Common Questions about Bankruptcy and Debt Relief

I heard that since the Bankruptcy law changed in 2005, bankruptcy no longer provides an effective credit card debt relief solution. Is this true?

No. Even though there is a lot of consumer and business debt relief information available today, there are still a lot of myths about bankruptcy, let alone a lot of myths about the bankruptcy law changes of 2005. A person can still discharge all of their credit card debt, medical debt, personal loans, repossession deficiencies, broken apartment leases, etc. For more see Common Bankruptcy Myths.

Is Chapter 7 better than Chapter 13?

Trick Question!!! No matter what your family, friends or co-workers say, there is no answer to this question. This is a common question brought up by almost all bankruptcy debtors seeking relief from debt. The bankruptcy laws have been very carefully designed to make sure that a person does not fair better under one Chapter or another.

In fact, your credit score is equally affected no matter which type of bankruptcy you file. The bankruptcy debt relief option that is best for you will be determined by your facts, circumstances and goals. Having a bankruptcy attorney review your facts and circumstances, with an understanding of your goals, is the absolute best way of making sure you file under the right Chapter.

Chapter 7 and Chapter 13 aim to accomplish the same goal,( i.e., discharge personal debt) but go about it in two separate ways. 

1. Chapter 7 bankruptcy lasts a couple of months and requires no repayment of the debt owed. Chapter 7 bankruptcy tends to be the cheapest and quickest bankruptcy. Generally speaking, in order to discharge your debt in a Chapter 7 bankruptcy, all that is required is that the Debtor (the person filing the bankruptcy) submit certain information to the court about their personal net worth, meet with the Chapter 7 Trustee assigned to their case, and take a Debtor Education class.
   
2. Chapter 13 lasts anywhere from 3 to 5 years and requires some repayment of your debt. Chapter 13 is typically filed by a Debtor who earns a larger than usual wage, or owns a high amount of assets, or is trying to keep their house or car from being foreclosed upon. Legally and practically, Chapter 13 is more complex than a Chapter 7 and therefore typically more expensive for the Debtor. Generally speaking, in or to discharge your debt in a Chapter 13 bankruptcy, the Debtor must meet all the requirements of a Chapter 7 bankruptcy, submit a Chapter 13 repayment plan, attend a hearing in Court to have the Chapter 13 plan approved, and make monthly payments to the Chapter 13 Trustee for a period of 3 to 5 years.

Can anyone successfully file a Chapter 7 bankruptcy?

No. There are many specific reasons why someone would be unable to file for bankruptcy, for the most part the two biggest reasons people find themselves unable to file are because they have recently filed for bankruptcy, or they earn a high wage. This question is best answered by an experienced bankruptcy attorney.

What type of bankruptcy should I file if I’m behind on my mortgage payments and trying to save my home? What if I’m behind on my car payments?

Typically, the best Chapter to file under either of these situations is a Chapter 13 bankruptcy. Under a very narrow set of circumstances would a Chapter 7 be appropriate.

    Important Note** Under the new Bankruptcy laws, there are penalties for filing a Chapter 13 incorrectly and you may only get “one bite at the apple.”  If you are trying to save your house or car, contact an experienced bankruptcy attorney immediately.

My regular mortgage payment is too high; what type of bankruptcy should I file?

This is a tricky problem. There is no black and white answer here. A good Bankruptcy Attorney can use the current bankruptcy laws to keep the house from going into foreclosure while you refinance the house and lower the monthly payment. Your Bankruptcy Attorney may also be able to remove certain liens on the house so that you can cash out the maximum amount of equity in the home.

Will I lose my car or house if I file a bankruptcy?

This depends on many different factors. Typically a person will have bankruptcy options available to them where they wouldn’t have to lose their car. The laws of the state where you intend to file bankruptcy will have a lot to do with what your options are in keeping your car. Normally, the state laws will allow you to have a car with a limited amount of equity (e.g., Florida only allows you to keep a car with equity of $1,000 in a Chapter 7 bankruptcy).

Should I pay off my car or any other debts before filing for bankruptcy?

No. No. No. Paying off a lot of debt prior to filing bankruptcy can be very bad. Paying off your car might lead to you losing the car in a bankruptcy.

Definitely do not pay back any friends or family members (if you can avoid it), they could end up getting sued by the bankruptcy estate!

I normally get a large tax refund, if I file for bankruptcy will the Court take it from me?

Maybe.  You’re only allowed to have so much personal property when you file bankruptcy (remember, cash is personal property). Generally speaking, when you file bankruptcy, you’re considered as owning a portion of your next tax refund. If you own a lot of personal property, the cash you get from your tax refund may be more than you are allowed to keep. So, whether someone can keep their entire tax refund depends on that person’s personal circumstances.

There is some good news: to the extent that your tax refund is attributable to *earned income credit* you keep all of it.

I co-signed on a loan with my spouse, will my bankruptcy affect him/her?

When you and your spouse co-sign a loan, you are both personally, equally liable for the loan. If one of you files bankruptcy and the other does not, the effect is to remove the spouse who filed bankruptcy from the loan. So, the spouse who didn’t file bankruptcy remains liable for the loan.

Are there some debt that can’t be discharged in a bankruptcy?

Yes. Here’s a short list of debts that will survive a bankruptcy:

1. Domestic support obligations (i.e., child support, alimony)
2. Certain tax obligations
3. Criminal restitution, and related fees and penalties
4. Debts owed due to fraud or theft
5. Student loans
1. (technically, there is a chance student loans could be discharged in a bankruptcy but it rarely, rarely, rare-ly, happens.)