What is bankruptcy?

Bankruptcy is a legal process for obtaining relief from creditors by filing a petition in federal bankruptcy court under the United States Bankruptcy Code.  There are several types of bankruptcy, but most consumer debtors seek relief under either Chapter 7 (“straight” bankruptcy) or Chapter 13 (“wager-earner’s bankruptcy”).

How do you know when you need to file bankruptcy?

If you are saddled with debt and are unable to meet your monthly obligations, and a realistic assessment of your future earnings indicates that things are not likely to improve, bankruptcy may be an appropriate way for you to obtain relief that will enable you to make a fresh start, free from an otherwise unmanageable financial burden.

What is the difference between Chapter 7 and Chapter 13 bankruptcy?

1. Chapter 7 permits individuals to discharge certain debts and protects debtors from harassment by creditors.  It is intended to provide relief to persons who do not have enough disposable income to pay toward any of those debts, unlike Chapter 13, which is for people who do have the ability to pay off some of their debts.  In general, Chapter 7 is an appropriate choice for a debtor who has little property or no equity in his property, and whose financial circumstances are such that there is no hope of repaying the debt through a payment plan.
2. Chapter 13 is for persons who are able to pay their creditors a part, but not all, of what is owed.  It permits them to reorganize their debts by making monthly payments from their disposable income under a payment plan approved by the Court.  If your current monthly income is less than the applicable state median income, then the payments will be for three years.  If your currently monthly income is more than the state median income, the plan must be for five years.  At the end of the approved payment plan, the remainder o the unsecured debts are discharged.  Under Chapter 13, after the court approves a repayment plan, the debtor makes monthly payments to the trustee, who distributes them among creditors.  Once all payments required under the plan have been made, the debtor is generally entitled to a discharge, which releases him from all debts provided for in the plan, except for certain debts that are not dischargeable.  Examples of some of the nondischargeable debts are debts incurred through fraud, certain delinquent taxes, child support and alimony obligations, certain educational loans, and homeowners association dues incurred after the filing of the petition, among others.  The debtor will remain obligated to pay nondischargeable debts even after receiving a general discharge in bankruptcy.
3. With regard to debt secured by real or personal property, a Chapter 13 debtor is allowed to cure his arrearages by making monthly payments and keeping the secured property, whereas in Chapter 7, non-exempt property is subject to being sold or abandoned to creditors to satisfy debts.  Therefore, Chapter 13 offers a major benefit for a debtor who is facing foreclosure on his delinquent mortgage.  Chapter 13 provides a way to catch up on the delinquent payments over time by including them in the Chapter 13 repayment plan.  In this way, a homeowner can avoid foreclosure if the debt that is in default is his home mortgage, and his disposable income is sufficient to pay off the past due balance over the course o the plan.

Do I need to have any credit counseling to file for bankruptcy?

Yes.  Before filing for bankruptcy, a debtor is required to undergo credit counseling by an approved credit counseling agency, which will analyze the debtors financial situation, identify the factors that led to the situation, and assist the debtor in developing a plan to deal with the debt.  After filing, but before receiving a discharge, a debtor must also attend a financial management course given by an approved counselor.

See our blog posts “Bankruptcy Steps – Part A Steps Before Filing” and “Bankruptcy Steps – Part B  Steps After Filing“.

Did the 2005 Bankruptcy Amendments make it almost impossible to qualify for Chapter 7 relief?

No, although that is a very common misconception.  What the 2005 change to the law did was make it harder for persons who have the ability to repay a portion of their unsecured debts to avoid paying anything under Chapter 7.  For these individuals, the new law requires that they seek relief under Chapter 13, which means they will have to pay a certain amount of their disposable income ever month for up to five years, before receiving a discharge of any debts that then remain unpaid.

How many people are filing for bankruptcy?

For the fiscal year ending September 30, 2008, over one million individuals filed for bankruptcy protection in the United States, with approximately two-thirds filing under Chapter 7 and one-third under Chapter 13.  For the quarter ending September 2008, 5,800 North Carolina residents filed bankruptcy petitions, with approximately half filing under Chapter 7 and half under Chapter 13.

Do I need an attorney to file for bankruptcy?

While you are not required to be represented by an attorney, the complexity of a bankruptcy proceeding makes it very difficult to successfully complete the process without the assistance of an attorney.  If the legal requirements are not followed, the consequences can be serious, including becoming disqualified from receiving bankruptcy protection.  For this reason, it is highly recommended to obtain representation from a qualified attorney familiar with the substantive and procedural requirements of the Bankruptcy Code and the local rules for the Bankruptcy Court in which you petition is filed.

Will filing bankruptcy protect me from harassment by debt collectors?

Yes.  Once a bankruptcy petition is filed, any and all actions by creditors to collect debts must cease.  This is called an “automatic stay”.  If this is your first bankruptcy filing, the stay remains in effect for as long as the case is pending before the bankruptcy court, unless a creditor obtains an order from the court relieving it of the obligations imposed by the stay.

Will I have to appear in court?

A debtor has only limited involvement in court proceedings.  Ordinarily, a Chapter 7 debtor will only appear before the bankruptcy judge if a creditor raises an objection in the case.  In Chapter 13 cases, the debtor will appear in court at a plan confirmation hearing.  Other than these instances, the only formal proceeding requiring the debtor’s appearance is the creditor’s meeting, referred to as a 341 meeting.  At the 341 meeting, the creditors have the opportunity to question the debtor about his assets and debts.  In most cases, however, creditors do not appear at the meeting, and the only participants are the debtor and trustee.

What happens to my property in a Chapter 7 bankruptcy?

Under Chapter 7, a person called a “trustee” is appointed to take charge of part of the debtor’s property that can be sold to pay creditors.  Under the law, only property that is not “exempt” can be taken and sold for this purpose.  For example, in North Carolina a debtor can claim up to $18,500 of the value of his house and $3,500 the value of the motor vehicle as “exempt”.  There are a number of other categories of property.  Once all non-exempt property has been collected and sold, the proceeds are distributed by the trustee to the creditors.  Any remaining debts are discharged, meaning they are no longer owed.