FAQ

 

     Debtors                                   Creditors

A person who owes          A person or business to whom

money to a creditor         money  is owed by a debtor

 

 


 

 

 

 

 

 


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What is a bankruptcy?

What is Chapter 7 Bankruptcy?

What are the most common reasons for a Chapter 7 Bankruptcy?

What is Chapter 13 Bankruptcy?

What is chapter 13 and when can it be used?

What are the benefits of filing for bankruptcy?

The Automatic Stay

Will my creditors stop harassing me?

What debts are not erased by a bankruptcy?

Will my spouse be affected?

Who will know?

Can I keep any credit cards?

Will I ever get credit again?

Can my boss fire me for filing bankruptcy?

I was bankrupt before. When can I file again?

How do I go into bankruptcy?

What is a discharge?

Utilize Pre Bankruptcy Planning and Exemptions to Protect your Assets and  Future in Bankruptcy

 

 

 

WHAT IS A BANKRUPTCY?

CHAPTER 7 is usually used for consumer bankruptcies or business liquidation. Individuals file chapter 7 bankruptcies to obtain a discharge (forgiveness) of most of their pre bankruptcy debts. For individuals, a chapter 7 trustee reduces to cash all nonexempt assets of the bankruptcy- estate and pays a pro rata distribution to unsecured creditors. For individuals who carefully plan their bankruptcies most or all of their assets are exempt. In a business chapter 7, the trustee reduces all assets of the bankruptcy estate to cash and pays a pro rate dividend to unsecured creditors. With a few exceptions, all debt owed prior to the chapter 7 is discharged or forgiven. Most lawsuits, pending at the time the bankruptcy is commenced. can be discharged. Child support and alimony, to the extent needed for the support of an ex-spouse or children, some tax obligations, e.g., payroll obligations, and criminal obligations are not dischargeable.

Suppose you make a good living but your expenses temporarily got out of hand. You incurred large and unexpected bills. Perhaps you were hit with a large court judgment or IRS assessment. The typical chapter 13 debtor, if the unexpected bills are not counted, has income in excess of his or her monthly expenses. In Chapter 13, you stay in possession of your property and income and pay excess income present your monthly expense budget and monthly income to the bankruptcy court.

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WHAT IS CHAPTER 7 BANKRUPTCY?

Chapter 7 bankruptcy, sometimes call a straight bankruptcy is a liquidation proceeding. The debtor turns over all non-exempt property to the bankruptcy trustee who then converts it to cash for distribution to the creditors. The debtor receives a discharge of all dischargeable debts usually within four months. In the vast majority of cases the debtor has no assets that he would lose so Chapter 7 will give that person a relatively quick "fresh start".

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WHAT ARE THE MOST COMMON REASONS FOR A CHAPTER 7 BANKRUPTCY?

The most common reasons for filing bankruptcy are:

1.   Unemployment:

2.   Large medical expenses;

3.   Seriously overextended credit;

4.   Marital problems, and;

      5   Other large unexpected expenses.

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WHAT IS CHAPTER 13 BANKRUPTCY?

Chapter 13 Bankruptcy is also known as a reorganization bankruptcy. Chapter13 bankruptcy is filed by individuals who want to pay off their debts over a period of three to five years. This type of bankruptcy appeals to individuals who have non-exempt property that they want to keep. It is also only an option for individuals who have predictable income and whose income is sufficient to pay their reasonable expenses with some amount left over to pay off their debts.

One of the main purposes of bankruptcy legislation is to afford the opportunity to a person, who is hopelessly burdened with debt, to free him/her of the debt and start fresh - "a new lease on life."

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WHAT IS CHAPTER 13 AND WHEN CAN IT BE USED?

Individuals may file chapter 13 bankruptcy petitions if they: 

1.   Reside, have a domicile, a place of business, or property in the United States, or a municipality;

2.   Have a source of regular income; and on the date the petition is filed owe less than $290,525 in unsecured debts and less than $871,550 in secured debts. Note:  The amounts given here are 2001 amounts. They are regularly adjusted to keep up with the cost of living. 

Corporations and partnerships may not file a chapter 13 bankruptcy petition. 

If you filed a prior bankruptcy petition and the prior proceeding was dismissed within the last 180 days, you may not be able to file a second petition and should check 11 U.S.C. sec. 109(g).

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WHAT ARE THE BENEFITS OF FILING FOR BANKRUPTCY?

For a debtor, it is an opportunity to reduce or eliminate debt, cancel contracts or leases, and return to financial health.

Bankruptcies may be used to:

  1. Gain a breathing space,

  2. Stop foreclosures,

  3. Stop seizures & garnishments,

  4. Stop interest accrual on unsecured debt and unpaid taxes,

  5. Recover money paid to secured creditors prior to the reorganization/bankruptcy,

  6. Regain possession of property seized by creditors or a receiver,

  7. Reduce, eliminate or, if desirable, repay debt over time,

  8. Terminate unprofitable ongoing leases and contracts,

  9. Invalidate improperly secured debt and some attachments,

  10. Discharge or reduce some taxes obligations,

  11. After you are discharged, you can repay your creditors without legal obligation.

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THE AUTOMATIC STAY

The filing of a petition in bankruptcy automatically triggers a broad restraining order against all creditors, preventing them from commencing or continuing any judicial proceeding against the debtor including the enforcement of judgments. Additionally, creditors are restrained from attempting to collect or recover upon their claims; from obtaining possession of any of the debtor's property; or from creating, perfecting, or enforcing any lien against the property of the debtor.

The automatic stay reaches a secured creditor even though the secured creditor has already repossessed its collateral. Unless a secured creditor has completed its foreclosure sale, the secured creditor is restrained from selling or disposing of the collateral without first seeking relief from the automatic stay.

1. Exceptions to the Automatic Stay: There are certain situations in which the automatic stay does not operate. A primary example is when a creditor makes a loan to a debtor taking a purchase money security interest in the property. Under the Uniform Commercial Code, a creditor has ten days within which to file a UCC-1 Financing Statement to perfect is interest. Even if the debtor were to file an intervening bankruptcy, the creditor would be entitled to record a signed UCC-1 Financing Statement and thereby perfect its security interest.

2. Termination of the Automatic Stay: When the bankruptcy estate no longer has an interest in property, the automatic stay, unless otherwise dissolved, continues until the earliest of:

  1. The time the case is closed;

  2. The time the case is dismissed; or

  3. If the case concerns an individual, at the time a discharge is granted or denied.

The bankruptcy estate no longer has an interest in property scheduled as exempt: (a) 30 days after the conclusion of the first meeting of creditors, or (b) After the bankruptcy court overrules any objections to the exemption. The bankruptcy estate will also have no interest in property it abandons or which the court orders abandoned. Alternatively, the automatic stay will expire at the time of the individual's discharge. By utilizing this method a creditor can often avoid the necessity of filing a costly complaint for relief from the automatic stay.

3. Grounds for Relief from or Modification of the Automatic Stay: Creditors can seek to terminate, annul, modify, or condition the automatic stay:

  1. For "cause," including the lack of adequate protection of the creditor's interest in specified collateral; or

  2. With respect to a stay preventing a secured creditor's foreclosure if:

(a) The debtor does not have equity in such property; and

(b) Such property is not necessary to an effective reorganization.

The Bankruptcy Amendments added a new provision regarding the automatic stay which states that an individual debtor injured by a willful violation of the automatic stay shall recover actual damages, including costs and attorneys' fees. Additionally, in appropriate cases, the debtor may recover punitive damages.

Another type of automatic stay operates when an individual files for relief under Chapter 13 of the Bankruptcy Code. The extra stay against co-debtors is in addition to and augments the standard automatic stay which is also effective on the filing of a Chapter 13 petition.

The co-debtor stay in a Chapter 13 proceeding will prevent creditors from commencing or continuing collection actions against any other individual who is liable on the same debt with the debtor. This stay of action against enforcement of obligations against co-debtors applies only to consumer debts.

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WILL MY CREDITORS STOP HARASSING ME?

Yes, they will! By law, all actions against a debtor must cease once the documents are filed. Creditors cannot initiate or continue any lawsuits, wage garnishees, or even telephone calls demanding payments.   Secured creditors such as banks holding, for example, a lien on a car, will get the stay lifted if you cannot make payments.

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WHAT DEBTS ARE NOT ERASED BY A BANKRUPTCY?
 

The following debts are not erased in both Chapter 7 and Chapter 13. If you file for Chapter 7, these will remain when your case is over. If you file for Chapter 13, these debts will have to be paid in full during your plan. If they are not, the balance will remain at the end of your case:   

1.   Debts you forget to list in your bankruptcy papers, unless the creditor learns of your bankruptcy case;

2.   Child support and alimony;

3.   Debts for personal injury or death caused by your intoxicated driving;

4.   Student loans, unless it would be an undue hardship for you to repay;

5.   Fines and penalties imposed for violating the law, such as traffic tickets and criminal restitution, and 

6.   Recent income tax debts and all other tax debts. This is a complicated area of the bankruptcy law and an attorney should be consulted. You can discharge (wipe out) debts for federal income taxes in Chapter 7 bankruptcy only if all of these five conditions are met:

1.   The IRS has not recorded a tax lien against your property. (If all other conditions are met, the taxes may be discharged, but even after your bankruptcy, the lien remains against all property you own, effectively giving the IRS a way to collect.) 

2.   You didn't file a fraudulent return or try to evade paying taxes. 

3.   The liability is for a tax return (not a Substitute or Return) actually filed at least two years before you file for bankruptcy. 

4.   The tax return was due at least three years ago. 

5.   The taxes were assessed (you received a notice of assessment of federal taxes from the IRS) at least 240 days (eight months) before you file for bankruptcy. (11 U.S.C. ŰŰ 523(a)(1) and (7).)


In addition, the following debts may be declared non-dischargeable by a bankruptcy judge in Chapter 7 if the creditor challenges your request to discharge them. These debts may be discharged in Chapter 13. You can include them in your plan, and at the end of your case, the balance is wiped out: 
 

1.   Debts you incurred on the basis of fraud, such as lying on a credit application;

2.   Credit purchases of $1,150 or more for luxury goods or services made within 60 days of filing;

3.   Loans or cash advances of $1,150 or more taken within 60 days of filing;

4.   Debts from willful or malicious injury to another person or another person's property;

5.   Debts from embezzlement, larceny or breach of trust, and

      6.   Debts you owe under a divorce decree or settlement unless after bankruptcy you would still not be able to afford to pay them or the benefit you'd receive by the discharge outweighs any detriment to your ex-spouse (who would have to pay them if you discharge them in bankruptcy).

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WILL MY SPOUSE BE AFFECTED?

Your wife or husband will not be affected by your bankruptcy if they are not responsible (did not sign an agreement or contract) for any of your debt. If they have a supplemental credit card they are probably responsible for that debt.

However, In community property states, either spouse can contract for a debt without the other spouse's signature on anything, and still obligate the marital community. There are a few exceptions to that rule, such as the purchase or sale of real estate; those few exceptions do require both spouse's signatures on contracts. But the day to day debts, such as credit cards, do NOT require both spouses to have signed

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WHO WILL NOW?

Bankruptcy filings are public records. However, under normal circumstances, no one will know you went bankrupt. The Credit Bureaus will record your bankruptcy and it will remain on your credit record for 10 years.

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CAN I KEEP ANY CREDIT CARDS?

Whether a debtor keeps credit cards after filing bankruptcy is up to the credit card company. If you are discharging a credit card they will cancel the card unless you reaffirm the debt. Even if you have a zero balance the credit card company might cancel the card.

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WILL I EVER GET CREDIT AGAIN?

Yes! A number of banks now offer "secured" credit cards where a debtor puts up a certain amount of money (as little as $200) in an account at the bank to guarantee payment. Usually the credit limit is equal to the security given and is increased as the debtor proves his or her ability to pay the debt.
 

Two years after a bankruptcy discharge, debtors are eligible for mortgage loans on terms as good as those of others, with the same financial profile, who have not filed bankruptcy. The size of your down payment and the stability of your income will be much more important than the fact you filed bankruptcy in the past.
 

The fact you filed bankruptcy stays on your credit report for 10 years. It becomes less significant the further in the past the bankruptcy is. The truth is, that you are probably a better credit risk after bankruptcy than before.

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       CAN MY BOSS FIRE ME FOR FILING BANKRUPTCY?

No. U.S.C. Sec. 525, prohibits any employer from discriminating against you because you filed bankruptcy.

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I WAS BANKRUPT BEFORE. WHEN CAN I FILE AGAIN?

A person can file Chapter 7 again if it has been more that 6 years since he or she was discharged from the previous Chapter 7 bankruptcy.

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HOW DO I GO INTO BANKRUPTCY?

There are two ways a person can become a bankrupt. The first and more common way is to have the person file a petition to voluntarily go bankrupt.
 

The second, and rarely used way, is for creditors to ask the Court to make an Order that a person is bankrupt. In both these cases a Bankruptcy Trustee is required to administer the bankruptcy.

 

 

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WHAT IS A DISCHARGE?

One of the primary purpose of filing for relief under the bankruptcy law is to obtain a discharge from all debts and liabilities on any claims that arose prior to the filing of the bankruptcy. The discharge is an integral part of a debtor's fresh start. A discharge releases a debtor from all debts and liabilities that arose before the commencement of the case (or after the order for relief when this occurs later than the filing date). Only individuals are entitled to a discharge. Corporations, partnerships, and other entities will not be granted discharges under Chapter 7, but will be granted a discharge in connection with a confirmed plan of arrangement.

1. Objections to Discharge:

There are numerous grounds upon which a trustee or creditor may object to the discharge of a debtor. Some of the more familiar grounds are as follows:

(1) The debtor, with intent to hinder, delay, or defraud creditors, transferred, removed, destroyed, mutilated, or concealed:

(a). property of the debtor within one year before the date of the filing of the petition; or

(b) property of the estate after the date of the filing of the petition.

(2) The debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, or papers from which the debtor's financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all the circumstances of the case.

(3) The debtor knowingly and fraudulently, in or in connection with the case, made a false oath or account or presented a false claim.

(4) The debtor has failed to explain satisfactorily any loss of assets or deficiency of assets to meet the debtor's liabilities.

(5) The debtor has refused to obey any lawful order of the court.

(6) The debtor has been granted a discharge in a case commenced within six years before the date of the filing of the petition.

(7) The debtor commits any of the above-specified acts (on or within one year before the date of the filing of the petition) in connection with another case concerning an insider.

An objection to discharge, if successful, leaves the debtor with the same debts and liabilities he had prior to the filing of the petition (except for the fact that his non-exempt prepetition assets can be distributed by the trustee). None of the debtor's debts or liabilities will be discharged and all creditors will be entitled to proceed against the debtor to collect their debts. Objections to discharge are fiercely fought and usually gain little for the objecting creditor because all the other creditors will be entitled to pursue the debtor's post-petition assets. Additionally, bankruptcy courts view these cases as coercion by the plaintiff and are reluctant to grant relief without flagrant violations by the debtor. Generally, it is advisable to pursue an objection to the discharge of only your debt (See "Exceptions to Discharge" below) because this will allow the creditor with the surviving debt to pursue the debtor while all other debts are discharged.

2. Exceptions to Discharge:

The Bankruptcy Code contains several grounds for objecting to the dischargeability of a creditor's particular debt. Some of the grounds for exceptions to the dischargeability of a particular debt are:

(1) Obtaining money, property, services, or credit using a statement in writing, that was published with an intent to deceive, the statement is materially false as to the debtor's financial condition, and the creditor reasonably relied upon the false statement.

(2) False pretenses, a false representation, or actual fraud.

(3) Willful and malicious injury by the debtor to another entity or to the property of another entity.

There is a presumption of non-dischargeability for:

(a) consumer debts for goods or services not reasonably necessary for support (i.e., luxury goods or services) incurred by an individual debtor on or within forty days prior to the filing of the petition and aggregating more than $500.00, and

(b) extensions of credit under an open-end credit plan incurred within twenty days prior to the filing of the petition and aggregating more than $1,000.000.

The bankruptcy court sets a deadline for the filing of objections to the discharge of the debtor and exceptions to dischargeability of particular debts. The deadline date is almost always listed in the order for the first meeting of creditors. This date is jurisdictional and creditors failing to file complaints to determine dischargeability of their debts or objections to discharge are forever barred from asserting these claims against the debtor.

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UTILIZE PRE BANKRUPTCY PLANNING AND EXEMPTIONS TO PROTECT YOUR ASSETS AND FUTURE IN BANKRUPTCY

            Don't file a bankruptcy until you have protected as many assets as possible. Utilize prebankruptcy planning and allowable exemptions to achieve the best possible results. Go through the bankruptcy and retain as many assets as possible. With careful prebankruptcy planning and a thorough knowledge of exemptions, Debtors can safeguard most, if not all of their assets.

           Don't tile a bankruptcy to soon. However, usually debtors file without thinking through what they wish to accomplish - retain assets and receive a discharge (forgiveness) of debt. Consequently, they lose assets, i.e., their pension plans and automobiles, to the bankruptcy trustee.

Pre-Bankruptcy Planning. A few pointers:

  1. Transactions, legal in all respects, can be undone in a bankruptcy. These transactions, include many payments to creditors. Consult your attorney well before filing a bankruptcy petition.

  2. Convert nonexempt assets to exempt assets. Nonexempt assets include money and certain equity in real and personal property. A bankruptcy trustee may not take exempt assets from you. Conversion must be properly executed. Otherwise your discharge may be denied.

  3. Use nonexempt assets, i.e. cash. to pay all debts, i.e., trust fund taxes. support obligations, mortgage payments, which cannot be discharged in bankruptcy.

  4. Purchase exempt assets and assets encumbered by liens prior to a bankruptcy. Reduce nonexempt assets to cash for a down payment on a new home or a car. Protect the new asset by maintaining minimal equity in it. Debtors should also consider purchasing nonexempt assets, i.e., food. prior to filing a bankruptcy petition.

  5. Pay careful attention to your pension or profit sharing plan and to any recovery due from a lawsuit to ensure that they are exempt to the greatest extent possible.

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PREFERENCES

 

The purpose of the Bankruptcy Code preference section is twofold. First, by permitting the trustee to avoid certain pre-bankruptcy transfers that occur within a short period before bankruptcy, creditors are discouraged from racing to the courthouse to dismember a debtor during his slide into bankruptcy.
 

Secondly, the preference provisions facilitate the bankruptcy policy of equality of distribution among creditors of the debtor. Any creditor that receives a greater payment than others of his class is required to disgorge the payment so that all may share equally.

1. Elements of a Voidable Preference:
    Transfer of an interest of the debtor in property:

  1. To or for the benefit of a creditor,

  2. For or on account of an antecedent debt (a past due debt),

  3. Made while insolvent (debtor is presumed to be insolvent in the  90days before the bankruptcy petition is filed),

  4. Made within ninety (90) days from filing of the bankruptcy petition, and

  5. Transfer must enable the creditor to receive a greater percentage of his claim than he would receive under a distribution in chapter 7 liquidation.

    2. Special Rules For Insiders:
    "Insider" is defined in the Bankruptcy Code to include persons having a relation with the debtor meriting special attention ad closer scrutiny.

    The elements of  avoidable preference are different with respect to insiders:

     

         a.     The reach-back period is extended to one year; and

         b.     No presumption of insolvency for the period from 91 days to 

                 one year.

     

    1.          Transfers intended by the debtor and creditor to be a 

                 contemporaneous exchange and which are substantially

                 contemporaneous (For example, when a check is presented for

                 payment in the normal course of affairs, the honoring of the check

                will qualify as a transfer that is substantially contemporaneous.)

     

    2.         In the ordinary course of business or financial affairs of the debtor

                and the transferee (For example, a sale on thirty-day terms, paid

                timely, would fall within this exception and be immune from attack

                as an avoidable preference.).

    3.           A purchase money security interest in connection with an

                 enabling loan in which the debtor acquires the property to the

                 extent that security interest is perfected on or before the tenth

                 day after the debtor receive possession of such property.

 

BANKRUPTCIES MAY BE USED TO

  1. Deny for Debtor‰s discharge (forgiveness) of your debt or all debts.
  2. Continue your foreclosure; obtain relief from Automatic Stay.
  3. Move to dismiss a debtor‰s bankruptcy filed in bad faith.
  4. Gain access to the Debtor‰s financial records.
  5. Replace the Debtor‰s principals.
  6. Convert a reorganization case to a liquidation case.
  7. Recover money and money fraudulently or improperly transferred by  

      the Debtor.
  8. Propose a repayment plan.
  9. File an involuntary bankruptcy petition against a debtor not paying his

      debts.
10. Terminate a lease or contract with the Debtor.
11. Purchase the debtor‰s assets free and clear of liens

 

 

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