Frequently Asked Questions About BankruptcyFound out more about chapter 7 & chapter 13 bankruptcy
What do I need in order to file bankruptcy?
In order to complete your petition, your attorney will need copies of your paystubs or proof of income for the past six months, your bank statements for the last three months, and your federal and state tax returns for the past two years with W-2’s or 1099’s. If you own your home or any other real estate, your attorney will also need a copy of your deed, mortgage, and property tax report. Other documents, like lease agreements, may be required depending on your particular case. Here’s a complete checklist for my office.
What is chapter 7 bankruptcy?
Chapter 7 bankruptcy is designed for individuals who lack sufficient income to pay their debt. In order to take advantage of a chapter 7, filers must first pass the “means test,” which is designed to help avoid abuse of the bankruptcy system. In turn, unsecured debt such as credit cards, medical bills, and pay-day lonas, are completely wiped out. In many cases, judgments can be avoided or discharged as well. Chapter 7 bankruptcies are the most common, comprising about 70% of filings each year.
How much does it cost to file chapter 7 bankruptcy?
The United States Bankruptcy Court charges a $335 filing fee for chapter 7 bankruptcies. For most chapter 7 cases, I charge a flat $1,500 which includes the filing fee to the court. This amount can be paid in installments via a payment plan. The cost of the required consumer credit counseling and debtor education courses (generally $40 altogether) is paid directly to the course provider.
What if I cannot afford to file chapter 7 bankruptcy?
Don’t worry! There are options available to help you file and flexible payment plans are available. For example, we can request that you be allowed to pay your filing fee to the court in installments starting at $84 per month. This is often helpful for those in need of an emergency filing.
How long does a chapter 7 bankruptcy last?
Chapter 7 bankruptcies generally last four months from filing the petition to discharge. Sometimes a trustee will hold a case open to collect tax refunds or non-exempt property, but you will still receive your discharge four months from filing the petition.
Will I lose my property in a chapter 7 bankruptcy?
Generally no. For individuals filing chapter 7 bankruptcy, Indiana law allows them to keep $19,300 in equity in a home, $10,250 worth of personal property, and $400 in cash at the time of filing. These amounts are doubled for married couples filing jointly. Keep in mind though that personal property is not valued at retail prices, but rather what a willing buyer would pay for them (often garage-sale or Craigslist prices). This is how many filers are about to keep all of their property in a chapter 7 bankruptcy.
Can I keep my home and car in a chapter 7 bankruptcy?
Generally yes. In most cases, filers in a chapter 7 bankruptcy either owe more than what the property is worth or their interest in the property is exempt. This means that the trustee will not take the property. BUT, if you are behind on your payments or have more equity than what can be protected by exemptions, then a chapter 13 may be the best option to protect your home.
How much debt do I need in order to file chapter 7 bankruptcy?
There is no minimum amount of debt required to file chapter 7 bankruptcy. Nor is there a maximum amount of debt that can be included in a chapter 7 bankruptcy.
Are there limitations to filing chapter 7 bankruptcy?
Yes. First, you cannot have received a discharge in a chapter 7 bankruptcy filed 8 years prior to your new case. Second, filers must first pass the “means test”; meaning their annualized income is at-or-below the state median income. Don’t let this discourage you though. Median income varies with household size and location. The means test also takes into account certain IRS living allowances like car payments, withholding, healthcare, and childcare. This could ultimately allow you to be eligible for a chapter 7 bankruptcy even if your income is over the median for central Indiana.
What are exemptions?
Exemptions are designed to protect you from emerging from bankruptcy completely broke and destitute. Indiana law allows you to protect or “exempt” certain property from seizure and sale by the bankruptcy trustee and your creditors. For example, an individual filing bankruptcy is allowed to exempt $400 in cash, securities, and other intangibles, $19,300 in equity in a home, $10,500 of personal property (clothes, equity in cars, motorcycles, etc.) and an unlimited amount in a qualified retirement savings account and health savings account. Since property is valued at “fair market value” or what a willing buyer would pay for it in its current condition (often referred to as “garage sale” prices), this is how individuals are often able to go through bankruptcy without losing any property.
What is a "no asset" chapter 7 bankuptcy?
Most chapter 7 bankruptcies are “no asset” cases; meaning that there are no non-exempt assets available for the trustee to sell and pay your creditors. That’s a good thing! The trustee will then bow-out of the case, you receive your discharge, and the case will be closed.
What if I have non-exempt property, like a large tax refund coming?
Sometimes, even with the best planning, there will be property whose value simply exceeds what we can protect through exemptions. A good example are tax refunds due the year after filing. Since bankruptcy trustees can take a pro-rated percentage of tax refunds, and Indiana law only allows a $400 exemption for single filers, bankruptcy trustees will often ask that a portion of the tax refunds be turned over to pay your creditors. In that case, you will still receive a discharge, but the case will be held open until your tax returns and refunds are provided, the trustee returns the difference to you, and then spreads the remaining amount out among your creditors.
I received a notice that property may be available for distribution. What happens then?
This notice signifies that there may be non-exempt property available for the trustee to take and sell to pay your creditors. Often, this is in the form of pro-rated tax refunds or preferential payments made to particular creditors. First, compliance with the trustee’s instructions will help protect your discharge. Second, the court will issue notice to your creditors that they must file a proof of claim before a certain deadline in order to receive a portion of any funds collected by the trustee. Third, the trustee and your attorney will evaluate the proof of claims, object if necessary, and determine the percentage paid to each creditor (this is based on the size of claim divided by the total amount of claims made x the amount of funds available). Checks are then issued by the trustee and the case will later be closed. If there are more funds available than claims made, then the difference is returned to you.
What is a "preferential payment"?
A preferential payment is a payment made to one particular creditor to the exclusion of all other creditors. Think of it as playing favorites. I often see this with regard to clients who want to repay a family member or think that it may entice the lender to keep a line of credit open. unfortunately, this causes issues as bnankruptcy trustees are allowed to sue that creditor for return of the payment if it was made within 90 days of your bankruptcy filing and no services or value were received by you in exchange for the payment. This does not affect your discharge, but it obviously causes grief for the creditor and may result in your case being held open for the trustee to collect the funds and administer them for your other creditors’ benefit.
I have a family member who loaned me money. Do I have to list them as a creditor? Can I pay them back before filing?
First, please see the question above about preferential payments. Paying a family member back before filing is dangerous and may cause the bankruptcy trustee to sue them for return of the payment. Obviously, this isn’t the best situation to be in if you anticipate seeing them at the next family reunion. Second, unfortunately, yes, you obligated under federal law to list all of your creditors. Including Uncle Bob who is selling you the truck.
What happens if I file bankruptcy and I have a legal claim against someone? Can I still sue them?
No. If you file bankruptcy and have a legal claim against someone (most often from a car accident or slip-and-fall), then that claim becomes subject to the control of the bankruptcy trustee. He or she will determine whether there is valyue in pursuing the claim. If so, they will request your assistance in pursuing the claim, which means that you may be required to testify at any hearings, depositions, or trials in the matter. That being said, many trustees will return a percentage of any recovery to you as compensation for your time and cooperation. The remaining amount is then divided among the trustee, the attorney handling the claim, and any creditors in your case.
What happens if I receive an inheritance after I file chapter 7 bankruptcy?
Uh oh. There is a special provision in the Bankruptcy Code that allows a trustee to recover for the benefit of your creditors an inheritiance received within six months of your bankruptcy filing. This means that any non-exempt funds or property received could be used by the trustee to pay your creditors. It doesn’t happen too often, but you’ll want to be sure to disclose to your attorney if you have any ill friends or family and anticipate receiving an inheritance.
What is chapter 13 bankruptcy?
Chapter 13 bankruptcy is designed for those with a regular source of income, regardless of whether they are working or receiving Social Security, disability, or retirement benefits. In a chapter 13 bankruptcy, a portion of the debt is repaid over 36 to 60 months through a repayment plan. This plan is approved by the court and becomes binding on all creditors. Payments are then collected by a chapter 13 bankruptcy trustee and distributed among the creditors. A benefit of a chapter 13 bankruptcy is that it allows the ability to “cure” or make-up past due mortgage and auto loan payments over 36 to 60 months while the filer can retain the home and car. It also allows for past-due student loan and tax payments to be spread out among this period and often on better terms than what would be offered by the government.
How much does it cost to file chapter 13 bankruptcy?
The United States Bankruptcy Court charges a $310 filing fee for chapter 13 bankruptcies. Since chapter 13 cases can last upwards of 60 months, I charge a flat $3,500 which includes the filing fee to the court. Only a small portion of this is required to file your case and the remaining balance can be paid through the life of your chapter 13 plan. The cost of the required consumer credit counseling and debtor education courses (generally $40 altogether) is paid directly to the course provider.
How long does a chapter 13 bankruptcy last?
Chapter 13 bankruptcies can last upwards of 60 months. The actual plan period depends on a variety of factors: whether the filer is above or below the median income, their disposable monthly income, amount of non-exempt property, and amount of claims filed by creditors in the case. So, while a plan may initially propose payments from 36 to 60 months, it’s quite possible for a chapter 13 bankruptcy to end much earlier.
Are there limitations on filing chapter 13 bankruptcy?
There are limits on the amount of debt included in a chapter 13. Filers must owe less that $307,675 in unsecured debt (credit cards, medical bills, utility bills) and less than $922,975 in secured debt (mortgage, car loans, title loans). A discharge won’t be granted if the filer received a discharge in chapter 7 bankruptcy within four years of filing or a discharge in a chapter 13 bankruptcy two years before filing the new case.
Can I keep my property in a chapter 13 bankruptcy?
Yes! That’s one of the benefits of a chapter 13 bankruptcy. Since filers are proposing a plan to repay some or all of their debt using their disposable income, they are allowed to keep their property.
Can chapter 13 bankruptcy help stop foreclosures and repossessions?
Yes. A chapter 13 bankruptcy will stop a foreclosure or repossession provided that the arrearage is addressed and funded in a chapter 13 plan. Not only can it halt a sheriff’s sale or force a lender to return a car, but chapter 13 bankruptcy allows filers an opportunity to catch up on their past-due payments. These payments can be stretched out over 60 months.
My car was just repossessed. Can chapter 13 bankruptcy help me get it back?
Yes! As long as the car has not gone to auction, you can use a chapter 13 to help gain it back. The chapter 13 has the added benefit of allowing you to make-up the past due payments.
I owe more than my car is worth. Can chapter 13 help me lower my payments?
Depending on whether you purchased the car over 910 days prior to filing bankruptcy, and certain other factors, it may be possible to “cram-down” the car. This means that you propose to pay only the fair market value of the car and at an interest rate closer to 3-5% per year. In turn, the unsecured portion of the loan is paid pennies on the dollar like other unsecured debt. This helps lower your car payments over the life of your bankruptcy and reduce the amount owed down to the real value of the car.
What happens if I have a co-signer on my car loan and only I file chapter 13 bankruptcy?
Another benefit of a chapter 13 bankruptcy is that the co-signer is protected from contact from creditors – just like the party filing bankruptcy. This is called an extension of the “automatic stay.”
What if I don't want to keep my car anymore? Can I let it go back to the lender as part of my bankruptcy?
Absolutely! Regardless of whether it’s a chapter 7 or chapter 13 bankruptcy, you have the option of surrendering the car to the lender in return for complete relief from the debt. Bankruptcy is one of the very few times that you can get out from under a bad auto loan without liability. I’ve often encountered bankruptcy trustees who will actually encourage debtors to let their vehicles go in order to take advantage of this important benefit.
What happens to my debt at the end of my chapter 13 bankruptcy?
A discharge is entered upon the successful completion of the chapter 13 plan. You are then relieved of any further liability for any unsecured debt (credit cards, medical bills, utility bills, etc.) left unpaid. You will be responsible for continuing payments on any secured debts, such as mortgages and car loans, assuming that you kept the property.
What is a chapter 13 plan?
A chapter 13 plan serves as notice to your creditors and the chapter 13 trustee as to how you intend to repay all or a portion of your debt. Think of it as a set of instructions. The plan provides an overview as to the amount of your monthly payments, length, and total amount to be paid. It then breaks down the various types of creditors, such as administrative, secured, and unsecured. It also informs creditors of whether certain claims will be “crammed-down”, avoided, or paid outside of the plan directly to creditors.
What happens if I later cannot make my plan payments?
The great thing about a chapter 13 bankruptcy is that your plan isn’t carved into stone. The courts and trustees recognize that life happens. If there is an unexpected expense or a temporary change in income, we can request a modification to reflect the change in expenses or income. If you can no longer make the plan payments, we may be able to apply for a hardship discharge or otherwise convert your case to a chapter 7 bankruptcy (provided that you qualify at that point).
What are the debtor education and financial management courses?
As part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Congress decided that consumers filing bankruptcy must take a credit counseling course before being able to file their bankruptcy case, and a second credit counseling before they are able to receive their bankruptcy discharge. The pre-filing course covers factors leading to bankruptcy, alternatives to bankruptcy, and determining your current income and expenses. The post-filing course, called “personal financial management,” discusses how to use credit responsibly, establishing household budgets, and how to avoid falling back into a bankruptcy situation.
How much do the debtor education and financial management courses cost?
The required consumer credit counseling courses can vary in price from provider to provider, but it generally costs no more than $40 for a household to complete. There are several providers serving the Southern District of Indiana. I typically suggest GreenPath and Debtorcc.org due to their customer service and promptness in emailing the certificates of completion.
How long do the debtor education and financial management courses last?
The pre-filing counsel credit counseling course can take upwards of 90 minutes to complete. The post-filing debtor education course takes a minimum of 2 hours to complete. Both can be completed either online or over the phone.
If I file bankruptcy, will I have to go to court?
In most bankruptcy cases, you only have to go to a proceeding called a “meeting of creditors” or “341 meeting.” These meetings are typically held in a conference room and usually last five-to-ten minutes. The trustee will ask simple questions about your petition and schedules with an eye towards verifying the accuracy of the information listed. In rare instances, creditors may appear and ask a few questions.
In some courts, chapter 13 debtors may need to reappear for a “confirmation hearing” prior to the court approving their chapter 13 plan. However, here in the Southern District of Indiana, debtors are only required to attend the meeting of creditors and their plans are confirmed without a formal hearing.
Can the bankruptcy trustee take my tax refund?
Yes. However, whether the trustee takes your tax refund depends on a variety of circumstances. For instance, if the refund is fairly small, say $1,000 or less, the trustee may determine that it’s not cost-effective to intercept it. The trustee is also only entitled to a pro-rated portion based when your case was filed. Finally, any portion of the tax refund coming from the Earned Income Credit is 100% exempt, meaning the trustee cannot use it to pay your creditors.
Will I lose my money in a medical savings account if I file bankruptcy?
No. Medical care savings accounts and health savings accounts are 100% exempt. This means that the funds cannot be taken by the trustee and be used to pay your creditors.
Will I lose my retirement account or pension if I file bankruptcy?
No. Qualified retirement savings accounts such as 401(k), 403(b), IRA, PERF, pensions, etc. are 100% exempt. This means that the funds cannot be taken by the trustee and be used to pay your creditors.
Can my utilities be disconnected if I file bankruptcy?
No. Public utilities, such as gas, electric, and water, cannot disconnect you or refuse service because you filed for bankruptcy. They can, however, demand that you provide a deposit for future services and you do have to pay bills which arise after the bankruptcy is filed.
How much can I have in my bank account at the time I file bankruptcy?
In Indiana, a person filing individually may exempt (protect from creditors) up to $400 in cash and other intangibles. For a married couple, it’s $800. Keep in mind that this the total amount from all accounts – checking, savings, money market, CD’s, tax refunds, rental deposits, and even the cash in your pocket. That said, proper bankruptcy planning can help reduce potential exposure and help protect your hard-earned money.
How much can I have in my bank account after I file bankruptcy?
Many believe that you cannot deposit additional funds to your checking or savings accounts after you file bankruptcy. Not true. After filing, you can continue to deposit money to your accounts. However, a trustee will ask to see your bank statements for the three months prior to filing and for the month of filing. This is to verify that no large sums of cash were withdrawn prior to filing and then re-deposited. The trustee will also scrutinize the bank statements to ascertain whether any unusual transfers were made to others.
How do I find out who my creditors are?
Back in the day, you had to visit sites like www.annualcreditreport.com, download, and print your credit reports from each of the three major credit bureaus. Now, as part of the bankruptcy package, I pull your credit reports electronically and import the information directly into your bankruptcy petition. That said, some debts, like medical bills and store cards, don’t get reported immediately or until they are sent to collections. If you have medical or other debt which you think may not be reported, then you’ll want to provide the most recent statements or contact those creditors for an updated balance and account number.
What if I forget to list a creditor in my bankruptcy case?
If you forgot to list a creditor in your bankruptcy case, all is not lost. If it is a chapter 7 “no asset” case, meaning that there are no non-exempt assets available to pay your creditors, then it’s a simple matter of sending the creditor a letter explaining that you filed bankruptcy, there were no assets available to pay the debt, a discharge was entered, and they should go away. If the creditor is still persisting, or there were assets available but they weren’t able to participate, then it’s possible to reopen the case, list the creditor, and then let the case close.
What should I do if my credit report is inaccurate or incorrect?
The three major credit bureaus (Experian, Equifax, and Transunion) offer a procedure to dispute inaccurate and/or incorrect information. This involves submitting to the bureaus a detailed written description of the inaccurate or incorrect information, evidence that the debt was listed in your bankruptcy and discharged, and a request the information be corrected or removed. As a reporting agency’s failure to correct inaccurate information can carry certain civil liability and penalties, it could be beneficial to enlist the aid of an attorney to dispute the entries.
How should discharged debts be listed in my credit report?
After you receive a discharge in bankruptcy, your credit reports should list your debts as having a zero balance; meaning that you do not owe anything on the debt. You should always check your credit report three to six months after discharge as incorrectly listed debts could negatively impact your credit score.
How long does a bankruptcy stay on my credit report?
A bankruptcy filing can stay on your credit report for ten years. But, filing for bankruptcy could actually help your credit as it wipes out your old debt, frees up cash to pay bills, and creditors know that you cannot file bankruptcy again for a certain period of time. You’re now considered a decent credit risk in their eyes!
Can only one spouse file for bankruptcy?
Yes! There’s no requirement that both spouses have to file bankruptcy together. But, if most of the debt is jointly owed, then it may make sense to file together as it saves on the filing fee and avoids duplication of work. A careful analysis should also be made to make sure that the combined household income doesn’t force the filing spouse into a chapter 13 bankruptcy.
If one spouse files for bankruptcy, will it affect the other spouse's credit?
Generally, one spouse’s bankruptcy case should not affect the other spouse’s credit. However, if the bankruptcy includes a debt owed by both spouses, then the debt may be reported on the non-filing spouse’s credit report as in bankruptcy. On the plus side, if it’s a joint debt in a chapter 13 case, then the automatic stay will extend to the other spouse even if they didn’t file for bankruptcy. This means that creditors cannot take action against the non-filing spouse without first going through the bankruptcy court.
Can I own property after a bankruptcy?
Yes, absolutely! Many people believe that you cannot own anything after filing for bankruptcy. This is the furthest from the truth. You can continue to own your exempt property and property you acquire after the bankruptcy was filed. However, if you receive an inheritance, life insurance proceeds, or a property settlement within 6 months after filing for bankruptcy, that money may have to be paid to your creditors if the money or property is not exempt.
What debt is discharged in a bankruptcy?
Basically all other debt is dischargeable in a bankruptcy case; meaning that you won’t be personally responsible for the debt after your bankruptcy is complete. This includes mortgages and auto loans, judgments, credit cards, pay-day loans, medical bills, and the like. However, on secured debt like mortgages and auto loans, you’ll need to continue paying the debt if you want to keep the home or vehicle.
What debt is not discharged in a bankruptcy?
There are certain debts that are generally non-dischargeable in bankruptcy. This means that you remain personally responsible for them even if you complete your bankruptcy case and receive a discharge. These debts include student loans, most taxes, alimony, domestic and child support, criminal fines and restitution, and debts incurred as a result of wrongful conduct, fraud, or larceny.
What is a bankruptcy trustee?
A trustee in bankruptcy is a person appointed by the United States Department of Justice under the U.S. Trustee Program or by the creditors in a bankruptcy case.
What does a bankruptcy trustee do?
A bankruptcy trustee’s role varies on whether it is a chapter 7 or chapter 13 bankruptcy. In both cases, the bankruptcy trustee will review your petition for accuracy and completeness, look for fraud or abuse, and will try to recover the most money possible for unsecured creditors in the bankruptcy case (although most chapter 7 bankruptcies are “no asset” cases, so there’s nothing for the trustee to take and sell). Chapter 13 trustees will review your chapter 13 plan, income and expenses, and collect and distribute the chapter 13 plan payments.