out with your own bankruptcy lawyer.
Q. What is a bankruptcy preference and what does
a bankruptcy preference mean to me?
Part of the job of the bankruptcy court includes trying
to treat all creditors of the same class in the same way. Imagine
that right before your bankruptcy filing you paid one credit card
a payment of $10,000. In your Chapter 7 none of your 10 credit card
companies would get a cent. The court does not like the fact that
one company got all that money right before you filed and the others
get nothing, they call that payment a “preference” and
can go back 90 days and demand that credit card company who got the $10,000 pay it back.
Q. Do I get the preference payment back?
No, the trustee would get it. Then in the case above
they would split the $10,000 up and pay each of the credit card companies
$1000. Where it can mean something for you comes more in the context
of a lien on a home you will keep. If someone puts a lien on your
house and you file bankruptcy within 90 days, the court will remove
the lien as a preference.
Q. Can this preference concept in bankruptcy
work against me?
Let’s say you paid money to a friend or relative
within 90 days of filing a bankruptcy, even if it involved repaying
a legitimate loan they made to you. The trustee would get that money
back from them as a preference.
Q. What exactly happens with the Chapter 7 means
A. If you are interested in filing Chapter 7 bankruptcy,
you will have to determine if you qualify for this form of bankruptcy
protection via the Chapter 7 means test. Essentially, the first part
of the Chapter 7 means test compares your income to the median income
in your state for the family that is the same size as yours.
If your income is less than the median income in your
state, you pass the test and qualify for Chapter 7 bankruptcy. If
your income proves to be greater than the median income in your state,
this doesn’t mean that you don’t qualify for this form
of bankruptcy; it simply means that you must move on to the next step,
which involves calculating your disposable income and debts.
With all this information considered, most people have found that
they still qualify for Chapter 7 bankruptcy after the inception of
the 2005 bankruptcy law. In the rare cases when people don’t
13 bankruptcy may be an option.
Q. What are the credit counseling and debtor
A major goal of the new bankruptcy law was to make
sure that people got necessary financial education for life prior
to and after bankruptcy. With that said, the law mandates that before
an individual debtor can file bankruptcy, he or she must obtain a
credit counseling briefing from an agency approved by the U.S. Trustee’s
Office. Things covered in the credit counseling briefing include an
evaluation of your personal finances, alternatives
to bankruptcy and personal
After filing bankruptcy but before being able to receive
a discharge, a debtor must complete a UST-approved personal financial
management debtor education course, which covers essentials like budgeting,
money management and credit use.
Q. How long do bankruptcy cases last?
Chapter 7 bankruptcy cases are relatively quick, with
a discharge often attainable in as little as six or seven months. Chapter 13
bankruptcy cases are naturally longer, as repayment plan periods typically
range from 3-5 years.
Q. How often can I file chapter 7 bankruptcy?
You can file bankruptcy as many times as you want in
your life; however, you may not file another chapter 7 bankruptcy case until
eight years have passed since your last chapter 7 bankruptcy case.
Q. Can I leave one credit card out of the bankruptcy
so I will have a credit card to use for car rentals and other instances where
one needs a credit card?
While the technical answer to this question might be “yes”,
I almost never suggest this. I would rather a debtor discharged all
of their credit card debt and used cash to get a secured
credit card after bankruptcy rather than pay off dischargeable
debt just to have a working credit card. By keeping a card you end
up paying that money just to keep a card, with a secure credit card
you pay the money to establish a saving account to secure a new credit
card. In a few years when your credit gets back to a reasonable level
if you kept an old credit card your money went to the bank, if you
got a secured credit card you can give that card up for an unsecured
card and withdraw your deposit for yourself.
Q. What can you tell me about common bankruptcy
There are a lot of myths and bad information that come with bankruptcy,
such as that filing will ruin your credit forever and make it harder for you
to do a lot of other things, including getting credit and loans for
a home and car. While it is true that a bankruptcy may be on your
credit record for up to 10 years and that it will take time to repair
your finances, the fact remains that there are post-bankruptcy friendly
lenders out there who may be willing to work with you to obtain these
goals. In terms of credit, you may actually look like a better credit
risk after receiving a discharge since you will not have any remaining
debts. The best way to assess bankruptcy myth from reality is to speak
with a bankruptcy lawyer. You may wish to read more on credit
rebuilding after bankruptcy or take our free
credit rebuilding course after your discharge.
Q. What are the alternatives to filing bankruptcy?
In addition to bankruptcy, there may be other ways
to address your financial problems, including planning a debt workout,
paying your bills, negotiating with creditors, taking out a debt consolidation
loan, working with a credit counseling agency or settling your debts.
For many free articles and FAQs on this subject visit Bankruptcy
Alternatives – Debtor’s Options for more information.
Q. How do I know if bankruptcy is right for me?
Coming to a decision to file bankruptcy takes a combination
of personal reflection on all of these questions and answers and professional guidance from a bankruptcy
lawyer. When thinking about bankruptcy, some things to keep in mind
include assessing your financial situation, asking questions about
how much debt you truly have and whether you are facing the threat
of foreclosure or repossession, and speaking with a bankruptcy
lawyer who can help you evaluate your situation and learn more
about how the U.S. Bankruptcy Code may be able to provide some financial
relief. For some suggestions to see how you personal financial situation
fits in with both bankruptcy and non-bankruptcy debt solution options
you might try the program at Debt
Help Solutions where your circumstances will be evaluated for
ten different debt elimination methods including Chapter 7 bankruptcy
and Chapter 13 bankruptcy.
Q. Where can I read more about filing a Chapter
Debtor Links page has more sites and articles on both Chapter
7 bankruptcy and Chapter 13 bankruptcy.
Nothing contained herein should be construed to constitute advice for your personal circumstances. This is intended as a peripheral exposure to the various options available, but by no means is this a comprehensive or exhaustive analysis of the bankruptcy laws or their alternatives. Whether or not you should file a Chapter 7 bankruptcy, Chapter 13 bankruptcy, or any bankruptcy, will vary depending on your personal circumstances and should only be undertaken after careful consideration, analysis and after consultation with an attorney experienced with such matters. These pages may contain information and rules peculiar to the Commonwealth of Massachusetts.
This material may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.