Q. What are the advantages of bankruptcy?
A. Once debts are discharged through the bankruptcy court in a Chapter 7 Bankruptcy they're gone
forever. With the other options you will most likely have to pay some money
even if it is pennies on the dollar.
Q. Is that better or worse for my credit?
A. Bankruptcy ranks as the worst thing possible on your credit report,
but once it's over you may start to rebuild credit immediately.
Q. How long will the case take?
A. Chapter 7 Bankruptcy cases may be filed in days and finished in 4-8 months most
times. Chapter 13 Bankruptcy cases may take many months until a plan gets approved
then three to five years for the plan to be completed. I've seen chapter
11 Bankruptcy cases take years for plan approval and even more years to carry out the plan of reorganization.
Q. How long until my credit gets back to the point where I might
hope to get a regular credit card, auto loan or mortgage?
A. Rebuilding credit depends on how aggressively you try to get back on
track, but don't figure less than 1-3 years for a loan after bankruptcy with terms close to those available to someone who never filed bankruptcy. Remember, you can always get
a secured credit card or a mortgage with a low loan to value (LTV) and
high interest rate, sometimes even still in the middle of a bankruptcy. For more information read articles on bad credit loans or apply online with lenders who welcome loans for people with bankruptcy history.
Q. How does bankruptcy compare time-wise to the other options in term of rebuilding credit?
A. Timing ends up so dependent on individual creditors that comparisons
would not be accurate. I think the best advice here is what you do to prove
your new credit-worthiness after a problem will be as or more important
than if the initial problem resulted in a workout or a bankruptcy for a solution. You may wish to read more about rebuilding credit.
Q. What type of debtor is best served by a Chapter 7?
A. Someone with no property, few enough assets that they may all be exempted,
large consumer debt from national creditors, low enough income that they will not be forced into a Chapter 13 and no non-dischargeable tax, student
loans or court obligations.
Q. Whats unique about national consumer debt creditors?
A. Some of them have a policy that if they can't recover close to 50 cents
on the dollar they would rather the debtor file a Chapter 7 and
get nothing. Sometimes a debt workout settlement of even 30 cents on the dollar can be too much to pay even if the payments can be streched over a term of years. When the debtor can not afford any of the settlement options bankruptcy may be the best way to go.
Q. How much would I have to earn for income for a court to try to convert a Chapter 7 bankruptcy to a Chapter 13 bankruptcy?
A. Use this for a quick answer, but each case will be a bit more complex. If you look at your income minus your expenses each month and you have less than $100 per month left over you should be OK filing a Chapter 7 bankrupty. For expenses use your regular budget, you do not need to use the special "shoe string" budget you have been forced to live with when things were at their worst. On the other hand do not expect to have luxuries like privite school of expensive vacations to be allowed as expenses.
Q. Exactly which taxes, student loans or court obligations are non-dischargable?
A. Some federal
taxes and student loans except in special cases where payment would
create an undue hardship, alimony, child support and criminal restitution.
For the exact list look at the federal
laws for non-dischargable items.
Q. Which option has the fewest out of pocket costs?
A. Of course, doing nothing ranks first here. For just consumer debt a
Chapter 7 remains the least expensive, which deals head on with the issues
in most of the cases. There is no legal time negotiating with creditors
and no money used to pay them off. Workouts come next followed by Chapter
13 and Chapter 11. By definition, paying creditors in full should rank
highest.
Q. Wouldn't a Chapter 7 still be cheaper if the debtor had secured
assets?
A. There would be less out of pocket costs, but remember when you file
a Chapter 7 you turn over all non-exempted assets to the trustee. This
means you have lost control of their future and may lose them completely.
Q. Can you pick and choose which assets to put into bankruptcy?
A. Only based on legal ownership. It works like this:If you control many
partnerships, trusts and corporations, any one may file bankruptcy by itself
without directly affecting the others. If you file personally, every asset
you own must be included in the filing. From there you elect to exempt
some.
Q. What happens to the assets I exempt?
A. If you can exempt all the equity you get it back. Lets take a car worth
$10,000 with a $9,000 loan. You exempt the $1,000 equity and keep the car.
Q. Then the bankruptcy court discharges my loan? Do I now have a
$10,000 vehicle free and clear?
A. No, the advantage of the bankruptcy discharge will be that the future
of the asset will be up to you. If you don't want the car anymore just
give it back to the bank, you won't owe the loan or any deficiency. This can
be very useful when you owe $15,000 for a car now worth only $10,000. If
you want to keep the car you will have to keep up the payments after the
bankruptcy. In fact, most creditors will want you to "reaffirm"
the debt.
Q. What does that mean?
A. When you reaffirm a debt you become personally liable for it again.
It's as if for that particular debt the bankruptcy dosen't count.
Q. What if I want to reaffirm all my loans?
A. You are not a bankruptcy candidate.
Q. What exactly can I exempt?
A. There may be two answers to this depending on where you live. See the
table of which states
allow the Federal exemptions, the Federal
Bankruptcy exemptions and State exemptions for those not allowing the
Federal exemptions. Most states allowing the Federal exemptions
will also allow the debtor to choose using the state exemptions if they
are more favorable.
Q. If I have a minority interest in a corporation do they get dragged
into the bankruptcy with me?
A. No, only your shares go to the trustee. Daily operations do not get
affected. This may have implications in terms of voting the shares and
transfer of the shares where sales are restricted.
Q. Could any of the other options ever cost more then paying creditors
in full?
A. Legal fees for Chapter 11 cases can run so high it could happen. Don't
try it unless there are a lot of assets at stake and the ability to fund
the entire process available.
Q. Can a person even file a Chapter 11, or only a business?
A. Individuals may now file Chapter 11 too.
Q. Will I have to go before a judge in a Chapter 7?
A. No, you will meet with a trustee at a meeting much less formal than
a trial.
Q. What is the trustee's job?
A. Find assets with equity, liquidate them and distribute the money left
after paying off the secured creditors to the unsecured creditors.
Q. What if I want to keep some non-exempted assets?
A. You may try to buy them back from the trustee.
Q. If I change my mind after filing can I reverse out the bankruptcy?
A. You may be able to get the case dismissed but the fact that you filed
it will be on your credit report and a judge will decide if it may be dismissed
or not.
Q. After I file bankruptcy can I still workout the non-exempt assets?
A. In a Chapter 11 or 13 you may negotiate the plan with the creditors
out of court, in a Chapter 7 you may still do a workout if the trustee
abandons the property.
Q. What does it mean when a trustee abandons property?
A. When an asset's liquidation value can't even pay off the secured creditors,
the trustee "abandons" it, or simply put; gives it back to the
debtor. As in our car example above, although the debtor has been discharged
from the obligation the security interest runs with the collateral. The debtor gets to keep the car because the trustee abandons the asset, but
if a workout can not be achieved or the payments made, the car will
be reposessed even though the debtor gets back title.
Q. I thought a big advantage of bankruptcy was it stopped foreclosures and reposessions.
How can they do that?
A. When a bankruptcy gets filed, an automatic "stay" on litigation
such as foreclosures and sheriff's sales goes into place. To get around
the stay a creditor must go into court and ask the bankruptcy judge for
a "relief from stay", if granted they continue with their plans
to take back your asset.
Q. When would a judge allow a creditor to do that?
A. Here's a list of reasons:
Q. I can't do a workout and I can't make any payments at all, should
I file a Chapter 13 to stop the impending forecloseure on my house?
A. Given these facts you will only be delaying the inevitable. The money
you will spend on legal fees might best be used elsewhere, such as securing
a new place to live, unless things may change in the next few months.
Q. Can I choose to leave some debts out of my bankruptcy?
A. Legally perhaps, but I rarely find it a good idea. Most times people ask about this they really want to be sure they can keep a credit card. While this can be a valid concern, for car rental or online purchases, debtors can be better served by including all debt in their bankruptcy and getting a new secured credit card.
Q. Can I change from a Chapter 13 to a Chapter 7 or vice versa later?
A. You can make a motion to convert a case after it is filed, as can the
bankruptcy trustee. A bankruptcy judge must approve the motion.
Q. When might this happen?
A. If a Chapter 13 looks like it will fail or has failed either or both
parties may desire a conversion to chapter 7. These days Chapter 7 trustees
look carefully at the assets and income of debtors. If they think money
might be available for unsecureed creditors they may make a motion for
conversion to a Chapter 13.
Q. Can I keep my house and car if I file a bankruptcy?
A. As long as the equity does not warrent the trustee keeping it and you
stay current on payments for the items you want to retain you should be
OK.
Q. May I keep my pets?
A. You should report animals of any value on your schedules such as pedigree
dogs or cats, horses etc. You should then be able to exempt the item and
keep the pet.
Q. What if I want to keep more assets after I have run out of exemptions?
A. Potentially exemptible assets can be bought back from the trustee after
all exemptions have been exhausted just as with non-exemptible assets described
above.
Q. May I file alone or must my spouse and I file jointly?
A. There is no law about who must file, the decision should be made based
on the debt, credit and personal situations. Here are a few quick examples:
Q If only one spouse files will the other spouse be affected in any
way?
A. If there is no joint debt the bankruptcy filing may not appear on their
credit report, but if you need to buy a car or house jointly in the future
it will force most new loans to be evaluated based on whoever has the worst
credit.
Q. What happens to joint debt when only one spouse files a bankruptcy?
A. The other spouse will owe the whole debt in most cases.
Q. Can I file without my spouse having to know about it?
A. This odd question has come up enough I feel I should include it here.
Yes, I have secretly filed for a debtor when we feared for the physical safety
of a spouse, but generally if this question needs to be asked the spouses
may need to take a hard look at the relationship. One day the other spouse
will likely find out such as when a home or car needs to be bought or refinanced.
Q. If my corporation goes bankrupt or out of business what debt will
I owe personally?
A. Provided no one tries to "pierce the corporate vail" you will
owe only any debts personally guaranteed and any taxes collected on behalf of
the IRS (941 trust fund taxes) if you controlled the collection of those
taxes and directed they not be paid.
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