1WHAT IS BANKRUPTCY?
Bankruptcy laws have been in existence for more than 400 years. Originally, the laws were designed only for the benefit of creditors so that they could more easily get paid and get a debtor's property. Uncooperative debtors were put in prison or had their ears cut off. If the debtors were lucky, they would escape with only having their ear nailed to a post (while still attached to the body, of course) in a public place. Today, bankruptcy laws protect both creditors and debtors and are much more "debtor friendly."
Bankruptcy laws today in the United States are federal laws which allow debtors to reduce or cancel a debt and to obtain a fresh start without the fear of being constantly harassed by creditors. There is no specific amount of debt required to file a bankruptcy. No one will ask you why you are filing. If you have secured debts, you get to choose which creditors you will pay and which you will not pay.
2ARE THERE DIFFERENT TYPES OF BANKRUPTCY?
There are several types of bankruptcy including Chapter 7, Chapter 13, Chapter 11 and Chapter 12. Most individuals who file bankruptcy file a Chapter 7. A few individuals file a Chapter 13. The laws governing all bankruptcies are complex. You should obtain expert help.
In a Chapter 7 bankruptcy, most debts are canceled completely. This is called a "discharge." Medical bills and unsecured loans (like credit cards) can usually be eliminated or "discharged" in full. Once a debt is discharged, the creditor is forever prevented from taking any action to collect the debt. Bankruptcy laws provide for certain exemptions which means the property is protected from creditors taking it. If the value of your equity in your property is less than the exemption amount, you will be allowed to keep it. If the value of your equity in your property is more than the exemption amount, you might be required by the court to give money to your creditors, if you want to keep the property, or turn it over to the bankruptcy trustee who will sell it and use the money to pay on your debts. Normally, you will be able to keep all of your property. The rules are different for secured loans, such as homes, cars, boats, RVs etc. With some minor exceptions, you must either pay for the collateral that secures the loan or give it back to the creditor.
3IS BANKRUPTCY EXPENSIVE?
We, at OREGON FRESH START, realize that clients are coming to us for help on money matters at a time when they probably do not have extra money. OREGON FRESH START makes every attempt to keep the costs of filing bankruptcy down to a minimum. The volume of petitions filed by OREGON FRESH START helps to accomplish that goal. Also, payment plans are available, depending upon your circumstances. Most clients have been saved several times the amount of the attorney fees because of the pre-filing planning provided by OREGON FRESH START. Also, it is sometimes possible to recover money garnished just prior to filing and return it to the client, thus helping to reduce the overall cost.
With the new bankruptcy laws, there are some non-attorney related costs to complete a bankruptcy. Congress now requires each debtor to take a credit counseling class before filing. The cost varies, but is usually $15-20. Also, Congress now requires all debtors to take a more involved financial management class before receiving a discharge. The estimated cost is $20-25. Tax transcripts may need to be ordered as part of the new law - estimated cost is $20.
4HOW LONG DOES A BANKRUPTCY CASE TAKE?
A Chapter 7 case takes about 4 months unless the bankruptcy trustee discovers something unusual in the information. If this happens, the trustee can extend the time it takes to complete the case.
A Chapter 13 case lasts 3-5 years depending on the plan that is approved by the court. However, after the plan is approved, the only involvement you will have with the court is the making of the monthly payments unless financial circumstances change requiring an amendment to the Plan.
About 5-6 weeks after filing of the petition, you are required to attend a meeting in bankruptcy court with your attorney where the bankruptcy trustee will ask you questions about information contained in the bankruptcy petition.
5WILL THE COURT TAKE MY PROPERTY AWAY?
Although bankruptcy law is a federal law, it provides certain "exemptions" which are found in state and federal law. There are at least 33 exemptions available. If the value of your equity in the property is below the exemption amount, then you will be entitled to keep the property. If the value of your equity in the property is more than the exemption amount, the court can require you to deliver the property to the bankruptcy trustee who will sell it and use the money to pay on your debts. In valuing property, the court normally uses fair market value. For example, the court does not maintain a used car lot, so a car whose value is more than the exemption amount will be delivered to the trustee who will usually wholesale it to a used car dealer.
It is important to remember that the bankruptcy court values only the equity in an item to determine if it falls within the exemption. For example, a car worth $10,000 wholesale with a loan against it in the amount of $9,000 has only $1,000 of equity.
Some of the more commonly used exemptions are as follows:
bank accounts and cash
It is important to know in advance of filing how to value your property. It is also possible, within certain limits, to do some pre-bankruptcy planning to convert what may be a non-exempt asset to an exempt asset and, thus, not lose it to the court. The most common property people lose is income tax refunds and checking account funds. Although each case is different and each trustee has his or her own limitations, if the combination of cash, bank accounts, stock and tax refunds exceeds about $13000, you could be in jeopardy of losing it to the Trustee. Call Oregon Fresh Start to get the exact particulars for your case.Therefore, spend it before you file or lose it to the court. Whatever you do, do not use the money to pay a loan owed to a relative. However, you should consult with OREGON FRESH START prior to spending the money or trying to convert a non-exempt asset to an exempt asset.
6WILL I HAVE TO GO TO COURT?
Yes. Part of the process of a bankruptcy includes a meeting, called "The First Meeting of Creditors." It is held approximately 5-6 weeks after the filing of the petition. At the meeting, a bankruptcy trustee will put you under oath and ask you questions about the information in the petition to make sure it is accurate. The trustee will also review some of your financial documents, including bank statements, tax returns and property tax valuation statements. It will take about 7-10 minutes. Also, it is an opportunity for creditors to attend and ask you questions. However, creditors very seldom attend the meeting. This meeting is mandatory. If you do not attend, the trustee will file papers with the court to have your bankruptcy dismissed. Only an excellent reason will be successful in convincing the court to reschedule your hearing. Part of the attorney fee you pay for bankruptcy includes an attorney with OREGON FRESH START being at the First Meeting of Creditors with you to assist you.
7DO I HAVE TO LIST ALL MY DEBTS?
We probably all have certain creditors that we do not want to see get "hurt" by any inability we have to pay our debts. However, bankruptcy law requires that you list every debt, even those to close friends and relatives. Oregon law provides that, under some circumstances, the debt will still be discharged even if it is not listed. However, there are some situations in which the debt might not be discharged if it is not listed. Also, one of the disadvantages of not listing the debt is that the creditor will not be notified by the court. If the creditor is not notified, the creditor almost always thinks that the debt is not discharged and will continue to harass you after your bankruptcy is completed. LIST ALL DEBTS! The good news is that it is possible to amend your bankruptcy petition if you forget to list a creditor. The bad news is that there are additional attorney fees and court fees to do so. If you are in doubt about whether you owe a creditor money or think that the debt is one that cannot be discharged, list it anyway.
8IF I AM MARRIED, CAN I STILL FILE BY MYSELF?
Yes. Married persons can file together, by themselves, or not join in with their spouse in filing for bankruptcy. Only the liability of the person filing is discharged, so if your spouse is obligated on the debt, and your spouse decides not to file, your spouse will still be liable on that debt. Even though your spouse may not file with you, unless you and your spouse do not live together, you will be required to list the income of your spouse to arrive at a "household income." This could have an impact on whether you will file a Chapter 7 or a Chapter 13 bankruptcy.
9WILL ANYONE ELSE FIND OUT THAT I FILED BANKRUPTCY?
All proceedings in bankruptcy court are public record which means that anyone can go to the court and obtain any information from it. It is also possible to obtain some information from the bankruptcy court by phone. However, the filing of a bankruptcy is not generally reported in newspapers that have a general circulation. The bankruptcy court sends out notices only to you, your attorney and your creditors.
10WHAT HAPPENS TO MY CO-SIGNERS?
Filing a bankruptcy petition discharges the debt only as to the person filing. Creditors sometimes require cosigners to add some additional safeguards and to protect them from bankruptcy filings. If your debt is discharged, the creditor will most likely go after the cosigner. The only way to protect against that situation is to continue to pay the debt after the bankruptcy is finished or to file a Chapter 13 bankruptcy and pay the debt through the bankruptcy.
11CAN I DISCHARGE EVERY DEBT?
No. There are some debts that cannot be discharged under any circumstances such as child support, alimony, any debt owed as a result of drunk driving, and criminal restitution.
You cannot discharge a debt where fraud was present or where there was a willful or malicious injury. An example of fraud would be where you gave false information on a credit application and the creditor granted you a loan based upon the false information. Another example would be where you made a large purchase or obtained a large cash advance on a credit card knowing that you were having financial problems and would have difficulty repaying the debt. Generally, you cannot discharge old taxes unless it has been more than three years since you filed your tax return for that year. Student loans present particular problems because the government has tightened the rules considerably over the past several years. To discharge a student loan requires that you sue the government and prove, among other things, that if you were required to repay the loan, it would create an "undue hardship" for you. Lawsuits against the government are very expensive so you should probably approach filing bankruptcy knowing that you will end up having to repay the student loan. The government now has programs that will allow you to repay the loan over as many as 30 years. The result is low payments over a long period of time.
In a Chapter 13 filing, you can discharge tax debts at the end of the 3-5 year period even if you did not file a tax return
The rules regarding the elimination of debts in bankruptcy are complicated. You should consult with an expert in bankruptcy before filing.
12WILL BANKRUPTCY HELP ME TO LOWER MY PAYMENTS?
A Chapter 7 bankruptcy is used primarily to eliminate debts - it will help you to lower your payments only if you can "cram down" the balance of the loan to the value of the collateral and pay off the loan in full by obtaining a new loan with smaller payments. In bankruptcy lingo, this is called "redemption." For a vehicle, the loan must be more than approximately 2 1/2 years old. For other personal property, the loan must be more than one year old. However, in a Chapter 13 filing, you can force your creditors to rewrite some of the terms of a secured loan. You can force the creditor to reduce the balance to equal the value of the collateral. You can also force the creditor to lower the interest rate and force the creditor to allow you to catch up on past due payments over the 3-5 years that you make your payments to the court.
13WHAT HAPPENS TO MY CREDIT?
The fact that you filed bankruptcy will, most likely, show up on your credit report. It can remain there for a maximum of 10 years. Although the filing of bankruptcy is a negative on your credit report, in many cases, it actually improves the credit report over what is was just prior to filing. Most people, by the time they come to OREGON FRESH START already have a credit report that shows defaults, delinquent payments and "charge offs." Many lenders will give consideration to a new loan after you have filed bankruptcy because you owe very little, if any, debt and the lender knows that you cannot file again for several years.
Many clients who come to OREGON FRESH START are embarrassed by their financial situation. To them, filing bankruptcy is the last thing they want to do. However, those clients are almost always feeling severe stress in the family. Once we explain to them that Congress has established bankruptcy laws to provide a fresh start for individuals and that they will feel that a huge burden has been lifted from their shoulders, they exhibit feelings of relief. You, too, will realize that OREGON FRESH START is not here to be judgmental but to provide assistance which will make your life better.
Credit can be reestablished. It has been our experience at OREGON FRESH START that avoiding bankruptcy at the expense of your health is not worth it.
14WHAT ABOUT GARNISHMENTS, REPOSSESSIONS AND FORECLOSURES?
Immediately upon the filing of a bankruptcy petition with the court, an "automatic stay" is created. This automatic stay provides that creditors cannot take any further legal action against you without special permission of the court. For example, if a creditor is garnishing your wages, the automatic stay created by filing a bankruptcy petition prevents further wage garnishments. Also, if a foreclosure sale on your house has been scheduled, the automatic stay will stop the foreclosure sale and give you more time to sell the home and recover your equity or provide for paying the past due payments through a Chapter 13 plan. It has not been uncommon for clients to come to OREGON FRESH START where a garnishment or foreclosure is scheduled within 3-4 days. In those circumstances, same-day or next-day filing can be accomplished, thus creating the automatic stay and avoiding further financial loss.
15HOW DO I STOP CREDITORS FROM HARASSING ME?
By law, creditors are allowed to call you within reason to discuss your failure to abide by the contract terms of your credit. However, as is all too well known, creditors, especially collection agencies, can be annoying, rude and frequently go beyond the bounds of the collection laws to the point of harassment. If a creditor has violated the law, you certainly are entitled to sue them. However, that costs money. Frequently, the creditor is in another state which might require you to file the lawsuit in that state. If you find that your financial situation is leading you towards bankruptcy, the easiest thing to do is contact OREGON FRESH START for a consultation about the situation. If it is determined that filing is the best thing for you to do, once you have paid the fees required, you can refer all creditor calls to OREGON FRESH START. This will stop most calls. Once your petition is actually filed, the automatic stay (discussed in more detail here) will prohibit your creditors from having any contact with you. There are severe penalties for creditors who knowingly violate the automatic stay. Keep track of any telephone calls, letters or other communications you receive from creditors after you file your petition. Give this information to OREGON FRESH START.
16WHAT ABOUT PAST DUE TAXES?
The bankruptcy code is a federal law. It is not surprising to find that Congress has given special protection to past due taxes. The rules for discharging taxes are some of the most complex in the bankruptcy code. Expert advice is necessary.
Under a Chapter 7, the tax must be at least 3 years old to have it discharged. Also, the time for beginning the calculation of the age of the tax may not be the year in which the tax was due. For example, let's take the tax year 2015. Your return for that year was due no later than April 15, 2016. Three years from April 15, 2016 would be April 15, 2019. If you filed your return on time and owed taxes for that year, those taxes would be dischargeable. However, if you did not file your return for 2015 until January 1, 2017, the 3 years would not be up until January 1, 2020 and the tax would not be old enough to discharge until 2020. Frequently, if you do not file a return, the IRS will "file one for you." Although this is not technically a real tax return, it does establish a tax debt. Unfortunately, in a Chapter 7 filing, you are required to file a return before any tax can be discharged. The IRS filing one for you will not count.
The rules are different in a Chapter 13 filing. You are not precluded from discharging a past due tax if you did not file the return. However, before a Chapter 13 plan will be approved, you will be required to file all tax returns that should have been filed as of the date you filed your bankruptcy petition.
As with all other debts, the filing of a bankruptcy petition will stop the IRS or the Oregon Department of Revenue from taking any further collection action for at least a short period of time. If you qualify for a Chapter 13 filing, you may have up to 5 years to pay the past due taxes without any further penalties or interest being assessed.
The information above is intended only to give you a general idea of what is involved in discharging taxes. As you can see, the rules are very technical and require expert legal advice.
17CAN I TRANSFER PROPERTY TO A FRIEND OR RELATIVE TO PROTECT IT FROM BANKRUPTCY?
If you transfer any of your property to a relative, even by selling it, within 1 year of filing for bankruptcy, the bankruptcy trustee can reverse that transfer if it was transferred for less than the fair market value of the property. For example, if you gave Uncle Joe your car 30 days prior to filing bankruptcy because you did not want it to show as an asset in your bankruptcy, the trustee has the power to sue Uncle Joe and get the car back. Unfortunately, some people engage in such an activity before consulting with an attorney. It is also not advisable if you have already made the transfer to attempt to transfer it back without first obtaining expert legal advice.
18ARE LOANS OWING TO RELATIVES GIVEN SPECIAL TREATMENT IN BANKRUPTCY?
It is not uncommon for you to owe money to a relative. As discussed in other answers to questions, you must list every debt. This includes debts you owe to your family members. The bankruptcy court looks closely at loan transactions between family members. As we all know, if we owe money to several creditors and one of them is a family member, we will probably be inclined to pay the family member first. In a bankruptcy context, this often means that family members have been paid while the other creditors have not been paid. One of the main ideas behind filing bankruptcy is that all creditors share your misfortune equally. One of the questions asked in the bankruptcy petition is whether you have repaid any loans from relatives within the past year. If you have, you are required to disclose the amount. If the amount is large enough, the bankruptcy trustee has the power to get the money back from the relative and spread it out equally among all the creditors.
While there is no set rule as to what amount is "large enough," if the amount were $2,000 or more, that would definitely be "large enough." There are other factors which go into the trustee's decision, including whether you have any other assets which exceed the exemption amounts and how likely it is the trustee can obtain a return of the money from the relative. A relative who has already spent the money and whose only source of income is Social Security is not likely to be a target for the trustee.
If you have a loan from a relative and are considering filing bankruptcy, stop paying on the loan until you consult with OREGON FRESH START.
19WHAT DOES IT MEAN WHEN A CREDITOR WANTS ME TO REAFFIRM MY LOAN WITH THEM? IS THAT DIFFERENT FROM REDEMPTION?
Secured creditors (those creditors who have collateral for their loan, such as a car or boat) will want you to reaffirm the loan. When you reaffirm the loan, you re-obligate yourself to all of the loan terms just as if you were getting a new loan from the creditor. Although this may sound harmless, it has serious consequences. If you reaffirm and then later default on the loan, you are personally liable to pay the balance and you will have no protection on that debt from the bankruptcy. One of the major changes made to bankruptcy law in 2005 is that a creditor can repossess the collateral if you do not reaffirm. This change does not apply to real estate debt. Your reaffirmation agreement is subject to court approval in some circumstances. If your income is less than your monthly expenses, you may be required to participate in a telephone hearing with the court where you will be required to explain to a bankruptcy judge why the reaffirmation is in your best interest and how you intend to make the payment.
More often that not, when you file bankruptcy, you owe more on the collateral securing the loan than it is worth. If your loan is more than 2 1/2 years old, under a process called REDEMPTION, bankruptcy law allows you to reduce the amount owing on the debt to the value of the collateral if you can pay it all at once. Many debtors can find a source of family financing or, perhaps, borrow from a 401K account, etc. and come up with the full value. There is also a company on the internet that specializes in redemption funding for cars. Talk with OREGON FRESH START about this for more information.
WOULDN'T IT BE BETTER TO SETTLE MY DEBTS THROUGH A DEBT CONSOLIDATION PLAN?
Although there may a few reputable credit counseling services out there, most will not and cannot give you what they promise. Usually, they promise they can settle your debts for 50 cents on the dollar and that when you get done, you will have great credit. The facts are that (1) most people do not complete the "plans" because they usually do not work, and if you do complete the plan, (2) your credit is trashed. Creditors report to credit bureaus exactly what happened. If you get hooked on a 50% plan, your credit report will show that you did not pay all of the debt and that the unpaid balance was charged off. Most creditors do not waive interest or late fees. In addition, most credit counseling programs will charge you a fee (a portion of each payment) and they often do not send your money to the creditors for several months. This gives them an interest free loan working with your money. Most debtors would be better off filing a Chapter 7 or Chapter 13 bankruptcy which can force the creditors to accept your terms of repayment.
In addition, and this is a big one, the amount that was charged off by the creditor will likely be reported to the IRS with a 1099 tax form and you will be required to pay income taxes on the charged off amount which will be a very unpleasant surprise for you when you file your tax returns for that year.
CAN STUDENT LOANS BE DISCHARGED?
Yes, but it is not easy. It will also, probably, be expensive. Once upon a time, federally guaranteed student loans were dischargeable if the loan was more than 7 years old. In 1998, the federal government changed all that. Now, federally guaranteed student loans cannot be discharged unless you can prove that being required to repay the loan will cause an undue hardship - not just a hardship, but an "undue" hardship. To have an opportunity to prove your case, you will be required to sue the federal government in bankruptcy court through an adversary proceeding. You will be required to prove all of the following:
repayment of the loan would prevent you from maintaining a minimal standard of living
your financial circumstances are not likely to change in the foreseeable future
you made a good faith effort to repay the loan before you became unable to pay
Frequently, the federal government will try to show that you could get a reduced payment plan by going through a consolidation program that will stretch out your payments for 20 years or more based upon an "ability to pay."
In short, it is possible to discharge a student loan, but the government has made it very difficult. Also, remember that the government has a raft of lawyers to defend the federal government in the lawsuit who are paid for by your taxes. On the other hand, you will be required to pay for your attorney.