The Law of Bankruptcy
Bankruptcy is a legal proceeding in which a person who cannot pay his or her bills an get a fresh financial start. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law.
What Can Bankruptcy Do for Me?
Bankruptcy may make it possible for you to:
- Eliminate the legal obligation to pay most or all of your debts. This is called a “discharge'' of debts. It is designed to give you, the “Debtor”, a “fresh financial start” which was the intent of Congress in enacting these laws.
- Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. (Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment.)
- Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
- Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt, even against the Internal Revenue Service, California Franchise Tax Board, California Board of Equalization, and other agencies.
- Restore or prevent termination of utility service.
- Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.
What Bankruptcy Cannot Do
Bankruptcy cannot, however, cure every financial problem. Nor is it the right step for every individual. In bankruptcy, it is usually not possible to:
- Eliminate certain rights of “secured'' creditors. A “creditor” is who is owed money or other obligation. The “debtor” is the one who owes the obligation. A “secured'' creditor is one who has taken a mortgage or a lien on property as collateral for the loan. Common examples are car loans and home loans. You can force secured creditors to take payments over time in the bankruptcy process and bankruptcy can eliminate your obligation to pay any additional money if your property is taken. Nevertheless, you generally cannot keep the collateral unless you continue to pay the debt. Sometimes you will only have to pay the “secured” portion of the debt, that is, if the collateral is worth less than the amount of the obligation owed.
- Discharge types of debts singled out by the bankruptcy law for special treatment, such as child support, alimony, certain other debts related to divorce judgments, student loans1, court restitution orders, criminal fines, and some taxes.
- Protect cosigners on your debts. When a relative or friend has co-signed a loan, and the consumer discharges the loan in bankruptcy, the co-signer may still have to repay all or part of the loan. There is limited protection for a co-debtor in Chapter 13.
- Discharge debts that arise after bankruptcy has been filed.
What different Types of Bankruptcy Cases Should I Consider?
There are four types of bankruptcy cases provided under the law:
Chapter 7 is known as “straight'' bankruptcy or “liquidation.'' It requires a debtor to give up property which exceeds certain limits called “exemptions'', so the property can be sold to pay creditors.
Chapter 11, known as “reorganization'', is used by businesses and a few individual debtors whose debts are very large.
1 The U.S. Supreme Court recently ruled 6-3 against the (President) Biden-Harris Plan for proposed cancellation of more than $400 billion in student debt by Executive Order.
Chapter 12 is reserved for family farmers.
Chapter 13 is called “debt adjustment" or “wage earner bankruptcy”. It requires a debtor to file a plan to pay debts (or parts of debts) from current income.
Most people filing bankruptcy will want to file under either chapter 7 or chapter 13. Either type of case may be filed individually or by a married couple filing jointly. If the amounts of your debts are very substantial and you cannot file a Chapter 7, you will have to file a Chapter 11.
Chapter 7 (Straight Bankruptcy)
In a bankruptcy case under chapter 7, you file a petition asking the court to discharge your debts. The basic idea in a chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property, except for “exempt'' property which the law allows you to keep. In most cases, all of your property will be exempt. But property which is not exempt is sold, with the money distributed to creditors.
If you want to keep property like a home or a car and are behind on the payments on a mortgage or car loan, a chapter 7 case probably will not be the right choice for you. That is because chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt.
Chapter 13 (Reorganization)
In a chapter 13 case you file a “plan'' showing how you will pay off some of your past-due and current debts over five years. The most important thing about a chapter 13 case is that it will allow you to keep valuable property--especially your home and car--which might otherwise be lost, if you can make the payments which the bankruptcy law requires to be made to your creditors. In most cases, these payments will be at least as much as your regular monthly payments on your mortgage or car loan, with some extra payment to get caught up on the amount you have fallen behind.
You should consider filing a chapter 13 plan if you:
- own your home and are in danger of losing it because of money problems;
- are behind on debt payments, but can catch up if given some time;
- have valuable property which is not exempt, but you can afford to pay creditors from your income over time.
You will need to have enough income in chapter 13 to pay for your necessities and to keep up with the required payments as they come due.
What Does It Cost to File for Bankruptcy?
The Bankruptcy Court charges a filing fee for the Bankruptcy Petitions, in excess of $300.00. Filing fees for a for a chapter 11 are now in excess of $1,700.00. The court may allow you to pay this filing fee in installments if you cannot pay all at once. If you hire an attorney you will also have to pay the attorney's fees you agree to. These begin for chapter 7's and 13's for at least $2,000.00+. There are rules which limit how much attorneys may charge in Bankruptcy to protect debtors from overreaching.
What Property Can I Keep?
There are laws called “Exemptions” which allow debtors to keep certain property, some with dollar limits. There are Federal exemptions and State Exemptions. The Federal Exemptions are embodied in California’s Federal Exemption set, California Code of Civil Procedure §§ CCP 703.140(b). Alternatively, depending on many factors including how much equity you have in a family home, you may use California’s California Code of Civil Procedure §§ 704, et seq. exemptions. Overall, the exemptions are quite generous.
In determining whether property is exempt, you must keep a few things in mind. The value of property is not the amount you paid for it, but what it is worth now. Especially for furniture and cars, this may be a lot less than what you paid or what it would cost to buy a replacement. “Fair Market Value” of an asset is the amount that a ready, willing and able buyer will pay under normal market conditions, in cash or other lump sum.
You also only need to look at your equity in property. This means that you count your exemptions against the full value minus any money that you owe on mortgages or liens. For example, if you own a $500,000 house with a $400,000 mortgage, you count your exemptions against the $100,000 which is your equity if you sell it.
While your exemptions allow you to keep property even in a chapter 7 case, your exemptions do not make any difference to the right of a real property loan holder or car loan creditor to take the property to cover the debt if you are behind. In a chapter 13 case, you can keep all of your property if your plan meets the requirements of the bankruptcy law. In most cases you will have to pay the mortgages or liens as you would if you didn't file bankruptcy. California does not have “mortgages” in real property loans. Rather, we have “lien theory” evidenced by a document called a “deed of trust” which secures a real property loan. In California when you buy real estate, you “own” the property even though you haven’t paid off the loan. This is different in many other States in the United States that still have “mortgages”, where, you do not “own” the property until the loan is paid off. Car loans in California are true “mortgages”; you don’t “own” the car until the “registered owner” is paid off.
What Will Happen to My Home and Car If U File Bankruptcy?
In most cases you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt. Even if your property is not fully exempt, you will be able to keep it, if you pay its non-exempt value to creditors in chapter 13. However, some of your creditors may have a “security interest'' in your home, automobile or other personal property. This means that you gave that creditor a mortgage on the home or put your other property up as collateral for the debt. Bankruptcy does not make these security interests go away. If you don't make your payments on that debt, the creditor may be able to take and sell the home or the property, during or after the bankruptcy case.
There are several ways that you can keep collateral or mortgaged property after you file bankruptcy. You can agree to keep making your payments on the debt until it is paid in full. Or you can pay the creditor the amount that the property you want to keep is worth. In some cases involving fraud or other improper conduct by the creditor, you may be able to challenge the debt. If you put up your household goods as collateral for a loan (other than a loan to purchase the goods), you can usually keep your property without making any more payments on that debt.
Can I Own Anything After Bankruptcy?
Yes. Many people believe they cannot own anything for a period of time after filing for bankruptcy. This is not true. You can keep your exempt property and anything you obtain after the bankruptcy is filed. However, if you receive an inheritance, a property settlement, or life insurance benefits within 180 days after filing for bankruptcy, that money or property may have to be paid to your creditors if the property or money is not exempt.
Will Bankruptcy Wipe Out All My Debts?
Yes, with some exceptions. Bankruptcy will not normally wipe out:
- money owed for child support or alimony, fines, and some taxes;
- debts not listed on your bankruptcy petition (although you can reopen your case at any time to add more if you missed them (Bankruptcy Code § 350);
- loans you got by knowingly giving false information to a creditor, who reasonably relied on it in making you the loan;
- debts resulting from “willful and malicious'' harm, including injury or death as a result of a vehicular accident;
- student loans owed to a school or government body, except if: -- the court decides that payment would be an “undue hardship”2;
- mortgages and other liens which are not paid in the bankruptcy case (but bankruptcy will wipe out your obligation to pay any additional money if the property is sold by creditor).
2 Which is very difficult to establish, in practice
For a complete list of non dischargeable debts, see 11 USC 523(a)(1-20), and (b) and © for qualifications.
Will I Have to Go to Court?
In most bankruptcy cases, you only have to go to a proceeding called the “meeting of creditors'' to meet with the bankruptcy trustee and any creditor who chooses to come. Most of the time, this meeting will be a short and simple procedure where you are asked a few questions about your bankruptcy forms and your financial situation.
Occasionally, if complications arise, or if you choose to dispute a debt, you may have to appear before a judge at a hearing. If you need to go to court, you will receive notice of the court date and time from the court and/or from your attorney.
Will Bankruptcy Affect My Credit?
There is no clear answer to this question. Unfortunately, if you are behind on your bills, your credit may already be bad. Bankruptcy will probably not make things any worse. The fact that you've filed a bankruptcy can appear on your credit record for ten years. But since bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills, and you may be able to get new credit. This is referred to as the “bankruptcy bump”.
In most cases, accounts that contain adverse information may remain on a person’s credit report for up to seven years from the date of first delinquency on the account. If accounts do not contain adverse information, most reporting agencies report the information for ten years from the last activity on the account. Adverse information or “derogatory references” is/are defined as anything that a potential creditor may consider to be negative when making a credit granting decision.
Like other credit history, paid accounts generally remain on file for seven years from the date closed if they contain any adverse information. If an account is paid and does not contain any adverse information, the account would remain on one’s file for ten years from the date closed.
In general, civil Judgments remain on a person’s credit report for seven years from the date filed. Tax Liens remain on file for seven years from the date paid. If the tax lien is not paid, it will remain on the file indefinitely.
Chapter 13 bankruptcies, which have been dismissed or discharged, remain on file for seven years. All other bankruptcies remain on file for ten years. The personal information appearing on one’s credit report may either be reported to us by a credit grantor, obtained from public records, or it could be updated in response to correspondence we have had with the individual consumer.
Credit decisions are made by lenders. Each lender has its own formula for evaluating a credit application, and only the lender can indicate why they made a decision. Credit reporting agencies only supply the lender with the contents of their report which lenders can review in order to assist them in make a sound decision. Many times, the decision does not have anything to do with one’s credit report, but instead is based on things like one’s income, length of residence or employment. If there is an error on a person’s credit report, then one must contact the office listed at the bottom of the report and file a dispute. Investigations will be concluded within 30 days of the date the agency receives a request. If the agency cannot verify the disputed information within that time frame, the disputed item will be deleted from one’s credit report or updated as requested. A revised report, reflecting the results of the investigation, will be sent to the consumer at the conclusion of the investigation. However, if the disputed information is subsequently verified, the agency may reinsert the information into the consumer’s file and notify the consumer in writing within five business days. If the agency’s investigation does not resolve the dispute, the consumer may add a 100 word explanatory statement to his or her report. At the consumer’s request, the agency may assist him or her in preparing the statement. The consumer may also request a description of how the agency conducted the investigation including the name, address, and telephone number of anyone it contacts for information.
A credit report is a history. Under federal law, you are entitled to an accurate history, but not to a re writing of truthful history. That history can properly include delinquencies or bankruptcy.
A bankruptcy discharge will not erase discharged creditors or your pre- bankruptcy payment history. After a bankruptcy discharge, the amount outstanding for each discharged account should be shown as zero. Your credit report is not a reliable guide to everyone you may owe money to. Not all creditors report to credit reporting agencies; your credit report lists only those that do report and the contents of the public record. The notation that a debt is “charged off” does not necessarily mean it is not legally enforceable. "Charge off" is essentially an accounting term that indicates that the creditor doesn't expect to collect the debt, and cannot carry the loan as an “asset” in its portfolio. A charge off alters the creditor's income for tax purposes. A “charge off” does not relieve the debtor of legal liability for its payment and often the creditor will assign the debt to a collection agency for enforcement.
Credit reports after bankruptcy
Your bankruptcy can be reported on your credit report for 10 years from the filing of the case. If you file a bankruptcy and voluntarily dismiss it before the discharge, the credit reporting agency must report the dismissal as well as the bankruptcy filing. Assuming you have income, you should be more credit worthy after a bankruptcy than you were before, since your old debts no longer have a claim on your future income.
A Commentary to the Fair Credit Reporting Act makes clear that a debt discharged in bankruptcy must be listed as having a 0 balance. Federal Trade Commission OSC section 607, item 6 states:
"A consumer report may include an account that was discharged in bankruptcy (as well as the bankruptcy itself), as long as it reports a zero balance due to reflect the fact that the consumer is no longer liable for the discharged debt."
After the discharge, you are entitled under federal law to have the balance of each discharged debt reported as "0". The history of delinquencies can be reported, but the balance must be zero. If it is not so reported, dispute the debt. Negative history on your credit report is just that: history. It does not doom you to perpetual credit rejection. It does challenge you to strengthen your financial present by saving and using credit carefully.
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You don't need to hire anyone to see that errors in your credit report are corrected or positive information is reported. In fact, many credit repair offers are scams that, at best, waste your money and, at worst, involve you in a crime.
Under the Fair Credit Reporting Act, you can challenge information that you believe is inaccurate. If the reporting agency can't verify the accuracy of the information, they must remove it. If you have received a discharge in bankruptcy, it is in your interest to have the discharge noted on your report, since it is proof that the old debt is no longer legally enforceable.
What Else Should I Know?
Utility services--Public utilities, such as the electric company, cannot refuse or cut off service because you have filed for bankruptcy. However, the utility can require a deposit for future service and you do have to pay bills which arise after bankruptcy is filed.
Discrimination--An employer or government agency cannot discriminate against you because you have filed for bankruptcy.
Driver's license--If you lost your license solely because you couldn't pay court-ordered damages caused in an accident, bankruptcy will allow you to get your license back.
Co-signers--If someone has co-signed a loan with you and you file for bankruptcy, the co-signer may have to pay your debt.
Do I need an attorney?
Many of the best bankruptcy lawyers do not advertise at all.
Debt counseling is now required before you can file bankruptcy under the 2005 Reform Act. It has to be done not more than 6 months prior to filing. It generally costs about $15-$30 and takes about 45 minutes on the telephone or online. You must file a certificate of completion when you file your bankruptcy petition. You will have to take a second course when your bankruptcy has been completed.
Document preparation services also known as “typing services'' or “paralegal services'' involve non-lawyers who offer to prepare bankruptcy forms for a fee. Problems with these services often arise because non-lawyers may not offer legal advice on difficult bankruptcy cases and they offer no services once a bankruptcy case has begun. There are also many shady operators in this field, who give bad advice and defraud consumers. Their fees are limited by Bankruptcy laws.
When first meeting a bankruptcy attorney, you should be prepared to answer the following questions:
- What types of debt are causing you the most trouble?
- What are your significant assets?
- How did your debts arise and are they secured?
- Is any action about to occur to foreclose or repossess property or to shut off utility service?
- What are your goals in filing the case?
Can I File Bankruptcy Without an Attorney?
Although it may be possible for some people to file a bankruptcy case without an attorney, it is not a step to be taken lightly. The process is difficult and you may lose property or other rights if you do not know the law. It takes patience and careful preparation. Chapter 7 (straight bankruptcy) cases are easier. Very few people have been able to successfully file chapter 13 (debt adjustment), especially chapter 11 cases on their own.
Remember: The law often changes and each case is different.