Bankruptcy FAQs

WHO WILL FIND OUT
ABOUT MY BANKRUPTCY?

Only the listed creditors in your bankruptcy schedules will receive an official notice of your filing from the Court. Many local newspapers report the filing of bankruptcies periodically.

WILL THE TRUSTEE COME TO MY HOME?

In most jurisdictions, no one will come to your home to examine your personal belongings, unless there is a suspicion that you have hidden assets or undervalued what you own. That is VERY RARE and should not worry you at all.

The Trustee and the Judge assume that you have truthfully scheduled your assets. Anxiety about the bankruptcy process and the fear of exposure or humiliation is created in the mind of the debtor to a far greater degree than by the reality of the judicial process.

HOW MUCH WILL BANKRUPTCY
HURT MY CREDIT?

Surprisingly, the bankruptcy itself will not likely decrease your credit score. Often, the damage has already been done. In fact, bankruptcy will eliminate most of the consumer creditors who are reporting negatively to the credit bureaus.

The bankruptcy remains on your credit report ten (10) years. This ten year period is counted from the day you file your bankruptcy.

This does not mean, however, that you will not be able to get credit for ten (10) years. Many of our clients report to us that they receive credit card offers in the mail even before the Court has closed their cases. In addition, if you maintain good credit after your bankruptcy case, and have a solid, consistent income, you may qualify for a home loan after two (2) years.

DOES A PREVIOUS BANKRUPTCY PREVENT ME FROM FILING?

It depends upon:

  • what chapter you want to file now;
  • what chapter you filed before; and
  • whether you received a discharge in the earlier case.

You can only get a Chapter 7 discharge if a previous Chapter 7 case was filed more than 8 years ago. This is a change from the previous period of 6 years.

If you got a Chapter 13 discharge within 6 years, the Chapter 13 plan has to meet certain repayment requirements to permit a Chapter 7 case earlier than 6 years from filing of the prior case.

If your previous case was dismissed before discharge, it does not count in these considerations.

You can file a Chapter 13 case after a Chapter 7 without any statutory time restrictions. However, under the newly amended Code, you can only get a discharge in that Chapter 13 case if the 7, 11, or 12 previous case was filed more than 4 years ago. If the previous case was also a Chapter 13, 2 years must elapse between filings. Some courts, however, question the debtor's good faith, a necessary element to confirm a Chapter 13 plan, if they have recently filed a Chapter 7 and received a discharge.

You can freely convert a pending case from one chapter to another. It is the same case, even though the chapter is different, so these time considerations don't apply. Generally, you can only convert a Chapter 7 to Chapter 13 before the discharge is entered.

WILL I BE ALLOWED TO FILE BANKRUPTCY IN MY INCOME IS HIGH?

Bankruptcy now includes a "means test" which is intended to provide a more objective approach to the issue of a debtor's ability to pay. Prior to the 2005 amendments, the Trustee could ask the judge to dismiss a case because the debtor's income was so high that to permit the debtor to discharge his debts in Chapter 7 was a " substantial abuse" of the bankruptcy system. Now, the means test purports to provide uniformity to the process and lowers the standard to simple "abuse". Section 707(b)(2).

The means test calculation is found in Form B 22, now a part of every individual's Chapter 7 bankruptcy schedules.

The United States Trustee or the Chapter 7 Trustee can seek to have a debtor's case dismissed for "abuse" if the debtor's income, including that of a spouse, is sufficient to repay a significant portion of the scheduled debts. 11 U.S.C. 707(b). The real expectation is that debtors who are challenged in this way will convert their case to Chapter 13.

This concept does not apply to Chapter 7 debtors whose debts are primarily business debts, tax debt, or to those filing Chapter 13.

DOES MY SPOUSE HAVE TO FILE BANKRUPTCY WITH ME?

No, you may file without your spouse. The effect on your spouse and any debts you have jointly will vary depending on the marital property laws in your state.

HOW IS MY SPOUSE AFFECTED IF I FILE BANKRUPTCY ALONE?

Since a bankruptcy can be filed by one spouse without the other, this is one of the most common bankruptcy questions. There are several aspects of the answer.

A bankruptcy filing by one spouse does not bring the other spouse into the bankruptcy case. Neither does the bankruptcy of a spouse give the non-filing spouse the full protection of the automatic stay or the bankruptcy discharge.

Joint debts - If you and your spouse are jointly liable to a creditor, the bankruptcy of one spouse does not relieve the other of paying the debt. Upon a bankruptcy, the creditor may look to the other spouse for payment, unless the bankruptcy case is under Chapter 13. If the debt is a consumer debt to be paid 100% through the Chapter 13 plan, the co-debtor is protected by the co-debtor stay in Section 1301.

Generally, marriage alone doesn't make both spouses personally liable for a debt. Liability on contracts such as home loans and credit cards arises by agreement between the creditor and the debtor. Only persons who signed the loan or credit card application are liable for the debt.

A joint tax return, however, makes both spouses liable for the total of the tax due.

If you have joint debts, you can expect the bankruptcy to be noted in some way on the credit report of the non-filing spouse. There is uncertainty in the law at the moment as to whether it is proper to mention the bankruptcy of one debtor on the credit report of a debtor who is not in bankruptcy.

Joint property - If you and your spouse own property together, that property may be included in the bankruptcy estate and be potentially available to pay creditors. So the filing of one spouse could have significant impact on the other.

WHAT IS MY LIABILITY FOR DEBTS INCURRED DURING MARRIAGE?

The effect of the bankruptcy discharge on the debts accumulated during marriage is easily understood when both spouses file bankruptcy: each of them is released from personal liability for dischargeable martial debts. But when one spouse, or one's ex-spouse, files bankruptcy, the result is more complex.

Personal liability - The starting point in the analysis is to understand just who is "personally liable" for the debt in question.

Debts generally arise either by:

  • contract (created by the agreement of the debtor and the creditor);
  • tort (arising by law from negligent or intentional harmful act of the debtor); or
  • statute (arising by operation of law, like taxes, or by court order, like family support).

If you are personally liable for a debt, the creditor can resort to property you own or your earnings to satisfy the debt.

Who is liable after divorce - In general, you are liable if you incurred the debt (bought goods on your credit card, signed the loan, incurred the debt in operation of your business, signed the tax return from which the tax liability arises, or caused the accident that injured someone).

You are not usually personally liable for debts on your spouse's credit card (unless you signed the application, too), for your spouse's tort debts, or for your spouse's taxes if you did not file jointly.

Note that the family court can create personal liability for either spouse for a debt in the course of dividing the debts upon divorce.

Marital debts after a bankruptcy - The bankruptcy discharge affects the personal liability only of the debtor in the bankruptcy case. When one spouse gets a discharge, the creditor can collect the debt from the non-filing spouse, if that spouse is personally liable for the debt.

Note that any provisions in agreements or court orders made in connection with the divorce requiring one spouse to indemnify (reimburse) the other spouse if third party creditors collect from the other spouse, is a debt that is potentially dischargeable in bankruptcy. In a Chapter 7 case, the spouse may benefit from such an order by be able to bring a non-dischargeability action to except that obligation from the discharge under 11 U.S.C. 523(a)15.

WILL I HAVE TO GIVE UP ALL MY ASSETS?

No. The Bankruptcy Code provides that a debtor filing for bankruptcy can keep certain assets for a "fresh start" by exempting property from the bankruptcy estate.

The vast majority of bankruptcy cases are "no asset" cases, in which the debtors have claimed an exemption in everything they own; there are the no assets from which to pay creditors.

The exemptions that are available vary from state to state: this is the only area in which bankruptcy law is not the same in all states. Iowa has a very liberal exemption statute.

DO I HAVE TO LIST ALL MY DEBTS?

Yes, you must list all of your debts on your bankruptcy schedules, even debts that are non-dischargeable or secured.

However, you can choose to reaffirm any secured debt you choose after the filing. Or, you can voluntarily pay a creditor after you receive a discharge, without becoming legally liable to continue paying. Thus, listing a creditor does not prevent you from paying creditors you wish to pay after bankruptcy.

Also, omitting a credit card company from your schedules, because you want to retain the use of the card, does not assure continued access to the card: most major credit card issuers use a national data base to determine who has filed bankruptcy, independently of the court's notice to them of bankruptcy filings. They routinely cancel cards of everyone who has filed bankruptcy, whether or not a balance is owed.

You can't assure that your creditors won't find out about your bankruptcy by not listing a debt. And omitting a debt constitutes perjury which could result in your discharge being denied. See denial of discharge.

CAN I PUT MY ASSETS IN SOMEONE ELSE'S NAME BEFORE FILING?

No, such transfers are not effective to put assets beyond the reach of the creditors and Bankruptcy Trustee. Worse, such action may lead to the denial of discharge (11 U.S.C. 727).

A Bankruptcy Trustee can recover assets transferred within two (2) years of the bankruptcy filing where the debtor did not get reasonably equivalent value for the asset, or where the transfer was made with the intent to hinder creditors.

In Iowa, the "look back" period may be even longer under state law, giving the Trustee that same state law look back period (5 years) in which to recover assets. Even an innocent transfer without consideration can cause serious trouble.

If you have more assets than you can protect with the available exemptions, consider filing Chapter 13 where the debtor generally keeps all of their property and "buys back" the non-exempt value from the creditors through payments to the Chapter 13 trustee from future income.

WILL I LOSE MY HOUSE EVEN IF I'M CURRENT?

Not necessarily.

If there is equity - Iowa has an unlimited exemption for equity in the debtor's homestead and therefore, the equity is all exempt and you can keep the house, so long as you pay the mortgage.

If there is no equity - If there is no equity in the house (today's value less costs of sale less payoff balances on all liens) the trustee in a Chapter 7 will abandon the house to you. That is, you keep it, as long as you pay the mortgages.

The bankruptcy discharge eliminates your personal liability for the mortgage, but it does not disturb the lien. A bankruptcy does not relieve the property of the liability for voluntary liens, like mortgages or deeds of trust, nor for tax liens. So, the lender retains the right to foreclosure if you don't pay.

Should you keep the house? - A different question is whether it is a good idea to keep the house if it is fully encumbered (that is, the debt on the house is equal to or greater than the value of the house). If you let the home go back to the creditors while filing the bankruptcy, any unsecured debt after sale of the home is discharged.

Sometimes, debtors have taken out home equity loans such that all of the value in the property is pledged to lenders. Or, the cost of paying the mortgages is greater than the cost of renting comparable housing. Part of getting a fresh start may be walking away from property that is a greater burden than an asset. It's just a house.

WILL I LOSE MY PENSION
OR RETIREMENT SAVINGS?

No. Bankruptcy law provides for specific exemptions, or protective statutes, utilized to protect your personal possessions and property. Pension and retirement savings are one of the assets that is exempt, thus you are allowed to keep said accounts even though you file bankruptcy.

CAN I KEEP MY CAR?

Yes. What you must do to keep the car through a Chapter 7 varies depending on whether there is non-exempt equity in the car.

Will the Trustee take the car? - If there is no equity in the car, after subtracting any car loan and exemption from the car's sale value, the Bankruptcy Trustee will not take the car.

If there is equity in the car over and above the value of the exemptions available, a debtor can usually buy any unprotected equity from the Chapter 7 Trustee. Otherwise, the Trustee will sell the car, give the debtor his exemption amount and retain the non-exempt proceeds for the bankruptcy estate.

Will the creditor take the car? - You've got choices: redeem, reaffirm or surrender:

Redemption means that you pay the secured creditor the present value of the car that is the collateral for the debt in a single cash payment. Upon payment, the car is yours, free of the secured debt. The balance of the debt is treated as an unsecured debt in the bankruptcy and discharged with your other debts.

Reaffirmation is an agreement to waive the discharge as to the reaffirmed debt and to pay the debt according to the terms of the original agreement. The reaffirmed debt is legally enforceable if you breach (stop paying) later on, and the creditor retains the security interest in the car until the debt is paid. With some lenders, you don't even have to reaffirm the debt: you can keep the car if you continue to make payments called for in the contract.

Surrendering the car renders the debt an unsecured debt in the bankruptcy. The creditor can sell the car to recover part of the claim. Even if the car isn't worth what was owed on it, the unpaid balance is discharged in the bankruptcy.

WILL BANKRUPTCY STOP WAGE GARNISHMENTS

Yes. Once your case is filed, creditors are no longer entitled to garnish your wages for debts that existed prior to the filing of the case. The only exception may be for on-going child or family support ordered by a Court. See automatic stay. Many times if the wage garnishment hasn't been going on too long, the funds taken can be recovered by the debtor.

The discharge of a debt will forever eliminate a creditor's right to garnish your wages on account of the debt.

CAN I DISCHARGE MY STUDENT LOANS?

Student loans are no longer dischargeable in any chapter of bankruptcy unless you can prove that repaying the loan creates an undue hardship on you and your family. Prior law allowed their discharge once they had been in pay status for 7 years. The law changes in the fall of 1998.

Proving hardship usually requires showing that you can't provide a minimum standard of living for yourself and your dependents if you have to repay the loan. Some courts will discharge part of the loan on a showing that repaying it all would be a hardship. It is nearly impossible to prove undue hardship.

WHICH DEBTS DO I STILL
OWE AFTER BANKRUPTCY?

Near the end of your bankruptcy proceeding, your unsecured or under-secured debts are discharged.

This means that you no longer have the legal obligation to repay those debts.

However, certain debts are excepted, or excluded, from discharge. The following list contains debts among those generally not discharged in bankruptcy:

  1. Domestic support obligations. This includes alimony, maintenance or support for a spouse or child.
  2. Student loans. Most student loans are non-dischargeable.
  3. Most taxes. The majority of taxes cannot be discharged. There are exceptions, but the process in determining "dischargeability" is complicated. You need to discuss this in more detail with your attorney.
  4. Debt incurred through fraud or false pretenses. In bankruptcy, this generally means that you borrowed the money with deceit involved and with no intention of repaying the debt. Fraud issues arise most often when credit card companies believe that you borrowed money from them close to the time you filed your bankruptcy.
  5. Criminal fines, penalties and restitution.
  6. Claims arising out of an auto accident caused while driving under the influence of drugs or alcohol.

DO I STILL OWE SECURED DEBTS?

That depends. The term "secured debt" refers to a loan transaction in which you give the lender an interest in your house, car or other personal property that acts as collateral that "secures" the loan. In other words, if you default on a secured loan, the lender has the right to repossess the collateral, sell it, and apply to proceeds against the amount you owe. If the proceeds are not enough to pay the entire debt, then you are still contractually obligated to pay the difference. That difference is often referred to as a "deficiency".

Bankruptcy discharges, or cancels, your obligation to repay secured debts, just like unsecured debts. This means that the creditor cannot sue you and collect the loan amount due after the bankruptcy case is closed.

However, the secured creditors lien against your property is not canceled by the bankruptcy. That is, the lender can still repossess the property, sell it, and keep the proceeds.

If you want to keep property that secures a loan, the first thing to do is remain current with your scheduled payments to the lender. Second, continue to make your loan payments after your bankruptcy case is filed. And third, it may be necessary for you to reaffirm the loan.

One of the most powerful tools for achieving a truly fresh start in bankruptcy is the debtors' power to avoid certain liens on his assets.

The power to avoid liens modifies the general bankruptcy rule that liens pass through bankruptcy unaffected by the discharge. Unless liens are avoided, the discharge only discharges the personal liability of the debtor, not the liability of property that is subject to a pre-petition lien.

What liens can be avoided and under what conditions? Liens that attach to assets that the debtor is entitled to claim as exempt can be avoided to the extent the lien impairs the value of the exemption in both Chapter 7 and Chapter 13.

To be avoidable, the lien must be a judicial lien (like a judgment or a garnishment), or a non-possessory, non-purchase money security interest in household goods or tools of the trade.

This phrase describes the typical finance company lien in which the borrower pledges his household goods, appliances, jewelry, etc. to the lender. These liens are taken by the lender, not because those items have enough value to repay the loan, but because the threatened loss of those items terrorizes borrowers.

These liens can be avoided on assets such as household goods, clothing, jewelry, pats, and musical instruments, tools of the trade or professionally prescribed health aids.

To avoid a lien, the debtor must file a motion setting forth all of the statutory elements that entitle him to avoid the lien and serve the motion on the creditor whose lien is to be avoided. 11 U.S.C. 522(f).

A lien that is avoided is forever void and of no effect so long as the debtor completes the case and gets a discharge.

Avoiding the involuntary transfer of property in which the debtor could have claimed an exemption - The Bankruptcy Code takes the idea of assuring the debtor of the right to exempt property a step further and allows the debtor to recover property that a creditor has taken possession of by garnishment before the bankruptcy is filed.

If the debtor could have claimed that property exempt if it had not been garnished and the transfer took place within 90 days of the bankruptcy filing, the debtor can sue in the bankruptcy court to recover the property. 11 U.S.C 522(h).

WHAT IS REAFFIRMATION?

Reaffirmation is the process by which you tell a secured lender that you will repay the debt, despite the bankruptcy. A reaffirmation agreement, which is signed by you, your attorney and the lender, legally obligates you to continue payments during and after your bankruptcy case. One advantage of signing a reaffirmation agreement is that the lender will report your payments to the credit bureaus, thus to help improve your credit scores after the filing of your bankruptcy.

Reaffirmation agreements are not required by the Bankruptcy Code or any other law.

If you enter into a reaffirmation agreement, you can change your mind and rescind the agreement during your bankruptcy case within sixty (60) days after the reaffirmation agreement is filed with the Court, or before discharge, whichever event occurs sooner.

SHOULD I REAFFIRM?

This is a question that only you can answer. But, the first thing you should ask yourself is "can I afford the monthly payment?"

You may also want to consider whether the property that you are seeking to keep is necessary. That is, can you do without it? For instance, a number of my clients seek to reaffirm debts on personal computers. Very often, the cost of a newer model computer is less than the amount to be reaffirmed. Consider any reaffirmation carefully and speak with your attorney.

Finally, it is almost never a good idea to reaffirm an unsecured debt like a credit card. The Court rarely approves the reaffirmation of an unsecured debt.

IS THE IRS AFFECTED BY MY BANKRUPTCY FILING?

Bankruptcy can provide relief from the tax man. Some taxes and penalties are dischargeable. Those that can't be discharged can be paid without interest in Chapter 13.

The automatic stay in bankruptcy stops even collection actions by taxing authorities, including garnishment and seizure. These provisions of the law apply equally to state and federal tax agencies.

The precise measure of the relief available in bankruptcy depends on a number of factors including:

  • the kind of tax involved;
  • the age of the tax;
  • whether a return was filed timely; and
  • the chapter of bankruptcy selected.

In general, unsecured income taxes that were first due more than there (3) years before the bankruptcy is filed, for which a timely and non-fraudulent return was filed, can be discharged in full in any chapter of bankruptcy.

Does the IRS have to agree to my Chapter 13 plan? - The IRS is just another creditor in the Chapter 13. Its objections are limited to the same grounds as any other creditor: lack of good faith, lack of feasibility, best interests of creditors, etc. My experience is that the IRS welcomes a Chapter 13 filing since the priority taxes get paid in full with little expenditure of time and energy by the IRS.

Are shareholders liable for the tax debts of their corporation? - No, except for trust fund taxes: the amounts withheld from the wages of employees and paid over to the taxing authority.

In general, officers and directors of the corporations, partners, and anyone with signature authority on the employer's bank accounts may be held liable for that portion of the business's tax liability. In Iowa, the sales tax collected by a retailer is also a trust fund, for which officers and directors may be liable.

What happens to tax liens that survive the Chapter 7 discharge? - If the discharge in the Chapter 7 case eliminates the debtor's personal liability for the tax year or years for which there is a lien, the lien survives only as a charge on the equity in the property that the debtor owned at the time the bankruptcy was filed. The lien, though not discharged, does not attach to assets that you acquire after the case is filed.

Your choices after the discharge are:

  • pay the IRS the value of the equity in assets to which the lien attached when the case was filed;
  • do nothing in the expectation that the IRS will not attempt to enforce a lien, if the collateral is of little value or is exempt from levy by law; or
  • filed a Chapter 13 to pay the lien over time if it attaches to assets of significant value.

ARE THERE TAX CONSEQUENCES TO FILING BANKRUPTCY?

For the average individual debtor, receiving a discharge in bankruptcy has no tax consequences. The Internal Revenue Code Section 108 excludes the discharge of debt in bankruptcy from its definition of cancellation of debt income. Outside of bankruptcy, cancellation of debt may be treated as if it were income for tax purposes.

If a debtor receives an IRS 1099(c) on a debt discharge in a bankruptcy case, he can file Form 982 to tell the IRS that the sum on the 1099 should be excluded from your income by reason of the bankruptcy.

Note that the debtor's tax attributes, such as loss carry forwards and exclusion of gain on sale of a primary residence, as they exist before bankruptcy, pass to the bankruptcy estate and may be used or even exhausted by the trustee in the administration of the estate.

WHAT IF I CAN'T MAKE PAYMENTS ON MY CHAPTER 13 PLAN?

Chapter 13 plans are voluntary and you can dismiss the Chapter 13 case freely.

If you have a temporary interruption in income or an unexpected increase in your expenses, you can ask the court to modify your plan to reduce the payments, or to obtain a suspension of the payments for a couple months.

If you miss the payments and don't take action to modify or get a suspension, the court will dismiss your case.

If your case is dismissed short of discharge, the fact that you filed does not bar you from eligibility to file bankruptcy again.

You also have the right to convert your Chapter 13 case to Chapter 7.

CAN I GET CREDIT AFTER BANKRUPTCY?

Filing bankruptcy does not prevent you from getting new credit. An entire class of lenders targets the recently bankrupt as customers. Immediately after a bankruptcy filing, you can expect credit to be more difficult to get, more expensive, and limited in amount.

A few years after a bankruptcy discharge, debtors are eligible for mortgage loans on terms just as good as those with the same financial characteristics who have not filed bankruptcy. That is, in getting a home loan after a bankruptcy, the size of your down payment and the stability of your income will be much more important than the fact you filed bankruptcy in the past.

There is no "right" to credit. Landlords and credit card companies are well within their rights to consider your financial history in their credit decision. However, debtors are protected from discrimination in employment and governmental licensing based solely on the fact that they have filed bankruptcy by provisions of the Bankruptcy Code Section 525.

While the fact that you filed bankruptcy stays on your credit report for 10 years, it becomes less significant the more time elapses. In fact, you are probably a better credit risk after bankruptcy than before.

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.