Real Answers To The Tough Bankruptcy Questions

Frequently Asked Bankruptcy Questions

Chapter 7 Questions, Chapter 11 Questions & Chapter 13 Questions

Keeping your head above water in these uncertain financial times can be tough. Many people are falling behind on bills through no fault of their own. Between falling house values and layoffs, you're not alone if you have been forced into making financial decisions you swore you'd never make, like charging groceries on a credit card or using a cash advance service.

Perhaps another financial decision you swore you'd never make is to file bankruptcy. Filing, however, may be just what you need to start fresh and move forward in a better financial position. While there are certainly lots of factors to consider before deciding to pursue this course of action, don't decide it's not for you before getting answers to the real tough bankruptcy questions.

Chapter 7 Bankruptcy Questions

What is Chapter 7 bankruptcy?

The main purpose of this bankruptcy is to get rid of a person's debt so they can start their life fresh. In Chapter 7, a debtor surrenders his or her non-exempt property to a bankruptcy trustee who then liquidates the property and distributes the proceeds to the debtor's unsecured creditors. In exchange, the debtor is entitled to a discharge of most of their debt. Certain debts (e.g. spousal and child support, student loans, some taxes) will not be discharged even though the debtor is generally discharged from his or her debt. Many individuals in financial distress own only exempt property (e.g. clothes, household goods, an older car) and will not have to surrender any property to the trustee. The amount of property that a debtor may exempt varies from state to state. Chapter 7 relief is available only once in any eight year period. Generally, the rights of secured creditors to their collateral continues even though their debt is discharged.

How do I qualify for Chapter 7 Bankruptcy?

For Individuals Filing "Consumer" Chapter 7 Bankruptcy:

Since October 2005, a new bankruptcy law has added new requirements to the bankruptcy process for individuals who wish to file. One of these requirements is passing the means test. In California, the current median income is:

Single Earners: $43,107
A Family of Four: $70,172

The debtor's average income for the last six months is compared to their state's median income. If the debtor passes the means test (meaning that their income is equal to or less than this median), then he or she is allowed to file for Chapter 7 bankruptcy. If the debtor doesn't pass the means test, they may be asked to file under Chapter 13 bankruptcy. Individuals filing for Chapter 7 or Chapter 13 bankruptcy must take a credit counseling course within 180 days prior to filing for bankruptcy protection.

For Companies Filing Corporate Chapter 7 Bankruptcy:

When a company files for bankruptcy under Chapter 7, the company ceases all operations and shuts itself down. Unlike Chapter 11 Bankruptcy, no reorganization plan is put into place and the company is not allowed to continue doing business. An appointed trustee is tasked with liquidating the business's assets to pay its debts. Secured creditors are paid off first, followed by unsecured creditors, and stockholders are only paid if the other creditors are paid off completely. The bankruptcy law regarding the scope of a chapter 7 discharge is complex, and debtors should consult a competent legal attorney prior to filing.

What is the process of Chapter 7 Bankruptcy?

The timeline for a Chapter 7 "No Asset" bankruptcy is generally a 90 day process. Once the case is filed, the court will generate a 341 Meeting of Creditors date to take place approximately 30 days from the file date. This is a mandatory meeting that is overseen by the Trustee. The debtor(s) creditors also have the opportunity to appear and inquire about debt incurred. The debtor(s) must then take the Financial Management Course or post-bankruptcy class within 45 days of the 341 meeting. The course is required for discharge and if not timely filed, the case will be closed without a discharge. If the Trustee determines the case to be a "No Asset" case, a Report of No Distribution will be filed. Once the deadline for objection to dischargeability has expired, the court will issue an Order of discharge and final decree. The case is then closed.

Chapter 13 Bankruptcy Questions

What is Chapter 13 Bankruptcy

Chapter 13 Bankruptcy, also called Reorganization Bankruptcy, enables financially distressed individual debtors to propose and carry out a repayment plan that will allow them to pay back creditors over an extended period of time. Companies are not allowed to file under Chapter 13 for bankruptcy protection. A person who owns a business, however, can file as an individual for Chapter 13 bankruptcy and include business-related debts as part of their debts.

How do I qualify for Chapter 13 Bankruptcy?

A person filing under Chapter 13 bankruptcy must show the courts that they have the resources to pay their debts over the next three to five years. Otherwise, a judge will not approve the repayment plan.

Under an approved Chapter 13 plan, a bankruptcy trustee appointed by the court will make the payments to the creditors.

Debts that must be paid in full include:

In order to qualify for Chapter 13 bankruptcy, your income must not be less than a certain minimum to ensure that you can pay your debts. Sources of income to fund a chapter 13 plan can include:

What is the process of Chapter 13 Bankruptcy?

As with a Chapter 7 bankruptcy, a person who wishes to file a Chapter 13 bankruptcy petition must first take a credit counseling course. Upon completion of this course, the debtor must present their certification of completion to the bankruptcy court, along with the many forms they will be required to fill out, their tax returns over the past five years, and a detailed repayment plan.

The filing of the petition under chapter 13 "automatically stays" most collection actions against the debtor, or the debtor's property, while a repayment plan is worked out under the supervision of the courts. As long as the "stay" is in effect, creditors generally cannot initiate or continue any lawsuits, make wage garnishments, or even make telephone calls demanding payments.

For example, by virtue of the automatic stay, an individual debtor faced with a threatened foreclosure of the mortgage on his or her principal residence in Cupertino can prevent an immediate foreclosure by filing a chapter 13 petition with the bankruptcy court's divisional office in San Jose. Chapter 13 then gives the debtor a right to cure defaults on long-term home mortgage debts by bringing the payments current over a reasonable period of time.

Chapter 11 Bankruptcy Questions

What is Chapter 11 Bankruptcy

A chapter 11 bankruptcy involves a bankruptcy reorganization plan that accommodates debt reorganization through a payment plan. This is similar to a Chapter 13 bankruptcy. Under this chapter, debtors prepare a disclosure statement which describes their proposed reorganization proposal and payment plan. The proposed plan is voted on by the various classes of creditors and then submitted to the Court for final approval.

How do I qualify for Chapter 11 Bankruptcy?

Both businesses and individuals may qualify for bankruptcy under Chapter 11. There is no limit to the amount of debt that can be discharged or repaid under a Chapter 11 bankruptcy. There is also no time limit for the duration of the bankruptcy.

What is the process of Chapter 11 Bankruptcy?

The process of Chapter 11 bankruptcy is very broad, complex and should be explained only by a qualified attorney.