Understanding bankruptcy

What is Bankruptcy?
When you owe money, you are a debtor, and the people or companies you owe money to are your creditors. “Bankruptcy” is a federal law that establishes an orderly process to provide protection to debtors and fair treatment to creditors. Bankruptcy proceedings, though not for everyone, can be very helpful in solving a financial crisis.

There are five different types of bankruptcy proceedings. The two most common types are referred to as Chapter 7 and Chapter 13 bankruptcies. Usually when people talk about filing for bankruptcy, they are talking about Chapter 7. A Chapter 7 bankruptcy gives you the opportunity to avoid (or “discharge”) all or almost all of your debts owed as of the date you file for bankruptcy without having to make any future payments. “Discharge” means you no longer have a legal obligation to repay a debt. This process takes approximately 90 days after your bankruptcy petition is filed. In a Chapter 7 bankruptcy, you may be at risk of losing some of your property, and some debts may not be discharged. In addition, some transfers of property that happened before you filed bankruptcy can be undone.

A Chapter 13 bankruptcy is a three- to five-year repayment proceeding. In Chapter 13 bankruptcy you gain protection for your property, and you are able to repay certain debts such as child support arrearages, taxes, car payments and home mortgage arrearages over a three- to five-year time period rather than having your wages garnished or losing property to foreclosure. In exchange for this added benefit, you must agree to make a monthly payment of your disposable income to repay a portion (or sometimes all) of your debts. When consumer credit counseling or Chapter 7 are not available options, Chapter 13 is often an alternative.

Will Bankruptcy Help My Situation?
Bankruptcy can give you a fresh financial start and can seem very attractive to people with debts they cannot afford to pay. However, the process is not for everyone. Because you can discharge only those debts that you owe as of the date you file your bankruptcy, and cannot discharge any debts you become responsible for after the day you file your bankruptcy, timing of the bankruptcy filing is very important. Filing for bankruptcy may affect your credit for a number of years or have other serious consequences that you will need to consider.

You may wish to consult a lawyer to assess the advantages and disadvantages of filing in your particular situation. Perhaps you will be able to work out a debt repayment plan on your own. Possibly you will do best to get help from consumer credit counseling services. Or perhaps bankruptcy will be your best solution later, but not necessarily at this time. Whatever route you take, you will need to gather some basic information before proceeding further. Many attorneys will give a free consultation to discuss the benefits and risks of a bankruptcy and what alternatives to bankruptcy are available.

Some Factors to Consider
What are your total living expenses? Calculate the total monthly expenses for you and your dependents, such as food, housing, utilities, transportation, insurance, clothing, medical care and some reasonable reserve for the unexpected. You will need an accurate list of these monthly expenses as well as a list of your total monthly income.

Do you have medical and automobile liability insurance? While you may think that you are not going to incur any new debts after you file bankruptcy, medical bills and liability for damages for an automobile accident are often unexpected and outside of your control. If you do not have the applicable insurance, these new debts could eliminate the benefits of the bankruptcy you are considering filing.

Whom do you owe money to? Make a list of all of the names and addresses of your creditors and how much you owe each of them. Identify those creditors to whom you have pledged property (e.g., car loan; mortgage or home equity line of credit; installment loan on furniture, appliances or other property), and the value of the property your creditors have an interest in. You can find information about many of your creditors on a credit report. You can get a free copy of your credit report once every 12 months from Equifax, Experian and TransUnion. You can get your credit reports at www.annualcreditreport.com. Print and save each report for future use. Note that you do not need to obtain all three credit reports at the same time.

Unless a creditor has a security interest in a particular item of property such as your car, a creditor cannot take any of your property or income with obtaining a court judgment against you.

Are you “judgment proof”? When a creditor sues you, the creditor is seeking a judgment. A judgment is generally not a court order that you have to pay a debt, but rather a court determination that you owe a certain amount of money. The creditor has to figure out how to collect the debt reflected by the judgment. A creditor with a judgment can garnish bank accounts or wages, or file a lien against your real property (such as your house), or ask the court to take possession of and sell your personal property. However, under Oregon law, you can protect certain property and income from your judgment creditors. This is called exempt property. Exactly what property and income are exempt depends on the type of property and income, and their value. If all of your property and income is exempt, your judgment creditors cannot take anything. In this situation, you are often called judgment proof. Creditors cannot take any property or garnish the income of a person who is truly judgment proof, so creditors may not bother to sue if they won’t be able to collect any money. However, even judgment-proof people can and do file for bankruptcy relief — often to stop harassing telephone calls.

If Your Current Debts were Erased, Would Your Financial Problems be Over? Bankruptcy is intended to give a fresh financial start and will work best if you will have enough income after the bankruptcy to support you and your family. On the other hand, bankruptcy will only be a temporary fix if you go right back into debt again with no way of paying off any new debts. Chapter 7 is only available once every eight years. It is often best to wait until you have resolved your financial problems before filing bankruptcy. Even if you have filed a previous bankruptcy, the court may allow you to file a Chapter 13 bankruptcy to deal with any new debts you may have incurred; however, this depends on the particular circumstances of your case.

Bankruptcy does not Discharge all Debts
It is important to realize that bankruptcy does not necessarily allow you to avoid paying back every kind of debt. For public policy reasons, several types of debts are specifically excluded from discharge in bankruptcy. The most common debts which cannot be discharged are child support obligations, spousal support, criminal restitution and criminal fines. Some other types of debts are dischargeable in some circumstances. For example, delinquent personal income taxes may be discharged depending on whether a return has been filed and certain time periods have passed. Depending on the circumstances, liability for bad checks or the alleged fraudulent use of a credit card may not be discharged. Student loans are difficult to discharge. As noted above, any debts incurred after the date you file your bankruptcy cannot be discharged. The details of your own particular situation should be discussed with a lawyer or other knowledgeable person before you begin bankruptcy proceedings.

Will I Have to Give Up All My Property?
When you file your bankruptcy, all of your property as of the date you file and your right to income that you have earned but not yet received become part of your “bankruptcy estate.” A trustee is appointed to liquidate the property in the estate and distribute the proceeds to your creditors. Some property that you do not have on the date you file your petition, such as the right to an inheritance or proceeds from a divorce decree or divorce settlement acquired within 180 days after the date you file, may also be included in your bankruptcy estate. Under certain circumstances, your right to tax refunds for prior years or the current year, may also be included in the estate, even though you have not yet received the refunds.

Although Chapter 7 is a “liquidation proceeding,” the goal of bankruptcy is to give you a fresh financial start. Consequently, you will be allowed to “exempt” — or keep — certain property and protect it from the trustee and your creditors. The property you can exempt is determined by the type of property and its fair market value. For many types of personal property, the fair market value is often described as “garage sale value,” or how much actual cash you would receive by selling the item to an unrelated party.

Certain property such as your working tools, household furnishings, radio, television, musical instruments, some savings and checking accounts, your car and the equity in your home may be entirely protected or exempt through bankruptcy.

Unlike a Chapter 7 bankruptcy, a Chapter 13 case usually allows you to retain all of your “nonexempt” assets, and over a three- to five-year period of time you pay to the court the value of those nonexempt assets for distribution to your creditors.

Some of your transactions prior to filing bankruptcy may also create an issue. For instance, if you have sold, transferred, given away or otherwise disposed of any property (including money) within two years (and sometimes four years) prior to filing bankruptcy and did not receive reasonably equivalent value in return, the trustee may have the option to take back the property or money from the recipient. Under some circumstances, if you have paid $600 or more on a debt to a creditor within 90 days prior to filing bankruptcy, the trustee may have the option to take back the money from the creditor. If you have paid $600 or more on a debt to a relative (and in some circumstances to a person who is not a relative) within one year prior to filing bankruptcy, the trustee may have the option to take back the money from the relative or other person.

Do I have to go to Court?
In almost all situations the answer is no. However, in both Chapter 7 and Chapter 13 you must attend a meeting of creditors, typically called the section 341(a) hearing. this hearing is usually held about 30 days after you file the case. This hearing is held by the bankruptcy trustee who is administering the bankruptcy process. You will be sworn in under oath, and the hearing will be recorded. Most of the questions will pertain to information in the bankruptcy papers you file with the court. The hearing typically only takes five to 10 minutes, and most creditors do not attend and ask questions.

How Long does the Bankruptcy Process Take?
Prior to filing bankruptcy you need to complete a credit counseling course. You also need to gather all of the relevant information to complete your bankruptcy petition, which takes time, of course. Once a Chapter 7 bankruptcy is filed, it generally takes about three months to complete. However, you are protected from your creditors beginning the day the bankruptcy is filed — they may not repossess your car, foreclose on your house, garnish your accounts, continue sending you letters or making collection telephone calls, or generally take any other collection activity. If all of your assets are exempt, and provided you have completed a second financial counseling course and paid in full any filing fees, you will receive your order discharging the debts about 60 days after the meeting of creditors hearing. This order will reflect that all of your dischargeable debts have been discharged, and the closing of your case.

Timelines for Chapter 13 are different. Chapter 13 cases run between three to five years, depending on the circumstances.

What is the Fee to File Bankruptcy?
The fee to file a Chapter 7 bankruptcy is currently $335. However, you have the option to pay this fee in three installments over a 90-day period, and you do not need to pay any fee at the time you file the bankruptcy. Under some circumstances, you may be able to extend the payment deadline to 180 days. If your income is low enough, you may be eligible for a full waiver of the filing fee.

What will Happen to My Credit Rating?
A Chapter 7 bankruptcy case will be reported by credit reporting agencies for 10 years from the date of filing. A Chapter 13 bankruptcy case will be reported by credit reporting agencies for seven years. Creditors are sometimes willing to approve credit after bankruptcy, because they know that a financial burden has been lifted and that you may now be able to make regular payments on any new debt. Also, they know that if you filed a Chapter 7 proceeding, you will not be able to declare Chapter 7 bankruptcy again for eight more years, so in some ways you are a better credit risk after filing bankruptcy. If you have completed a Chapter 13 plan, then you have demonstrated that you can handle regular payments on your debt obligations. Some creditors will require an extended period of time after bankruptcy before extending further credit.

Do I need a lawyer to file a bankruptcy case?
The law does not require individuals and sole proprietors to hire a lawyer. However, you may want to consult a lawyer to make sure that bankruptcy is the best option for you at this time, and if so, that you are taking the correct steps to file. Completing all the required documents can be difficult. If you wish to pursue a bankruptcy on your own, you can obtain a packet of information by contacting the bankruptcy court.

Are there Alternatives to Bankruptcy?
Yes. There are many credit counseling agencies that exist to help people who have money problems. Most are nonprofit services offering free advice on how to get out of debt and how to use credit wisely. There is no charge to have a counselor review your financial situation and help analyze your problem. If the service handles your payments to creditors under a debt-management plan, a small monthly contribution may be requested. This fee would be waived if the counselor finds it is not possible because of a very tight program. If you do not have enough money to make even partial payments to your creditors, then most counseling services will be unable to help you and may suggest filing bankruptcy.