Divorce & Bankruptcy FAQ's

1. What is bankruptcy?

Bankruptcy is a legal method of eliminating debt and providing a means for debt-oppressed people to obtain a "fresh start." In many cases, bankruptcy means the elimination of the debt that you owe to your creditors. There are two primary forms of bankruptcy, Chapter 7 and Chapter 13.

2. Who can file Chapter 7 bankruptcy?

You must reside or have a domicile, a place of business, or property in the United States or a municipality. You must not have been granted a Chapter 7 discharge within the last 6 years or completed a Chapter 13 plan. You must not have had a bankruptcy filing dismissed for cause within the last 180 days. It must not be a "substantial abuse" of bankruptcy to grant the debtor relief.

Generally speaking, if after you pay the monthly expenses for necessities there is not enough money to pay remaining monthly debts, then granting a discharge would not be an abuse of Chapter 7. It would not be fundamentally unfair to grant the debtor relief under Chapter 7 or Chapter 13.

3. Why is it legal to "wipe out" our debts?

More so than in any other time in our country's history, our economy is based on consumer debt. In fact, in this age of multibillion dollar corporate bailouts, easy credit, and relentless bombarding of seductive messages cajoling us to "charge, consume, buy," it is not surprising that so many people are drowning in debt.

For many of us, this debt is insurmountable and is causing family problems and feelings of hopelessness and even suicide. With credit card interest rates of 18-21%, many feel like modern day indentured servants. Many times, the debt is occasioned by unforeseen events such as the loss of a job or medical bills, but more often it is simply poor planning. Nevertheless, in instituting our bankruptcy laws, Congress recognized that responsible, well-intentioned people could from time to time run into financial problems. By allowing you to recover from your debt burden, you will be able to start afresh, look to the future, and become a more productive member of society. This is good for you and good for society as a whole.

4. What is Chapter 7 bankruptcy?

This is commonly referred to as "straight bankruptcy" and is the most commonly filed form. Only individuals (not businesses or partnerships) may obtain a discharge in a Chapter 7 proceeding. Large credit card debt and other unsecured bills, coupled with few assets, typify the filer of this form of bankruptcy. In the vast majority of cases this type of bankruptcy is able to completely eliminate all of the filer's debts.

5. Will I have to give up any of my property to my creditors?

The vast majority of filers get all or most of their debts discharged (wiped out) without giving up any of their own property. This is because federal as well as state laws provide exemptions for your property. Exempted property is property such as household goods and personal belongings, which you may keep despite your bankruptcy.

6. Are some of my debts not dischargeable?

Some kinds of debts are not dischargeable, which means that you will remain obligated to repay them even after you complete your personal bankruptcy. Examples of nondischargeable debts are certain state and federal taxes, student loans unless at least 7 years old, and debts that were induced or extended by fraud.

7. What is a Chapter 13 bankruptcy?

Under a Chapter 13 bankruptcy, a debtor proposes a 3-5 year repayment plan to the creditors, offering to pay off all or part of the debts from the debtor's future income.

The amount to be repaid is determined by several factors including the debtor's disposable income. To file under this chapter you must have a "regular source of income" and have some disposable income. As in Chapter 7, corporations and partnerships may not file under this chapter.

8. When is Chapter 13 a better alternative than Chapter 7?

There are several situations where a Chapter 13 is preferable to a Chapter 7. A Chapter 13 bankruptcy is normally for people who have too much income to file a Chapter 7 bankruptcy or have the kind of debt that is non-dischargeable in a Chapter 7 (e.g., certain taxes). Also, people file Chapter 13 because they are behind on their mortgage or business payments and are trying to avoid foreclosure. A Chapter 13 bankruptcy allows them to make up their overdue payments over time and to reinstate the original agreement. Also, where a debtor has valuable nonexempt property and wants to keep it, a Chapter 13 may be a better option.

However, for the vast majority of individuals who simply want to eliminate their heavy debt burden without paying any of it back, Chapter 7 provides the most attractive choice.

9. Will filing bankruptcy stop my bill collectors from taking action?

Yes. When you file bankruptcy, federal law imposes an "automatic stay" which precludes your creditors from taking any action to collect debts against you, including court judgments and tax debts, during the pendency of the bankruptcy. For instance, if you have been served by one of your creditors to appear in court over a debt, the bankruptcy filing will stop this lawsuit.

Any wage garnishments or repossession efforts are also halted. However, once the bankruptcy is over, a creditor holding a claim that was not discharged may proceed to collect on the debt. Also, under some circumstances, a secured creditor may proceed to collect on the lien he has on the filer's asset during the bankruptcy proceeding, but may only do so by filing a court motion and by getting the approval of the bankruptcy court first.

10. How quickly will my creditors get notice of my bankruptcy?

Within a couple of weeks of the filing of your petition, the bankruptcy court clerk mails your creditors notice of the filing and the imposition of the automatic stay. Until the creditors get notice, it may be necessary for you to supply the creditor with the docket number and date of your bankruptcy. Once they have been given notice, they must stop collection efforts against you or may be liable for court sanctions. Thankfully, for the vast majority of people, once their bankruptcy petition is filed that is the last they hear from their unsecured creditors.

11. Do I have to pay my bills during the bankruptcy proceeding?

For the most part, the answer is no. For specific property (usually secured) that you plan on keeping, such as your car loan or your house mortgage, you should probably continue to make payments. Also, for day to day expenses such as rent and utilities you should also continue to make payments. You should stop making payments on other old debts incurred prior to the bankruptcy such as credit card debts.

12. How long does a bankruptcy take?

For a typical Chapter 7 case, the discharge of your debts usually takes approximately 3-4 months. A Chapter 13 takes anywhere from 3-5 years.

13. How do I know if it's time for me to file?

If your creditors are attacking your assets and income and you are in debt way over your head, look into the "fresh start" filing bankruptcy may be able to provide you. It seems the stigma attached to filing bankruptcy has greatly diminished over the last decade, as a fast increasing percentage of the population files every year.

14. Is hiring a bankruptcy petition preparer to help me file my bankruptcy petition a smart move?

It depends on your case. However, the fact is that the vast majority of bankruptcy cases could have been successfully handled without an attorney. However, you must keep in mind that a preparer cannot give you legal advice, and may charge anywhere from $150-250 just to type your petition. You are probably better off filling in the forms yourself using a step-by-step guide.

15. Will I lose my car and my house?

As long as you continue to keep up-to-date on your payments on the loan secured by the property, there should not be a problem keeping your house or car, even after the bankruptcy proceeding is concluded. If you want to play it safe, contact your creditor to reaffirm the debt directly. This reaffirmation agreement must then be filed and approved by the court.

16. Does bankruptcy devastate my credit?

Although the record of filing bankruptcy may technically stay on your credit for up to 10 years, often by making payments on time subsequent to your bankruptcy you can regain an "A" credit rating within two years of your discharge.

Ironically, in many cases, filing bankruptcy may actually help your credit rating because discharging your debts greatly improves your debt-to-income ratio, which is a major criteria creditors use in judging your "creditworthiness" (see below). In fact, many people report a flood of pre-approved credit card offers within weeks of a bankruptcy discharge.

By all accounts, bankruptcy no longer has the stigma attached to it that it once did. Perhaps this is one of the reasons that the number of filings has been dramatically increasing over the last several years.

17. Can I keep any of my existing credit card accounts?

Credit card accounts with a zero balance are not technically creditors and thus are not discharged in bankruptcy. Often these creditors will allow you to keep your credit with them.

If you do have an outstanding balance when you file, you may still be able to keep your account. To do this you usually must agree with the creditor to pay off the balance. Once you make an agreement with the creditor you must file the "reaffirmation agreement" and get the approval of the bankruptcy court. It is advisable to consult legal assistance before you reaffirm an otherwise dischargeable debt. Some creditors will allow you to get a new account with them by reapplying even though you discharged their debt in the bankruptcy.

18. Will everyone find out about my filing?

Not unless you tell them or they go out of their way to check the public records. Bankruptcy filings are not normally published in newspapers; therefore, the only people who usually find out that you are in a bankruptcy are creditors whose debts you have listed on the petition or those with whom you apply for credit.

19. Can I be fired for filing bankruptcy?

No. If your employer finds out about your bankruptcy, it is against federal law to discriminate against someone for filing bankruptcy.

20. What is the procedure after I file for bankruptcy?

In most cases, completing and filing your petition is the hardest part. If your bankruptcy petition does not raise any red flags for the trustee or your creditor(s), you're usually in good shape. Thirty to forty days after filing the petition, you are required to attend the "First Meeting of Creditors" or "Section 341(a) Examination."

At this meeting, creditors are given the opportunity to ask you questions. There is no judge for this hearing, just the trustee in charge of your case. However, in most "no asset" cases, rarely do creditors show up for this hearing. Normally there is a room full of other filers and the questioning by the trustee is very limited since he or she is usually pressed for time.

In most cases, the key to the success of your case lies in your bankruptcy petition. Normally, three to four months from the time the petition is filed, you are granted final discharge of your debts.

21. Can I run up my credit cards right before I file bankruptcy?

No, running up your credit cards on the eve of bankruptcy in anticipation of filing may cause your debt to be non-dischargeable on the grounds of fraud and you can be fined. You should get legal advice concerning large amounts of credit card debt incurred for "luxury goods" right before your bankruptcy.

22. Do I have to list all of my assets on my petition?

Yes. Knowingly and fraudulently concealing your assets from the bankruptcy court is a felony and the court has the power to fine you and deny you a discharge. Remember that most bankruptcy cases are considered "no asset" cases since state or federal exemptions protect all of the property.

23. Can I file bankruptcy without a lawyer?

Yes, no matter what state you are in, you have the right to file bankruptcy without a lawyer. In fact, a fast-growing percentage of people are filing without lawyers. They realize that many bankruptcies are highly routine and could be filed without a lawyer. Therefore they choose to save the money ($1,000 or more) and do it themselves. Thousands have used bankruptcy kits such as ours to guide them and have successfully filed their own bankruptcy without paying a retainer fee.

24. Should I feel ashamed to file bankruptcy?

There is a lot to think about before filing bankruptcy; however, feeling ashamed should not be among your thoughts. The history of bankruptcy in the United States dates back to the founding of our nation. The early English practice of debtor's prison was so abhorred by our founding fathers that they expressly outlawed it and instituted forgiving bankruptcy laws early on in our nation's history. Over the years, some of our nation's most revered companies and people have turned to the bankruptcy system for help. Perhaps this nation's greatest president and founding father, Thomas Jefferson, filed for bankruptcy not just once, but several times to eliminate the accumulation of his huge debt. Filing bankruptcy is better put into perspective when you know that a man of Mr. Jefferson's foresight and intelligence could repeatedly get himself into financial trouble.