Bankruptcy FAQ

1. What is bankruptcy?

Bankruptcy is the means by which you as a debtor may relieve yourself of many kinds of oppressive unsecured debts, stop creditor harassment, and depending upon which chapter you file under, force a repayment scheme on certain kinds of secured debts.

Federal law provides bankruptcy as a way for you to get a “fresh start” in life with respect to your debts. The way is to file bankruptcy. The Bankruptcy Code (Title 11, United States Code) is designed to relieve you of burdensome debts by either eliminating most of them completely (Chapter 7) or by forcing a repayment scheme (Chapter 13 reorganization) on many kinds of creditors to help ensure that you can remain a contributing member of society.

The etymology of the word “bankrupt” is interesting (but speculative). It’s believed that in times past, money brokers transacted their business on tables or benches. When they couldn’t pay their debts and became insolvent or they disappeared from the scene, their benches were broken up, or in another word, they were bankrupted.

2. What is a Chapter 7 bankruptcy?

Chapter 7 of the Bankruptcy Code is known as a liquidation. The “deal” in a chapter 7 is that in exchange for turning over your non-exempt assets (if any) to the Chapter 7 Trustee who liquidates the assets and distributes the proceeds to your creditors, you’re relieved from your dischargeable liability on the debts by way of a discharge order. A discharge is an order entered by a U.S. Bankruptcy Court Judge that forever prevents creditors from taking any action to collect on your personal liabilities existing at the time you filed for bankruptcy.

Certain requirements must be met for filing in Chapter 7. You may not be permitted to file under Chapter 7 if you have a very high income or if you would have enough money after meeting expenses to make a “meaningful payback” to your unsecured creditors. In that case a Chapter 13 bankruptcy may be appropriate. Other requirements exist but listing them would make this FAQ too large.

In most cases it takes 4-5 months from the time of filing until you receive your Chapter 7 discharge.

3. What is a Chapter 13 bankruptcy?

Chapter 13 of the Bankruptcy Code is known as a “wage earner’s” bankruptcy. It’s available to most individuals, married couples, and small businesses. Although it’s called a wage earner’s bankruptcy the income needn’t be wages. There must however be income in excess of expenses in order to successfully file for Chapter 13.

Filing under Chapter 13 allows you to impose a repayment plan typically yielding a discount as large as $1.00 on each dollar owed to most of your unsecured creditors (this figure may be more if you want to hold onto more non-exempt assets) while keeping your non-exempt assets. You may also be able to restructure past-due amounts on secured debts, force reasonable interest rates on secured debts, and if for other than a home you owe more than the secured property is worth, you may be able to “strip” off the excess amount owed and pay a fraction of the excess back in the repayment plan as an unsecured debt.

Chapter 13 is much more flexible than chapter 7 but more complicated and takes longer to complete than a chapter 7.

4. What is a Chapter 11 bankruptcy?

When the debtor owes more than the maximum amounts that can be supported in a Chapter 13 (contact your attorney for these figures), Chapter 11 may be the answer. Chapter 11 is far more complex than any of the other bankruptcy chapters. Few debtors will need to file Chapter 11, and those who will probably know it already.

5. What is exempt property?

The term “exempt” applies to certain kinds of property that can’t be reached by your creditors and therefore cannot be reached by the trustee in bankruptcy. In New Jersey, you can choose to use either the state or federal exemptions. Usually, the federal exemptions will be more beneficial.

6. What is secured property?

Secured property is any kind of property in which someone other than yourself has a “security interest.” Generally speaking, a security interest is some piece of ownership in an item of property entitling another to claim the property if some event occurs or doesn’t occur. For example, a financed car is often secured by some entity that can repossess the car if payments aren’t made. In this example your default on the note is the relevant event that allows another entity to repossess the property.

7. I’m behind on my mortgage, can I keep my house?

Maybe. Filing in either Chapter 7 or 13 may buy you some time to come up with a plan to save the house. In Chapter 7 however the time may be very, very short, and frankly there is little that can be done in a 7 to save secured property (such as a mortgaged home, or a financed vehicle) if the payments are overdue.

Chapter 13 on the other hand may allow you an extended period of time (three years but sometimes up to five years) to repay the overdue balance on your mortgage through the Chapter 13 repayment plan.

8. Creditors are calling me all the time. Can bankruptcy help?

Yes. Once you have retained a bankruptcy attorney you may instruct your creditors to call your attorney rather than you. An even bigger stick is available once you file for bankruptcy. Once you’ve filed, Federal Law prohibits creditors who know about your bankruptcy from taking any action to collect on your personal liability for debts you’ve incurred before filing. Sanctions may be available to penalize creditors who ignore these laws; it is a rare creditor who continues to harass debtors post-filing.>

9. I’ve heard of credit counseling. Can it help?

In one sense it doesn’t matter. Under the 2005 BAPCA laws individuals seeking bankruptcy relief are required to obtain a certificate of credit counseling in the 180 days before filing. The counseling is not much more than preparing a budget and your attorney will do this. Your attorney however cannot provide the required certificate.

Credit counselors sometimes use the counseling session as a marketing device to select debtors for whom they will offer a “Debt Management Plan” (DMP). DMPs are sometimes touted as being superior to bankruptcy, and for the agency they are superior as the agency will usually collect a fee either directly from the debtor or as a kickback from certain creditors. The Internal Revenue Services has investigated a number of these agencies for abuse of the non-profit designation, and they have gone bankrupt themselves. An in-depth investigation of the DMP provider you elect to use would not be unwise.

If the DMP provider is sound and legitimate it still may not be able to help unless it can force a settlement that you can live with upon every single one your creditors. It may take only one non-cooperative creditor to “break” things. You’ll be depending on the voluntary cooperation of your creditors throughout the entire process.

10. How does bankruptcy affect my credit?

Realistically by the time most debtors realize they’re not going to be able to pay their bills their credit is usually in bad shape.

A bankruptcy remains on your credit history for ten years (more in some circumstances). After discharge most debtors find they are able to obtain credit again, however, the terms are usually not as good as when they had stellar credit.

For those debtors who file under Chapter 13, during the life of the plan they may not obtain new credit without the permission of the Chapter 13 Trustee, which is typically not unreasonably withheld.

11. Help! I’ve been sued, can I file bankruptcy and stop the state court civil lawsuit?

Filing bankruptcy will almost always stop (“stay”) a state court civil lawsuit for a time. A lawsuit related to an unsecured debt (such as most dischargeable credit card debts) may be stopped permanently upon filing and subsequent receipt of your discharge on the unsecured debt. There are timing aspects to be careful of here though. If the lawsuit proceeded to the point where a judgment was rendered then there may be judicial liens in play. Time is of the essence in these cases.

Lawsuits related to secured debts, such as foreclosures on a home, are stayed by the bankruptcy filing but depending upon the chapter you file in the stay may afford only temporary relief.

12. Who or what is the trustee in bankruptcy?

There are two kinds of trustees in Chapters 7 and 13.

The United States Trustee is a player in both sorts of bankruptcies. The U.S. Trustee is federal appointee in the Department of Justice charged with enforcing the bankruptcy laws. Personnel in the U.S. Trustee’s office review filings with the Bankruptcy Court for various violations of the code, conduct investigations in cases where it suspects violations, can bring lawsuits within the bankruptcy case (“Adversary proceedings”) to force dismissal of the case or denial of discharge, and in egregious cases where it suspects criminal laws have been violated, refer the cases for criminal prosecution to the the United States attorney. In typical cases the U.S. Trustee acts behind the scenes, and most debtors will never encounter the U.S. Trustee.

Debtors filing under Chapter 7 meet a person known as the Interim Trustee. The Interim Trustee, often but not necessarily an attorney, is a member of a panel appointed by the U.S. Trustee, charged with essentially the same tasks as the U.S. Trustee. However unlike the U.S. Trustee, every debtor will encounter the Interim Trustee. He or she is the person who conducts the Meeting of Creditors, diligently investigates the bankruptcy filing, collects and liquidates non-exempt assets, and where there are issues pertaining to the legitimacy of the filing, he or she can refer cases back to the U.S. Trustee, hire other professionals such as appraisers to verify the infomration on the filing, and where there are contests, even hire other attorneys to enforce the bankruptcy laws.

Debtors filing under Chapter 13 will meet an employee of the Standing Chapter 13 Trustee’s office. An employee of the the Chapter 13 Trustee performs much of the same tasks as the Chapter 7 Trustee except for the aspect of liquidating non-exempt assets. The Chapter 13 Trustee is further charged with executing the confirmed chapter 13 plan, meaning that he will collect the chapter 13 payments and distribute them in accordance with the plan.

13. What is the difference between secured and unsecured debt?

Simply stated, unsecured debts are debts whereby if they’re not paid, there is no specifically identified item of property for the creditor to repossess. The distinction is far more complex than this; consult your attorney for more information.

14. Can I discharge taxes, fines and government penalties in bankruptcy?

Debts owed on federal taxes cannot be discharged in bankruptcy unless they are for taxes that could have been last paid three years prior to filing without penalty. There are other tests for dischargability as well. Note that even though newer tax debts usually can’t be discharged in bankruptcy they may be susceptible to repayment over time in a chapter 13 plan.

Fines and penalties are usually not dischargeable in bankruptcy.

15. Will I owe taxes on discharged debts?

No, not if they’re discharged in bankruptcy.

16. Do I have to go to Court?

Generally, no, not in court. However in all but very rare circumstances where, for example, there is documented medical incapacity, almost all filers will have to appear in person at the Meeting of Creditors or risk having their case dismissed. The Meeting is conducted by the Chapter 7 or Chapter 13 Trustee. There are unusual circumstances where further appearances are required or would be to your advantage. You should consult with your attorney to discuss these circumstances.

17. I am not a U.S. citizen. Can I file bankruptcy in the U.S?

Yes, provided you have a domicile, place of business, or property in the U.S. But note that there may be certain complications regarding claims of exemptions by undocumented immigrants.

18. I’ve filed bankruptcy on my own (pro-se) but I’m in over my head. Can a bankruptcy attorney still help me?

Many bankruptcy attorneys will agree to take over cases originally filed pro-se. Contact a bankruptcy attorney to discuss the details of your case.