|Frequently Asked Questions|
1. Are there alternatives to bankruptcy?
Yes. Bankruptcy is not always the best solution. In some cases you may be able to work out a payment agreement with creditors or settle your debts for less than the amount that you actually owe. Keep in mind, however, that whenever a lender agrees to accept less than full payment of a debt, the creditor is required to report the amount “charged off” to the IRS, and you must pay income tax on that amount as regular income. Also, it’s generally not in your best interest to borrow money using equity in a home or car in order to pay off unsecured debt.
2. What is bankruptcy?
Bankruptcy is a federal law that allows persons who owe more than they can afford to repay a way to either eliminate debts outright or pay only the portion that he or she can afford to repay, generally without a tax consequence.
3. Am I “cheating my creditors” by filing a bankruptcy?
No. The law implies into every agreement your right to protect the assets you’ve worked for your entire life by filing a bankruptcy case. All major banks and credit unions write contracts for their benefit, not their customers. Because most individuals are at a disadvantage against powerful banks, Congress enacted the Bankruptcy Code to “even up the playing field” to make it more fair for consumers to get a financial fresh start.
4. What’s the difference between a Chapter 7 and Chapter 13?
Chapter 7, also known as a “straight bankruptcy” discharges or eliminates most debts completely. There are some exceptions. Chapter 13, is a court structured repayment plan generally used to cure a mortgage delinquency so a home does not foreclose, modify the repayment terms of auto loans, catch up child/spousal support or an income tax arrearage, and, if you can afford it, pay the amount left over after your reasonable living expenses are met to other creditors.
5. Can anyone file bankruptcy?
No. Chapter 7 can only be used once within an 8 year period. Chapter 13 can be filed at any time, even if there was a prior bankruptcy case within 8 years. Also, the law limits how much income you can receive in order to qualify for a Chapter 7.
6. Do I have to repay all of my debts if I file a Chapter 13?
No. Chapter 13 plans typically are either 3 or 5 years, although they can be any length less than 5 years in unique cases. In Chapter 13, a judicial review of your budget determines what expenses are reasonable, and after your expenses are met, you pay only what you can afford.
7. Who manages my chapter 13 plan? Do I have to turn over all of my income?
The court appoints a trustee to your case who receives the monthly payment provided in the plan that you and your attorney jointly prepare. The amount of your payment depends upon what you can afford and which debts will be paid in the plan.
8. Can I keep my assets in bankruptcy?
Yes. In California, state law determines which assets you may keep in bankruptcy. In nearly all cases, all of a debtor’s assets are protected. However, if an asset has been used as collateral to secure a loan (usually a home or car), you may keep the asset only if you elect to continue the payments on that asset. In many Chapter 13 cases, you can restructure secured debt payments to make them more affordable. Often, by discharging unsecured debts, cash flow is then available to pay the secured debts.
9. What’s the difference between secured and unsecured debts?
Secured debts are those in which an asset has been pledged as collateral against the loan. Outside of bankruptcy, a “secured creditor” may seize (i.e. foreclose or repossess) the asset when loan payments are late. An unsecured creditor may not seize an asset when payments are late without first suing you and obtaining a court order to do so.
10. Does bankruptcy stop a wage garnishment, a bank levy, a lawsuit, a foreclosure, or a repossession?
Yes. With few exceptions, when a case is filed in the bankruptcy court, a “stay” goes immediately into effect which prohibits creditors from taking any legal action to attempt to collect a debt, including wage garnishments, bank levies, lawsuits, foreclosures, and repossessions. The intent is to give you a chance to reorganize your finances, pay secured debts to keep assets you intend to keep, and pay what you can afford to pay to other creditors. In fact, creditors are immediately prohibited from enforcing payments, calling you, sending demand letters, and even monthly billing statements.
11. What does bankruptcy cost? How can I afford an attorney when I can’t pay my bills?
We offer a FREE consultation to evaluate your situation, and advise you regarding what debts are dischargeable, what assets are protected in bankruptcy, and let you know up front what the total costs will be before you make any decisions. We believe that bankruptcy should be the last resort to reorganize your finances, and will discuss other alternatives available to you.
We structure fees to be fair and affordable based on your situation and can offer a payment plan to you. Also, we will assist in evaluating what debts you can stop paying immediately so you can afford to get your life back on track as soon as possible. Fees do vary depending on the complexity of each case. However, during your free consultation, we will clearly outline the amount of the fee so there are no surprises and so you can make an informed decision about what’s best for you.
12. Can I make payments to my attorney?
Our office will set up an affordable monthly payment plan with you. Once you decide to retain our firm, you will be advised which debts to stop paying immediately so you can afford to have an attorney on your side. Also, once you make your first payment, we are your representative so you do not have to speak to your creditors. Please note, that we cannot file your case in court until all of your fees are paid. However, we will advise you which creditors you should stop paying immediately so you can afford to get your life back as soon as possible.
13. What if I have an asset that’s not protected during a bankruptcy?
In most cases, you can restructure your assets prior to filing a case so you can legally use the protections afforded by law to protect otherwise unprotected assets. If you own an unprotected asset, we will discuss that problem during your initial meeting and guide you through your options so you can legally protect your assets to the fullest extent possible. If for any reason your assets cannot be legally restructured to protect everything, you will be advised so you are aware of what to expect before a case is filed.
14. Does my spouse have to file with me?
No. You may file a case without your spouse. We will discuss this concern during your initial consultation so you can decide if it’s better for you and your spouse to file without the other or together.
15. Do I have to include all of my debts in my case?
Yes. You must include every creditor. However, you may elect to “reaffirm” or keep debts that you intend to retain (i.e. your home, car, etc.). In order to reaffirm a debt, the court must agree that you can afford to continue to re-pay the debt and that it’s best for you to do so. Usually the judge will agree that it’s in your best interest to keep a home or car so long as your budget demonstrates that you can afford it.
16. What debts are not dischargeable?
Most debts are dischargeable. Child and spousal support payments are never dischargeable, but a Chapter 13 plan can help you get current. Criminal fines or restitution orders are not dischargeable. Recent income taxes are not dischargeable, but a Chapter 13 plan can help get you current without having to pay penalties or interest. In most cases student loans are not dischargeable. Also, credit undertaken fraudulently or under false pretenses is not dischargeable. There are also other less common circumstances in which a debt may not be dischargeable. We will discuss any these concerns as well as any other potentially not dischargeable debts with you during your initial consultation.
17. Do I need an attorney?
The law does not require you to have an attorney. Bankruptcy laws are complex and there are many pitfalls that can result in the needless loss of assets or even complete dismissal of a case if a mistake is made. An experienced attorney who does his job correctly is an asset, not a liability.
18. Can I transfer any of my assets to a family member or friend before I file my case?
The transfer of an asset to a family member or friend for less than fair market value can result in the recipient of the asset from being required to turn it over to a bankruptcy trustee for liquidation and subsequent payment to your creditors. There may be other legal strategies to effectively protect otherwise unprotected assets. We will review these concerns and strategies with you before any legal action is taken.
19. Can I pay off any of my debts before I file so they do not have to be included?
The repayment of debts can result in what is known as a “preferential transfer” and may require the creditor to refund the payment(s) to a bankruptcy trustee so those monies can be reallocated to other creditors. We will review these concerns with you during your initial consultation.
20. What is a bankruptcy trustee?
Generally, in a chapter 7, the bankruptcy trustee is primarily responsible to evaluate your qualification to file a chapter 7 case, determine if you own any assets which are not protected by law, and investigate any improper transfers prior to the filing of your case as well as your overall financial situation. The trustee will determine if your income is too high to file a chapter 7 (i.e. whether or not you can afford to pay at least a portion of your unsecured debts), liquidate any unprotected assets, if any, and collect any assets from third parties that received assets from you prior to filing your case.
Generally, in a chapter 13, the bankruptcy trustee is primarily responsible to receive a monthly payment (as determined by the plan you and your attorney have jointly prepared and approved by the court) and use those payments to pay creditors. The trustee also will assess whether or not your plan satisfies all of the legal requirements necessary as well as review your overall financial situation.
21. Will I have to go to court?
Yes. In either a chapter 7 or 13, you and your attorney must appear at a hearing call the “meeting of creditors.” The purpose of the meeting is to examine your financial affairs and determine whether or not all of the requirements to proceed in either chapter have been satisfied. The meeting is usually only a few minutes long. Prior to the meeting, we will explain the questions you will be asked and prepare you to answer them honestly.
22. What happens to my credit/Will I be able to use credit again?
Any chapter of bankruptcy will lower your credit score. In most cases, the bankruptcy will appear on your credit report for a 10 year period following the date when a case is first filed. Even though the case remains on your report during this period, the effect on your score diminishes over time. As you acquire new credit or continue payments on debts you retained through your case, your score will gradually rise. In general, the first two to three years following a case will have the greatest effect on your score. Also, most lenders will require a two year period following a discharge in order to fund a new home loan. There are many lenders who will offer you new credit immediately after your case is discharged to help you “rebuild your credit.” However, you should review all of the lending disclosures carefully as some are predatory lenders who charge very high fees and expenses. In some cases, if your credit is already damaged due to late payments, “charge offs,” or collections, a bankruptcy case can establish a plateau to stop the hemorrhaging effect of these notations on your credit so you can start rebuilding your credit score.
23. Can I file a Bankruptcy if I’m current on all my bills?
Yes. Often clients are current on all of their debts because of a sudden catastrophic financial event, such as an unexpected job loss or illness. In some cases, in hopes of a brighter financial outlook some have “robbed Peter to pay Paul” by borrowing from one account to pay another believing they would be able to repay the debt when things improved. In general, even though you may have an excellent credit score which will be reduced by a bankruptcy case, the impact of a bankruptcy on your future credit score is less dramatic than waiting until the score begins to drop as a result of late payments so rebuilding credit after a bankruptcy case is less challenging.
24. Will my employer be notified?
No notice is sent to your employer unless you owe money to your employer, in which case your employer is a creditor and must be notified. However, do not confuse a 401(k) or other retirement loan as a loan to your employer. Your employer is NOT notified if you owe money to your retirement plan.
25. Will my case be published in the newspaper?
26. How long does it take to file a case?
Once we receive all of the information we need from you to prepare your case, the average time to have all of the court pleadings prepared is between one to two weeks. In an emergency (i.e. foreclosure, repossession, wage garnishment, bank levy, etc.), a “skeletal case” can be filed to stop creditor action. A skeletal case consists of minimal information necessary to file the case so it can be immediately filed to stop creditors. However, there is a deadline (14 calendar days) to file the remaining information required that is strictly enforced by the court. Failure to file the remaining required information on time will result in dismissal of the case.
27. Can the court order a reduction in my mortgage payments?
The court cannot alter a first mortgage on your principal residence. However, in a Chapter 13 case, you can take up to five years to bring your payments current by beginning to pay the monthly payment going forward along with an additional amount each month to bring the payment current. In cases where your home is worth less than the balance due on the first mortgage, you may be able to eliminate junior mortgage liens from the property, leaving just the first mortgage.
28. Is my retirement plan/social security protected?
Yes. As long as the amount of your retirement is a reasonably necessary amount to maintain a reasonable standard of living.
29. How can I get more information?
Click here to schedule an appointment to discuss your concerns.