- What debts can be discharged (eliminated) in bankruptcy?
- Can I keep my house? Can I stop a foreclosure?
- Will bankruptcy stop wage garnishments?
- Do I have to give up all my assets?
- Do I have to list all my debts and assets?
- Does the bankruptcy court care what I tried to do to pay my debts before filing for bankruptcy?
- How will bankruptcy affect my credit?
- What are secured and unsecured debts?
- What is exempt and non-exempt property?
- Can I discharge a payday loan?
- Can I eliminate the mortgage on my house?
- What will happen to my income tax refund if I file for bankruptcy?
- What or who is a bankruptcy trustee?
- What is a meeting of creditors?
1. What debts can be discharged (eliminated) in bankruptcy?
Most unsecured debts can be discharged in bankruptcy. This includes credit card balances, medical bills, and personal loans. In addition, some secured debts, like judicial liens, can be discharged if they impair an exemption in a debtor’s property.
It shoud be noted, however, that certain debts, even though unsecured, are not discharged in bankruptcy. For example, bankruptcy will not discharge domestic support obligations and certain taxes. In addition, whether some unsecured debts are dischargeable may depend on the type of bankruptcy filed (i.e. Chapter 7 or Chapter 13). If you have questions about the dischargeability of a particular debt, you will need to speak to a bankruptcy attorney. If you reside in Tucson or Southern Arizona, please contact Yusufov Law Firm for a free consultation.
2. Can I keep my house? Can I stop a foreclosure?
The answer is generally yes, if you continue making the mortgage payments. If you fell behind on your mortgage payments due to temporary financial difficulties, filing a Chapter 13 bankruptcy call allow you to catch up on the missed payments over a period of several months to several years. This is true even if a foreclosure date has already been set--filing bankruptcy will stop the foreclosure process. On the other hand, if your income is not sufficient to continue making your monthly mortgage payment, you may not be able to keep your house. In some situations, especially where the debt on the house far exceeds its value, surrendering the house to the lender may be the best option, and may in fact resolve most, if not all, of your financial difficulties. However, for individuals who want to keep their house, their other debts can often be restructured, reduced, or eliminated in order to free up enough income to make the mortgage payment. To learn about your options, please contact a Tucson bankruptcy attorney at Yusufov Law Firm for a free consultation.
3. Will bankruptcy stop wage garnishments?
Yes, filing for bankruptcy will stop most wage garnishments. However, bankruptcy will not stop wage garnishments based on a domestic support obligation, like child support.
4. Do I have to give up all my assets?
No, you do not have to give up all your assets. In fact, the purpose of the bankruptcy laws is to allow individuals to obtain a fresh financial start. This purpose would be completely defeated if debtors were required to give up all their assets. The bankruptcy code and state law specifically allow an individual to keep (exempt) various types of personal and household property, as well as a car and a house, each up to a certain value. In most situations, individuals can keep all their personal and household belongings after filing for bankruptcy. An experienced bankruptcy attorney can advise you how filing for bankruptcy will affect your assets, and can help you plan prior to filing bankruptcy to maximize the assets you are able to keep.
5. Do I have to list all my debts and assets?
Yes, you have to list all your debts and assets. Failure to do so may result in you not being able to discharge (eliminate) the unreported debt, and in not being able to exempt an unreported asset. Further, providing incomplete or false information under oath on bankruptcy forms may, in the most serious cases, result in criminal penalties. It is to the benefit of every debtor to list all debts and assets, because if a debt or asset is not listed, it cannot be managed through the bankruptcy process. Sometimes, a debtor may not want to list debts owed to certain preferred creditors (e.g. a family member who loaned you money) because he or she wants to repay those creditors in full. Or a debtor may not want to list an asset because he or she is afraid to lose that asset in bankruptcy. An experienced bankruptcy attorney can help you structure your affairs so that you protect assets you want to keep, and can also advise you on how you can repay certain creditors in full without violating bankruptcy laws. However, your attorney cannot do this if he does not have complete information about your debts and assets.
6. Does the bankruptcy court care what I tried to do to pay my debts before filing for bankruptcy?
No, it does not matter to the bankruptcy court what efforts you made to repay your debts prior to filing bankruptcy. In some cases, especially when dealing with collection agencies, individuals who try to resolve their financial difficulties on their own may end up putting themselves in a worse financial situation by giving in to the threats of collectors and paying bills that could be discharged in bankruptcy, while neglecting bills that cannot be discharged. If you are faced with serious financial difficulties, it is usually advisable to seek competent advice as soon as possible. An experienced bankruptcy attorney can advise you of your options, including whether bankruptcy is the right choice in your situation, and can not only save you money, but also months of stress of dealing with collection agencies.
7. How will bankruptcy affect my credit?
There is no single answer to this question. Under the current federal law, a bankruptcy can remain on a person’s credit history for up to 10 years. On the other hand, most individuals who file for bankruptcy already have poor credit because of prior defaults and delinquencies, and therefore bankruptcy is not likely to negatively affect their credit. In some situations, bankruptcy may even improve a person’s credit, because bankruptcy can eliminate many debts and thus improve a person’s financial situation, and because once a person receives a discharge in bankruptcy, he or she generally cannot file for bankruptcy and receive another discharge for 4 to 8 years. While each creditor is different, many do not automatically exclude the millions of customers who have filed for bankruptcy, and most look more to a potential customer’s current income situation, and its stability, than to anything else.
8. What are secured and unsecured debts?
Secured debts are those debts the payment of which is guaranteed (secured) by a particular item or items of property. For example, when buying a house, the buyer usually borrows money for the purchase and pledges the house itself as a guarantee (security) of repayment (what we all know as a “mortgage”). If the borrower does not pay a secured debt, the lender can sell the property to recover the money loaned. In the example with the house, if the borrower does not pay the mortgage, the lender (bank) can sell the house to recover the money it loaned. Other examples of secured debts are car loans, home equity loans, and judicial liens.
Unsecured debts are debts that are not protected by a pledge of property as collateral. An example is medical bills—if a person does not pay his or her medical bills, the hospital cannot automatically sell any of the person’s property to pay the bills. Another example is credit card bills. Credit card purchases are normally secured by the item purchased (e.g. the item of clothing), but because most items purchased with a credit card lose value very quickly and are hard for credit card companies to locate, credit card debts are generally treated as unsecured debts.
The difference between secured and unsecured debts is important because if a person files for bankruptcy to receive a fresh financial start, he or she generally does not need to repay unsecured debts in full, but secured debts, with certain exceptions, must generally be repaid in full.
9. What is exempt and non-exempt property?
Exempt property is property that cannot be taken by most creditors to satisfy the creditors’ claims against the debtor. Put simply, it is the property that the debtor can keep. All other property is non-exempt. The purpose of exemption law is to allow the debtor to keep those items of property deemed essential to daily life.
Exemptions are created by both state and federal law. As an example, under Arizona law, a debtor can generally exempt up to $150,000 of equity in his residence (the amount by which the value of the property exceeds the mortgage and other voluntary loans secured by the property). So, if a person filing for bankruptcy owns a $250,000 house with a $100,000 mortgage, his creditors, other than the mortgage company, cannot take the house to satisfy their claims. Another Arizona exemption allows a debtor to keep a car up to $5,000 in value. Yet another exemption, under federal law, allows a debtor to keep most pension and retirement benefits. For a detailed list of Arizona bankruptcy exemptions, please click here.
There are two important caveats to keep in mind when discussing exemptions. First, an exemption cannot protect property from a creditor who holds a voluntary lien on the property. So, if you voluntarily grant a lien on your property to a creditor in order to obtain a loan, which is what happened if you have a mortgage on your house or obtained a loan to buy a car, then that creditor can take the property if you do not pay the debt. Second, many exemptions are limited in amount, like the car exemption discussed above. However, there are ways for a debtor to keep property even if its value exceeds the exemption amount, and an experienced bankruptcy attorney can advise you on how to accomplish this.
10. Can I discharge a payday loan?
Yes. Payday loans (i.e. loans in which you give the lender a post-dated check in return for the loan) are generally unsecured. Therefore, they can be discharged (eliminated) just like other unsecured loans. How much of the loan you can discharge depends on several factors, including the type of bankruptcy (Chapter 7 or Chapter 13), your income, other assets, and expenses.
11. Can I eliminate the mortgage on my house?
The general answer is no, you cannot eliminate a mortgage on your house. Because a mortgage is a secured debt, it is guaranteed by the house itself. Therefore, as long as you own the house, you are required to pay the mortgage. However, in Arizona, there is an important exception to this rule--if you have two mortgages on your house, and the value of the house is equal to or less than the amount of the first mortgage, then you can avoid (strip) the second mortgage. The second mortgage then becomes an unsecured debt, and can be discharged just like other unsecured debts.
Similarly, if you have three or more mortgages, and the value of the house is equal to or less than the amount of the first mortgage, then the second and all subsequent mortgages can be stripped. If the value of the house is equal to or less than the amount of the first and second mortgages combined, then the third and all subsequent mortgages can be stripped, and so on.
12. What will happen to my income tax refund if I file for bankruptcy?
The answer depends on whether you file a Chapter 7 bankruptcy or a chapter 13 bankruptcy. In Chapter 7, as a general rule, if you receive an income tax refund that relates to a tax year that preceded the bankruptcy, you must turn the refund over to your creditors. So, if you file in 2010, and then receive a refund for the 2009 tax year, you will not be able to keep the refund. However, the timing of the bankruptcy filing is important. If you receive a refund after you file for bankruptcy, like in the preceding example, you cannot keep it. If, on the other hand, you receive the refund before you file for bankruptcy, an experienced bankruptcy attorney can advise you how to organize your finances to enable you to keep the refund.
In Chapter 13, you can generally keep all income tax refunds that relate to a tax year that preceded the bankruptcy, regardless of whether you receive the refund before or after filing for bankruptcy. However, if you receive the refund after filing for bankruptcy, you may be required to pay the value of the refund to your creditors over the term of your Chapter 13 plan.
To sum up, if you are expecting to receive an income tax refund, it is generally advisable to wait until after you receive it before filing for bankruptcy. However, every situation is different, and there are both benefits and costs associated with delaying a bankruptcy filing. If you are considering bankruptcy, you should consult with a bankruptcy attorney in your area. If you reside in Tucson or Southern Arizona, you may contact a Tucson bankruptcy attorney at Yusufov Law Firm for a free consultation.
13. What or who is a bankruptcy trustee?
A bankruptcy trustee is an individual (usually a lawyer) with responsibility for overseeing a bankruptcy case.
You may see references to several different types of trustees: the United States Trustee—an officer of the Department of Justice who generally oversees all bankruptcy cases, takes legal action to enforce requirements of the Bankruptcy Code, and appoints Chapter 7 and Chapter 13 trustees; Chapter 7 trustee—a private individual appointed to administer a Chapter 7 bankruptcy case; Chapter 13 trustee—a private individual appointed to administer a Chapter 13 bankruptcy case; Chapter 11 trustee—a private individual appointed to administer a Chapter 11 business reorganization case (this does not happen often). You may also sometimes hear the term “case trustee.” This refers to the trustee assigned to the particular case, and would include any type of trustee except the United States Trustee.
Some of the duties of the different types of trustees are: reviewing the petitions and schedules filed by debtors, presiding over the meeting of creditors that must be held in every bankruptcy case, objecting to improperly claimed exemptions, selling non-exempt property and paying creditors (in Chapter 7 bankruptcy cases), collecting and distributing debtors’ monthly plan payments (in Chapter 13 bankruptcy cases), appointing creditors’ committees and reviewing disclosure statements (in Chapter 11 bankruptcy cases).
A meeting of creditors (sometimes also called a “341 meeting,” because it is provided for by section 341 of the Bankruptcy Code) is a meeting that must be held in all Chapter 7 and Chapter 13 bankruptcy cases, and in most Chapter 11 bankruptcy cases. Absent extraordinary circumstances, a debtor must personally appear at this meeting. The purpose of the meeting is to give an opportunity to the debtor’s creditors to question the debtor about matters related to the debtor’s finances and the bankruptcy filing. The meeting is presided over by the United States trustee or the case trustee. The bankruptcy judge is not present at this meeting.
In cases involving consumer debtors (i.e. not business bankruptcy cases) such meetings are usually very short, and no creditors show up. In business bankruptcy cases, the meetings of creditors are generally longer, and, if multiple creditors wish to participate, can sometimes extend over several days.