What is Bankruptcy?

Bankruptcy is a legal proceeding in which a person who can not pay his or her bills can 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 a fresh financial start.
• 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.
• 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 Will Happen to My Home and Car If I 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 also several ways that you can keep collateral or mortgaged property after you file a chapter 7 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 can not 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;
• Most fines and penalties owed to government agencies;
• Most taxes and debts incurred to pay taxes which can not be discharged;
• Student loans, unless you can prove to the court that repaying them will be an “undue hardship”;
• Debts not listed on your bankruptcy petition;
• 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;
• Debts incurred by driving while intoxicated;
• 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 the creditor).

What Different Types of Bankruptcy 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 an individual to give up property which is not “exempt” under the law, so the property can be sold to pay creditors.  Generally, those who file chapter 7 keep all of their property except property which is very valuable or which is subject to a lien which they can not avoid or afford to pay.  Click for more information on Chapter 7.
• Chapter 11, known as “reorganization,” is used by businesses and a few individuals whose debts are very large.
• Chapter 12 is reserved for family farmers and fishermen.
• Chapter 13 is a type of “reorganization” used by individuals to pay all or a portion of their debts over a period of years using their current income.   Click for more information on Chapter 13.

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.

Why Do I Need 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 complex, and you may lose property or other rights if you do not know the law and follow it exactly.  It takes patience and very careful preparation in order to protect your rights and your property.

What Questions May My Attorney Ask Me?

When first meeting your 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?
• To whom do you owe money and what are the balances?
• Is any action about to occur to foreclose or repossess property, to attach your wages or bank account, or to shut off utility service?
• What are your goals in filing the case?