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Bankruptcy Alternatives / Debtor's Options

Bankruptcy FAQ

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Special Note: This FAQ will discuss bankruptcy and compare it to the other debtor's alternatives. I assume you are very well versed in how bankruptcy works. If you need more introductory bankruptcy information first proceed to my Chapter 7 FAQ or FAQ on what is chapter 13 bankruptcy or my Chapter 13 FAQ on the chapter 13 process. For a complete set of bankruptcy FAQs visit either the set of chapter 7 bankruptcy FAQs and articles or chapter 13 bankrupcy FAQs and articles. For more basic bankruptcy information try the sites on the Debtor Links page, many are bankruptcy related including all our bankruptcy questions, answers and articles. The listing order for the bankruptcy links is based on volume of information starting with the larger ones. If you need the basics go to the Bankruptcy - General FAQs section and work your way from the bottom up.

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, like debt settlement, 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 score?
A. Bankruptcy ranks as the worst thing possible on your credit report, but once it's over you may start to rebuild credit immediately. Compare this to a debt settlement that takes three years. The debt settlement person must start the credit rebuilding process only after the debt settlement finishes, by that time the person who filed bankruptcy already put three years of credit rebuilding to work and could have good credit re-established.

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 or enroll in a free credit improvement course.

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 balances due from national creditors like credit card debt, 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 or 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 or my FAQ just dealing with student loan debt in a bankruptcy.

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 or Chapter 13 come next followed by 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 or have not come to grips with the fact that you can not or should not reaffirm the debt.

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. How does a person buy back their own assets from the bankruptcy trustee?
A. Imagine bought a $3000 living room set and that no exemption covers this furniture. The bankruptcy trustee feels they can get $1500 at an auction. Knowing the trouble it would take to move and store the furniture and pay the auctioneer fee, you offer the bankruptcy trustee $1000 for the furniture to just let you keep it. They got money for the unsecured creditors and you keep your living room set. The numbers in this example were made up, but the process happens all the time and might include larger items like cars or vacation homes.

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, repossession 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:

  1. You default on your scheduled Chapter 13 or Chapter 11 payments.
  2. You fail to file a reorganization plan or other required documents on time.
  3. Your income is insufficient to execute a reorganization plan within the court's guidelines.
  4. The asset in question will not be needed to reorganize.
  5. The value of the asset is rapidly eroding.
  6. You filed a chapter 7.

Q. How can I figure if I can afford a viable chapter 13 reorganization plan?
A. Start by making sure you understand your personal budget and what you can afford to pay monthly. With that number in mind use the chapter 13 bankruptcy payment calculator to see what your estimated plan might cost.

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. Think very carefully about if you are really a person who should file chapter 13 bankruptcy because it you never should have filied in the first place it will not be very long until you find your chapter 13 bankruptcy dismissed and you looking for another way to stop foreclosure.

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 credit card for people with bad credit.

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. The concept that you lose everything is just one of the bankruptcy myths.

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:

  1. If all of the debt is in the name of only one spouse only that spouse need file.
  2. If all debt is joint and you want a Chapter 7 discharge both should file.
  3. If the goal is stoping a foreclosure with a Chapter 13 only one spouse need file. Make sure that the filing spouse is named in the title to the home.

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.

Q. I think a bankruptcy might be right for me, how do I choose which bankruptcy chapter fits my situation?
A. Try reading the FAQ on chapter 7 vs. chapter 13 bankruptcy or use the bankruptcy analysis and second opinion tool.

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Debt Workout Mortgages & Secured Debt | Credit Card & Unsecured Debt | Bankruptcy | Do Nothing | Deed in Lieu of Foreclosure | Do Nothing Home Forclosure | Pay Creditors in Full | Debt Consolidation Loan | Non-Profit Credit Counseling | Credit Card Balance Transfer

Debt Consolidation / Debt Settlement Program - Consolidate your credit card and unsecured personal debt with a program to settle balances for 30-50 cents on the dollar. Make monthly payments toward the total settlement over a period of years. Free initial consultation. Learn more and see if your situation fits the program online.

A Guide to Borrowing Money with Bad Credit - Including informational articles on obtaining a home mortgage, auto loan, credit card or unsecured personal loan.

Credit Card Debt - Online guidance to understand your debt and consumer spending habits in order to evaluate the credit card debt solutions and pick best debt relief for you. See 10 common causes of bankruptcy so you can avoid them.

Credit Cards For People With Bad Credit - Read either informational articles on obtaining any type of bank card or credit card with bad credit, including a definition of what is bad credit or look at a complete set of FAQs dealing secured credit cards.

Credit Repair and Credit Rebuilding -Credit repair and credit rebuilding article. Topics include how to repair your credit and warnings about credit repair scams. Links to other credit repair sites and professional credit repair services plus my own Free Guide to Help Repair and Rebuild your Credit Report. For more credit help try 14 Do's and Don'ts To Raise A Score Fast or the Credit Score FAQ.

Who to pay when you can't pay everyone - An article addressing cash allocation for debtors.

How to Get money when you need money - Examines WHEN you really NEED money and how to get money even with bad credit for an emegency or financial crisis.

Stop Home Foreclosure Help - Articles to better understand the foreclsoure process and how to avoid a foreclosure including an interactive tool to analyze your own situation and point you in the right direction to keep your home, a list of various ways to halt a foreclosure, a list of 10 mistakes to avoid when facing foreclosure and foreclosure myths.

Personal Home Budget Analysis - An interactive tool to learn where your money REALLY goes. Input your income and expenses, the program will automatically determine if you have accounted for all you have spent. When you have discovered all your expenses you will be know the details of any overspending. Use this information to help plan and keep a monthly budget or change spending to avoid further debt or bankruptcy.

Bankruptcy Questions - Find all the bankruptcy information you might be looking for about both chapter 7 bankruptcy and chapter 13 bankruptcy including chapter 7 vs chapter 13, what does a chapter 13 do, who should file a chapter 13, what happens after chapter 13 bankruptcy dismissal, how to find a bankruptcy attorney, hiring and working with your bankruptcy attorney, and much more.

For information on consulting with Mory Brenner, Esq please visit the contact page.

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.

Web site design by Mory Brenner, Esq. This page, and all contents, are Copyright © 2010, all rights reserved by

Financial Firebird Corporation, 150 North Street Suite 40, Pittsfield, Massachusetts 01201.

Bankruptcy Alternatives / Debtor's Options - Home Page

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The most recent update of this page occurred on 11/03/10.

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