Bankruptcy Basics

What is Bankruptcy?

A bankruptcy is a legal proceeding in which a person who can’t pay his or her bills can get a “discharge” of some or all of their debts.  The primary purpose of bankruptcy is to allow individuals and families to recover from their economic setbacks and have a fresh financial start.  At the same time, bankruptcy functions to ensure that all of a person’s creditors are treated equally and fairly.  

A bankruptcy may allow you to:

  • Stop a foreclosure and catch up on missed payments
  • Prevent a car repossession or even force the creditor to return your car after repossession
  • Eliminate the legal obligation to pay all or most of your debts
  • Stop wage garnishments and in some cases get wages that were already taken returned to you
  • Stop debt collection calls and harassment
  • Restore or prevent termination of utility service
  • Protect your property

Most individuals file under Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code.  Both require that the debtor disclose all assets and liabilities to the court.

 

Chapter 7

Chapter 7, otherwise known as a “liquidation,” is the simplest type of bankruptcy.  Chapter 7 may be appropriate for a person who does not own a lot of valuable property and whose income is less than the state median income.  The bankruptcy trustee may liquidate any “non-exempt” property the debtor owns and use the proceeds to pay the person’s creditors.  In Maryland, a debtor is entitled to exempt — or protect — at least $12,000 worth of personal property and approximately $23,000 of equity in a home.  A Chapter 7 bankruptcy often can be completed in 4-5 months from date of filing to date of discharge.  Not everyone is eligible to file a Chapter 7 bankruptcy.

Chapter 13

Chapter 13, otherwise known as a “reorganization,” is for people who have the ability to repay some or all of their creditors, are seeking to protect valuable assets, and/or are seeking to cure the arrears on a mortgage or other secured debt such as a car loan.  The debtor proposes a “plan” showing how he or she will repay some or all of his or her debts in either three or five years (depending on income and other factors).  The plan involves making a monthly payment to the bankruptcy trustee who then pays the person’s creditors, either in part or in full, depending upon the debtor’s ability to pay.  In order to file a Chapter 13, you need to have enough income to pay for your ongoing living expenses, make payments on your mortgage and/or car loan (if you intend to keep your home or car), and make an additional monthly payment toward your debts.

Frequently Asked Questions

How will bankruptcy affect my credit?

Your bankruptcy will stay on your credit report for ten years.  At the time you consider filing for bankruptcy protection, your credit may already be in bad shape. Bankruptcy actually can give you a fresh start and enable you to rebuild your credit.

Will bankruptcy wipe out all of my debts?

Yes, with some exceptions.  Normally, you cannot get a discharge of the following types of debts: domestic support obligations such as child support or alimony; most fines and penalties owed to government agencies; most tax debts, particularly those incurred within 3 years of filing bankruptcy; student loans unless you can prove to the court that paying them will be an “undue hardship”; debts not listed in your bankruptcy; loans you got by knowingly giving false information to a creditor, who reasonably relied on it in giving you the loan; debts resulting from “willful and malicious harm”; and debts incurred by driving while intoxicated.

Can I keep my car if I file for bankruptcy?

It depends.  In a Chapter 7, whether you can keep your car depends on whether you are behind in your car payments, how much (if any) equity you have in the car (the car’s value minus the loan balance), and any available exemptions you can take to protect that equity.  If you choose to keep and are able to keep the car, you have options of redeeming the car (paying its full market value to extinguish the lien) or reaffirming the debt (promising to pay the loan in full) or simply continuing to pay, which may come with some risk that the creditor could repossess the car once the automatic stay is no longer in place.  In a Chapter 13, if you are behind on car payments, you may propose a plan that cures the arrears and allows you to keep the car.  You may even be able to reduce the amount of the loan to equal the car’s fair market value.  Seek an attorney’s advice regarding how a bankruptcy might affect your ability to keep your car.

Will I have to go to court?

Typically, a court appearance is not required, but you will have to attend a mandatory “meeting of creditors” about 45 days after you file bankruptcy.  At the meeting of creditors, the trustee — who represents your unsecured creditors — will ask you a series of questions about your case.  Although the meeting does not take place in a courtroom, you must take an oath to tell the truth and the meeting is recorded.  In a Chapter 13 case, you may be required to attend a “confirmation hearing,” which is the proceeding during which the judge will approve (“confirm”) or reject your proposed plan of reorganization.  The confirmation hearing takes place at the federal courthouse.  Often, however, you will not be required to attend.  If your case includes an “adversary proceeding” (litigation related to your bankruptcy), you may need to go to court just as you would in any other type of court action.

Can I file bankruptcy without an attorney?

You are not required to have an attorney.  However, the law is complex, there are numerous procedural requirements you must comply with in order to receive a discharge, and you may lose property or other rights if you do not know the law.  Hiring an experienced bankruptcy attorney is advisable for these reasons.

Can I transfer property to a family member or friend to keep it out of the bankruptcy?

No. You must honestly disclose all of your assets.  Bankruptcy fraud is a crime that can cause a person to lose their discharge and go to prison.  Transfers of property, whether before or during the bankruptcy, for the purpose of avoiding a creditor’s claim, can be voided by the court.