FAQs
Frequently Asked Questions
- Will bankruptcy forever ruin my credit rating?
- I am heading into foreclosure! Can I save my house?
- Will my car or truck be repossessed?
- Will News of My Bankruptcy Be Published?
- Can I Keep My Retirement and Pension Accounts?
- Can I get rid of student loans through bankruptcy?
- Didn’t Congress Change the Laws Making it Nearly Impossible to File Bankruptcy?
- What is the Means Test?
- What May A Bankruptcy Lawyer Say to Their Clients?
- What changes were made to the federal bankruptcy laws after 2005?
- What is a Bankruptcy Court?
- What is a Bankruptcy Petition?
- What is a Bankruptcy Estate?
- What are non-exempt assets?
- What is an “automatic stay”?
- What is a “Bankruptcy Trustee”?
- What is wage garnishment and how do I stop it?
- Who can be considered a “secured creditor”?
- How do I find out the details of who my creditors are?
- Where Is My Bankruptcy Filed?
- Do a Husband and a Wife Have to File Together?
- How Does Filing Bankruptcy Affect Lawsuits and Attachments That Have Already Been Filed Against Me?
- When Will Be My Bankruptcy Trustee’s Hearing and What Will I Do There?
- What Is a Meeting of Creditors?
- What information should I bring with me to my consultation?
- What other information will I eventually need?
- Why do I need a lawyer? Isn’t just paperwork?
- If I file for bankruptcy will it affect my military status or security clearance?
1. Will bankruptcy forever ruin my credit rating?
First of all, if you are considering bankruptcy, your credit is probably not all that good to begin with. Secondly, most clients report their credit rating scores actually IMPROVE upon filing their case! In fact, if someone is overwhelmed with debt, bankruptcy will usually improve a person’s Fair Isaac Corporation (FICO) score within 18 months to two years. It is true that the bankruptcy filing can legally remain on a credit report for up to ten years under the Fair Credit Reporting Act. However, it tends to have a positive rather than negative effect over the long term.
Here is why. If you have ever applied for a mortgage, you might remember the loan officer discussing “debt ratios,” which relate to the percentage of available income that an individual has to service the debt that is being applied for. In the case of a mortgage, for instance, many lenders want total debt obligations (including mortgage, credit cards, other debt, and car payments) to be less than 40 percent of the borrower’s gross income. Although not discussed as openly in other credit transactions, a person’s total debt is always considered and factored into the decision to grant credit. The more debt you have, the less likely you are to be able to manage even more, which is directly reflected in your FICO score. Second, if you file for Chapter 7, for instance, and receive a discharge, you are precluded from filing another Chapter 7 and receiving a discharge for eight years. For that reason, a person is often a better credit risk the day after he files bankruptcy than the day before. Why? It is because if a person is overwhelmed with debt, she is a bankruptcy waiting to happen. However, after she files bankruptcy, there is no longer a significant risk, at least for another eight years. Creditors know this. In fact, many people have little difficulty obtaining a car loan (a five to six year note typically) immediately after they file for bankruptcy. Finally, creditors and the FICO credit score system look at the overall picture of a person rather than just one event. With good income and very responsible use of credit, a FICO score of over 700, while not typical, is possible within two years of a bankruptcy discharge.
Clients typically start receiving multiple offers of credit about 90 days after filing Chapter 7. Credit card companies begin to see them as inviting targets for credit card solicitations because they recognize the filing individual’s debt-to-income ratio has gone to zero after filing and that the filing individual is prevented from filing another Chapter 7 for eight years.
So, bankruptcy can actually become a tool to rebuild a credit rating.
2. I am heading into foreclosure! Can I save my house?
This is not an easy question to answer without knowing a lot more and it also depends on your unique circumstances. If you are many months behind in payments, you should probably consider Chapter 13. Under certain circumstances you can also eliminate a payment on a second or third mortgage. If you know you absolutely cannot afford your future mortgage payments mortgage Chapter 7 might be the better option.
3. Will my car or truck be repossessed?
NO! Once the papers are brought to the courthouse, a federal court order goes immediately into effect, preventing a car from being repossessed. In a Chapter 7 bankruptcy, the client simply continues to make the payments on the loan. In a Chapter 13, a monthly payment is worked out with the court, which in turn pays the car lender. That monthly payment is often hundreds of dollars less than the original payment, and can be imposed upon the lender regardless of how many months the client may have missed prior to filing bankruptcy.
We can even lower the purchase price, car or truck payments you are making, and the interest you are paying.
In a Chapter 13 bankruptcy, the client typically pays the value of the vehicle with either the contract rate of interest OR the market rate, whichever is lower. Since most clients owe thousands of dollars more than their vehicles are presently worth, they get to save a substantial amount on the purchase price. If we can also slash the interest rate-perhaps in half-the result is a monthly payment often HUNDREDS OF DOLLARS less than the original car payment.
4. Will News of My Bankruptcy Be Published?
Your bankruptcy papers become public records and may be published by some credit reporting agencies. Most newspapers do not report consumer bankruptcy unless you are a public person.
5. Can I Keep My Retirement and Pension Accounts?
Usually, yes. As long as the retirement accounts or retirement plans are qualified under the Internal Revenue Code as tax exempt retirement assets or protected under the Employees Income Retirement Security Act (ERISA), then those retirement accounts are generally exempt under state and federal law no matter what the value. Analyzing retirement accounts, as they relate to ERISA, the Internal Revenue Code, and the Bankruptcy Code should be done with the assistance.
6. Can I get rid of student loans through bankruptcy?
It is nearly impossible to discharge student loans in a bankruptcy (unless the debtor is permanently disabled or diagnosed with a terminal illness) but it is possible to restructure the debt in Chapter 13.
Bankruptcy can gain you a student loan deferment of up to five years.
Though you will still owe that portion of the loan which was not yet paid, at the end of the deferment, your career will presumably be back on track and you will be debt-free and better able to resume payment of the student loan.
7. Didn’t Congress Change the Laws Making it Nearly Impossible to File Bankruptcy?
No. Congress did change the law in ways which make filing for bankruptcy more cumbersome and therefore slightly more expensive than before. However, most people who would benefit by filing for bankruptcy will still qualify for Chapter 7 bankruptcy relief, which normally allows them keep their property while discharging (eliminating) their general unsecured debt.
If your debts are primarily consumer as opposed to business debts you will not usually be eligible to file Chapter 7 bankruptcy if you cannot pass the “Means Test.” In addition, the means test is used to determine how much you might be able to pay back in a Chapter 13 bankruptcy. The Means Test has two components one based on your income level and the other based on disposable income.
With regard to income level, which is the first step in figuring out whether you can qualify to file a Chapter 7 bankruptcy is to measure your “current monthly income” against the median income for a family of your size in California. Your “current monthly income” is your average income over the last six months before you file. If your income is less than or equal to the median, you can file for Chapter 7.
If your income is more than the median, then you may still file a chapter 7 Bankruptcy; however, you must pass the second component of “the means test” based on disposable income in order to file for Chapter 7.
With regard to disposable income, if your income is over the California state median, then a complicated mathematical calculation is used to determine what type of bankruptcy you must file. Your expenses are compared to allowable expenses as established by the U.S. Census Bureau and the IRS. After deducting your expenses from your income; if you have sufficient disposable income to repay a portion of your debt over five years, then you must file a Chapter 13 Bankruptcy.
9. What May A Bankruptcy Lawyer Say to Their Clients?
The United States Supreme Court issued an important ruling, during the spring of 2010, which regulates consumers’ relationship with their bankruptcy attorneys. The Court focused on a provision in the Bankruptcy Code, section 526(a)(4) which was added by Congress in the 2005 amendments, that prohibits a bankruptcy attorney from advising his client to “incur more debt in contemplation of such person filing [a bankruptcy case].” This new language caused great concern among bankruptcy lawyers.
There are several situations where incurring debt, even though a bankruptcy may be imminent, is perfectly appropriate. For instance, no creditor or trustee could seriously object if someone used her credit card to purchase groceries for her family prior to filing for bankruptcy, especially if she had no cash because it had all gone to service the interest payments on her credit cards.
There are several situations were incurring debt prior to a bankruptcy is problematic, and perhaps fraudulent. One example would be purchasing several costly goods on credit knowing full well that the person was going to file bankruptcy without either the means or intent to pay the debt.
One reading of the new provision could have been read to prohibit a bankruptcy attorney even from advising a cash-strapped consumer that it was o.k. to use his credit card to buy necessities whenever he were considering bankruptcy. A Minnesota law firm that represents clients who file bankruptcies sued to have the law declared unconstitutional for that reason, as it potentially prevented lawyers from giving clearly legal and ethical advice. The Supreme Court, in an opinion authored by Justice Sotomayor, disagreed, and ruled that the statute was constitutional. However, in so doing, the Court clarified that the statute is not to be read so broadly.
The United States Attorney General argued that the statute was constitutional because it should be read as only prohibiting advice that was intended to manipulate the bankruptcy process. The Supreme Court essentially agreed with the Justice Department, and interpreted the statute as referring only the situation where someone purposely “loads up” on debt in order to manipulate the bankruptcy laws.
Justice Sotomayor wrote the important opinion for a unanimous court that is very important for bankruptcy attorneys and bankruptcy law. Milavetz v. United States. http://www.supremecourt.gov/opinions/09pdf/08-1119.pdf. The Court ruled that the prohibition only comes into play when a person is advised to incur debt if the “impelling reason” was the decision to file for bankruptcy. The Supreme Court could have been clearer on drawing the line of improper advice. The Court did assist bankruptcy lawyers by implying that the type of advice that would likely get a bankruptcy lawyer into trouble would be advice that would harm her client if followed.
There are situations where incurring debt, in particular secured debt that will be retained after bankruptcy, could be appropriate under some circumstances or inappropriate under others. The test is whether the purpose for acquiring the debt was to “load up” on debt to “manipulate” the Bankruptcy Code, and whether the decision to file bankruptcy in the future was the “impelling” reason for acquiring the new debt.
Congress, in 2005, may have intended to make bankruptcy relief less desirable and make bankruptcy lawyers more careful about how they advise their clients. However, after many years, the courts have given experienced bankruptcy lawyers sufficient guidance so that they can advise their clients how to legally and ethically take full advantage of the benefits the law provides.
10. What changes were made to the federal bankruptcy laws after 2005?
There have been a number of changes and it is important to go over each of them with your attorney if you are seriously considering filing for bankruptcy. The following list is an overview of areas with significant changes.
Eligibility for Bankruptcy – A “means test” determines whether a debtor can file Chapter 7 bankruptcy.
Barriers to Filing – Debtors must obtain approved credit counseling before they can file bankruptcy.
Chapter 13 – Disposable income is calculated using the IRS collection standards, rather than allowing the judge flexibility.
Multiple Bankruptcies – The interval between Chapter 7 discharges has increased by two years. A Chapter 13 may not be filed within 4 years of a Chapter 7 discharge.
General – The law imposes new duties on debtors and their attorneys, and failure to timely perform these duties will result in dismissal of the case or lifting of the automatic stay.
11. What is a Bankruptcy Court?
Each of the 94 federal judicial districts handles bankruptcy matters, and in almost all districts, bankruptcy cases are filed in the bankruptcy court. Bankruptcy cases cannot be filed in state court.
12. What is a Bankruptcy Petition?
A Bankruptcy Petition is a formal request for the protection of the federal bankruptcy laws. You can file a petition in a district where you have been domiciled or had a residence, principal place of business, or principal assets for 180 days OR for a longer part of 180 days than in any other district. You may also file in a district where an “affiliate,” general partner, or partnership has a pending case.
13. What is a Bankruptcy Estate?
A Bankruptcy Estate is all legal or equitable interests of the debtor in property at the time of the bankruptcy filing. The estate includes all property in which the debtor has an interest, even if it is owned or held by another person.
14. What are non-exempt assets?
Every asset that is not exempt! Everything not specified under the law. The Bankruptcy Code requires that you give all these nonexempt assets to the bankruptcy trustee. The trustee will then liquidate (sell off) these nonexempt assets for the benefit of your creditors. However, in actual practice, over 85 percent of Chapter 7 filings are “no-asset filings” that is, there are no assets left for unsecured creditors after the exempt assets have been claimed.
15. What is an “automatic stay”?
An Automatic Stay is an injunction that automatically stops lawsuits, foreclosure, garnishments, and all collection activity against the debtor the moment a bankruptcy petition is filed. However, under certain circumstances, creditors can ask the court to allow them to go ahead with collections in spite of the bankruptcy filing. This is called a Motion for Relief from Automatic Stay, and a successful one often negates the whole purpose of filing for Chapter 7 bankruptcy in the first place. For more information on Motions For Relief from Stay please click on the above link to my guest blog post from New York bankruptcy attorney Jay Fleischman.
16. What is a “Bankruptcy Trustee”?
A Bankruptcy Trustee is a private individual or corporation appointed in all Chapter 7, Chapter 12, and Chapter 13 cases to represent the interests of the bankruptcy estate and the debtor’s creditors.
If your creditor sues you and obtains a court judgment against you which you don’t pay, he may collect that judgment by having the court order your employer to take no more than 25% of your paycheck and pay that money directly to the creditor. A wage garnishment is any legal or equitable procedure through which some portion of a person’s earnings is required to be withheld by an employer for the payment of a debt. Most garnishments are made by court order. Other types of legal or equitable procedures include IRS or state tax collection agency levies for unpaid taxes and federal agency administrative garnishments for non-tax debts owed the federal government. The filing of a bankruptcy will immediately stop most wage garnishments, and, in many cases, will enable the person to get some or all of the garnished wages back.
18. Who can be considered a “secured creditor”?
Secured creditors have a lien giving them specific rights to the property which is the collateral for their claim. Most often, those rights are created by, and described in, a deed of trust on real property, a security agreement on personal property, or a judgment lien. Secured creditors have the best chance of getting relief from the automatic stay or “adequate protection payments” to prevent a decline in the equity available to secured their claim. In a bankruptcy, the parties that often have the most to lose and the least leverage in protecting their interests are unsecured creditors. Their claims against the debtor are low priority, falling at the bottom of the list.
19. How do I find out the details of who my creditors are?
If you are not sure you know all your creditors you may want to get a report from a credit reporting agency. If you have recently been denied credit, you are entitled to a free credit report from the reporting agency. Instructions for obtaining this report should be on the letter you received denying credit. You can obtain your credit report from Equifax online at http://www.equifax.com, by mail at Equifax Credit Information Services, Inc., PO Box 740241, Atlanta, GA 30374, or by telephone at 1-800-685-1111. You can obtain a copy of your credit report from TransUnion online at http://www.transunion.com, or mail at TransUnion, LLC, Consumer Disclosure Center, PO Box 1000, Chester, PA 19022, or by telephone at 1-800-888-4213. TransUnion accepts telephone requests only if you have been denied credit within the last 60 days and TransUnion was the reporting agency. Anyone can get one free credit report from all three credit bureaus once per year by going to www.annualcreditreport.com. Also, when you hire me as your bankruptcy attorney, I will order a three source credit report as part of the process.
20. Where Is My Bankruptcy Filed?
In the office of the Clerk of the United States Bankruptcy Court District where you have lived or maintained your principal place of business for a majority of the past 180 days. The bankruptcy court is associated with the United States District Court. Each county in California is assigned to a particular federal district. The District for San Diego is the Southern District of California.
21. Do a Husband and a Wife Have to File Together?
A husband and wife do not have to file together, but a husband and wife should file together when they both owe some of the same debts. If one spouse files alone, creditors may try to force the other spouse into paying them, even if they are unemployed.
22. How Does Filing Bankruptcy Affect Lawsuits and Attachments That Have Already Been Filed Against Me?
Filing bankruptcy will automatically stop all lawsuits and attachments against you. Your creditors must stop all actions against you immediately after a bankruptcy is filed. The only cases not affected are criminal cases and those to collect debts for alimony, maintenance or child support.
23. When Will I Go to My Bankruptcy Hearing What Will I Do There?
You are required to appear for what is called the First Meeting of the Creditors. This will occur about 30 days after your case is filed. The trustee will ask you questions under oath concerning your bankruptcy papers and assets. Few, if any, of your creditors will usually appear. You will be required to provide for inspection documents such as bank statements and copies of property appraisals.
24. What Is a Trustee in Bankruptcy?
The trustee is an officer of the court, usually a practicing attorney, appointed by the bankruptcy court. His or her primary duty is to gather your non-exempt property, turn it into cash, and pay this money to your creditors. You are required by law to cooperate with the trustee. If you refuse to cooperate, your discharge may be denied.
25. To get the most out of your first in-office consultation with us, you should have the following information:
- 6 months of pay stubs and income information,
- an estimate of your debt, both secured and unsecured (or just bring your bills
- an estimate of your monthly expenses, and
- information concerning all assets: real estate, automobiles, etc.
- Client Checklist (PDF)
We do not review documents for telephone consultations.
26. What other information will I eventually need?
You will need copies of your tax records to obtain necessary information for your petition. This would include returns or if you do not have returns, transcripts from the IRS and the Massachusetts Department of Revenue. You will require an appraisal of your real estate or any other assets you have as well as copies of bank statements, including canceled checks
27. Why do I need a lawyer? Isn’t just paperwork?
There are document preparation services that will prepare the documents necessary for a bankruptcy filing for a lesser cost than what you would pay an attorney. However, they are forbidden by law to give you legal advice. There are other duties debtors have, including disclosing important real estate documentation, income information, as examples. Additionally, the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, imposed additional requirements on debtors that if not met can result in the case being dismissed.
28. If I file for bankruptcy will it affect my military status or security clearance?
The status of a service member’s security clearance can be affected by the filing of bankruptcy, but this is not automatic. Bankruptcy by itself is not a reason for a security clearance to be denied; it’s what led to the bankruptcy and what has been done with the finances since the bankruptcy that matters. The outcome also depends on other factors, such as job performance and relationship with the chain of command. The security section will weigh whether the bankruptcy was caused primarily by an unexpected event, such as medical bills following a serious accident, or by financial irresponsibility. It is important that you be honest about having filed for bankruptcy as well as the financial problems that caused the bankruptcy. If you are not honest in the security clearance process, you simply will not receive a clearance.
The security section may also consider the recommendations and comments of your chain of command and co-workers. This is an issue that can be argued both ways, so as a practical matter your security clearance probably should not be a significant factor in making your decision about whether to file bankruptcy. The amount of your unpaid debts, by itself, may jeopardize your clearance, even if you don’t file bankruptcy. In that sense, not filing for bankruptcy may make you more of a security risk due to the size of your outstanding debts. By the same token, using a government-approved means of dealing with your debts may actually be viewed as an indication of financial responsibility. Eliminating your debts through bankruptcy may make you less of a security risk. There is no hard and fast answer here, with one exception: it never hurts to have a good reputation with your co-workers and your chain of command.
The military’s policy concerning bankruptcy petitions filed by service members in general is one of strict neutrality. Service members have a statutory right to invoke the procedures of the bankruptcy law. No adverse actions may be taken against a member of the military for filing a petition for bankruptcy, receiving a discharge of a debt in bankruptcy, or consolidating his debts under a Chapter 13 bankruptcy plan. Similarly, Commanders and Supervisors may not require members to seek financial counseling assistance before allowing them to file bankruptcy. The assets and protection of rights of individual creditors are matters for the Bankruptcy Court and the military cannot intervene in any matter. Creditors should receive no assistance from the military to collect debts and members should be treated like any individual not in military service.
Nevertheless, the underlying circumstances of a case may involve such mismanagement of personal affairs or dishonorable failure to pay just debts as to become factors that may form a basis for adverse action against the member. However, the mere filing of a petition in bankruptcy, or receiving a discharge in bankruptcy is not considered “mismanagement” or “dishonorable.”
