| What are the
main purposes of bankruptcy for those who cannot
pay their debts? |
| For individuals who
cannot pay their debts—called “debtors”—bankruptcy
has two main purposes. First, bankruptcy operates
to give the people who are owed money—the
creditors—a fair share of the money that the
debtors can afford to pay back.
Second, bankruptcy operates to give the
debtors a fresh start, by canceling many of their
debts, through an order of the court called a
“discharge.” |
|
| How does
bankruptcy accomplish these purposes? |
| There are two
different ways in which bankruptcy can provide for
payments to creditors and a discharge for
debtors—chapter 7 and chapter 13. |
|
| How does chapter
7 work? |
| In a chapter 7
bankruptcy, debtors give up certain property that
they own at the time they file the bankruptcy
case. This property is sold by
a trustee, who uses the proceeds to pay creditors.
The debtors receive their discharge shortly after
the case is filed. In this way, chapter 7 debtors
are allowed to keep the money that they earn after
filing the bankruptcy case, as well as most other
property that they obtain after the filing. |
|
| What property do
debtors have to give up in chapter 7? What about
tax refunds and lawsuits? |
Debtors in chapter
7 are required to give up “t;nonexempt” property
that they own at the time of the filing; they are
allowed to keep both &8220;exempt&8221; property
that they own at the time of filing and any
property that they receive a right to own after
the bankruptcy filing. Exempt property is property
that, according to the law, is necessary for the
debtors’ support and the support of their
dependents. The law that determines what property
is exempt varies from state to state. If all of a
debtor’s property is exempt, then the debtor does
not have to give up any property in chapter 7, but
may still obtain a discharge.
As long as a debtor has a right to payment at the
time of the bankruptcy filing—from a tax refund, a
lawsuit, or some other source—that right to
payment is property that must be given to the
chapter 7 trustee unless it is exempt, even though
the debtor has not yet received any money. Thus, a
debtor may have to turn over a tax refund to the
trustee that is received after the bankruptcy is
filed, and a debtor may not be entitled to the
settlement of a personal injury action that is
entered into after the bankruptcy is filed. |
|
| If a debtor is
behind in house or car payments, can chapter 7
stop a foreclosure or repossession from taking
place? |
| Whenever any
bankruptcy case is filed, the creditors are
stopped from taking action to collect the debts
that were owed at the time of the bankruptcy. This
feature of bankruptcy is called the “automatic
stay.” The automatic stay stops a foreclosure or
repossession from going forward. However, no
bankruptcy filing allows a debtor to keep property
that is security for a loan without making
payments on the loan. For example, debtors with
home mortgages and car loans, cannot keep their
homes and cars without making payments. As soon as
the bankruptcy case is closed, the automatic stay
terminates, and the creditor can proceed with
foreclosure or repossession. Moreover, if the
debtor is not current on payments, creditors may
ask the court to terminate the automatic stay
while the bankruptcy is still pending, and, in
chapter 7, creditors are usually able to terminate
the automatic stay. In order to keep property that
is security for a loan, a debtor often must enter
into a “reaffirmation agreement“ with the creditor
who holds the lien on that property. |
|
| What is a
reaffirmation agreement, and how does it work?
|
- A reaffirmation agreement is
an agreement by a debtor and a creditor about
how to treat a particular debt that would
otherwise be discharged in the debtor’s
bankruptcy. Usually, the debt is secured by
collateral that the creditor could repossess or
foreclose on. In the reaffirmation agreement,
the debtor agrees to pay some or all of the
debt, usually, according to schedule. In
exchange, the creditor agrees not to repossess
or foreclose on collateral that secures the
debt, as long as the debtor makes the
agreed-upon payments. A valid reaffirmation
agreement puts the debtor under a legal
obligation to pay back the entire amount agreed
upon, even if this is more than the value of the
collateral that the debtor is keeping. So if the
debtor defaults on the payments required under
the reaffirmation agreement, the creditor can
repossess or foreclose, and then seek a personal
judgment against the debtor if the sale of the
collateral does not satisfy the debt.
However, in order for a
reaffirmation agreement to be valid, several
requirements must be met, including the
following:
- the agreement has to be
entered into before the debtor receives a
discharge;
- the agreement has to be
filed with the court;
- if the debtor is
represented by an attorney, the attorney has
to certify that it will not create a serious
problem for the debtor; and
- if the debtor is not
represented by an attorney, the bankruptcy
court has to make a finding that the
reaffirmation agreement does not create a
serious problem for the debtor.
The agreement must be
voluntary; no one can force either the debtor or
a creditor to enter into a reaffirmation.
Finally, debtors are given the right to change
their minds: a debtor may cancel any
reaffirmation agreement within 60 days after the
agreement is filed with the court, or any time
before discharge, whichever is later.
If any of the requirements for
a reaffirmation have not been complied with, the
agreement may not be binding. In that event, the
debtor would have no personal obligation to make
payments under the agreement.
|
|
| Can a chapter 7
debtor make payments on a discharged debt without
a reaffirmation agreement? |
-
- Yes. Even though a debt has
been discharged, the debtor can still make a
voluntary payment of the debt. This often
happens, for example, with debts that are owed
to family members or friends. But the key to
this kind of payment is that it must be entirely
voluntary; the debtor has no legal obligation to
pay a discharged debt, and the creditors can
take no action to pressure or persuade the
debtor into making payments.
|
| What can be done
if a debtor falls behind in payments after
obtaining a chapter 7 discharge? Can another
bankruptcy case be filed? |
| The discharge in a
chapter 7 case only covers the debts that were
incurred before the case was filed. The bills that
a debtor incurs after the case is filed are not
discharged. The hope is that, after their old
debts are canceled by the discharge, debtors will
be able to pay their new obligations as they
become due. But unexpected circumstances, such as
illness or loss of employment, may again put
debtors in a situation where they cannot pay their
bills. In this situation, a debtor could file
another chapter 7 case, but there might not be a
right to discharge. After a debtor receives a
discharge in a chapter 7 case, the debtor only has
the right to receive a discharge in a later
chapter 7 case if the later case is filed at least
six years after the first case was filed. However,
even during this six-year “waiting” period,
debtors may still be able to obtain relief in
chapter 13. |
|
| Are all debts
that were incurred before the bankruptcy
discharged in chapter 7? |
| No. There are a
number of types of debts that are excepted from
the discharge given in chapter 7. Among the most
common are debts for certain taxes, fraudulently
incurred credit card debt, family support
obligations (including child support and alimony),
and most student loans. A debtor with debts of
these kinds can still receive a discharge of other
debts, but after the bankruptcy the “excepted”
debts will still be owing (less any payments made
through the bankruptcy itself). Additionally,
chapter 7 debtors who engage in certain misconduct
connected with the bankruptcy (like failing to
disclose assets) may be denied a discharge
entirely. However, many of the debts that are
excepted from discharge in chapter 7 (fraudulent
credit card debt, for example) may be discharged
through chapter 13. Other types of debt (family
support and student loans, for example) are
excepted from discharge in chapter 13 as well as
chapter 7. |
|
| How does chapter
13 work? Who can file a chapter 13 case?
|
- Debtors in chapter 13 keep
all of their property, whether or not it is
exempt, but they make regular payments on their
debts out of the money that they earn after
filing the bankruptcy case. These payments must
be at least as much as would have been paid to
creditors in a chapter 7 case. The payments are
made to a trustee, who distributes the payments
to the creditors. The payments are made in
regular installments, according to a plan that
the debtor draws up (usually with the help of an
attorney). The plans last either until the debts
are paid in full or until the end of a three- to
five-year period. The debtor receives a
discharge at the end of the plan. Some kinds of
debts that are not discharged in chapter 7
cases—for example, debts arising from fraudulent
use of a credit card—may be discharged in
chapter 13.
A chapter 13
case can be filed by most consumer debtors.
There are two principal requirements: First, the
debtor must have regular income, although this
need not be from a job—regular benefit payments
or rental income would qualify. Second, the
debtor must not have excessive debt. Chapter 13
is available only to debtors who do not owe more
than $750,000 in secured debt (like home
mortgages and auto loans), and more than
$250,000 in unsecured debt (like most credit
card debt).
|
|
| If a debtor is
behind in house or car payments, can chapter 13
stop a foreclosure or repossession from taking
place? |
| Yes. Unlike chapter
7, where the debtor can usually stop a foreclosure
or repossession only if the creditor agrees to a
reaffirmation, a debtor in chapter 13 can provide
for car and mortgage payments in the chapter 13
plan, and the creditor can be required to accept
these payments instead of proceeding with
foreclosure or repossession. |
|
| What can be done
if a debtor falls behind in payments after filing
a chapter 13 case? |
| Debtors who have
unexpected financial problems in a chapter 13 case
should immediately consult with their attorneys.
It is often possible to deal with changed
circumstances by amending the chapter 13 plan.
Also, it is sometimes possible to add to the plan
debts that were incurred after the chapter 13 case
is filed, so that they will be discharged with
other debts at the completion of the plan.
Finally, even after the plan is completed and the
debtor receives a discharge in chapter 13, if
unexpected circumstances arise that again make it
impossible for the debtor to deal with new bills,
the debtor may be able to file another bankruptcy
case. There is never any “waiting period” before
filing another chapter 13 case, and if the debtor
paid off at least 70 percent of the outstanding
debt through the plan, there is generally no
“waiting period” before obtaining a chapter 7
discharge. |
|
| Do all creditors
have to be listed on bankruptcy schedules?
|
| Yes. All of the
debts have to be scheduled, with the name and
address of the creditors. This is so that they can
receive notice of the bankruptcy, and get their
fair share of any money that is paid to creditors.
Sometimes debtors think that they should omit a
creditor because they want to continue to pay the
debt. This would violate the law, and it is
unnecessary, because a debtor can always choose to
pay a debt voluntarily, even though the debt has
been discharged and there is no legal obligation
to make payment. However, creditors are prohibited
from taking any action to collect discharged
debts. |
|
| What should a
debtor do if a creditor does demand payment of a
debt that is listed in the bankruptcy schedules?
|
| If a creditor who
is listed in the debtor’s schedules attempts in
any way to collect a scheduled debt, the debtor
should inform the creditor that a bankruptcy case
has been filed and request that the creditor stop
the collection efforts. If the debtor is
represented by an attorney, the debtor should give
the attorney’s name and telephone number to the
creditor. If the debtor is not represented by an
attorney, the debtor should give the creditor
additional information about the case—the date of
filing, the court in which the case was filed and
the case number. If improper collection action
continues, the debtor should consult with an
attorney to consider further action. |
|
| What should
debtors do if they forgot to list a creditor in
their bankruptcy schedules? |
| As soon as a
debtor realizes that a creditor has been omitted,
the debtor should notify his or her attorney with
all of the information necessary to complete the
schedule (the amount of the debt, the type and
value of any collateral, and the name and address
of the creditor). The attorney can then advise the
debtor about what additional action, if any, is
necessary. If an omitted creditor demands payment
of the debt, the debtor should inform the creditor
of the bankruptcy, as discussed above. |
|
| Does a
bankruptcy case automatically remove liens—such as
mortgages—against a debtor’s property? |
| No. Liens can be
placed on a debtor’s property in many different
ways. Some are by agreements, like mortgages and
auto liens. Others are by operation of the law,
like property tax liens on a debtor’s home. And
some liens are to enforce judgments that have been
entered against the debtor. Certain liens can
never be removed in a bankruptcy case except by
paying the underlying indebtedness, and others can
only be removed if special action is taken in the
bankruptcy case. So, if a debtor has any question
about liens on his or her property, these matters
should be discussed with an attorney. |
|
| How do I know
when my bankruptcy case is completed, and I am no
longer in bankruptcy? |
| At the conclusion
of an individual’s bankruptcy case, the court
enters an order closing the case, and a copy of
this order is sent to the debtor. Unless the
trustee has assets to distribute to creditors,
case closing takes place fairly quickly in chapter
7 cases. In chapter 13, the case will not be
closed until after the debtor finishes making
payments under the plan. The case will also be
closed if the court enters an order of dismissal. |
|
| How does
bankruptcy affect the debtor’s credit rating?
|
| Issuers of credit
(like banks and credit card companies) are free to
consider the fact of a bankruptcy filing in
deciding whether to extend credit, and bankruptcy
filings can be listed in credit reports for up to
10 years. Some issuers of credit may decide to
extend credit regardless of a bankruptcy. Others
may be willing to extend credit only after a
number of years have passed, or until the
bankruptcy filing is no longer on the credit
report. |
|
| What can debtors
do to re-establish their credit after filing
bankruptcy? |
| In some
jurisdictions there may be debtor education
programs offered in connection with chapter 13
cases that can help debtors re-establish credit.
Where such programs are not available, debtors may
be able to obtain a “secured” credit card, which
requires that the debtor deposit funds with the
credit card issuer. This provides the opportunity
to show responsible use of credit, which is a
major factor in any issuer’s credit decisions.
(Other major factors are length of employment and
length of residency.) |
|
| How can debtors
obtain a copy of their credit reports and correct
any errors? |
| Whenever a
debtor’s application for credit is denied, the
credit issuer is required to give the debtor, on
request, a copy of any credit report that was used
in making the decision. Otherwise, debtors can
obtain their credit reports from the major credit
bureaus. These bureaus will either provide a copy
of the report without charge or sell a copy for a
small fee. If there are errors in a report, such
as an incorrect Social Security Number or the
listing of a debt that is not owed, the debtor
should make a request for correction in writing to
the bureau, enclosing copies of any documents that
would establish the correct facts. |