Bankruptcy Q & A
What is bankruptcy?
Chapter 7 and Chapter 13 bankruptcy are legal proceedings that are available to a person to cope with a financial crisis. One of the main purposes of bankruptcy legislation is to afford the opportunity to a person, who is hopelessly burdened with debt, to free himself of the debt and start fresh.

Will I need to repay all of my debt?
When you file Chapter 7, the law requires all actions against you as the debtor to cease. Creditors cannot initiate or continue lawsuits, wage garnishes or telephone calls demanding payment. Secured creditors of such debts as car liens will have their stays lifted.

Under Chapter 13 protection, you are required to repay debt within five years. Chapter 13 bankruptcy enables you to reorganize your debts into a repayment plan, without losing any property. Like Chapter 7, it stops mounting fees and interest on current debt and stops wage garnishes, foreclosures and certain attachments and liens.

How will bankruptcy affect my spouse?
Your spouse will be responsible for any debt for which he or she co-signed, for example a supplemental credit card. In community property states, such as California, either spouse can contract for a debt without the other spouse's consent and still obligate the spouse.

Will I lose my job?
No. In the U.S., discrimination based upon a debtor filing for bankruptcy protection is prohibited by law.

Will my employer know that I've filed bankruptcy?
Not unless your employer is also a creditor.

Who will know that I've filed for bankruptcy?
Typically, only your creditors will know, because they will be notified. However, Chapter 7 filings are public record and remain on your credit history for 10 years.

What does it cost to file?
Filing Chapter 7 bankruptcy costs around $200, and lawyer's fees usually range from $800 to $1200. Being well organized and prepared will help keep fees down.

Will I be able to get credit again?
Yes. Some banks now offer secured credit cards. A debtor pays a certain amount up front as security for the credit. The bank puts the money in an account to guarantee payment. Usually the credit limit equals the amount placed down as security. The bank may increase the credit limit as the debtor proves he or she can pay the debt.

Two years after being discharged from bankruptcy, you will be eligible for mortgage loans. You will be able to secure terms as good as those offered to people who have not declared bankruptcy in the past.

A bankruptcy filing will remain on your credit history for 10 years. However, most creditors consider you a safer risk after bankruptcy than before.

Will I lose my house?
Not necessarily. You will be required to liquidate your assets, and your house is one of them. When liquidated, properties are often valued less than what the property is actually worth. Depending on your exemption scheme, you may be exempt for up to $100,000 in equity. Use the liquidation value of your property to calculate your equity. Subtract the amount you owe on the property plus selling and transfer costs from that number to calculate your equity.

Will bankruptcy stop a foreclosure? An eviction notice?
Your bankruptcy filing will stop a foreclosure. However, the mortgage company may apply to the court for relief from the automatic stay that prevents them from taking action on the deed of trust. This takes time, which is beneficial to you. You might be able to make a deal with the deed holder in the meantime.

A foreclosure may stop an eviction notice, but eventually the owner of the property is entitled to possession, even if he has to wait until you are discharged from bankruptcy. Also, using bankruptcy as a means of avoiding eviction can be considered an abuse of Chapter 7 filings, and may result in other legal action taken against you.

Will bankruptcy stop judgments and liens?
Civil judgments and wage attachments are halted by bankruptcy filings. However, bankruptcy court orders are required to remove liens against you.

Are there any debts that bankruptcy won't alleviate?
Yes. They include:
  • Taxes
  • Child support
  • Spousal support
  • Non-dischargeable debts from prior bankruptcy
  • Student loans
  • Criminal fines or debt resulting from willful misconduct
Secured debts will be discharged, however the creditors will typically repossess the property.

When will I be able to buy a new home?
Even people with bad credit can eventually purchase a home. There is a whole segment of the mortgage industry that specializes in lending to people with less-than-perfect credit reports. They offer "B" paper loans, as opposed to the standard "A" paper loans offered to buyers with good credit.

"A" paper lenders typically need to see that the buyer has made 24 months worth of on-time mortgage or rent payments. If you've recently been through a bankruptcy, it's unlikely you'd be able to show that. "B" paper loans provide an opportunity for home owners to demonstrate their ability to pay on-time mortgage payments. They include 2/28 and 3/27 loans, where the number before the slash refers to the number of years that the initial rate is fixed. After that time period, the rate changes, or adjusts, on a predetermined schedule, such as every 6 months, for the remainder of the loan. The adjusted rate is calculated using a mathematical formula based on the U.S. bond market. These loans usually have a two-year payment penalty which means you cannot refinance during that time. The benefit of a "B" paper loan is that you are given two years to demonstrate your ability to make regular payments. After those 24 payments, lenders will be more willing to qualify you for "A" paper loans with lower interest rates.

Furthermore, the market for "B" paper loans is very competitive. So although your rate will be higher than if you secured an "A" paper loan, you can still shop for good rates with in the "B" paper category.


Disclaimer: The above information is not intended as legal advice. Different states have different bankruptcy laws, and you should consult a lawyer to learn the legal specific for your particular bankruptcy case.
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