Frequently asked questions about Bankruptcy

This page contains answers to common questions regarding Bankruptcy.  While the information presented is accurate, it should not be cited or relied upon as legal authority.  It should not be used as a substitute for reference to the United States Bankruptcy Code (title 11, United States Code) and the Federal Rules of Bankruptcy Procedure, both of which may be reviewed at local law libraries, or to local rules of practice adopted by each bankruptcy court.  Finally, these explanations should not substitute for the advice of competent legal counsel.

What is a Chapter 7 Bankruptcy?
Technically speaking, a Chapter 7 Bankruptcy contemplates an orderly, court-supervised procedure by which a trustee takes over the assets of the debtor’s estate, reduces them to cash, and makes distributions to creditors, subject to the debtor’s right to retain certain exempt property and the rights of secured creditors.  Because there is usually little or no nonexempt property in most chapter 7 cases, there may not be an actual liquidation of the debtor’s assets.  These cases are called "no-asset cases."  A creditor holding an unsecured claim, such as credit card debt or medical bills, will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court.  In most chapter 7 cases, if the debtor is an individual, he or she receives a discharge that releases him or her from personal liability for certain dischargeable debts.  The debtor normally receives a discharge just a few months after the petition is filed.  Amendments to the Bankruptcy Code enacted in to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a "means test" to determine whether individual consumer debtors qualify for relief under chapter 7.  If such a debtor’s income is in excess of certain thresholds, the debtor may not be eligible for chapter 7 relief.

What is a Chapter 13 Bankruptcy?
Chapter 13 isdesigned for an individual debtor who has a regular source of income.  Chapter 13 is often preferable to chapter 7 because it enables the debtor to keep a valuable asset, such as a house, and because it allows the debtor to propose a "plan" to repay creditors over time – usually three to five years.  Chapter 13 is also used by consumer debtors who do not qualify for chapter 7 relief under the means test.  At a confirmation hearing, the court either approves or disapproves the debtor’s repayment plan, depending on whether it meets the Bankruptcy Code’s requirements for confirmation.  Chapter 13 is very different from chapter 7 since the chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor’s anticipated income over the life of the plan.  Unlike chapter 7, the debtor does not receive an immediate discharge of debts.  The debtor must complete the payments required under the plan before the discharge is received.  The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect.  The discharge is also somewhat broader (i.e., more debts are eliminated) under chapter 13 than the discharge under chapter 7.

Will I lose all my property if I file bankruptcy?
The fact is that most people don't lose anything in their bankruptcy.  The Bankruptcy Code provides "exemptions" for your home and for your personal property up to a certain amount.  These exemptions allow most people to keep their personal and household property, some equity in their home, some equity in a car, most retirement plans, and many tools of the trade.

What is a discharge in bankruptcy?
A bankruptcy discharge releases the debtor from personal liability for certain specified types of debts.  In other words, the debtor is no longer legally required to pay any debts that are discharged.  The discharge is a permanent order prohibiting the creditors of the debtor from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters, and personal contacts.  Although a debtor is not personally liable for discharged debts, a valid lien (i.e., a charge upon specific property to secure payment of a debt) that has not been avoided (i.e., made unenforceable) in the bankruptcy case will remain after the bankruptcy case.  Therefore, a secured creditor may enforce the lien to recover the property secured by the lien.

Does a bankruptcy discharge get rid of all debt?
Although most debts are wiped out in bankruptcy some debts are not affected.  Certain debts, such as alimony, child support, fines, loans obtained by fraud, debts arising from a DUI, restitution, student loans, some taxes, and debts resulting from "willful and malicious" harm, cannot be discharged in a Chapter 7 bankruptcy.  However, some of these can be handled effectively in a Chapter 13 bankruptcy.

When does the discharge occur?
The timing of the discharge varies, depending on the chapter under which the case is filed.  In a chapter 7 (liquidation) case, for example, the court usually grants the discharge promptly on expiration of the time fixed for filing a complaint objecting to discharge and the time fixed for filing a motion to dismiss the case for substantial abuse (60 days following the first date set for the 341 meeting).  Typically, this occurs about four months after the date the debtor files the petition with the clerk of the bankruptcy court.  In a chapter 13 (adjustment of debts of an individual with regular income) case, the court generally grants the discharge as soon as practicable after the debtor completes all payments under the plan.

Will I be able to re-establish credit after a bankruptcy?
It used to be next to impossible to rebuild credit after a bankruptcy.  Times have changed however.  Many credit card companies and banks actively market to people who have filed bankruptcy.  Most car companies will sell you a car as long as your bankruptcy has been discharged.  Most mortgage companies can assist applicants with a bankruptcy after two to three years.  After the bankruptcy you are likely to be in a better position to pay current bills and that should improve your chances of getting new credit.

Can an employer terminate a debtor's employment solely because the person was a debtor or failed to pay a discharged debt?
The law provides express prohibitions against discriminatory treatment of debtors by both governmental units and private employers.  A governmental unit or private employer may not discriminate against a person solely because the person was a debtor, was insolvent before or during the case, or has not paid a debt that was discharged in the case.  The law prohibits the following forms of governmental discrimination: terminating an employee; discriminating with respect to hiring; or denying, revoking, suspending, or declining to renew a license, franchise, or similar privilege.  A private employer may not discriminate with respect to employment if the discrimination is based solely upon the bankruptcy filing.

Some of these answers were obtained and compiled from a publication of the Bankruptcy Judges Division entitled "Bankruptcy Basics.

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