Common Bankruptcy Questions

Bankruptcy, a legal process, provides individuals, couples, and businesses with a fresh financial start by temporarily or permanently preventing creditors from collecting on certain types of debts. It helps people who can no longer pay bills. When the legal procedure for bankruptcy is complete, it provides a discharge, a court order, that confirms to creditors that individuals, couples, or businesses, who are granted the discharge, do not have to repay certain types of debts. When the discharge is permanent for the full amount of debt owed a creditor, it disallows that creditor from trying to collect on that debt.

How Can Filing Bankruptcy Help You?

Filing bankruptcy can give you a fresh financial start by eliminating your legal obligation to pay most types of debt. Once you file bankruptcy, harrassing calls will stop immediately. The automatic stay, a temporary injunction, requires creditors to stop calling. Once the automatic stay is granted, it also means creditors must stop any process for repossessions, foreclosures, or garnishments. It is a type of time out until the bankruptcy process has been completed. Stopping foreclosures, garnishments, and repossessions can give you the opportunity to catch up on payments, while the bankruptcy process is pending.

What will Bankruptcy Not Do for You?

Filing bankruptcy is not the resolution for all types of debt. For example, typically, filing bankruptcy will not eliminate debts owed to secured creditors. Secured creditors are creditors, who hold an interest in property, usually homes, buildings, or vehicles. Although bankruptcy may help restructure some types of secured debt, it will not discharge them. Also, it usually will not discharge certain types of debts, such as: alimony, child support, student loans, some taxes, and court fines and penalties.

Also, it is important to understand that debts that where either not included in the bankruptcy petition or incurred after the bankruptcy petition was filed will not be discharged either.

Finally, if you are the primary debtor on a loan that someone else has co-signed for you, bankruptcy may discharge the loan in regards to your debts. However, the co-signer(s) may still have to repay part of even all of the loan.

How Much Debt is Required to File Bankruptcy?

Bankruptcy experts suggest a minimum of $15,000 in debt. You could file bankruptcy with less debt. However, you risk the damage to your credit reports outweighing your benefits from filing bankruptcy. Also, you risk being able to persuade the bankruptcy court to grant you a discharge for your debt. Instead of just looking at a dollar amount, it is more important to speak to a bankruptcy attorney and consider the following red flags that indicate whether or not filing bankruptcy may be a good option for you:

• Paying off your credit card debt would take five years or longer;
• Considering taking money out of your retirement account to pay your bills;
• Wages are being garnished;
• House is about to be foreclosed;
• Getting ready to retire and will be switching to a fixed income that will not cover your debts; and/or
• Creditors are harassing you constantly.

If you are experiencing one or more of these types of situations, these are red flags you should consider filing bankruptcy. It is more than just a dollar limit, as you should consider your overall financial situation and plan.

What Information Do You Need to File Bankruptcy?

The information you need to file bankruptcy includes basically all of your financial information. In order to file bankruptcy, you need to include all of your debts and income, as well as, additional information to determine if you qualify.  When you work with a bankruptcy expert like Trezza & Associates, they will provide you with a workbook, which will walk you through all the information you need to compile. Also, if you are having difficulty locating the information you need, they will help you obtain the data.

Including all of your debts is extremely important. Unfortunately, when you file bankruptcy, you cannot exclude specific debts from your petition. Also, if a debt is not included as part of your bankruptcy petition, it will not be included as part of the discharge. It is imperative you spend adequate time accurately collecting your financial data, so your information is reported correctly. This will make the best use of both your time and resources.

What Type of Bankruptcy Should You File?

For individuals, there are two main types (chapters) of bankruptcy: Chapter 7 and Chapter 13. There is another strategic plan of filing both, called Chapter 20 (7 + 13). Determining what type of bankruptcy you should file will depend on several factors including: your specific financial situation, your goals of filing bankruptcy, timeframe you want to work within, and whether or not you qualify.

Chapter 7 bankruptcy is filed more often because it is fast, effective, and does not require payments to be made over time. Also, people who file Chapter 7, are allowed to keep a certain amount of exempted property, which cannot be taken as part of the bankruptcy process.

Chapter 13 bankruptcy is chosen by people, if they are eligible, because it gives them an opportunity to establish a payment plan. It allows them to “reorganize” their debt, so it is more manageable. It helps people who have a steady income and are experiencing issues other than consumer debt, such as: foreclosure, student loans, and/or tax obligations. Chapter 13 helps people who have debt that may not be dischargeable as part of the bankruptcy process, but who would benefit from a manageable payment plan. The payment plan is set up usually to repay the debt over the next 3 – 5 years.

There are some situations where it is advantageous for individuals to file both Chapter 7 and Chapter 13 bankruptcy, known as Chapter 20 (7 + 13). Although, there actually is no such thing as a Chapter 20, it is just filing both Chapter 7 and Chapter 13. Chapter 20 works best for people who have too much unsecured (usually, credit card) debt that would make a payment plan too expensive and are close to foreclosure or have undischarged debt that could go into through the “reorganization” process of Chapter 13.

How Long Does It Take to Complete the Bankruptcy Process?

How long it takes to complete the bankruptcy process depends on which chapter of bankruptcy you file. Chapter 7 bankruptcy, typically, is the fastest form of bankruptcy to file. After you gather all your needed information and complete your financial course, it, typically, takes 3 – 4 months to close the case after it has been opened.

Chapter 13 bankruptcy takes much longer. Typically, the bankruptcy court requires you to complete your payment plan before the judge will grant you a discharge and close your case. The payment plan for Chapter 13 bankruptcy, typically, takes 3 – 5 years to complete, depending on how long you need to pay off your debt. This means it can take almost 6 years to close a Chapter 13 bankruptcy case.

Do I Have to Complete a Financial Class?

To receive a bankruptcy discharge in either Chapter 7 or Chapter 13, you need to complete a personal financial management class. The financial class, also known as the predischarge debtor education course, is easy and can be completed online from your home. If you do not have Internet or a computer, you can even complete it on your phone.  It only takes approximately one hour to complete the class. The class helps teach individuals how to use credit wisely and manage money following filing for bankruptcy. Once you complete the class, you will receive a certificate confirming you have finished the class. You cannot fail the class, and the bankruptcy judge will not look at the results.

Usually, if you fail to file the financial class’ certificate of completion with the bankruptcy court by the deadline, the bankruptcy court will close your bankruptcy case. In order to reopen your case to obtain a discharge, you will need to pay the fees and file a motion to reopen your case. A lot of work and extra expense that is easily avoidable by completing the class in a timely manner.

What Types of Debt are not Dischargeable in Bankruptcy?

Certain types of debt are not dischargeable in bankruptcy. Filing bankruptcy will not help you eliminate student loans, recent taxes, child support, alimony or domestic support obligations, and civil or criminal fines.

Depending on the type of debt, although it may not be dischargeable, you may qualify to have it reorganized under Chapter 13 bankruptcy. This can help make payments more manageable.

If You File Bankruptcy What Will Happen to Your Home?

If you file bankruptcy, what will happen to your home will depend on your financial situation and what chapter of bankruptcy you file. If you qualify and file Chapter 13 bankruptcy, you can save your home. Filing Chapter 13 bankruptcy allows you to keep all of your assets. Whatever you are behind on your mortgage, filing Chapter 13 bankruptcy will allow you to stop the foreclosure and pay the amount that is past due on your home over a period of five (5) years. Successfully completing the Chapter 13 repayment plan can save your home.

When you file Chapter 7 bankruptcy, you must give up any assets that are not exempt. However, if the discharge is granted, you will not have to repay any of your debt.  In Arizona, you are allowed a $150,000 exemption for your home. For example, if your home’s market value is $250,000, but you have a $200,000 balance on your mortgage, you can claim the $50,000 as an exemption for your home (way below the $150,000 allowable exemption).

If the value of your home is above the allowable exemption, more than likely, you would not want to file Chapter 7 bankruptcy. For example, if your home’s market value is $300,000, but you only have a balance on your mortgage of $50,000, you would be $100,000 above the allowable exemption in Arizona. This means, if you file Chapter 7 bankruptcy, the bankruptcy trustee may take your nonexempt property, sell it, and distribute the proceeds to pay your creditors.

If You File Bankruptcy What Will Happen to Your Car?

If you file bankruptcy what will happen to your car will depend on several factors including: how many cars you own, how much you owe on your cars, and what type of bankruptcy you file.

If you file Chapter 13 bankruptcy, you will be allowed to “reorganize” your debt into a manageable payment, which can help you keep your car(s) and all of your assets, if completed successfully. Even if your car has been repossessed, Chapter 13 can help you get your car returned and allow you five (5) years to finish paying it off inside Chapter 13. However, if your car has been repossessed, you only have ten (10) days to file the bankruptcy petition after the repossession to save your car.

In Arizona, you are allowed up to a $6,000 exemption for a vehicle ($12,000 for physically disabled), and couples are allowed two (2) vehicles. Even if you file Chapter 7 bankruptcy, there can be some situations, where if you own a second car, the bankruptcy trustee may not take it. For example, if you own a second car worth $7,500 but owe $7,000, the bankruptcy trustee may allow you to keep it because by the time the bankruptcy trustee pays the costs associated with repossessing, storing, and selling the car, they more than likely will not get enough to even cover the balance of the loan. The bankruptcy trustee in a similar situation would definitely not get additional funds from this car sale to pay your other credits.

You can easily see how just looking at your vehicle situation can make it extremely important to review your entire financial situation and develop a bankruptcy plan. Individuals experiencing the same situation as outlined above may want to handle the situation completely different depending on their goals from the bankruptcy discharge. For example, someone, such as a rideshare driver, keeping both vehicles may be extremely important. Someone else, may prefer the second vehicle (or even both) gets repossessed, so they can eliminate the extra payment(s). Reviewing your financial situation with a bankruptcy expert will help you determine if filing bankruptcy is right for you, and if it is, the best plan to move forward to obtain your bankruptcy discharge and fresh financial start.

The Bottom Line

Filing bankruptcy can be a confusing, difficult process, but with the right help, it does not have to be. The bankruptcy experts at Trezza & Associates will review your financial situation with you to help you make a confident decision regarding whether or not filing bankruptcy is the best course of action for you. If it is, they will review your options and advise you on whether you should file Chapter 7, Chapter 13, or Chapter 20.

Although not all debts are dischargeable through the bankruptcy process, if it makes the most sense given your financial situation, filing bankruptcy can help you save your home and/or car. Depending on whether or not you qualify and your financial situation, including the amount and types of your debts, you may need to file Chapter 7 bankruptcy to “liquidate” your assets, if you have any; file Chapter 13 bankruptcy to “reorganize” your debt into a manageable 3 – 5 year payment plan; or file both Chapter 7 and Chapter 13 bankruptcy known as Chapter 20 bankruptcy.

Understanding the bankruptcy process will help you make an educated decision regarding whether or not filing bankruptcy is right for your financial situation. Filing bankruptcy can give you the fresh start you need to build a financially healthy life.