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A decision made to file for bankruptcy should be made only after determining that bankruptcy is the best way to deal with your financial problems. This introduction cannot explain every aspect of the bankruptcy process. If you still have questions after reading this, you should speak with an attorney familiar with bankruptcy.
What is Bankruptcy?
Bankruptcy is a legal proceeding in which a person who cannot pay his or her bills can get a fresh financial start. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court.
What Can Bankruptcy Do for Me?
Bankruptcy may make it possible for you to:
Eliminate the legal obligation to pay most of your unsecured debts. This is called "discharge" of debts. It is designed to give you a fresh financial start.
Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. (Bankruptcy does not, however, eliminate mortgages and other liens on your property without payment.)
Prevent repossession of a car or other property.
Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt.
Restore or prevent termination of utility service.
What Bankruptcy Cannot Do:
Bankruptcy cannot, however, cure every financial problem. Nor is it the right step for every individual.
In bankruptcy it is usually not possible to: Eliminate certain rights of "secured" creditors. A "secured" creditor has taken a mortgage or other lien on property as collateral for the loan. Common examples are car loans and home mortgages. You can force secured creditors to take payments over time in the bankruptcy process and bankruptcy can eliminate your obligation to pay any additional money if your property is taken. Nevertheless, you generally cannot keep the collateral unless you continue to pay the debt.
What Type of Bankruptcy Should I File?
Most people filing bankruptcy will want to file under either chapter 7 or chapter 13. Either type of case may be filed individually or by a married couple filing jointly.
Chapter 7 (Straight Bankruptcy)
In a bankruptcy case under chapter 7, you file a petition asking the court to discharge your debts. The basic idea in a chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up "non-exempt" property. Most people who file a Chapter 7 are able to exempt (keep) all of their property. Property that is not exempt is sold, with the money distributed to creditors.
Chapter 13 (Reorganization)
In a chapter 13 case you file a "plan" showing you will pay off some of your past-due and current debts over a period of three to five years. Some creditors will be paid in full while other creditors (such as most credit card debt, medical bills and other unsecured debt) may be discharged without paying them anything.
You should consider filing a chapter 13 plan if you:
own your home and are in danger of losing it because of financial problems;
are behind on debt payments, but can catch up if given some time; or if you have valuable property which is not exempt, but you can afford to pay creditors from your income over time.
You will need to have enough income in chapter 13 to pay for your typical monthly expenses and to keep up with the required chapter 13 payments as they come due.
What Will Happen to My Home and Car if I File Bankruptcy?
Again, most people who file a bankruptcy do not lose any of their property. This is because you are entitled to "exempt" certain property. Even if you have property that is not exempt and/or you are behind on payments to your secured creditors, you should be able to keep the property in a chapter 13. A chapter 13 is designed to let an individual keep all of their property while they pay back a portion of their debt over a period of time.
Some of your creditors may have a "security interest" in your home, automobile or other personal property. This means that you gave that creditor a mortgage on the home or put your other property up as collateral for the debt. Bankruptcy does not make these security interests go away. If you don't make the payments on that debt, the creditor may be able to take and sell the home or the property, during or after the bankruptcy case.
There are several ways that you can keep collateral or mortgaged property after you file bankruptcy. You can agree to keep making your payments on the debt until it is paid in full. Or, in some cases, you can pay the creditor the amount that the property you want to keep is worth. If you put up your household goods as collateral for a loan (other than a loan to purchase the goods), you can usually keep your property without making any more payments on that debt.
Can I Own Anything After Bankruptcy?
Yes! Many people believe they cannot own anything for a period of time after filing for bankruptcy. This is not true. The purpose of bankruptcy is to give you a fresh start and a second chance. Most people buy cars, houses, obtain credit cards or other loans after they receive their discharge in bankruptcy.
Will Bankruptcy Wipe Out ALL My Debts?
Yes, with some exceptions. Bankruptcy will not normally wipe out: money owed for child support or alimony, fines, and most taxes; loans you obtained by knowingly giving false information to a creditor, who reasonably relied on it in making a loan; debts resulting from "willful and malicious" harm; student loans owed to a school or government body, except if the court decides that payment would be an undue hardship; mortgages and other liens which are not paid in the bankruptcy case (but bankruptcy can wipe out your obligation to pay any additional money if the property is sold by the creditor).
Will I Have to Go to Court?
In most bankruptcy cases, you only have to go to a proceeding called "meeting of creditors" to meet with the bankruptcy trustee and any creditor who chooses to attend. Most of the time, this meeting will be a short and simple procedure where you are asked a few questions about your bankruptcy forms and you financial situation.
Occasionally, if complications arise, or if you choose to dispute a debt, you may have to appear before a judge at a hearing. If you need to go to court, you will receive notice of the court date and time from the court and/or your attorney.
In most bankruptcy cases, you only have to go to a proceeding called "meeting of creditors" to meet with the bankruptcy trustee and any creditor who chooses to attend. In almost all cases, creditors do not attend that hearing.
Will Bankruptcy Affect My Credit?
There is no clear answer to this question. Unfortunately, if you are behind on your bills, your credit may already be bad. Bankruptcy will probably not make things any worse.
The fact that you have filed a bankruptcy can appear on your credit record for ten years. But since bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills, and you should be better able to get new credit.
What Else Should I Know?
Utility Services -- Public utilities, such as the electric company, cannot refuse or cut off service because you have filed for bankruptcy. However the utility service can require a deposit for future service and you do have to pay bills that arise after bankruptcy is filed.
Discrimination -- An employer or government agency cannot discriminate because you have filed for bankruptcy.
Co-signers -- If someone has co-signed on a loan with you and you file for bankruptcy, the co-signer may have to pay the debt if you don't. If you file a chapter 13, you may be able to protect co-signers, depending upon the terms of your chapter 13 plan.
Remember: The law often changes. Each case is different. This introduction is meant to give you general information and not meant to give you specific legal advice.
©Adapted by the National Consumer Law Center from a pamphlet prepared by Legal Services, Inc., under a grant from the Pennsylvania Law Coordination Center, and from National Consumer Law Center, Surviving Debt (3d ed. 1999).<
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