. What are the advantages of bankruptcy?

Once discharged through bankruptcy your debts are erased; in other words you are no longer responsible for paying them.

2. What about my credit?

The fact is that when lenders or other creditors review your credit report they rank bankruptcy as the worst.

3. How long do I have to wait to rebuild my credit?

You can rebuild your credit immediately with a secured loan or credit card. In fact you can even obtain these items while going through the bankruptcy process.

4. How long does it take before my debt are discharged?

Chapter 7 takes between 3 to 8 months;

Chapter 11 can take from just under a year to many years;

Chapter 13 can take several months while trying to get your repayment plan approved. However, the actual discharge is not final until you've met the payment plan requirements which takes from 36 to 60 months to complete.

5. How long until my credit gets back to the point where I might hope to get a regular credit card or mortgage?

Rebuilding credit depends on how aggressively you try to get back on track, but don't figure less than 1-3 years. Remember, you can always get a secured credit card or a mortgage with a low loan to value (LTV) and high interest rate, sometimes even still in the middle of a bankruptcy.

6. How would I know if Chapter 7 is right for my situation?

If you have very few assets with no property and your assets can be exempted then Chapter 7 may be right for you as long as you have no other obligations such as court ordered alimony, child support payments, criminal restitution, non-dischargeable taxes, or student loans. (list of non-dischargeable items) Many national creditors prefer that you file Chapter 7 if they cannot recover at least 50 cents on the dollar.

7. Which bankruptcy chapter is the least expensive?

Chapter 7 is the least expensive because you do not have to pay off the debts. The next least expensive is Chapter 13 where you repay about 10 cents on the dollar, followed by Chapter 11.

8. Can I pick and choose which assets to put into a personal bankruptcy?

No. Every asset you own must be included in the filing. After filing you may choose to exempt some of your assets.

9. So I exempted my vehicle, what happens to it?

You didn't actually exempt the vehicle (or any asset) you really only exempted the equity (if any) in the asset . So, if you have a loan for $17,000 on a vehicle worth $20,000 then you exempt $3,000. However this does not mean you get to keep the car free. You only keep the vehicle if you make payments on it.

On the other hand, if the situation was reversed and you owed $20,000 on a vehicle worth only $17,000 then you could choose to simply give the vehicle back and owe nothing. One of the advantages to filing bankruptcy.

10. What does reaffirm mean?

You become personally liable for the debt again. For instance, in the vehicle example above if you kept the car and made payments the creditor would probably want you to sign a new contract (reaffirm) for the vehicle.

11. What exactly can I exempt?

It depends on which state you live in. Most states allow the Federal exemptions but also have state exemptions that may be more favorable.

12. Does my personal bankruptcy affect my corporation?

No! But your shares go to the trustee and may restrict your voting and transferring privileges.

13. Can I file a personal Chapter 11?

Individuals may file.

14. Do I have to appear before a bankruptcy judge?

No, you will meet with a trustee and your creditors at a meeting called 341.

15. What is the trustee's job?

Find assets with equity, liquidate them and then pay off the secured creditors. If any money is left then they also pay unsecured creditors based on priority. For a more in depth explanation see

16. What if I want to keep some non-exempted assets?

In most cases, you can buy them back from the trustee.

17. If I change my mind after filing can I get of or stop the bankruptcy?

Only the judge will decide if it may be dismissed or not. Even if you get the case dismissed your credit report will still show that you filed.

18. After I file bankruptcy can I still workout the non-exempt assets?

In Chapters 11 and 13 you may negotiate with your creditors out of court. In a Chapter 7 you may do a workout if the trustee abandons the property.

19. What does it mean when a trustee abandons property?

When the liquidation value of an asset cannot pay off the secured creditors, the trustee "abandons" it, or simply gives it back to the debtor. Although you've been discharged from the obligation, if a workout can not be achieved or payments made, you'll probably lose the property at a foreclosure.

20. I thought bankruptcy stopped foreclosure? Can they still take my house?

When you file Bankruptcy, you receive an "automatic stay" on court actions such as foreclosures and sheriff's sales. A creditor can still go into court and ask the bankruptcy judge for a "relief from stay", and if granted the creditor can proceed with court action to foreclose.

21. What are the reasons a judge would allow creditors to take my home after I've filed bankruptcy?

1. You filed a chapter 7.
2. You fail to file a reorganization plan or other required documents on time
3. You default on your scheduled Chapter 13 or Chapter 11 payments.
4. Your income is insufficient to execute a reorganization plan within the court's guidelines.
5. The asset in question will not be needed to reorganize.
6. The value of the asset is rapidly eroding.

22. What if I can't make any payments, should I file Chapter 13 or Chapter 7?

If you truly cannot make payments on your home or other assets you're probably better off filing Chapter 7 and using the money you would have spent on Chapter 13 to survive on.

23. Should I leave some debts out of my bankruptcy?

No, you should include all debts.

24. Can I change from a Chapter 13 to a Chapter 7 or vice versa later?

Yes, it's called "motion to convert" and can be done after you've filed for either chapter, be advised that the trustee can also request a conversion!

For instance, if your chapter 13 fails, either you or the creditor, may request a conversion to chapter 7. Likewise if the trustee thinks money might be available for unsecured creditors they may make a motion to convert your chapter 7 to a chapter 13.

25. Can I keep my house, cars or pets?

After filing you can exempt certain items such as a house or pedigree dog. However, in order to keep these items you'll need to stay current on payments such as a mortgage or car payment.

26. What if I run out of exemptions but still want to keep some items?

After all exemptions have been exhausted, you may still be able to buy back from the trustee certain assets.

27. Does my spouse and I have to file jointly?

No! The decision to file individually or together depends on your situation. For instance . . .

1. If only one partner owns all or most of the debt then only that person should file;
2. If both partners own the debt, and want to file a Chapter 7 then both should file;
3. If you're trying to stop a foreclosure, only one person, on the title to the home, need file a Chapter 13.

28. If only my spouse files, what am I liable for and what happens to my credit?

As long as there was no joint debt, your credit will not be affected. However, any future join credit purchases will depend upon the member with the worst credit history. On the other hand, if there was joint debt and only one member filed, then the member who did not file will be help responsible for the entire debt.

29. Can I file without my family, friends, or spouse having to know about it?

Yes! You can file without telling family and friends.

30. Is going Bankrupt a bad thing to do?

In calendar year 1999, approximately 1.3 million individuals sought the relief from debts and claims of creditors by filing for bankruptcy, down slightly from the 1.4 million in calendar 1998. With that huge number of people seeking relief from their debts and the claims of their creditors, much of the stigma of "going bankrupt" has gone away. In addition to providing relief from debts and obligations for individuals, hundreds of such long established blue chip companies as Dow Corning, Montgomery Ward, Penn Central and Texaco have used the provisions of the bankruptcy laws.

31. Lots of people are filing for Bankruptcy, why shouldn't I?

Bankruptcy is not something that should be entered into just for the heck of it. Very often there are intelligent alternatives to bankruptcy that may produce a far better result than going into bankruptcy. Bankruptcy also goes on your credit records, and may make it difficult to obtain new credit for years. Before anyone files for bankruptcy he or she should consult with a bankruptcy lawyer. There are critically important issues as to timing and disclosure that you had better address before, not after, you file for bankruptcy.

32. Are there different types of bankruptcy?

Yes, and they are known by the title of the Chapter of the Federal Bankruptcy Act in which they appear. Each "Chapter" contains a different set of laws and rules.

33. What is chapter 7, 11, 12, and 13?

Chapter 7 is the most frequently used chapter because it involves the complete liquidation of a debtor's property, with the proceeds used to pay off the debts. However, the debtor can retain certain exempt property under Federal law and/or State law, such as tools of one's trade, limited equity in a car and house, and some personal effects. If you use Chapter 7 you may lose your home (depending on your state) but it does enable you to get out from under the burden of debt more quickly.

Chapter 11 is typically used for business bankruptcies and restructuring. It is not commonly used by individual consumers since it is far more complex and expensive to pursue. It allows businesses to reorganize themselves, giving them an opportunity to restructure debt and get out from under certain burdensome leases and contracts. Typically a business is allowed to continue to operate while it is in Chapter 11, although it does so under the supervision of the Bankruptcy Court and its appointees.

Chapter 12 allows farmers with real estate debts to pay off the debts from the profits generated by future crops.

Chapter 13, which has also been known as a wage earner's plan, is used by about 25% of consumers. In Chapter 13, consumers work out a periodic payment plan with their creditors to pay off their debts, or at least substantial portions of the debt. Generally the creditors expect to get more than they would have received from the debtor's estate if the debtor had sought a complete liquidation under Chapter 7.

One of the important benefits of Chapter 13 is that debtors generally continue to live in their home so long as they comply with the terms of the Chapter 13 arrangement. If the debtor fails to comply, the Court treats the matter as a Chapter 7 liquidation. The disadvantage of Chapter 13 to the debtor is that the debts can linger for years, burdening future income.

34. Can all my debts be discharged in bankruptcy?

No. (See question 45 below) There are exemptions and depending on your circumstances bankruptcy may or may not make sense for you. You must decide whether, after the bankruptcy, you will be better or worse off.

35. What debts cannot be discharged in bankruptcy?

In general:

• Liens, such as mortgages and security interests in cars are non-dischargeable as are some other types of obligations including: Federal, State and local tax claims (subject to specific time rules)
• Customs duties
• Spousal and Child support
• Most student loans
• Secured debts
• Fines and penalties imposed by government agencies
• Debts incurred due to false statements made with the intent to deceive
• Fraud committed in a fiduciary capacity, such as embezzlement or larceny
• Punitive damage claims for "willful and malicious" acts
• Debts not list on the forms filed with the Court
• Drunk driving obligations

A non-dischargeable debt is one that will survive the bankruptcy proceeding. The debtor still has the obligation to pay this debt; the creditor has every right to collect.

36. What if I committed fraud, would my debts still be discharged in bankruptcy?

No! The Bankruptcy Code has long prohibited debtors from discharging liabilities incurred on account of their fraud, carrying forth a basic policy of affording relief only to an "honest but unfortunate debtor." Congress did not favor giving perpetrators of fraud a fresh start (by allowing them to wipe out their debts in bankruptcy) over the interest in protecting victims of fraud when it wrote the Bankruptcy Laws.

Accordingly, Section 523(a)(2)(A) of the Bankruptcy Code excepts from discharge in bankruptcy "any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud." 11 U.S.C. § 523(a)(2)(A).

37. I have statutory penalties and punitive damages for fraud, can they be discharged in bankruptcy?

No. It is not only the actual value of the "money, property, services, or . . . credit" the debtor obtained through fraud that is non-dischargeable in bankruptcy, but also treble "punitive" damages and attorneys fees and costs related to the fraud.

This was made clear in a March 25, 1998 decision of the Supreme Court of the United States in Cohen v. de la Cruz. The case involved a landlord who had overcharged his tenants. The trial court found that the landlord had committed "actual fraud" within the meaning of the Bankruptcy Act and that his conduct amounted to an "unconscionable commercial practice" under New Jersey’s Consumer Fraud Act. As a result, the court awarded the tenants treble damages plus reasonable attorney's fees and costs.

38. Can the creditor ask to have me reaffirm the debt?

Yes, this means that the creditor is asking that the debtor pay the debt anyway, even after it has been discharged. A debtor may be willing to do this if there is a co-signer or guarantor of the debt (such as a family member, friend or employer) that the debtor does not wish to leave saddled with the debt.

Also, a debtor may want to reaffirm a debt in order to avoid having a secured creditor take the collateral provided for the debt. A creditor may also ask a debtor to reaffirm the debt before he (the creditor) will agree to do business with the debtor again.

39. Which is the best option; Chapter 7 or 13?

The answer really depends on your financial picture. An individual with serious financial difficulties would most likely find Chapter 7 "straight" bankruptcy proceeding as the preferred type. A Chapter 7 proceeding, used by approximately 70% of all consumers filing bankruptcy petitions, is faster to complete, giving the debtor a financial "fresh start" without the years of sacrifice.

On the other hand, a Chapter 13 plan offers an alternative if you have a steady income, a stable job, and want to pay off most or all of your debts.

40. Can I really file bankruptcy without a lawyer?

It is possible, but I do not recommend it. 

41. What are the tax obligations of a person filing a bankruptcy?

The tax obligations of the person filing a bankruptcy petition vary depending on whether you file a Chapter 7 or Chapter 13. The filing of a Chapter 7 bankruptcy petition creates a separate taxable bankruptcy estate, consisting of property that belongs to you before the filing date, and is completely separate from you as an individual taxpayer.

The trustee is responsible for preparing and filing the estate’s tax returns (Form 1041) and paying its taxes. The individual debtor remains responsible for filing returns (Form 1040) and paying taxes on any income that does not belong to the estate. The filing of a Chapter 13 bankruptcy petition does not create a separate taxable estate for federal tax purposes. You file the same federal income tax return (Form 1040) that was filed prior to the bankruptcy petition.

42. What happens to my Federal Tax Debts?

It depends whether you file a Chapter 7 or a Chapter 13. A Chapter 7 debtor can wipe out federal income taxes if all the following are met:

the IRS had not filed a prior tax lien on the assets you own (if they have, the lien survives bankruptcy, which means that the government may still seize property to collect the discharged tax debts);

you didn't file fraudulently or try to evade paying your taxes;

your liability is for a tax return filed at least two years prior to the bankruptcy;

the tax return was due more than three years ago; and

tax deficiencies that were assessed on prior returns were assessed at least 240 days prior to the filing of the bankruptcy.

In a Chapter 13 filing, you'll pay the IRS as part of your repayment plan.

43. My spouse is declaring bankruptcy; should he/she file alone or together?

Whether married couples should file a joint petition or a single one depends on various factors: type of property, the amount of community debt involved, and how the property is held (e.g., community, joint tenancy, or an estate-by-the entirety--see "Real Estate").

Filing together eliminates the separate debts of you and your spouse and all the jointly-held marital debts. Filing alone leaves the non-bankrupt spouse still liable for his or her share of joint debts, but wipes out the spouse's separate debts and his/her share of the joint debts.

If you are legally separated, have divided your property, and taken care of all the financial considerations, your best option may be to have your spouse go it alone. If all the debts were incurred before you were married, there is no point in having you both file.

Community property) and common law (also called "equitable distribution") are the two types of martial property ownership. The vast majority of states apply the equitable distribution rules; nine states apply the community property rules. If you live in a common law property state, your spouse's bankrupt estate will include his/her separate property and half of the jointly-held marital property. The non-bankrupt spouse will not have to worry about the effects of the bankruptcy on his or her separate property.

However, the bankruptcy court takes a dim view if the non-bankrupt spouse is merely holding the property or has received the property from the bankrupt spouse within one year of filing bankruptcy. In this case, this transaction is considered fraudulent, and the property will be turned over to the bankruptcy trustee.

In community property states, spouses equally own all property earned or received during the marriage, splitting 50-50. In bankruptcy, then, all the community property you and your spouse own jointly is part of the bankruptcy estate, regardless whether you join in the filing. Your separate property -- property you owned before the marriage -- is not effected by your spouse's bankruptcy. Property held by your spouse will be used to settle debt first, and then non-exempt community property will be used.

44. What is Community Property?

There are nine community property states - Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In addition, Puerto Rico is a community property jurisdiction.

These states generally regard as community property all property that has been acquired during the marriage, other than a gift or inheritance. Even if one spouse earns all the money to acquire the property, all the property acquired is considered to be community property. While there are a number of differences in each state, all states have special laws that operate on the theory that both spouses contribute equally to the marriage; thus all property acquired during the marriage is the result of the combined efforts of both spouses. In community property jurisdictions, spouses equally own all community property (fifty percent owned by the husband and fifty percent owned by the wife).

45. What is "Equitable Distribution"?

Most states employ "equitable distribution" in dividing marital (community) property as a result of the dissolution of marriage (divorce). Instead of a strict fifty-fifty split (in which each spouse receives exactly one-half of the marital or separate property), equitable distribution looks at the financial situation that each spouse will be in after the termination of the marriage. While equitable distribution is more flexible, it is harder to predict the actual outcome, since the various factors are subjectively weighed. Factors considered in equitable distribution include:

Earning power of the spouses (one might be much greater than the other)

Separate property of the spouses (one might be greater in value than the other)

One spouse having done all the work to acquire the property

The value that one spouse contributed as the home-maker for the family

Economic fault of one spouse in wasting and dissipating marital property

Duration of the marriage

Age and relative health of the spouses

The responsibility for providing for children of the marriage

Spousal abuse or marital infidelity (to penalize the offending spouse)

Business Bankruptcy FAQ

 

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Q: Can a business be forced into bankruptcy?

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• A: Yes. If enough is at stake, creditors can start an involuntary bankruptcy proceeding against a business. This doesn't happen too often but it does happen when creditors are concerned that a debtor is squandering or misappropriating assets that should otherwise go to pay debts that are owed to them.

   

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Q: Can a business get a discharge?

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• A: If you're operating your business as a sole proprietor, you may still be entitled to a discharge. But corporations and other business entities are not entitled to a discharge.

  A sole proprietor should keep in mind, though, that a bankruptcy filing must include all of the debtor entity's debts, regardless of how or why they were incurred. So it would be difficult for a sole proprietor to treat business debts separately from his or her personal finances. The assets of a sole proprietorship, like business equipment or receivables, are property of the bankruptcy estate unless they're claimed exempt or abandoned by the trustee in a Chapter 7. But it may be possible to classify business debts separately and pay them in full in a Chapter 13, if necessary to continue to use vendors. An individual debtor can also reaffirm debts.

   

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Q: Can a debtor give special treatment to certain creditors?

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• A: Subject to certain defenses, the power to avoid transfers is generally effective against transfers made by a debtor within 90 days prior to filing bankruptcy. Transfers to "insiders" (relatives, general partners, and directors or officers of the debtor) made up to a year before filing can be avoided. Also under 11 U.S.C. 544, the trustee has authority to avoid transfers under applicable state law, which often provides for longer time periods. Check with an attorney in your state to find out the time frame for avoidable transfers before you contemplate filing your bankruptcy petition.

   

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Q: Can all types of debt be discharged?

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• A: No. Although the debts that can't be discharged vary slightly between the different chapters of bankruptcy, the following generally can't be discharged:
  • Debts for taxes owed to local, state or federal agencies
  • Debts for money, property, services, or an extension, renewal, or refinancing of credit, which was obtained fraudulently
  • Debts which were neither listed nor scheduled or which the debtor waived discharge
  • Debts which are owed to a spouse, former spouse, or child of the debtor, for alimony, maintenance, or support of such spouse or child, in connection with a separation agreement, divorce decree or other order of a court of record
  • Debts owed for willful and malicious injury by the debtor to another person or property owned by another
  • Debts for government sponsored educational loans, unless it can be shown that repayment will cause an undue hardship
  • Debts for death or personal injury caused by the debtor's drunk driving or from driving while under the influence of drugs, or other substance
  • Debts incurred after the bankruptcy was filed

   

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Q: If they can't pay their creditors, how do people afford bankruptcy lawyers?

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• A: Usually a bankruptcy lawyer is going to insist on being paid up front. When people know that filing bankruptcy is inevitable, they can plan ahead to pay their lawyer. This usually involves paying the lawyer at the expense of and with money that might otherwise have gone to pay unsecured creditors. The logic is that, if someone is going to file bankruptcy anyway, it's better to reallocate the resources to pay for good legal representation rather than continue to pay on an unsecured debt that is going to be discharged or structured in the bankruptcy. Usually a bankruptcy lawyer is not even going to be subject to the same rules that apply to creditors, because he or she will be paid a retainer in advance so that the lawyer isn't a creditor of the bankruptcy debtor at the time the petition is filed.

   

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Q: Isn't it true that someone can only file for bankruptcy once every seven years?

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• A: No. This is a common misinterpretation of the rule. The court will deny a discharge if the debtor received a discharge under chapter 7 or chapter 11 in a case filed within 8 years before the second bankruptcy petition is filed or if the debtor previously received a discharge in chapter 12 or chapter 13 case that was filed within 6 years before filing the second case. If the debtor can show that all the unsecured claims in the earlier case were paid in full or the debtor made payments totaling 70 percent of the allowed secured claims, and the plan was proposed in good faith and the payments represented the best efforts of the debtor, the debtor may not have to wait that long for a second discharge. A debtor is not eligible for discharge under chapter 13 if he or she received a prior discharge in chapter 7, 11, or 12 case filed within 4 years before the current case was filed or in a chapter 13 case filed two years before the current case.

  There are other strategies that debtors can utilize, as well. For example, you can file a Chapter 7 to discharge those debts that are dischargeable and file a subsequent Chapter 13 to repay those debts that were not discharged in Chapter 7.

   

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Q: What happens if a debtor or a creditor doesn't follow the bankruptcy rules?

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• A: The bankruptcy rules are very complicated. If a debtor fails to comply with the rules or makes misrepresentations to the bankruptcy court, the court may deny a discharge. Debtors have to be very careful to account for everything and to follow the bankruptcy rules.

  In the alternative, a bankruptcy court may simply dismiss a bankruptcy, meaning that the debtor would no longer be entitled to protection of the bankruptcy laws. A debtor could even be prosecuted criminally.

  Creditors are not immune, either. They may be subject to similar sanctions if, for example, they collude with the debtor to hide assets. A creditor can also get in big trouble with the bankruptcy court for violating the automatic stay.

   

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Q: What happens to my corporation if I file personal bankruptcy?

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• A: Since the corporation is a legal entity different and distinct from its shareholders, the bankruptcy of a stockholder doesn't affect the corporation. But the bankrupt shareholder's shares in the corporation are an asset of his or her bankruptcy estate. The value of the shares in the hands of the bankruptcy estate is a function of:
  • The share's marketability
  • The percentage interest they represent of the corporation
  • The net value of the corporation's assets

  A corporate bankruptcy shouldn't directly affect the shareholders. If the officers or shareholders are personally liable for the debts of the business, the automatic stay in the corporation's case doesn't prevent creditors from trying to collect from others who may be liable.

  Stockholders don't have to be notified of a chapter 7 filing because they usually don't receive anything in return for their investment. If creditors are paid in full, the court will notify the stockholders and give them a chance to file claims to whatever is left over.

  It makes no difference if you have made an "S" election for your corporation. Such an election is a matter of tax law. For purposes of the bankruptcy laws, an "S" corporation is treated no differently than a "C" corporation. But any taxable income generated by an "S" corporation after bankruptcy may still be taxable to the shareholders, as the corporation isn't a taxpaying entity.

   

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Q:

What's "bankruptcy" and how does it affect business?

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• A: While technical definitions of bankruptcy can vary, the term refers to a situation where an individual or a business has liabilities that exceed assets, or where the person or business is insolvent by reason of not being able to meet financial obligations as they become due.

   

  Virtually anyone or any type of business entity can start a bankruptcy proceeding by filing a petition in federal bankruptcy court. The bankrupt person who files a petition is called the bankruptcy debtor.

   

  The filing of a bankruptcy petition affects all creditors of the debtor. There are many different categories of creditors, including:
  • Secured creditors (usually those with a lien on a debtor's property)
  • Unsecured creditors (usually vendors, credit card companies and anyone else who doesn't have a security interest in any of the debtor's property
  • Judgment creditors (usually those creditors who have sued and obtained a judgment against the debtor prior to the bankruptcy being filed)
  • Creditors with super priority claims (who have higher priority over other creditors because of special rules or proceedings within the bankruptcy)
  • Creditors with administrative claims (usually creditors such as accountants or lawyers with claims that are given priority because of their having assisted in the bankruptcy in some manner)
  • Post-petition creditors (who have extended credit to the debtor after the bankruptcy has been filed. Bankruptcy generally covers only pre-petition debts (those that were outstanding at the time the petition was filed).

   

  Inevitably, every business is going to run into situations where customers file bankruptcy. Businesses will end up filing bankruptcy, as well.

   

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Q:

What's the effect of filing a bankruptcy petition?

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• A: The filing of a bankruptcy petition is a lot like filing a lawsuit in the sense that the act of filing simply starts a legal proceeding without any guarantees of the outcome. The debtor will make allegations, but there's no guarantee that the court will declare the debtor bankrupt or grant any other requests. The debtor must go through a statutory process, with creditors and other third parties given the opportunity to challenge and object to the relief being sought by the debtor.

  Unlike any other type of legal proceeding, though, the filing of a bankruptcy petition immediately gives rise to an "automatic stay" that stops creditors from taking any further action to try to collect their debts unless or until the bankruptcy court decides to the contrary. The automatic stay is an injunction that's issued against all creditors immediately upon filing a bankruptcy petition. The intent behind the automatic stay is to give debtors temporary relief from their financial problems, giving them the opportunity to figure out how to deal with them.

  The automatic stay is only temporary, and there are any number of ways that a creditor can get relief from the bankruptcy court to proceed with trying to collect its debt. One common way is to file a petition or motion with the court, asking for relief from the automatic stay. In the case of a secured creditor, a court will look to see if the creditor is adequately protected. For example, a creditor with a lien on real property may still be adequately protected if there's enough equity and/or the debtor starts making "post-petition" payments again after the filing of the bankruptcy. If there isn't adequate protection, a creditor may be given permission to proceed with foreclosure or other remedies.

   

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Q: What kinds of bankruptcies are there?

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• A: There are four kinds of bankruptcy proceedings that are commonly referenced by the different chapters of the federal bankruptcy code that covers them:
  • Chapter 7 is the most common type of bankruptcy proceeding. Chapter 7 is available to individuals, married couples, corporations and partnerships. In this proceeding, individual debtors may seek a discharge of their unsecured debts, meaning that they are extinguished by order of the bankruptcy court at the end of the proceeding. Unless there are problems in the case, individual debtors are usually able to get a discharge within four to six months of filing the case.

    As in all bankruptcy filings, the filing of a Chapter 7 proceeding imposes an automatic stay on all creditors, which prevents them from trying to collect their debts without first getting approval of the bankruptcy court. A bankruptcy trustee is appointed to the debtor's case, who controls all of the debtor's assets. All creditors must be given notice of the proceeding. The trustee then identifies which assets of the debtor are exempt from the bankruptcy proceeding (such as personal effects, household goods, qualified retirement funds), and those that will be sold to pay off creditor claims.

    A Chapter 7 is a liquidation proceeding, which means that the debtor's non-exempt assets, if any, are sold or otherwise liquidated by the trustee. The proceeds are distributed to creditors according to the priorities rules established by the federal bankruptcy code.

    Any wages the debtor earns after the case is begun are the debtor's, beyond the reach of creditors who had claims on the date of filing.

     

  • Chapter 11 is a reorganization proceeding, typically for corporations or partnerships. A business in financial trouble may elect to file a Chapter 11 petition to try to reorganize outstanding debts and continue to operate the business. There's an automatic stay, just like any other bankruptcy proceeding. Unlike a Chapter 7 proceeding, though, a business that files a Chapter 11 proceeding will become a debtor-in-possession, and there will initially be no bankruptcy trustee appointed. The debtor-in-possession is given an opportunity to prepare a plan of reorganization that must be approved by a majority of the creditors. If a plan is approved by the creditors and is confirmed by the court, it binds both the debtor and the creditors to its terms of repayment. Under the plan, the debtor-in-possession can reduce debts by repaying a portion of its obligations and discharging others. It can also terminate burdensome contracts and leases, recover assets, and rescale operations to get back to profitability. Under this chapter, a business normally goes through a consolidation period and comes away with a reduced debt load and a reorganized business. Plans can call for repayment out of future profits, sales of some or all of the assets, or a merger or recapitalization. Generally, the plan of reorganization must provide for paying creditors at least as much as they would have been entitled to be paid in a Chapter 7 liquidation proceeding.

    It isn't easy to salvage a business in a Chapter 11 proceeding, and many of them end up converting to a Chapter 7.

     

  • Chapter 12 is a simplified reorganization for family farmers, modeled after Chapter 13. The debtor retains his property and pays creditors out of future income.

     

  • Chapter 13 is a repayment plan for individuals only. It protects the debtor from collection action during the case and discharges any unpaid balance of dischargeable debts at the end of the plan. It's a powerful tool for debtors to regain control of their financial lives and to get a meaningful fresh start. A debtor must have a regular income and less than $922,975 in secured debt (debt involving property that your creditor might take if you don't make your payments) and $307,675 in unsecured debt. The debtor keeps his property and makes regular payments to the Chapter 13 trustee out of future income, to pay creditors over time (3-5 years). Repayment in Chapter 13 can range from 10% to 100% depending on the debtor's income and the makeup of the debt. Certain debts that can't be discharged in Chapter 7 can be discharged in Chapter 13 (which is one incentive for a debtor to choose this type of proceeding over a straight liquidation under Chapter 7). Chapter 13 also provides a mechanism for individuals to prevent foreclosures and repossessions, while catching up on their secured debts.

   

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Q: When should a business file for bankruptcy?

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• A: This is not an easy decision and a business owner should first exhaust all other options. There are also different types of bankruptcy proceedings, so the decision may not be as simple as you think. It's a good idea to get financial and legal advice before taking any action.

  As a business owner, you may want to file bankruptcy if there's a black cloud of credit problems hanging over your head that just won't go away. In these situations, the relief of filing bankruptcy will usually outweigh the inevitable drawbacks from doing so (like loss of the business, hurting credit history, embarrassment).

  In a business setting, though, there may not be quite the stigma to filing bankruptcy and it can actually be an effective tool to save a business enterprise. In a Chapter 11 proceeding, for example, you can sometimes restructure or consolidate debts and come out of the bankruptcy with a fresh start. In most instances, creditors would rather that a business not file for bankruptcy since they may then get nothing. But creditors are usually of the mindset that none of them is going to accept a compromise on a debt unless they all do. The threat of filing bankruptcy is sometimes just the leverage a business needs.

  A distressed business may actually be able to work with one or more creditors up front to develop a plan of reorganization prior to filing bankruptcy, and then use a bankruptcy filing as a means to put the plan in place. The bankruptcy will allow for an orderly process to be followed with all claims being addressed within the same proceeding within the exclusive jurisdiction of the bankruptcy court. Otherwise, the creditors working with the debtor would have to worry about other creditors trying to exercise their own remedies by filing separate lawsuits or by trying to foreclose on assets that the debtor would need to reorganize.

  Most publicly-held companies will file under chapter 11 rather than chapter 7 because they can still run their business and control the bankruptcy process. Chapter 11 is a way to rehabilitate the business. Sometimes the plan returns the business to profitability; other time it ends up liquidating.

  Under chapter 11, a company's stocks and bonds may continue to trade but the company must file SEC reports.

  The trustee will appoint a committee to represent the interest of the creditors and stockholders in trying to develop a plan of reorganization. The plan must be accepted by the creditors and stockholders and confirmed by the court. The court may confirm a plan if it rejected by the stockholders and creditors if the court finds that the plan treats everyone fairly.

   

MYTHS OF FILING BANKRUPTCY I will lose my house if I file for bankruptcy. In the majority of bankruptcies, people can keep their homes and other property, including the family car and essentials. This is done by using exemptions that are allowed under the law to keep assets. Everyone will know I've filed for bankruptcy. Well, unless you're a well known person or a major corporation and the filing is picked up by the media, the chances are very good that the only people who will know about a filing are your creditors. Although bankruptcy is a public legal proceeding, the numbers of people filing are so massive, very few publications will print all of them. All debts are wiped out in Chapter 7 bankruptcy. There are certain kinds of debts that will not be discharged. They include child support and alimony, student loans and debts incurred as the result of fraud. If you've defrauded someone and a judgment has been made against you, that won't be erased either. I'll lose everything I have. People think that they will lose everything in a bankruptcy. While the bankruptcy laws vary from state to state, every state has exemptions that protect certain kinds of assets, such as your house, your car (up to a certain value), money in qualified retirement plans, household goods and clothing. If you have a mortgage or a car loan, you can keep those as long as you stay current on the payments. I'll never get credit again. Actually, shortly after your discharge, you will start receiving credit card offers. They will be from subprime lenders that will charge very high interest rates. However, if you're planning to buy a house or a car, you might want to do that before you file. Those loans will be tough to get, and the higher interest rate on such a large purchase would make a significant impact on your payments. If you're married, both spouses have to file for bankruptcy. Not necessarily. It is not uncommon for one spouse to have a significant amount of debt in their name only. However, if spouses have debts they want to discharge that they're both liable for, they should file together. Otherwise, the creditor will demand payment for the entire amount from the spouse who didn't file. I am irresponsible if I file for bankruptcy. Most people file for bankruptcy after a life-changing experience, such as a divorce, the loss of a job or a serious illness. They've struggled to pay their bills for months and just keep falling further behind. I don't want to include certain creditors in my filing. You must list all of your creditors in your bankruptcy petition. Filing for bankruptcy will improve my credit rating. A bankruptcy can stay on your credit report for up to ten years. I can max out all my credit cards. No, do not do this, it’s called fraud. The trustee in your case will review all your purchases right before your filing. They know what to look for. I don’t have to list all my debt and assets. Actually, when debts and property are in your name it has to be listed even if a relative or friend has possession of the property and is making the payments. Did you Know? Financial troubles are not limited by socio economic status. Filing for bankruptcy does not mean you are financially irresponsible and of poor character. People with all levels of income can overcome their financial problems by filing for bankruptcy. Many of the following famous people bounced back after bankruptcy and were able to make great money and do successful things: Phineas Taylor (P.T.) Barnum - Founder of Barnum Circus (who later merged his circus with James Bailey to form Barnum & Bailey Circus) Kim Basinger - Actress L. Frank Baum - Wizard of Oz author King Edward II - 14th century English King Lorraine Bracco - Actress Natalie Cole - Singer Gary Coleman - Actor John Connally - Former Texas Governor Francis Ford Coppola - Film Director/Producer Cathy Lee Crosby - Actress Walt Disney - Film Producer & Theme Park Pioneer Eddie Fisher - Actor Mick Fleetwood - Singer (Fleetwood Mac) Heidi Fleiss - Clothing Line Founder & Famous Hollywood Madam Henry Ford - First two automobile companies failed William Fox - Co-founder of 20th Century Fox Film Corporation Marvin Gaye - Singer Andy Gibb - Singer Charles Goodyear - Founder of Goodyear Tire Co. Ulysses S. Grant - 18th U.S. President & Civil War General Bob Guccione - Publisher/Founder of Penthouse Magazine Dorothy Hamill - Olympic Ice Skater Richard Harris - Actor/Producer/Director Isaac Hayes - Songwriter/Musician/Singer Henry John Heinz - Famous Condiment Manufacturer Sherman Hemsley - Actor (George Jefferson from The Jeffersons Milton Snavely Hershey - Founder of Hershey's Foods Corp. Jermaine Jackson - Singer (Michael Jackson's brother) Joe & Katherine Jackson - Parents of the Michael Jackson Thomas Jefferson - American Founding Father and President Don Johnson - Actor/Producer Larry King - Talk-show Host/Author Bowie Kuhn - Former Major League Baseball Commissioner Stan Lee - Co-creator of Spider Man, The Incredible Hulk, The X-Men, etc. Jerry Lewis - Actor Jerry Lee Lewis - Singer Meat Loaf - Singer Jorge & Joanne Lopes - Winners of the $110.3 million 2002 Big Game Multi-state Lotto jackpot. Wolfgang Amadeus Mozart - Famous Musical Composer Willie Nelson - Country & Western Singer/Songwriter Wayne Newton - Famous Singer/Actor who regularly performs in Las Vegas Immanuel Nobel - Father of Alfred Nobel (who founded Nobel prizes) Tom Petty - Singer Burt Reynolds - Actor/Director Debbie Reynolds - Actress/Singer Mickey Rooney - Actor Anna Nicole Smith - Model/Actress James & Lynne Spears - Britney Spear's parents Donald Trump's Trump Hotels and Casino Resorts Inc. Mike Tyson - Boxer Johnny Unitas - Hall of Fame Quarterback