NEWS & RESOURCES
BANKRUPTCY OVERVIEW

Frequently Asked Questions



What is bankruptcy?

Bankruptcy is designed to give debtors who owe more money than they can pay right now a financial fresh start from burdensome debts. This goal is accomplished through the bankruptcy discharge, which releases debtors from personal liability for most debts and prohibits creditors from taking any actions to collect those debts. 
 
The filing of a bankruptcy petition immediately stops most actions to collect debts which were due at the time of filing, including law suits, repossessions, and foreclosures. Any person, partnership, corporation, or business trust may file a bankruptcy. People who are married may file together.
 
Do I have to appear in court?
Much of the bankruptcy process is administrative and is conducted away from the courthouse.  A debtor's involvement with the bankruptcy judge is usually very limited and typically will not see the bankruptcy judge unless an objection is raised in the case. Usually, the only formal proceeding at which a debtor must appear is the meeting of creditors.
 
Should I file for bankruptcy?
Bankruptcy offers some very power tools to individuals.  Some people find it helpful to file a bankruptcy case when they cannot pay their bills and they do not think they will be able to pay their bills in the near future. Some people file because their financial situation is causing them emotional distress or depression, or because they would like to free themselves of debt now and have their income and property to themselves in the future.  
 
You should consider bankruptcy if: 
  • most of your debts are unsecured such as credit card bills or medical bills
  • your total debt is more than you could pay in five years
  • collection agencies are calling you at home and/or at work
  • your payments are more than 30 days behind on more than one bill
  • lawsuits are pending against you
  • you owe income taxes that you are currently unable to pay
  • you have little savings
  • you have had a vehicle or other property repossessed
  • your mortgage lender has threatened or started foreclosure proceedings against your home
What can bankruptcy do for me?
Filing for bankruptcy gives you a fresh start by eliminating many of your debts including credit card debt and other unsecured debt through a court order known as the discharge. Bankruptcy allows you to pay your Creditors a portion of what they are owed depending on what you can pay. Creditors are prevented from trying to collect the remainder of what you owe them.
 
What are the different types of bankruptcy?
 
Chapter 7
Chapter 7 is the liquidation chapter of the Bankruptcy Code, and may be filed by an individual, corporation, or a partnership. In the case of an individual, the debtor is allowed to claim certain property exempt. If there are no assets from which a dividend can be paid, the trustee will prepare a report of no distribution and the case will be closed.  Those assets of a debtor that are not exempt from creditors are collected and liquidated, and the proceeds are distributed to creditors.  The debtor receives a complete discharge from debt under Chapter 7, except for certain debts that are prohibited from discharge by the Bankruptcy Code. 
 
Chapter 11
Chapter 11 bankruptcy provides a procedure by which an individual or a business can reorganize its debts while continuing to operate. The vast majority of Chapter 11 cases are filed by businesses. A plan of reorganization is proposed to repay part or all of its debts like in Chapter 13 although Chapter 11 is more expensive and complicated.
 
Chapter 12
Chapter 12 allows a family farmer or a fisherman to file for bankruptcy, reorganize its business affairs, repay all or part of its debts, and continue operating.
 
Chapter 13
Chapter 13, often called wage-earner bankruptcy, is used primarily by individual consumers, including individuals who operate businesses as sole proprietorships to reorganize their financial affairs under a repayment plan that must be completed within three or five years.  To be eligible for Chapter 13 relief, a consumer must have regular income and may not have more than a certain amount of debt, as set forth in the Bankruptcy Code. Chapter 13 generally permits individuals to keep their property by repaying a portion of their debt out of their future income. Many debts that cannot be discharged can still be paid over time in a chapter 13 plan. After completion of payments under the plan, debtors receive a discharge of most debts. 
 
What protections does bankruptcy provide?
The moment you file for bankruptcy, you are protected from your creditors. An "automatic stay" goes into effect that stops all collection efforts against you and against your property. Creditors must stop calling you and sending you letters. If a creditor has already sued you, that lawsuit must stop. The automatic stay also stops foreclosures, repossessions or sales of property from going forward.
 
What is a discharge?
One of the reasons people file bankruptcy is to get a “discharge.” Once debt is discharged, you no longer have an obligation to pay the debt.  A bankruptcy discharge releases the debtor from personal liability for certain types of debts. The discharge is a permanent order prohibiting creditors from taking any form of collection action on discharged debts, including legal action and communications with the debtor. The discharge is usually granted at the end of the case. The discharge is one of the best benefits of bankruptcy and is the primary reason most people file.You can only receive a chapter 7 discharge once every eight years. Other rules may apply if you previously received a discharge in a chapter 13 case. No one can make you pay a debt that has been discharged, but you can voluntarily pay any debt you wish to pay. You do not have to sign a reaffirmation agreement or any other kind of document to do this.
 
When does the discharge occur?
In a chapter 7 case, the court usually grants the discharge about four months after the petition is filed. In individual chapter 11 cases and chapter 13 cases, the court generally grants the discharge after the debtor completes all payments under the plan.
 
Do all debts get discharged?
No, some debts cannot be discharged through bankruptcy. The debts discharged vary under each chapter of the Bankruptcy Code.  Non-dischargeable debts include:
  • student loans
  • debts for income and property taxes
  • debts for domestic support obligations such as alimony and child support
  • debts to governmental units for fines and penalties
  • debts for restitution or a fine imposed as part of a criminal sentence'
  • debts arising from death or personal injury caused by the operation of a motor vehicle while intoxicated or under the influence of drugs
Additionally, debts not listed on the bankruptcy schedules or incurred after filing for bankruptcy are generally not discharged.
 
What is a reaffirmation agreement?
If a debtor wishes to keep certain secured property, they may decide to “reaffirm” the debt. A reaffirmation agreement is an agreement by which a bankruptcy debtor becomes legally obligated to pay all or a portion of an otherwise dischargeable debt. Reaffirmation agreements are voluntary. They are not required by the Bankruptcy Code or by any other law. Reaffirmation means the debtor’s personal liability for that debt will not be discharged in the bankruptcy.
 
What must I do to prevent foreclosures and repossessions?
In Chapter 7, you must declare whether you will return the property, purchase the property from the creditor or enter into a Reaffirmation Agreement with the creditor. 
 
You may use a chapter 13 to save your home from foreclosure. The automatic stay stops the foreclosure proceeding as soon as you file bankruptcy. Chapter 13 allows you to catch up on overdue pre-petition payments over time, while keeping up with current payments.
 
What is redemption?
Redemption allows an individual debtor to keep tangible, personal property intended primarily for personal, family, or household use by paying the holder of a lien on the property the amount of the allowed secured claim on the property, which typically means the value of the property. The property redeemed must be claimed as exempt or abandoned. With redemption, a debtor can often get liens released on personal household possessions for much less than the underlying debt on those secured possessions. Unless the creditor consents to periodic payments, redemption must generally be made in one lump sum payment to the creditor. 
 
What is secured debt, unsecured debt and priority debt?
Secured Debt
A secured debt is a debt that is backed by property. A creditor whose debt is "secured" has a right to take property to satisfy a "secured debt." For example, most homes are burdened by a "secured debt." This means that the lender has the right to take the home if the borrower fails to make payments on the loan. Most people who buy new cars give the lender a "security interest" in the car. This means that the debt is a "secured debt" and that the lender can take the car if the borrower fails to make payments on the car loan.
 
Unsecured Debt
A debt is unsecured if you have simply promised to pay someone a sum of money at a particular time, and you have not pledged any real or personal property to collateralize that debt.
 
Priority Debt
A priority debt is a debt entitled to priority in payment, ahead of most other debts, in a bankruptcy case. A listing of priority debts is given, in general terms, in 11 U.S.C. § 507 of the Bankruptcy Code. Examples of priority debts are some taxes, wage claims of employees, debts related to goods and services provided to a debtor's estate during the pendency of a bankruptcy case, and alimony, maintenance or support of a spouse, former spouse, or child. 
 
How does a chapter 13 case help me with my secured debts?
In Chapter 13, the debtor’s plan can “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence.”  This gives the bankruptcy court the power to strip off wholly unsecured junior mortgage liens and the right to modify loans secured by other collateral.  The court can also modify the terms of a mortgage on properties other than the debtor’s principal residence, such as investment properties.  The plan can modify other loan obligations by stretching out payments and reducing interest rates.
 
What is the difference between consumer debt and business debt?
Consumer debt is either secured or unsecured debt incurred by an individual primarily for a personal, family or household purpose. The mortgage on your personal residence is considered consumer debt, however income taxes are not. Debts which are incurred in pursuit of a business would also not be consumer debt.
 
Can bankruptcy help me with personally guaranteed small business debt?
As a general rule, filing for bankruptcy will eliminate personally guaranteed business debts.
 
What are exemptions?
11 U.S.C. § 522(b) allows an individual debtor to exempt real, personal, or intangible property from the property of the estate. Exempt assets are protected by state law from distribution to your creditors. Typically, exempt assets include some jewelry, vehicles up to a certain dollar amount, the equity in your home up to a certain amount, and tools of the trade.
 
In California, you are entitled to list the assets set forth in section 703 or section 704 of the Code of Civil Procedure as exempt. Exemptions are claimed on Schedule C. As with all schedules, it is important to fully complete and provide all the information requested. If no one objects to the exemptions you have listed within the time frame specified by the bankruptcy court, these assets will not be a part of your bankruptcy estate and will not be used to pay creditors through your bankruptcy case.
 
What is a bankruptcy trustee?
In all chapter 7, 12, 13 and in some chapter 11 cases, a case trustee is assigned. In chapter 7 cases they are called "Panel Trustees." In chapter 12 and 13 cases they are called "Standing Trustees." The trustee's job is to administer the bankruptcy estate, to make sure creditors get as much money as possible, and to run the first meeting of creditors, (also called the "341 meeting", because 11 U.S.C. § 341 of the Bankruptcy Code requires that the meeting be held). The trustee either collects and sells non-exempt estate property, as in the case of a chapter 7, or collects and pays out money on a repayment plan, as in the case of a chapter 13.
 
What is the creditors meeting? 
A "meeting of creditors" is the hearing all debtors must attend in any bankruptcy case. It is held outside the presence of the judge and usually occurs between 20 and 40 days from the date the original petition is filed with the court. In chapter 7, chapter 12, and chapter 13 cases, the trustee assigned to the case conducts the meeting on behalf of the United States Trustee.  The meeting is referred to as the "meeting of creditors" because creditors are notified that they may attend and question the debtor about the location and disposition of assets and any other matter relevant to the administration of the case. However, creditors rarely attend these meetings and, in general, are not considered to have waived any of their rights by failing to appear. The meeting usually lasts only a few minutes.
 
How many years will a bankruptcy show on my credit report?
Credit reporting agencies regularly collect information from the petitions filed and report the information on their credit reporting services. Bankruptcies normally will remain on your credit report for up to ten years. The decision whether to grant you credit in the future is strictly up to the creditor and varies from creditor to creditor depending on the type of credit requested. There is no law which prevents creditors from extending credit immediately after filing bankruptcy.
 
May an employer terminate a debtor's employment solely because the person was a debtor or failed to pay a discharged debt?
The law provides express prohibitions against discriminatory treatment of debtors by both governmental units and private employers. A governmental unit or private employer may not discriminate against a person solely because the person was a debtor, was insolvent before or during the case, or has not paid a debt that was discharged in the case. A private employer may not discriminate with respect to employment based solely upon the bankruptcy filing.

  

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