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Denis A. Kitchen, P.C. Attorney at Law
Estate Planning, Probate Law, Debt Relief And Other Issues In Williamsville, New York

FAQ About Bankruptcy

What is bankruptcy?

Bankruptcy is a legal proceeding brought in the U.S. Bankruptcy Court, designed to protect individual or business debtors that cannot meet their financial obligations. It is also designed to protect creditors. The Bankruptcy Code, the federal law that governs all bankruptcies, refers to different types of bankruptcy by the chapters in the Code: (Chapter 7, 11, 12 or 13). In a Chapter 7 bankruptcy (a straight bankruptcy or liquidation), the Bankruptcy Court appoints a Trustee to take the debtor's property (except for exempt property), sell it, and distribute it among the creditors. The debtor is then discharged (released) from most debts and doesn't have to pay them. In a Chapter 13 bankruptcy (formerly called a wage earner's plan), the debtor submits a plan to pay the creditors some or all of the debts over a 3 to 5 year period. (Not for the average consumer: Chapter 12 bankruptcy is reserved for family farmers or fishermen. Chapter 11 bankruptcy allows a business time to reorganize and work itself out of debt, but does not grant a discharge.)

Which is better, Chapter 7 or Chapter 13?

With either one you get a discharge of your unsecured debts, but most people prefer to file under Chapter 7. It relieves a person of all unsecured debts (the debts without liens on property you own) right away. A Chapter 13 plan requires monthly payments over 3-5 years that pay your creditors through a trustee a portion of what you owe. You may want to file under Chapter 13 if you are: (1) significantly behind on a mortgage and need to catch up; or (2) you have some non-exempt property that you want to keep (such as a car that's all paid for); or (3) your household income exceeds the median income for this area. Also, some secured debts such as car loans can be reduced if the car is worth less than what is owed and you've been paying on it for at least 2 1/2 years.

Will I lose all my property?

No, some property is exempt (the Trustee can't take it), including: most clothing and furniture; the equity in a home up to $75,000 ($150,000 for a couple); or if you don't own a home, $5000 cash; one car per person up to $4000; pensions; IRAs; most life insurance policies; and certain other items. In a typical consumer bankruptcy, the debtor has no nonexempt property, and there is nothing for the Trustee to take or distribute. These are often called "no asset" cases.

What happens to property that's not exempt?

The Trustee may take nonexempt property including cash, bank accounts and other assets. He may choose not to take property of minimal value or property too troublesome to sell or administer. (Note: Income tax refunds you are waiting for belong to the Trustee, so it is usually best to file your tax return and collect your refund before filing bankruptcy.) The debtor may purchase some property back from the Trustee. In a Chapter 13, you may be able to keep nonexempt property if your plan pays the creditors as much as they would get if that property were sold.

What kind debts are dischargeable?

There are different types of debt: Secured Debts such as home mortgages and auto loans are guaranteed by liens on your house or car. You can avoid the debt, but usually you then have to give up the property. Unsecured Debts have no liens guaranteeing them, and they can be discharged, but not all unsecured debts are dischargeable. Even after the bankruptcy, most taxes, school loans, alimony, child support, fines, and fraudulent transfers will still have to be paid.

Are all my credit card debts dischargeable?

Since most credit card debts are unsecured, they are dischargeable, but there are some exceptions. Charges made without any intent to repay are considered fraudulent. Also, the law presumes that any cash advances taken or luxury goods purchased within 60 days before filing bankruptcy are fraudulent.

How do I "Declare Bankruptcy?"

After a preliminary interview, you will fill out a form to assist your attorney in preparing a Bankruptcy Petition which describes your property, debts, income, expenses, and financial history. (In a Chapter 13, a Plan is also prepared.) You must also attend a debt counseling session with a credit counseling agency. After you review and sign the petition, it is filed electronically in the U.S. Bankruptcy Court along with a $335 filing fee ($310 for a Chapter 13). At that point, all collection efforts by creditors must stop. In about two weeks, you and all creditors receive a Notice of the First Meeting of Creditors scheduled a few weeks later. The meeting is conducted by the Trustee appointed by the court. Creditors can, but seldom do, appear. At the meeting, you are sworn in, asked to confirm the petition and answer any questions the Trustee (and creditors, if present) ask regarding your financial affairs. Occasionally additional information is needed which we would prepare and submit. You must then take your second educational session from a credit counseling agency. Assuming no problems, you will receive a Notice of Discharge after about 3 months in a Chapter 7 case, confirming your release from your dischargeable debts, and the case is closed. In a Chapter 13, you must complete the Plan before you receive your discharge.

How will my credit be affected?

Bankruptcies, along with other credit information, is collected by credit reporting agencies (Equifax, TRW, Trans Union) who will list your bankruptcy on your credit report for about 10 years, and you may find your credit adversely affected. On the other hand, your credit history may already be poor if your payments have been delinquent. Some creditors willingly lend to recently bankrupt debtors since they will usually not be able to file bankruptcy again for another 8 years. Also, you may be able to keep some credit cards if you had no balance owing at the time of the bankruptcy.

PLEASE NOTE: This very brief collection of questions and answers does not cover all relevant questions nor do they cover any subject thoroughly. Specific issues should be discussed with a lawyer. This information pertains only to New York law. [7/15)

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