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The
minute that you read something that you can't understand, you can almost be sure it was drawn up by a lawyer. -- Will
Rogers
I will try to prove Will Rogers wrong by explaining, in English, how bankruptcy works.
What Is Bankruptcy?
Bankruptcy is a legal proceeding in which a person who cannot pay his
or her bills can get a fresh financial start. The right to file for bankruptcy is provided by federal law, and all bankruptcy
cases are handled in federal court. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts
from you, at least until your debts are sorted out according to the law.
What Can Bankruptcy Do for Me?
Bankruptcy may make it possible for you to:
- Eliminate
the legal obligation to pay most or all of your debts. This is called a "discharge" of debts. It is designed to
give you a fresh financial start.
- Stop foreclosure on
your house or mobile home and allow you an opportunity to catch up on missed payments. (Bankruptcy does not, however, automatically
eliminate mortgages and other liens on your property without payment.)
- Prevent repossession of a car or other property, or force the creditor to return property even after it has
been repossessed.
- Stop wage garnishment, debt collection
harassment, and similar creditor actions to collect a debt.
- Restore
or prevent termination of utility service.
- Allow you to
challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.
What Bankruptcy Cannot Do
Bankruptcy cannot,
however, cure every financial problem. Nor is it the right step for every individual. In bankruptcy, it is usually not possible
to:
- Eliminate certain rights of "secured"
creditors. A "secured" creditor has taken a mortgage or other lien on property as collateral for the loan. Common
examples are car loans and home mortgages. You can force secured creditors to take payments over time in the bankruptcy process
and bankruptcy can eliminate your obligation to pay any additional money if your property is taken. Nevertheless, you generally
cannot keep the collateral unless you continue to pay the debt.
- Discharge
types of debts singled out by the bankruptcy law for special treatment, such as child support, alimony, certain other debts
related to divorce, most student loans, court restitution orders, criminal fines, and some taxes.
- Protect cosigners on your debts. When a relative or friend has co-signed a loan, and
the consumer discharges the loan in bankruptcy, the cosigner may still have to repay all or part of the loan.
- Discharge debts that arise after bankruptcy has been filed.
What Different Types of Bankruptcy Cases Should I Consider?
There are four types of bankruptcy cases provided under the law:
- Chapter 7 is known as "straight" bankruptcy or "liquidation." It requires a debtor to
give up property which exceeds certain limits called "exemptions," so the property can be sold to pay creditors.
- Chapter 11, known as "reorganization", is used by businesses and a few individual
debtors whose debts are very large.
- Chapter 12 is reserved
for family farmers.
- Chapter 13 is called "debt adjustment".
It requires a debtor to file a plan to pay debts (or parts of debts) from current income.
Most people filing bankruptcy will want to file under either chapter 7 or chapter 13. Either
type of case may be filed individually or by a married couple filing jointly.
Chapter 7 (Straight Bankruptcy)
In a bankruptcy case under chapter 7, you file a petition asking the court to discharge your debts. The
basic idea in a chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property, except
for "exempt" property which the law allows you to keep. In most cases, all of your property will be exempt. But
property which is not exempt is sold, with the money distributed to creditors.
If you want to keep property
like a home or a car and are behind on the payments on a mortgage or car loan, a chapter 7 case probably will not be the right
choice for you. That is because chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors
to take your property to cover your debt.
Chapter 13 (Reorganization)
In a chapter
13 case you file a "plan" showing how you will pay off some of your past-due and current debts over three to five
years. The most important thing about a chapter 13 case is that it will allow you to keep valuable property--especially your
home and car--which might otherwise be lost, if you can make the payments which the bankruptcy law requires to be made to
your creditors. In most cases, these payments will be at least as much as your regular monthly payments on your mortgage
or car loan, with some extra payment to get caught up on the amount you have fallen behind.
You should consider
filing a chapter 13 plan if you
(1) own your home and are in danger of losing it because of money problems;
(2) are behind on debt payments, but can catch up if given some time;
(3) have
valuable property which is not exempt, but you can afford to pay creditors from your income over time.
You
will need to have enough income in chapter 13 to pay for your necessities and to keep up with the required payments as they
come due.
Can I Own Anything After Bankruptcy?
Yes. Many people believe they
cannot own anything for a period of time after filing for bankruptcy. This is not true. You can keep your exempt property
and anything you obtain after the bankruptcy is filed. However, if you receive an inheritance, a property settlement (such
as from a divorce), or life insurance benefits within 180 days after filing for bankruptcy, that money or property may have
to be paid to your creditors if the property or money is not exempt.
Will Bankruptcy Wipe Out All My Debts?
Yes, with some exceptions. Bankruptcy will not normally wipe out:
(1) money owed for child
support or alimony, fines, and some taxes;
(2) in some cases, debts not listed on your bankruptcy petition;
(3) loans you got by knowingly giving false information to a creditor, who reasonably relied on it in making
you the loan;
(4) debts resulting from "willful and malicious" harm;
(5)
student loans owed to a school or government body, except if the court decides that payment would be an undue hardship;
(6) mortgages and other liens which are not paid in the bankruptcy case (but bankruptcy will wipe out your
obligation to pay any additional money if the property is sold by the creditor).
(7) all debts arising from
divorce, including alimony and child support, any debts you owed jointly with your spouse but that you were ordered to pay
by the divorce court, and any property you were ordered to sell and split with your spouse.
Are the Names
of Persons Who File Bankruptcy Published?
When a case is filed, it becomes a public record. The
names of consumers who file bankruptcy in the Northern District of Iowa (headquartered in Cedar Rapids) will be published
in the Cedar Rapids Gazette. The names are published in the Quad City Times and possibly in the Des Moines Register for those
who file in the Southern District of Iowa (headquartered in Des Moines). Sometimes a debtor’s name will appear in one
newspaper or the another regardless of where the case is filed. Some local papers also publish this information. Historically,
the Iowa City Press Citizen has not published this kind of information. In recent years, the Muscatine and Washington newspapers
have not published this information. Please note that newspapers may change their policies at any time.
Are
Employers Notified of Your Bankruptcy Case?
Employers are not notified when a bankruptcy case is
filed. However, the trustee in the case may contact an employer seeking information as to the status of the debtor's wages
or salary at the time the case was filed, although this is not commonly done. In a Chapter 13 case, you may choose to have
a wage withholding order entered, in which case the court will send an order your employer.
Will I
Have to Go to Court?
In most bankruptcy cases, you only have to go to a proceeding called the
"meeting of creditors" to meet with the bankruptcy trustee and any creditor who chooses to come. Most of the time,
this meeting will be a short and simple procedure where you are asked a few questions about your bankruptcy forms and your
financial situation.
Occasionally, if complications arise, or if you choose to dispute a debt, you may have
to appear before a judge at a hearing. If you need to go to court, you will receive notice of the court date and time from
the court and/or from your attorney.
Will Bankruptcy Affect My Credit?
There
is no clear answer to this question. If you are behind on your bills or will default in the near future, your credit may already
be bad or soon will be, and so bankruptcy will probably not make things any worse.
The fact that you've
filed a bankruptcy can appear on your credit record for ten years. But since bankruptcy wipes out your old debts, you are
likely to be in a better position to pay your current bills, and you may be able to get new credit.
What
Else Should I Know?
Utility services--Public utilities, such as the electric company, cannot
refuse or cut off service because you have filed for bankruptcy. However, the utility can require a deposit for future service
and you do have to pay bills which arise after bankruptcy is filed.
Discrimination--An employer or government
agency cannot discriminate against you because you have filed for bankruptcy.
Driver's license--If you lost
your license solely because you couldn't pay court-ordered damages caused in an accident, bankruptcy will allow you to get
your license back.
Co-signers--If someone has co-signed a loan with you and you file for bankruptcy, the co-signer
may have to pay your debt. If you file a chapter 13, you may be able to protect co-signers, depending upon the terms of your
chapter 13 plan.
What About Debt Counseling or Bankruptcy Preparers?
You are required
to consult a government-approved debt counselor before you can file a bankruptcy case. I recommend Horizons (www.horizonsfamily.org/consumercreditcounseling.asp),
which is a local, reputable counseling agency and can provide the required pre-bankruptcy counseling and, at the same time,
give you advice about whether you have options other than bankruptcy. If you prefer to do your counseling and review
your options online, then I recommend CCCS of Atlanta (www.cccsatl.org/).
If you are considering hiring a debt settlement company, refer to the page titled "Mistakes to Avoid" in this website.
Document preparation services also known as "typing services" or "paralegal services" involve
non-lawyers who offer to prepare bankruptcy forms for a fee. Problems with these services often arise because non-lawyers
cannot offer advice on difficult bankruptcy cases and they offer no services once a bankruptcy case has begun. There are
also many shady operators in this field, who give bad advice and defraud consumers.
Can I File Bankruptcy
Without an Attorney?
Although it may be possible for some people to file a bankruptcy case without
an attorney, it is not a step to be taken lightly. The process is difficult and you may lose property or other rights if
you do not know the law. It takes patience and careful preparation. Chapter 7 (straight bankruptcy) cases are easier. Very
few people have been able to successfully file chapter 13 (debt adjustment) cases on their own.
Remember: The
law often changes. Each case is different. This pamphlet is meant to give you general information and not to give you specific
legal advice.
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