If you find that you are not able to pay your bills as they become due, you may need t take a closer look at your financial situation. Filing for bankruptcy is usually the last resort when no other solution to your financial difficulties appears to exist. However, alternate solutions, such as working out special payment plans with your creditors that fit within your budget, may be available. Agencies such as the Consumer Credit Counseling Service can assist you in working out a plan with your creditors.

Do I Need a Lawyer to File for Bankruptcy?

You are not legally required to have an attorney file for bankruptcy; however, consulting with an attorney who has experience in bankruptcy law will help you to fully understand your options and avoid potential difficulties that may occur once you have filed.

What are the Different Kinds of Bankruptcy?

An individual filing for bankruptcy generally must decide whether to do so under Chapter 7, 11, 12 or 13 depending upon the particular individual’s circumstances and preferences involved.

Chapter 7 is sometimes known as a "straight bankruptcy" or liquidation, and results in a discharge of all eligible debts. Some debts cannot be discharged, such as certain student loans or court ordered fines and restitution. Once you file Chapter 7, an estate is created and a trustee is appointed to administer and liquidate all assets of the debtor to pay off creditors. Each debtor is entitled to certain exemptions in order to retain certain assets that may not be taken by the trustee. Generally, each individual may exempt up to $6,000 worth of property. Once a person is discharged under a Chapter 7, they cannot file a Chapter 7 bankruptcy again for six years.

Chapter 11 is a reorganization in which the business or individual debtor remains in possession of the assets and formulates a plan to pay creditors over a period of time. The debtor-in-possession may divide creditors into different classes, rearrange or sell certain assets, and have certain protection while formulating a plan. There is no limit on the amount of debt an individual or business may have under this chapter.

Chapter 12 is the newest type of bankruptcy, and was designed to provide relief for the family farmer. To be eligible, one has to be a family farmer with regular annual income. Debts cannot exceed $1,500,000, excluding a debt for principal residence. At least 50 percent of the annual income must come from farming operations. The debtor has 90 days from the date of filing to formulate a plan to repay creditors.

Chapter 13 is a repayment plan to creditors under the supervision of the Bankruptcy Court for debtors with regular income. The debtor must formulate a plan of repayment, which can last for three years or up to five years, with special permission from the court. The debtor submits a portion of his/her future earnings, which is paid to a trustee, for distribution to creditors pursuant to the plan. The plan must be confirmed by the court and entered in good faith. The debtor may designate certain classes of creditors. Frequently, this chapter is used to pay back arrearages to secured creditors, particularly mortgage holders on the debtor’s personal residence.

If the debtor complies with all requirements of the plan and completes it on schedule, the balance of any unsecured debt owed will be discharged. If the total debt exceeds $350,000, the debtor must select either a Chapter 7 or 11.

If I File for Bankruptcy, Will I Lose Everything I Own?

No. Individual debtors may exempt up to $6,000 of property, while husband and wife debtors filing jointly may exempt up to$12,000. Sometimes, additional exemptions available under state laws such as "tools of the trade" may be taken. All personal assets must be listed on schedules filed with the court including furniture, clothing, bank accounts, and any equity in homes and cars. An attorney experienced in bankruptcy law can explain how this works.

What Happens After I File for Bankruptcy?

The Bankruptcy Court sends out a notice of your bankruptcy filing to all of the creditors you listed when you filed your petition. This notice advises the creditors that you have filed, under which chapter you have filed, and advises that an "automatic stay" is in effect, which prevents creditors from pursuing any further efforts to collect the debt unless they obtain permission from the court. For example, if your wages are being garnished, the garnishment must stop, and the court may require that some of the money collected is returned to you.

Within four to six weeks after you file, you will be required to attend a hearing called a meeting of creditors. A trustee appointed by the court will preside at the meeting. At the meeting certain questions will be asked concerning the schedules you filed and any particular assets that you own.

Creditors have a right to be present and ask questions concerning your debts and assets. In some circumstances, creditors may seek a court order preventing their particular debt from being discharged if they can prove, for example, that the debtor made false statements or misrepresentations to obtain credit or a loan.

In a Chapter 7 case, the meeting of creditors is; generally, the only hearing of a debtor will be required to attend. In a Chapter 11, 12, or 13, a debtor will be required to attend a hearing to consider the proposed plan. This confirmation hearing is presided over by a U.S. bankruptcy judge.

If I am Behind on Payments on My Home or Car, Will Filing for Bankruptcy Prevent Foreclosure or Repossession?

In almost all instances, creditors who are owed money on a home or car are secured creditors and posses certain rights that unsecured creditors do not possess. For example, they have the right to foreclose on home or repossess a car if payments are not made in accordance with the contract. A debtor who is behind on these payments can file under Chapter 11, 12, or 13, and propose a plan to repay the arrearages. However, in all cases, the debtor must continue to make the current monthly payments.

How Does Filing for Bankruptcy Affect My Credit?

If you file for bankruptcy, that information will generally show up on a credit report through the local credit bureau for up to 10 years. However, if you are in a situation that you need to file for bankruptcy, your credit rating is usually already damaged. Also, some creditors will extend credit to you if you can provide collateral and make your payments on time.

How Much Does it Cost to File for Bankruptcy?

The filing costs are $120. Attorneys’ fees vary, and it would be advisable to call several that practice in the area to determine exact costs of their services. Chapter 11, 12 and 13 bankruptcies will involve higher attorneys’ fees because these chapters are more complex and involve more work.

Should I File for Bankruptcy © 1988, MSBA, Inc. Revised 1991
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