Personal Bankruptcy

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What is Chapter 7 bankruptcy?

Can I eliminate all of my debts in Chapter 7?

What are the most common reasons for a Chapter 7 bankruptcy?

Can I stop my creditors from calling?

How long after I file will the creditors stop calling?

Does my spouse have to file bankruptcy too?

Will I lose my job?

Will my employer find out about my bankruptcy?

What happens to my property?

Can I keep my home?

Can I keep my car?

Can I keep my house after bankruptcy?

Can I keep my credit cards after bankruptcy?

Will bankruptcy stop a wage attachment?

Will bankruptcy stop a foreclosure?

Will bankruptcy stop a judgment?

Will bankruptcy remove a lien against my property?

I am divorced; will bankruptcy wipe-out my obligation to pay marital debts?

How does bankruptcy affect my obligation as a co-signer?

Who notifies the creditors?

Are there any debts that will not be discharged in bankruptcy?

Do I have to go to court?

When do I get my discharge?

Who deals with my creditors during the bankruptcy?

How will bankruptcy affect my credit?

After bankruptcy, can I get credit?

How do I re-establish my credit after bankruptcy?

What should I do if I am contemplating bankruptcy?

Can I ever file bankruptcy again?

What information does my attorney need?

Are there any alternatives to bankruptcy?

Counseling requirements to filing and obtaining a discharge.

A Chapter 7 bankruptcy is a liquidation proceeding.  Under applicable law, the debtor is entitled to certain exemptions.  To the extent that there are assets over and above that which the law allows the debtor to keep (the “exempt property”), the property is surrendered to the bankruptcy trustee to be liquidated.  After payment of administrative expenses the Trustee distributes the remainder of the case among the creditors in the order of their priority, and the debtor receives a discharge of all dischargeable debts.

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Bankruptcy is designed to give an honest debtor a “fresh start.”  Accordingly, if you find yourself in debt beyond your ability to pay, a discharge of debts through a bankruptcy proceeding may be available to you.

Not all debts are dischargeable in bankruptcy, however.  Generally, and subject to certain exceptions, the following obligations with not be affected by a bankruptcy: (1) taxes; (2) alimony and child support; (3) debts arising out of the debtor’s willful or malicious misconduct; (4) liability for injury or death caused by the debtor’s driving while intoxicated; (5) nondischargeable debts from a prior bankruptcy; (6) student loans; (7) fines, penalties and forfeitures arising out of a criminal proceeding.

Your “personal liability” to secured creditors is dischargeable.  Secured creditors are those creditors that have collateral to secure repayment, e.g., a mortgage, an automobile lien, etc.  Even though you may be discharged from personal liability, if you don’t pay the secured creditor as agreed, you should expect that creditor to take the necessary legal action to recover the the collateral securing the claim.  In most consumer Chapter 7 cases, the debtor has little, if any, equity in such property (e.g., the home, the car); and whatever equity there exists is likely exempt.  If the debtor wishes to retain possession of personal property, e.g., an automobile, he must either (1) redeem the property at its replacement cost by paying that amount to the creditor, (2) reaffirm the debt at an agreed amount pursuant to a written agreement with the creditor (agreeing that the creditor will not be affected by the discharge) which must be filed with the Court within 30 days of the meeting of creditors, or (3) surrender the collateral.   In certain cases the Court may permit the debtor to retain the personal property with a reaffirmation of the underlying debt.

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Everyone’s circumstances are different, however, the most common reasons for consumer bankruptcy include loss of employment, extraordinary medical expenses, over extended credit (credit cards, in particular), judicial proceedings (wage attachments) and marital problems (although in many cases it is the debt load that is contributing to the marital problems).

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The filing of a bankruptcy case triggers the “automatic stay.”  Once a creditor is made aware that you have filed for protection under the Bankruptcy Code, all debt collection efforts, including wage attachments, repossessions and foreclosures are halted.  If the creditor continues to call you or to otherwise take action in violation of the automatic stay, he does so at his peril, for he may be found in contempt of court and could be required to respond in damages and attorneys’ fees.

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As soon as you inform the creditor or collection agency that you have filed bankruptcy, he must stop all efforts to collect the debt.  Within thirty days or so after the bankruptcy is filed, the court mails a notice to all creditors listed in your schedules.  

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No.  However, a married couple can file a joint case under Chapter 7.   In those circumstances where only one spouse has the significant debts, you may be well advised to file bankruptcy only for the debtor spouse.  In Maryland, real and personal property may be owned by spouses as tenants by the entireties (a special form of joint ownership between husband and wife).  In that case, a creditor, including the bankruptcy trustee, must have a claim against both spouses in order to reach the joint property.   And, if there are any “joint” creditors, the bankruptcy trustee can proceed against property held as tenants by the entireties even if only one spouse filed for bankruptcy relief.

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No private employer may terminate your employment or otherwise discriminate with respect to employment solely because you filed bankruptcy or failed to pay a debt that was discharged in bankruptcy.

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Unless your employer is also a creditor or unless you choose to tell him/her, generally your employer will not be aware of your bankruptcy.

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With certain specified exceptions, all assets which the debtor owns at the time of the bankruptcy filing become the property of the bankruptcy estate.  In addition, the bankruptcy estate includes property that the debtor acquires within 180 days after the filing of the petition as a result of inheritance, divorce or property settlement agreement with a spouse, or as beneficiary of a life insurance policy or death benefit plan.  The bankruptcy trustee takes control of these assets for the purpose of satisfying, to the extent possible, the claims of the creditors.   However, much of the debtor’s property is excluded or exempt under applicable law, and the debtor will be allowed to keep it.

The exemptions available to a Maryland debtor include: (1) trade tools and apparel not to exceed $5,000 in value; (2) money payable on account of sickness, accident, injury or death; (3) the debtor’s interest, not to exceed $1,000 in value, in any household furniture or wearing apparel used for personal or family purposes; (4) $11,000 in real or personal property; (5) interests in certain qualified retirement plans; (6) child support.  Each debtor in a husband-wife joint case is entitled to these exemptions.   Also, an exemption is allowed for equity in real or personal property the debtor or a dependent uses as a residence to the extent of $22,975.00.

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The first thing to do is to determine the equity in your residence.  In this regard, you must value the residence and all other assets at replacement value.  Once you determine this value, you must then subtract the amount owed on any mortgage or home equity loan to calculate the equity.  Furthermore, if you would realize a gain on a sale, then the tax consequences must be factored into the analysis.  Assuming there is no equity in excess of the allowable exemptions, the Trustee will take no action.  The Trustee represents the creditors, and he will not take action against assets that will not benefit the creditors.  Please note that any creditor secured by the home will take action if you fail to make the mortgage payments as agreed.

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In most cases, if you are making a car payment, there will be little, if any, equity in the vehicle.   Even if there is some equity, there is nothing for the trustee or the creditors whose interests he represents if your equity is equal to or less than the allowed exemptions.  To determine the value of the car, use the Blue Book or obtain a written appraisal from a dealer.  All collateral must be valued at “replacement cost.”  To calculate the equity, subtract the balance owed on the car to pay it off.   You will probably have to call the creditor to obtain the correct payoff figure.  Even if there is no equity available to the unsecured creditors, if the lien was on account of the purchase money for the vehicle you must reaffirm the debt or redeem the vehicle in order to keep the car.  If you fail to do that within 45 days of the first meeting of creditors, the holder of a purchase money lien can demand surrender of the car.  Any creditor that has a valid lien against the vehicle will be able to take action if you fail to make the installment payments as agreed.

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If there is equity in the house over and above your allowable exemptions, the trustee will have an interest in the asset.  As a general rule, the secured creditor enters the bankruptcy court and leaves the bankruptcy court with his lien intact.  If you fail to make your mortgage payments after the bankruptcy, the mortgage holder can exercise all remedies available to him under non-bankruptcy law, such as foreclosure.  Just like before the bankruptcy, “if you pay, you stay; if you don’t, you won’t.”  Unless you agreed to reaffirm your indebtedness to the mortgage holder in the course of the bankruptcy, however, you will not be personally liable for any deficiency balance if the property does not sell for an amount sufficient to satisfy the obligation and the costs of the foreclosure proceeding.

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Sometimes.  Many of the credit card issuers, in an effort to avoid a loss due to bankruptcy, offer debtors an opportunity to maintain their credit if they agree to reaffirm the indebtedness.  Indeed, many actively encourage a reaffirmation.  Whether or not this is advisable depends on the particular circumstances, and there are many factors which must be considered.  

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Yes, the filing of the bankruptcy automatically stays the wage attachment.  Furthermore, in some circumstances the debtor can recover monies that were turned over to the creditor during the 90 days prior to the bankruptcy filing.

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Yes, but the relief may only be temporary.   The lender may apply to the bankruptcy court for relief from the automatic stay.  As a general rule, to keep a home that is in foreclosure, you will have to bring the account to a current status or work out terms with the lender.

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Yes.  The filing of bankruptcy automatically stays any pending civil action against you, thereby preventing the entry of a judgment.  If a judgment is entered before the civil court has notice that the bankruptcy was filed, the judgment can be stricken later as having been entered in violation of the automatic stay.  The bankruptcy also stays any action to enforce a judgment, such as a wage attachment.

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Generally, secured creditors are unaffected by the bankruptcy with respect to the collateral securing their claims. However, there are certain types of liens that may be avoided by the bankruptcy court for various reasons. It is important that such liens be avoided by the bankruptcy court during the case, or the opportunity may be forever lost.  This is a complicated area of bankruptcy law and bankruptcy counsel should be consulted.

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In general, you will be discharged from all debts, marital or otherwise. However, you should discuss this with your family law attorney as well as with bankruptcy counsel.  There are many factors that must be considered, e.g., did you agree to pay these debts in a Marital Settlement Agreement?  Is there a Court Order or Judgment of Divorce which orders you to pay the debts?  Is your obligation to pay the marital debts in the nature of spousal support or maintenance?  Even though discharged from the direct obligation to the creditor, you may be obligated to indemnify your ex-spouse on account of the obligation.

As a general rule, obligations to a spouse, former spouse or child as the result of a divorce or separation, are unaffected by a bankruptcy proceeding.  Under Chapter 7, if the debtor has assets which are not exempt, those assets will be sold by the trustee with most of the money going to pay the debtor’s domestic support obligation.

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If the debt is discharged you will not have to pay it; however, the creditor will look to the co-signer for payment.  The co-signer should be listed as a creditor in the schedules, for he may have a claim against you and you want to be discharged from this contingent liability.

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After your bankruptcy is filed, the court mails a notice to all creditors listed on the mailing matrix filed with your Chapter 7 petition.   It usually takes several weeks for the notice to issued by the court.

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Yes.  Certain debts are not dischargeable in bankruptcy.  As a general rule, the following debts will not be discharged: taxes; alimony and child support; debts arising out of willful or malicious misconduct by the debtor; liability for injury or death from driving while intoxicated; nondischargeable debts from a prior bankruptcy; student loans; and criminal fines and forfeitures.

Your personal liability to secured creditors will be discharged unless you reaffirm the indebtedness; however, expect the creditor to take appropriate action to proceed against the property securing his claim.

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Most Chapter 7 debtors will have only one court appearance, and they will never see a Bankruptcy Judge.   Approximately 60 days after the bankruptcy case is filed, you must attend a hearing called the First Meeting of Creditors.   At this hearing the bankruptcy trustee will ask questions under oath regarding your assets and liabilities.  Most of these questions will have been answered already in the schedules, but the trustee may have further questions concerning valuation of assets or other matters.  Any creditors in attendance will also have the right to question you; however, there is very little time set aside for the meeting, and any extensive questioning by the creditor will have to be done at another time. Your bankruptcy counsel will be with you throughout the hearing and he can assist you in accurately responding to the inquiries.  In most no-asset Chapter 7 cases, creditors do not attend the meeting.  However, some secured creditors customarily attend the First Meeting of Creditors to ascertain your intentions concerning the property which secures their claim.   Various options are generally available to you in this regard, and bankruptcy counsel can help negotiate the deal that is best for you.

After the First Meeting of Creditors, you will not have to return to court unless a creditor files a motion or an adversary proceeding affecting your discharge or property. This does not happen in most cases; however, your bankruptcy counsel can advise you if this is likely to happen in your case.

At the meeting of creditors you will be required to submit proof of identity in the form of photo identification, such as a driver’s license or passport, and proof of social security number, e.g., social security card, pay stub bearing social security number, etc.

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Generally, and barring any objections to the debtor’s entitlement to a discharge, the bankruptcy court automatically enters a discharge 75 days or so after the First Meeting of Creditors.

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Your attorney deals with your creditors, for they are not allowed to contact you directly after the bankruptcy has been filed.  Indeed, one of the advantages of the bankruptcy filing is that you will not have to deal with the creditors.

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This is probably the most commonly asked question by clients contemplating a bankruptcy filing.   Generally, your credit rating is already pretty bad or you would not be considering bankruptcy.   Like a judgment, the fact that you filed bankruptcy will remain a part of your credit history for a period of ten years or so.

Issuers of credit (like banks and credit card companies) are free to consider the fact of a bankruptcy filing in deciding whether to extend credit.   Credit reports may list bankruptcy filings for up to 10 years.  Some issuers of credit may decide to extend credit regardless of a bankruptcy. Others may be willing to extend credit only after a number of years have passed or until the bankruptcy filing is no longer on the credit report. After bankruptcy, it may be difficult to rent an apartment.

Some creditors have been offering credit to bankruptcy debtors more freely than other people in financial difficulty because the debtor cannot obtain another discharge for many years to come. For the most part though, for obvious reasons, it is best for bankruptcy debtors to avoid incurring new debt as much as possible after bankruptcy.

Curiously, the filing of bankruptcy can eventually have a positive effect on your credit score.   The more recent a public record or delinquency appears on your credit report, the greater that delinquency or “blemish” will negatively impact your credit score.   Although the bankruptcy will be such a blemish, as time passes and the bankruptcy filing becomes more distant, the lesser will be the impact on the credit score.   To obtain a good understanding of how the credit reporting system works, we recommend the book Credit Scores & Reports written by Evan Hendricks.

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Possibly.  There are many factors that will be considered in any application for credit following the bankruptcy discharge.  These factors include the reason for the bankruptcy filing, your employment security, your ability to service the contemplated debt, any collateral offered in connection with the credit accommodation, and the length of time since you filed for bankruptcy relief.

Generally, if your only option is a bankruptcy filing, then your present credit worthiness is rather bleak in any event.  Since you do not have the ability to service your existing debt, it is unlikely that further credit will be extended to you.  Following the discharge of the existing debt, your ability to service any new credit extension may be enhanced. 

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Many of the unsecured creditors will offer you an opportunity to maintain your credit card account if you agree to reaffirm the indebtedness.  This may or may not be in your best interest.  Alternatively, many banks offer a secured credit card as a means of re-establishing your credit.   It would be prudent to open a savings account with a bank and start saving money.  To the extent that you can accumulate savings, you demonstrate to your bank that you have the ability to service debt.  Since you are not making the payments on account of the pre-bankruptcy debts, perhaps you will have the ability to begin saving.

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You should consult with experienced bankruptcy counsel as soon as possible.  There may be alternatives to a bankruptcy filing; yet, there may be no other options available.  Generally, until you consult with counsel:

*    You should stop using credit cards, for creditors may object to a discharge of debts incurred without the intention of repaying them.

*    Make no further payments on account of unsecured obligations.

*    Continue to make payments to secured creditors if you intend to keep the collateral (such as your home, your car, etc.).

*    Don’t transfer any of your assets in an effort to “hide” them.

*    Remember, bankruptcy is designed to provide relief and a fresh start to honest debtors; do not commit bankruptcy fraud.

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A person may be discharged in bankruptcy under Chapter 7 only once every 8 years.

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In order to properly advise you, and to accurately prepare your bankruptcy Petition, Schedules and Statement of Financial Affairs, and to advise you on the merits of any contemplated reaffirmation, your attorney must be fully informed.  You will need to provide a complete list of your creditors, with correct mailing addresses and the balance owed to each; a description of any collateral securing the claim; a complete list of your real and personal property, with replacement values; copies of deeds to real estate and titles to motor vehicles; a budget showing family income and expenses; copies of tax returns for the preceding three years; and copies of any law suits or legal papers served on you. 

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Bankruptcy is to be viewed as a last resort; alternatives to bankruptcy should first be considered.  Once creditors are aware that bankruptcy counsel has been consulted, and that a bankruptcy filing is contemplated, they may be more inclined to compromise the debt or to otherwise work out a favorable payment schedule.  Most creditors would prefer a partial recovery rather than a total loss due to a bankruptcy charge off.  Bankruptcy is a “trump card” that should not be played early in the game.  If all else fails, or if you have no realistic alternatives, bankruptcy offers a fresh start.

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Mandatory Prepetition Counseling.  Before debtors may file for bankruptcy, they must submit to credit counseling with an approved credit counselor.  The filing must be accompanied with a certification prepared by the counselor, which is generally sent electronically to your attorney. 

Financial Management Counseling.  In order to receive a discharge, debtors must successfully complete a course in personal financial management.   

Both of the required counseling services are offered by many companies.  They are available by telephone or via internet with DebtorEdu.  The website address is www.DEBTOREDU.com and the telephone number is 1-800-610-3920.   This firm refers clients to DebtorEdu.

You will be charged a fee for the requisite counseling.

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