Frequently Asked Questions

about Debts & Bankruptcy

 

What is bankruptcy?

Bankruptcy is a legal proceeding brought in the U.S. Bankruptcy Court, designed to protect an individual or business debtor that cannot meet its financial obligations, and also designed to protect the creditors. The Bankruptcy Code, the federal law that governs all bankruptcies, refers to different bankruptcies 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, the debtor submits a plan to pay the creditors some or all of the debts over a 3 to 5 year period, usually through a wage deduction. If your household income exceeds the median income for this geographical area, you have to file a Chapter 13 rather than a Chapter 7. Debtors can also protect certain nonexempt property they don’t want to lose, and they can catch up on a home mortgage if they’re behind. Also, some car loans can be reduced if the car is worth less than what is owed. Not for the average consumer: Chapter 12 bankruptcy is reserved for family farmers or fisherman. Chapter 11 bankruptcy (a reorganization) allows a business time to reorganize and work itself out of debt, but does not grant a discharge. You may have to file a Chapter 13 rather than a Chapter 7. If you earn above a certain amount, you may have to file a Chapter 13 instead of a Chapter 7. If your household income is above the median income for New York ( 1 person-$55,333; 2-$71,343; 3-$83,887; 4-$102,384.

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 $85,400 ($170,800 for a couple); or if you don't own a home, $5700 cash; plus one car per person up to $4,550; these figures are adjusted every 3 years for inflation. Pensions; IRAs; most life insurance policies; and certain other items are also exempt. In a typical consumer bankruptcy, the debtor has no nonexempt property and almost everything is exempt, so there is nothing for the Trustee to take or distribute. These are 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 file your tax returns and collect your refund before filing bankruptcy.) In a Chapter 7, the debtor may purchase some property back from the Trustee. In a Chapter 13 the debtor may be able to keep nonexempt property if your plan pays the creditors as much as they would receive if that property were sold.

What kind debts are dischargeable?

There are several 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 then you have to give up the property, or keep making the payments and keep the property. Unsecured Debts have no liens guaranteeing them and do not have to be repaid. But not all debts—some are non-dischargeable. Even after the bankruptcy, most taxes, school loans, alimony, child support, fines, and fraudulent transfers will still have to be paid.

How will my credit be affected?

Bankruptcy data, as with other credit information, are collected by credit reporting agencies (Equifax, TRW, Trans Union) who will list your bankruptcy on your credit report for about 10 years (shorter in Chapter 13 cases), and you may find your credit adversely affected. Of course your credit history may already be poor if your payments have been delinquent. Some creditors willingly lend to recently bankrupt debtors since you are usually not allowed another bankruptcy discharge for 8 years. Also, you may be able to keep a credit card on which you had no balance owing at the time of the bankruptcy. In any event, the way to rebuild credit is with regular mortgage or car payments over time. You may to apply for a credit card (even one with a low limit or requires a deposit to cover the balance), but you should plan to pay off the balance promptly every month.

Are all my credit card debts dischargeable?

Most credit card debts are unsecured, and they are dischargeable, but there are some exceptions. Charges made without the intent to repay are considered fraudulent, and 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 forms to assist your attorney in preparing a Bankruptcy Petition that describes your property, debts, income, expenses, and financial history. (In a Chapter 13, a Plan is also prepared.) You must also complete a debt counseling session with an approved credit counseling agency. (Most people do this online for about $20–25) After we prepare the petition and schedules, you review it, sign the petition, and we file it electronically in the U.S. Bankruptcy Court along with a $335 filing fee ($310 for a Chapter 13). At that point, you have “declared bankruptcy.” All collection efforts by creditors must stop. In about three days you and all creditors receive a Notice of the First Meeting of Creditors scheduled a about a month later. The meeting is conducted by the Trustee appointed by the court. Creditors can appear, but rarely do. You will be sworn in, show your photo ID and Social Security card, and be asked to confirm your signature on the petition. You must answer any questions the Trustee (and creditors, if present) ask regarding your financial affairs. You must take your second educational session from the credit counseling agency before your case is closed. Assuming no problems, you will receive a Notice of Discharge in a Chapter 7 after about 3 months, confirming your release from your dischargeable debts, and the case is closed. In a Chapter 13, after seeing the trustee, you appear in front of the judge for approval of your Plan, and you must complete the Plan payments (three to five years) before you get a discharge and the case is closed.

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. The information on exemptions pertains only to bankruptcies in New York.