Family Considering Bankruptcy

Bankruptcy is provided for in the United States Constitution. It is a way for honest folks who find themselves in impossible debt situations to cancel (“discharge”) most debts in order to get a fresh start with a clean slate. Bankruptcy requires only that you act honestly and make full disclosure of your assets and debts. It involves no guilt or shame to you; your personal dignity will be in no way compromised by the bankruptcy process.

Bankruptcies for individuals and small businesses fall within two categories: Chapter 7 and Chapter 13. There are other types of bankruptcies for family farmers or fishermen (Chapter 12), for large business (Chapter 11), and (rarely used) for railroads and municipalities.

Chapter 7 is the most common, most popular kind of bankruptcy—often called “straight bankruptcy.” It’s what most people think of when they think of bankruptcy. Chapter 7 is often the easiest and least expensive way for people to achieve a fresh start. Basically, Chapter 7 quickly allows folks to wipe out their unsecured debts such as credit cards, medical bills, vehicle deficiency claims, and personal loans. You may ordinarily retain your residence and vehicles provided you are current on your vehicle and mortgage payments. Chapter 7 does not discharge student loans, court fines, domestic support, and most taxes.

A Chapter 13 bankruptcy, often called a “wage-earner plan” or “debt consolidation,” involves your participation in a minimum 36-month payment plan where you repay a certain percentage to your unsecured creditors (you may think of Chapter 13 as a “partial bankruptcy.”) As more is involved in Chapter 13 than a straight bankruptcy, folks normally only file under this Chapter if they have a problem that is not solved by a Chapter 7.

In Chapter 13 cases, which last from 3 to 5 years, we propose a monthly payment plan to the Court. The amount of your payment and the length of the Plan depend on the type of debts you have and your income. Fortunately we have great experience in the Chapter 13 process which permits us to come up with a Plan that will be both affordable to you and acceptable to the judge. We rely on our long relationships with the Court and the Chapter 13 Trustee to create smooth sailing through this process.

The aim of Chapter 13 is to give you a payment that you can afford that repays only a portion of your debts. At the conclusion of your case, the remainder of your unsecured debts are discharged (canceled). Chapter 13 can prevent a foreclosure and permit you to catch up on back house payments. It can lower most vehicle payments. It can discharge certain types of debts not dischargeable in Chapter 7, particularly certain taxes. As to debts that cannot be discharged, Chapter 13 can still protect you from creditor harassment or lawsuits while permitting you to pay the nondischargeable debts over the course of your Plan. While Chapter 13 is more involved than Chapter 7, it can solve many problems beyond the scope of a straight bankruptcy.

Although bankruptcy is not good for your credit, generally individuals who file Chapter 7 can obtain credit within a few months after completing their case. Many credit card and loan companies will see you as less of a risk since (a) you cannot file another Chapter 7 for eight years and (b) you have eliminated all of your other creditors leaving you debt-free. Rebuilding your credit is really just a matter of (a) keeping your job, (b) having a stable address, (c) paying all current debts on time, (d) saving money regularly which shows you are in control of your finances, and (e) making responsible use of the credit that you do incur.

In bankruptcy you must list all creditors to whom you owe money (aside from your living expenses that you pay off every month). You cannot pick and choose which credit cards to list. Generally most credit card companies will close your account.

Bankruptcy will not discharge child support or alimony, court fines, or recent taxes. Other nondischargable debts include intentional injury, injury caused while driving drunk or debts involving theft, fraud, or embezzlement. Student loans are nondischargable except in very narrow circumstances. Some debts (such as orders to pay money in domestic cases other than for support) are nondischargable in Chapter 7 but can be discharged in Chapter 13.

Student loans, whether government or private, are generally nondischargable unless you can show that repaying the loan would result in undue hardship (very rare). Unfortunately, lenders will aggressively oppose any attempt to discharge a student loan, which would make the attempt very expensive.

Yes. A vehicle loan is considered a secured debt on which a payment must be made to retain the vehicle—whether the regular payments in a Chapter 7 or as part of a Chapter 13 Plan. In bankruptcy you normally cannot eliminate a loan against a vehicle or other collateral while at the same time retaining it. In Chapter 13, however, it is often possible to lower the balance on a vehicle loan provided it is a purchase loan at least 2-1/2 years old or a refinance loan.

Yes. In a Chapter 7 case you may retain your house provided that you are current on your payments and that you continue to make your regular payments. If you are behind on your house payments, however, you would file a Chapter 13 case as this will stop any threatened foreclosure and permit you to catch up on your back payments over the life of your Chapter 13 Plan. You must, however, resume your regular house payments upon filing the case. In both cases you must always maintain your fire insurance and pay your current property taxes.

In Chapter 13, if your house is worth less than what you owe just on your First Mortgage we can file a motion to strip (“avoid”) your Second Mortgage. Essentially this turns your Second Mortgage into an unsecured debt which will then be discharged at the end of your case. This can be a major windfall for folks, but it is effective only if you stay in your case until the conclusion of your Plan. A formal appraisal is required to show the judge that your house is indeed worth less than what is owed on your First Mortgage. We deal with several local appraisers who we can trust to come up with an accurate value. Lien strips are not available in Chapter 7, and never with regard to First Mortgages.

No. You are entitled to file as an individual if you wish to do so, but you must list all joint debts and all community property.

Although bankruptcy is a public record at the US Bankruptcy Court in San Jose, it is rare that a particular friend or relative will learn of your case. Generally the parties aware of your bankruptcy are your creditors listed in the case, plus any co-signers you might have.

Every case is different, but creditors generally follow similar patterns in attempting to collect a debt. At first they will contact you by mail and then by phone. If they are not satisfied with your response they will refer you to a collection agency which will also mail and call you, often more aggressively. Collection agencies can become abusive, making threats and even contacting relatives and neighbors in an attempt to embarrass you. If unsuccessful in collecting, the creditor or the collection agency will then file a lawsuit against you. You may fight the lawsuit if you wish, but the cost just to file a legal Answer to the Complaint can run up to $370 or more. If you do not file a legal Answer to the Complaint within 30 days after you were served, the creditor can then take your default and obtain a judgment for whatever amount is demanded in the Complaint. The creditor can then—

  • Use the judgment to garnish your salary or bank account;
  • Record the judgment to create a lien on your house; and
  • Request an order that you personally appear in court to answer questions about your income and assets.

Yes. Immediately upon the filing of your case an order is entered in the Bankruptcy Court that all creditor actions must cease all phone calls, lawsuits, garnishments, and foreclosures. Creditors take this court order seriously and there are very few violations.

Your lawyer’s job in bankruptcy is not just to get you out of debt, but also to allow you to keep your assets. For this purpose, we make use of your “property exemptions” established by State law. As California has generous exemption limits, for most folks all of their assets are protected. If a client’s assets happen to exceed the exemption limits, that client would likely file under Chapter 13, which protects even “excess assets”, provided the client pays a higher repayment amount through his or her Chapter 13 Plan.

No. The Bankruptcy Code forbids employers from firing or disciplining a worker solely for filing bankruptcy or for not paying a debt discharged in bankruptcy. Generally employers will not even be aware you have filed bankruptcy. It is more likely that an employer would learn of your financial problems if you did not file bankruptcy and continued to receiving harassing creditor calls or a wage garnishment.

No—you normally do not have to go to court or appear before a judge. What you do have to do is appear with your lawyer at a meeting with the Bankruptcy Trustee who oversees your case. This usually takes no more than five minutes and permits the Trustee to ask general questions about your case. Such meetings are non-adversarial—the Trustee merely wants to ensure that the case is being properly handled.

It can be very dangerous to transfer assets or to pay certain obligations, particularly to relatives, prior to filing for bankruptcy. Do not make any property transfers, debt repayments, or loans to others without first obtaining the advice of your attorney.

No. In the USA, Federal Bankruptcy Law forbids the government from discriminating against anyone for filing a bankruptcy petition. In the bankruptcy process, no one will inquire about your citizenship status. If you do not have a legal Social Security number, we will assist you in applying, without risk or penalty, for a Tax Identification Number.

Yes. Folks often file bankruptcy when they are on Social Security, Unemployment, State Disability, welfare, or even food stamps.

By filing bankruptcy you are on the road to repairing your credit.

A Chapter 7 filing may remain on your credit report for ten years. For a Chapter 13, credit bureaus will generally remove the bankruptcy from your report after seven years. However, it does not take seven or ten years to “rebuild” your credit. Most folks who file bankruptcy are able to rebuild their credit score to a good level after two to three years.

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