Bankruptcy Law FAQ
- What is bankruptcy?
- What are the types of bankruptcy?
- What is Chapter 7 bankruptcy?
- What is Chapter 13 bankruptcy?
- What is the “means test” in bankruptcy?
- What happens during the bankruptcy process?
- What happens to my house and property if I file for bankruptcy?
- What kinds of exemptions are available for me?
- Do I need an attorney to file a bankruptcy? What about collecting a debt?
If you are unable to pay your bills, you might be able to file for bankruptcy to immediately halt all creditors from trying to collect on their debts. Bankruptcy provides a process in which a federal bankruptcy court eliminates or determines the process by which debt will be repaid. Bankruptcy could prevent your property from being wrongfully seized, stop a foreclosure on your home, or halt wage garnishment.
There are six types of bankruptcy allowed by federal law:
- Chapter 7: a debtor gives up property which exceeds certain limits or exemptions to allow the property to be sold, or liquidated to pay creditors. After this property is liquidated, the remaining debt is discharged. In order to file for Chapter 7, a debtor must meet certain requirements outlined in the Means Test. Additionally, certain debts, such as educational loans, alimony and child support cannot be discharged.
- Chapter 9: a debt reorganization option available only to municipalities including cities, counties, townships and school districts.
- Chapter 11: for businesses and individual debtors with large debts. Known as reorganization bankruptcy, businesses use Chapter 11 proceedings to file a repayment plan that makes significant debts more manageable and stops creditors from pursing collection actions and foreclosures.
- Chapter 12: a consumer bankruptcy option limited to family farmers or family fisherman. To qualify, more than 50% of your income must be derived from a farming or fishing enterprise.
- Chapter 13: a debtor files a plan with the court to pay debts (or a portion of debts) from existing income. This option is used frequently by individuals who do not qualify for Chapter 7 or homeowners whose mortgages are in default and wish to save their homes from foreclosure.
- Chapter 15: a unique form of bankruptcy allowing a foreign company with assets or debts in the United States to file bankruptcy proceedings in this country as well as its country of origin. This enables bankruptcy courts in different countries to work together towards a resolution.
Consumers usually use a Chapter 7 or Chapter 13 bankruptcy.
A debtor initiates a Chapter 7 bankruptcy by filing a petition with the bankruptcy court. After filing, the debtor may eventually be required to sell certain non-exempt property to satisfy debts owed to creditors. A debtor’s property will often be considered exempt. A chapter 7 bankruptcy lawyer can help ensure that a debtor’s petition is properly filed, and that the debtor understands which property has exempt status.
A debtor files a plan with the bankruptcy court under Chapter 13, which indicates how he or she plans to pay off their debts over the next three to five years. A chapter 13 bankruptcy lawyer can help a debtor determine which debts must be paid in full or in part.
For a debtor to be eligible to file for bankruptcy, the debtor must satisfy the “means test,” which requires that the debtor’s current monthly income be less than the median income in California. Up-to-date information on median income is available on the U.S. Trustee website.
A debtor must submit a petition to a bankruptcy court and pay a filing fee (which could be paid in installments or waived). After this step, a trustee may be appointed to work with the debtor and the creditors. Usually the trustee holds a creditor meeting, to address creditor claims and the debtor’s financial status. A debtor may need to appear in court, if the debtor challenges a creditor’s claim or if other issues arise.
Filing for bankruptcy can stop foreclosure and give you time to make up for missed payments. All mortgages and liens owed on your home may not be eliminated by filing for bankruptcy; however, you should consult with an experienced bankruptcy attorney who can advise you about stripping a second or third lien through Chapter 11 or 13 bankruptcy. Whether you will be able to keep your property depends on your equity in the property, the current value of the property, the amount of debt owed, and other factors specific to each debtor’s situation.
California offers debtors a choice between the state law exemptions listed in the Code of Civil Procedure section 704 or the set of bankruptcy-only exemptions listed under federal law and in the Code of Civil Procedure section 703. Debtors may be able to claim many different exemptions, including the homestead exemption for real or personal property that the debtor occupies. Another available exemption is the personal property exemption, which could include some of the following items:
- Appliances, furnishings, clothing, and food
- Jewelry, heirlooms and art up to a certain value
- Motor vehicles up to a certain value
Other available exemptions include some of the following:
- Certain forms of insurance
- Certain types of pensions
- Public benefits
- Tools of trade
- A portion of wages
- Professional licenses
A qualified bankruptcy attorney can ensure that a debtor claims all appropriate exemptions during the bankruptcy process.
Federal law does not require a bankruptcy petitioner to file with the help of an attorney. However, all debtors can benefit from the assistance of a bankruptcy attorney during the bankruptcy process. Bankruptcy attorneys with experience filing petitions, negotiating with creditors, and dealing with trustees ensure that debtors’ rights are protected and that debtors are able to start over financially at the conclusion of a bankruptcy proceeding. Likewise, creditors can ensure that their rights are fully protected with the help of an experienced bankruptcy practitioner.