CHAPTER 7

In a Chapter 7 bankruptcy, you file for protection in federal court listing assets, debts, income, expenses, and financial history. In most Chapter 7 bankruptcies, all the assets are exempt and no assets are taken from you. In the event that there is any property that is not exempt, the bankruptcy trustee would sell the property and apply the money to the unsecured debts. The debts are then discharged, no matter how much is still owed.

If you have any secured debts (debts for which there is collateral, such as home or car), you must keep current in the payments or the creditor may take back the property. Security interests in non-purchase money debts (common with finance companies) may be avoided and you will be able to keep the property.

Advantages of Chapter 7:
  • Discharge will usually occur within four months after filing;
  • No payments to unsecured creditors;,
  • No wage withholding;
  • Very high success rate.
Disadvantages of Chapter 7:
  • Cannot be filed within eight years of the filing of a previous Chapter 7 bankruptcy.

CHAPTER 13

In a Chapter 13 bankruptcy, you file a plan to make payments over a three to five year period. Under the plan, you make a monthly payment to a court-appointed trustee. The trustee keeps a percentage (typically 10%) of the monthly payment as a fee. The balance is used to pay on the debts.

If your home is secured by a mortgage, you may keep the home by resuming regular monthly payments following the filing of bankruptcy and by proposing a plan to pay the delinquent payments (arrearage) over the plan period. The Chapter 13 Plan will be for a term of not less than 36 or more than 60 months (3 to 5 years), before discharge.

Advantages of Chapter 13:
  • Repayment of delinquent payments for home and automobile can be spread over the term of the Plan.
Disadvantages of Chapter 13:
  • No discharge until after successful completion of 3 to 5 years;
  • Stringent oversight of your budget. You must have permission of trustee to incur secured debt;
  • More expensive with monthly payments and tax refunds going to the trustee (and pay raises can raise the Plan payment);
  • Wage withholding for Plan payments are mandatory;
  • The case will be dismissed if monthly payments are not made on time;
  • Poor likelihood of success, if job loss, injury, or illness occurs during the 3 to 5 years.

Chapter 11 is for complex (business) debtors and is seldom appropriate for individuals.
Chapter 12 is for family farmers.

DRAWBACKS TO BANKRUPTCY

The primary negative aspect of filing bankruptcy is the personal and emotional feelings a person may have about bankruptcy. Although there were over 1.5 million bankruptcies filed in the last year, many people feel guilty. This is despite the reality that predatory lending practices are the primary cause of most bankruptcies.

To buy a home, you should plan on waiting up to two years after discharge before applying for a conventional mortgage.

Financing an automobile is difficult during the bankruptcy proceedings. You should plan on waiting until after discharge.

You may get credit card offers during the bankruptcy proceedings and you almost certainly will after discharge. Most people are better off without any credit cards. No one needs more than one.

THE PROCESS OF BANKRUPTCY

What will I need to bring with me for my initial consultation?
All you will need to do is make a list of just the names of your creditors and approximate amounts. Include the medical expenses, student loans, old accounts, and repossessions that you can recall. The names and the amounts do not need to be exact -- we do not need addresses or account numbers in this summary.

If you are considering bankruptcy, YOU MUST STOP USING YOUR CREDIT CARDS, including gas and store cards. You may continue to use debit cards and checks. It is prudent to cancel automatic check drafts (ACH/EFT) on your checking account. Creditors will stop taking auto-drafts after the bankruptcy filing.

You should stop making credit card payments, as well. When you quit paying your credit cards, within a matter of days, creditors and collection agents will start calling you. If you have retained us with $200.00 and a contract, you can use our script to forward their calls to us. Once we confirm you have hired us, creditors usually stop calling for a period of a few months, which gives us time to file. Most of our clients take between 2 and 6 months to pay for the bankruptcy.

If your checking or savings accounts are in a financial institution where you also have any debt, the lender may take your account money and apply it to the debt. They can take or set-off any account with your name on it -- check with your relatives to make sure they have not added your name to their accounts. We recommend that you keep your checking account at a financial institution where you have no debts.

Do not pay back any debts or transfer any property to friends or relatives.

Avoid taking withdrawals from your IRA, 401k, ESOP, pension, profit-sharing, or other retirement accounts until you discuss the proposed withdrawal with an attorney.

How long will it take?
The meeting with the trustee will be between 20 and 60 days after filing. Attorney Scott Lemke or Janet Pederson will attend this meeting with you.

The Judge will not attend, and most creditors do not appear either. You will be asked if you listed all your assets, debts, etc. Discharge is usually granted sometime after 60 days. (The clerk of court may take some time to process the discharge.)

COMMON QUESTIONS

When will creditors stop harassing me?
In general, you are "fair game" for a creditor until a bankruptcy petition is actually filed with the court. As a practical matter, however, most creditors cease collection efforts once informed of the attorneys name and telephone number.

If I've already been sued, can bankruptcy help me?
A bankruptcy filing will automatically stop all collection efforts. If you have been sued, and the bankruptcy is filed before a judgment is entered, no judgment can be entered. If a judgment has been entered before the filing of the bankruptcy, collection of the judgment is stopped. Note that until a bankruptcy petition is signed and filed with the court, lawsuits can still proceed, including execution of judgment (levy on bank accounts).

Can a creditor repossess my property?
Yes, in some cases. When you borrow money to buy a car, the creditor can repossess it if you do not make your payments. Secured property is not repossessed if payments are kept current. If household goods are put up as collateral for loans from finance companies, the goods can be repossessed unless the lien is avoided in bankruptcy.

What property is exempt?
In general, your homestead, retirement accounts, personal and family household goods, and apparel are exempt. Additional property, such as motor vehicles or tools of your trade, may also be exempt.

Will I get rid of all my debts in bankruptcy?
A bankruptcy will not discharge debts for child support, criminal restitution, income taxes due within three years of filing bankruptcy, property taxes, debts incurred by using false financial statements, false pretenses, or other fraud, and willful and malicious torts. Student loans are rarely discharged, and only if the bankruptcy court determines that payment would create a substantial financial hardship.

The collateral of a secured loan can be taken as collateral of all loans, secured or unsecured, at the same institution. This cross-collateralization of loans is standard practice at credit unions, and usually at banks. Lenders stack the unsecured debt, such as a credit card, onto the collateral of the secured debt. If you have two automobiles financed at the same lender, both automobiles can be secured to each loan.

When may I discharge income taxes?
Income taxes can be discharged if more than three years have passed between the date the return was due and the filing of the bankruptcy, unless an income tax return was not filed.

We will need to know if you 1) filed your return, 2) filed it on time, and 3) have received notice of levy or tax lien. We have a form you may sign that allows the IRS to provide a transcript of your tax record.

AFTER BANKRUPTCY

Will I ever get credit again?
It is much easier to rebuild credit after a bankruptcy than in the past. After bankruptcy, make sure that your payments on continuing obligations, such as utilities, rent/mortgage payments, and car payments are received before due date. There will be no "grace" period. Not all creditors continue to send payment booklets after bankruptcy, so do not wait for a new booklet.

Realtors can assist in the purchase of a home through non-qualifying assumable, contract for deed, HUD, VA or FHA. Home mortgage loans are generally available after two years have elapsed (assuming you otherwise qualify for the loan).

Many major car dealerships advertise for customers who have bad credit, repossessions, foreclosures or bankruptcy. Another way to help rebuild credit is through the judicious use of a secured credit card.

After bankruptcy you will likely receive offers of credit cards (you may receive credit card offers during the bankruptcy), fresh start automobile financing offers, and checks in the mail from finance companies. Lenders, especially credit card companies target people who have been discharged in bankruptcy.

Many clients use a debit card, which has fraud protection if from MasterCard or VISA, and draws against your checking account. If you want a credit card after the bankruptcy for emergencies, we recommend getting just one regular MasterCard or VISA, and then, don't carry it.

How can I remove bankruptcy from my credit report?
No one can legally remove accurately reported information from your credit report. A bankruptcy notation will appear for 10 years.

After completion of your bankruptcy, we will offer to review your credit reports to ensure that creditors and their agents are not intentionally or negligently misreporting the discharged debt.

To protect your credit report from excessive inquiries, you may opt out by calling 888-567-8688.

If not bankruptcy, what else can I do?
Consumer Credit Counseling Service has merged with GreenPath Debt Services and offers Debt Management Plans, with offices in McKinney and Plano.

Whatever you decide, do not continue to pile up debt. Excessive debt will prevent you from providing for yourself, your family, your children's education, and your retirement. Bankruptcy can keep you from becoming dependent on welfare or relatives. Take back control of your future.

The information included in this website is general information and is not to be considered legal advice, nor is any part of it provided in the course of an attorney-client relationship. You must consult an attorney for individual advice regarding your situation.

Copyright © 2003-2016 by Scott Lemke and Janet Pederson. You may reproduce this material for your own personal use and for non-commercial distribution. All copies must include this copyright statement.