Bankruptcy Basics
For most of my clients, filing bankruptcy is their last choice. The vast majority of people want to honor their obligations and they struggle with the stigma of filing bankruptcy. Therefore, I encourage all of my clients to evaluate all of their options before deciding to file. This choice should be made after examining all of your options.
On this website, I have provided some basics about how bankruptcy works and alternatives to bankruptcy to assist you in making the right choice for you. If you are looking for more detailed information on any of the topics discussed, please click the associated link.
What is bankruptcy?
- Tell the Truth! – the whole truth. If you are not sure whether something needs to be disclosed, you should consult your attorney. If it occurs to you, then you probably should tell us about it.
- You need to be able to participate in the process and provide payroll records, tax returns, bank statements, vehicle information and information about your assets. You will have to fill out forms. You will have an obligation to supplement information even after you have filed your case.
- You will have to attend a 341 meeting of creditors on Zoom.
- You will have to take two credit counseling courses (one before you file and one after).
- It is a public record and stays on your credit report for 10 years from the date that you file your case. See Bankruptcy and Credit
- If you have car loans or house loans, (secured) you need to keep making payments to keep the asset. See Dealing with Secured Creditors
- People who have co-signed on the debt may be impacted by your filing a bankruptcy. See Co-Debtors and bankruptcy
- Significant transactions between family members prior to filing may have legal consequences. Make sure to tell your attorney. See Bankruptcy and Family Transactions
- If you are in the process of separation or divorce, your bankruptcy will be impacted. See Bankruptcy and Divorce
- Your business may be impacted by filing bankruptcy. See Bankruptcy and Business
- Eliminate the legal obligation to pay debt
- Stop a foreclosure
- Prevent repossession – or recover repossessed vehicles
- Stop Wage Garnishment
- Restore or prevent utility shut offs.
- Allow you to challenge some creditors’ claims. (13)
- Allow you to catch up on house and car payments. (13)
- Remove rollover balances from old car loans. (13)
- Refinance car loans to the value of the car for car loans that are over 910 days old
- Get rid of obligations on secured loans unless you give up the property securing the loan.
- Discharge child support, alimony, most student loans, most taxes, court restitution orders, criminal fines, and debts incurred through fraud. Debts divided in divorce decree are also not discharged, except in a 13.
- Protect co-signers, except there are some solutions in chapter 13 if the debt is consumer debt.
What chapter should you file?
There are several chapters of the bankruptcy code:
- Chapter 7 – Chapter 7 is a short proceeding (about 3-4 months once filed) that allows people who cannot afford to pay a reasonable amount of their debt to discharge some or all of their debt. It requires an individual to give up property that is not “exempt” under the law, so the property can be sold to pay creditors. Generally, those who file chapter 7 keep all of their property except property that is not exempt or that is subject to a lien that they cannot avoid or afford to pay. If you have non-exempt property you want to keep, chapter 13 may be a better option for you.
- Chapter 11 – The reorganization chapter is used when businesses and individuals have a very large amount of debt.
- Chapter 12 – Is a reorganization chapter specifically for family farmers and fishermen.
- Chapter 13 – Is a reorganization chapter for individuals to pay all or a portion of their debts over a period of 3-5 years. Chapter 13 is similar to debt consolidation except that provides you protection from your creditors while you pay back some or all of their debt with generally lesser cost than a non-bankruptcy solution. In most cases there is no interest charged on unsecured debt, there are costs such as attorney fees, court fees and trustee fees. Often it is a more economical solution to debt negotiation and debt consolidation.
I help people file for chapter 7 and chapter 13. This includes people who own businesses and who are self-employed because most people who have their own small businesses do not need to, nor want to file a chapter 11.
What debts are discharged?
- Credit card debt
- Personal Loans
- Medical Debt
- Utilities
- Business debt
- Some Tax Debt
- Some government overpayments
- Uninsured motorist liability
- Lease payments if property is surrendered
- Secured debts when property is surrendered
What debts are NOT discharged?
- Money owed for child support or alimony;
- Most fines and penalties owed to government agencies;
- Most taxes and debts incurred to pay taxes;
- Student loans, unless you can prove to the court that repaying them will be an “undue hardship”;
- Debts not listed on your bankruptcy papers;
- Loans you took out by intentionally giving false information to a creditor,
- Debts resulting from “willful and malicious” harm;
- Debts incurred by driving while intoxicated
What does it cost to file for bankruptcy?
I do my best to keep your fees as low as possible. I understand that you wouldn’t be contacting me if you had money sitting around. I am happy to give you a quote at the conclusion of the consultation. I offer payment plans, and try to work with your situation.
What property can I keep?
In a chapter 7 case, you can keep all property which the law says is “exempt” from the claims of creditors. In the state of Washington, you have the option to use the exemptions that are provided by Washington State Law OR the Federal Bankruptcy Code Exemptions. If you have moved to Washington within the last 2 years, you may be required to use the exemptions from the state where you lived the majority of the time in the last 2 years. It can be complicated due to variations in those laws.
Federal bankruptcy exemptions
If you are allowed to use the federal bankruptcy exemptions, they include:
- $31,575 in equity in your home;
• $5025 in equity in your car;
• $700 per item in any household goods up to a total of $14,875;
• $3175 in things you need for your job (tools, books, etc.);
• $1675 in any property, plus part of the unused exemption in your home, up to $15,800; - $2125 jewelry;
- $3175 in things you need for your job (tools, books, etc.);
• $31,575 Personal Injury Recovery Exemption; AND - Your right to receive certain benefits such as Social Security, unemployment compensation, veteran’s benefits, public assistance, and pensions—regardless of the amount. If you are a married couple who is filing these exemptions are doubled.
WA State bankruptcy exemptions
- $15,000.00 in equity in your car; • $700 per item in any household goods up to a total of $14,875; • $3175 in things you need for your job (tools, books, etc.); • $1675 in any property, plus part of the unused exemption in your home, up to $15,800;
- $2125 jewelry;
- $3175 in things you need for your job (tools, books, etc.); • $31,575 Personal Injury Recovery Exemption; AND
- Your right to receive certain benefits such as Social Security, unemployment compensation, veteran’s benefits, public assistance, and pensions—regardless of the amount. If you are a married couple who is filing these exemptions are doubled.
What is my property worth?
The value of property is not the amount you paid for it, but what it is worth when your bankruptcy case is filed. Especially for furniture and cars, this may be a lot less than what you paid or what it would cost to buy a replacement.
You also only need to look at your equity in property. That means you count your exemptions against the full value minus any money that you owe on mortgages or liens. For example, if you own a $90,000 house with a $80,000 mortgage, you have only $10,000 in equity. You can fully protect the $90,000 home with a $10,000 exemption.
In a chapter 13 case, you can keep even property that is not fully exempt by paying the amount that is not exempt over time from future income under a plan approved by the bankruptcy court. If you have very valuable property that might be sold in a chapter 7 bankruptcy, chapter 13 can allow you to keep it if you are able to pay the amount not exempt to your creditors over a number of years in a chapter 13 plan. While your exemptions allow you to keep property even in a chapter 7 case, your exemptions do not make any difference to the right of a mortgage or car lender to take the property to cover the debt if you are behind after the bankruptcy because the lender has a secured loan. In a chapter 13 case, you can keep all of your property if your plan meets the requirements of the bankruptcy law for secured loans. In most cases you will have to pay the mortgages or liens as you would if you didn’t file bankruptcy.
What will happen to my home and car if I file bankruptcy?
In most cases you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt. Even if your property is not fully exempt, you will be able to keep it, if you pay its non-exempt value to creditors in chapter 13. However, some of your creditors may have a “security interest” in your home, automobile, or other personal property. This means that you gave that creditor a mortgage on the home or put your other property up as collateral for the debt.
Bankruptcy generally does not make security interests go away. If you don’t make your payments on that debt, the creditor may be able to take and sell the home or the property during the bankruptcy case if the creditor gets permission from the court, or after the bankruptcy case is closed. In chapter 13 case, you may be able to keep certain secured property by paying the creditor the value of the property rather than the full amount owed on the debt. Or you can use chapter 13 to catch up on back payments and get current on the loan.
There are also several ways that you can keep collateral or mortgaged property after you file chapter 7 bankruptcy. You can agree to keep making your payments on the debt until it is paid in full. Or you can pay the creditor the amount that the property you want to keep is worth. If you put up your household goods as collateral for a loan (other than a loan to purchase the goods), you can usually keep your property without making any more payments on that debt. Generally, all of these ways to keep secured property require that you and your attorney take some action during the bankruptcy case.
Can I own anything after bankruptcy?
Yes! Many people believe they cannot own anything for a period of time after filing for bankruptcy. This is not true. You can keep your exempt property and anything you obtain after the bankruptcy is filed.
However, if you receive an inheritance, a property settlement, or life insurance benefits within 180 days after filing for bankruptcy, that money or property may have to be paid to your creditors if the property or money is not exempt.
Will bankruptcy wipe out all my debts?
Yes, most debts are discharged, though there are some exceptions. Bankruptcy will not normally wipe out:
- Money owed for child support or alimony;
• Most fines and penalties owed to government agencies;
• Most taxes and debts incurred to pay taxes;
• Student loans, unless you can prove to the court that repaying them will be an “undue hardship”;
• Debts not listed on your bankruptcy petition;
• Loans you got by knowingly giving false information to a creditor, who reasonably relied on it in making you the loan;
• Debts resulting from “willful and malicious” harm;
• Debts incurred by driving while intoxicated;
• Mortgages and other liens that are not paid in the bankruptcy case (but bankruptcy will wipe out your obligation to pay any additional money if the property is sold by the creditor).
What else must I do to complete my case?
Will bankruptcy affect my credit?
There is no clear answer to this question. Unfortunately, if you are behind on your bills, your credit may already be bad. Bankruptcy will probably not make things any worse. The fact that you’ve filed bankruptcy can appear on your credit record for ten years from the date your case was filed. But because bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills, and you may be able to get new credit.
If you decide to file bankruptcy, remember that debts discharged in your bankruptcy should be listed on your credit report as having a zero balance, meaning you do not own anything on the debt. Debts incorrectly reported as having a balance owed will negatively affect your credit score and make it more difficult or costly to get credit. You should check your credit report after your bankruptcy discharge and file a dispute with credit reporting agencies if this information is not correct.
What else should I know?
Utility services—Public utilities, such as the electric company, cannot refuse or cut off service because you have filed for bankruptcy or because you have not paid the balance that was owed before you filed bankruptcy. However, the utility can require a deposit for future service and you do have to pay bills which arise after bankruptcy is filed.
Discrimination—An employer or government agency cannot discriminate against you because you have filed for bankruptcy. Government agencies and private entities involved in student loan programs also cannot discriminate against you based on a bankruptcy filing.
Driver’s license—If you lose your license solely because you couldn’t pay court-ordered damages caused in an accident, bankruptcy will allow you to get your license back.
Cosigners—If someone has cosigned a loan with you and you file for bankruptcy; the cosigner may have to pay your debt. If you file under chapter 13, you may be able to protect cosigners, depending upon the terms of your chapter 13 plan.
Can I file bankruptcy without an attorney?
Although it may be possible for some people to file a bankruptcy case without an attorney, it is not a step to be taken lightly. The process is difficult, and you may lose property or other rights if you do not know the law. It takes patience and careful preparation. Chapter 7 (straight bankruptcy) cases are somewhat easier. Very few people have been able to successfully file chapter 13 (reorganization) cases on their own.
Remember: The law often changes. Each case is different. This pamphlet is meant to give you general information and not to give you specific legal advice.