Commonly Asked Questions About Bankruptcy
Like any legal matter, bankruptcy is a topic full of complexity. If you’re considering debt relief by filing for bankruptcy, you may also be familiarizing yourself with these matters for the very first time. Below, we’ve prepared some answers to commonly asked questions we often hear from clients who are concerned about the bankruptcy process and what may be at stake for them should they choose to declare.
If you have a specific question about your financial or legal situation or have a bankruptcy-related question we didn’t address here, you are welcome to reach out to JM Law Firm, APC for assistance. We offer a complimentary consultation to each prospective client who wants to explore debt relief options in bankruptcy. Speak with our bankruptcy lawyers in Woodland Hills today!
Q:How will bankruptcy impact my credit score?
A:Initially, your credit score can take a substantial hit from a bankruptcy debt discharge. Depending upon where your credit score was before you filed, a lot of lenders’ doors may stay closed to you for a while as a result. That said, you will not be obligated to your former creditors, which can free you from a cycle of a debt that seemed never-ending before. This can give you an opportunity to rebuild your credit and create a more stable financial situation. Your credit score will improve over time as long as you can remain current on your balances or maintain a healthy amount of debt. Your bankruptcy will even stop showing up on credit inquiries after about 10 years, so you can rest assured that bankruptcy’s net positive can be more meaningful than its initial impact.
Q:How are Chapter 7 & Chapter 13 different?
A:Each of these types of bankruptcy resolves outstanding debt in different ways. In Chapter 7, one’s belongings and assets are seized and liquidated to pay off creditors. In Chapter 13, one’s debt is reorganized as a proposed payment plan that’s typically completed within three to five years. Clearing debt in the latter case does not have to involve liquidation. In both situations, secured and unsecured debt can be discharged in bankruptcy.
Q:Can I choose one type of bankruptcy over the other?
A:There are more bankruptcy options available than Chapter 7 and Chapter 13, however, you may not always be able to “choose” which option to go with. There are certain eligibility requirements for both that consider various factors such as your current debt, income, family size, etc. Other requirements include not having filed for bankruptcy too soon (about six months) after a prior petition.Idk.
Q:How do I qualify for Chapter 7?
A:Generally speaking, those who qualify for Chapter 7 have to pass a means test. This will examine their income, which should fall lower than the median income of a similar-sized family in their state of residence. They are also unlikely to be able to pay off their unsecured debt within five years on their own. There are other more technical requirements, such as how long ago a past bankruptcy debt discharge occurred or how long ago a prior bankruptcy case was dismissed. If you’re curious to know more about how you might qualify, it’s best to speak with a lawyer in Woodland Hills about your specific situation and receive personalized feedback.
Q:How do I qualify for Chapter 13?
A:Qualifying for Chapter 13 largely comes down to how much you owe. You will typically owe less than around $419,000 in unsecured debt and less than $1.26 million in secured debt. As with Chapter 7, there will be other eligibility requirements related to time – such as not having a prior bankruptcy debt discharge within the past few years and not having a prior case dismissed within the past six months of a new filing.
Q:Will I lose everything in a Chapter 7 liquidation?
A:Not necessarily. If you do experience liquidation, you can keep a vehicle up to a certain value, certain other exempt items such as household appliances and clothing, a pension, and even equity in your home. Other items like expensive electronics, jewelry, and even family heirlooms can be liquidated. That said, liquidation is actually not as common as you’d think – the majority of Chapter 7 filings end up as “no-asset” cases where the debtor’s debts are discharged without undergoing asset seizure and sale. Our attorneys at JM Law Firm, APC aim to be transparent on what, if any, of your assets can be at risk of liquidation.
Q:What is an ‘automatic stay’ in a bankruptcy filing?
A:An automatic stay is an injunction that prevents most of your creditors from collecting debts during bankruptcy proceedings. Collection actions that can be stopped include wage garnishment, harassing collections communications, repossession, foreclosure, and more. In a Chapter 13 case, a bank cannot seek vehicle repossession or home foreclosure until the stay is lifted by a judge. It’s important to note that this action merely pauses your creditors’ ability to collect debt – it does not prevent you from generating new debts.
Q:Will I get to keep my house in bankruptcy?
A:If you are current on your mortgage payments, you are more likely to be able to keep your home during bankruptcy. Falling more than 90 days behind can open the door for your lender to threaten foreclosure, potentially complicating your bankruptcy situation if the issue was originally about unpaid credit card balances or medical bills. Filing for Chapter 7 would require you to pay off your arrears on a mortgage in one fell swoop, which could cost you your home should your equity in a home be greater than the exemption you’re permitted. Therefore, filing for Chapter 13 can be a better strategy to keep your home because it allows you to work out a repayment plan with your lender to stay current on your payments while working on paying off prior missed payments.
Q:Am I permitted to continue using my bank accounts once I file bankruptcy?
A:In all likelihood, the answer to this is yes. Once a Chapter 7 bankruptcy petition has been filed, the Chapter 7 trustee becomes the owner of all your assets. However, in most cases it is clear that the bankruptcy trustee will have no economic incentive to liquidate or otherwise administer your bank accounts, since in most cases the balances have been claimed exempt pursuant to California exemption statutes, or the amounts in the accounts are not material enough to warrant trustee administration. So, in most cases you are entitled to continue using your own bank accounts without interruption. In a Chapter 13 bankruptcy, the situation is a bit different. You remain in control of your assets, so you are entitled to continue to use of your bank account without interruption. One possible exception in both Chapter 7 and Chapter 13 are credit union accounts. Credit unions operate under their own set of rules, because you are considered a member of the credit union. If you owe a debt to your credit union, it is probable the credit union will freeze your bank account with them and attempt to offset the funds in the account.
Q:What about my credit cards? Is it possible for me to get through the bankruptcy process with one or two credit cards in case of an emergency, or if I need to rent a hotel room or a vehicle?
A:While a few limited companies will allow you to keep a credit card open post-bankruptcy, many people have to give up all of their cards. Keep in mind that the Chapter 7 process is a relatively short process. During the few months that it takes to get your case discharged, you are saving the money previously spent on minimum payments. Therefore, most people can just rely on their debit cards for any purchases that require a credit card (e.g. purchasing plane tickets, online purchases, etc.). Believe it or not, most people receive offers for secured credit cards right after the bankruptcy discharge. These secured credit cards are a great tool for reestablishing/rebuilding credit.
Q:Can I file bankruptcy without my spouse filing as well?
A:Yes. It is not required that your spouse file when you file for bankruptcy, but if there are any debts that you are both liable for, the creditor may just go after the non-filing spouse once the debt has been discharged by the filing spouse. Also, keep in mind, you won’t be able to keep your spouse completely out of the bankruptcy process. Since California is a community property state, your spouse’s income and shared assets will play factors in the bankruptcy paperwork.
Q:Will filing bankruptcy affect my employment opportunities?
A:Federal, state, or local government agencies will not take your bankruptcy into consideration when deciding whether to hire you. There is no corresponding rule for private employers, however. Some private employers conduct a credit check on job applicants as a matter of course and may find out about your bankruptcy from the credit report. While employers need your permission to run a credit check, employers can also refuse to hire you if you do not consent. Your best option is to be open an honest. Believe it or not, a great majority of employers could care less. Most employers understand that there are many factors that may cause a person to have to file bankruptcy, including, but not limited to, medical issues, divorce, job loss, etc. Even the most responsible person can find themselves in such a position. Therefore, do not assume that because a routine bankruptcy question is listed on an application that it means that you are doomed-it’s usually far from the case.
Q:How can I expedite the process of rehabilitating my credit after bankruptcy?
A:There are a few ways to improve your credit after filing bankruptcy. As mentioned earlier, while your credit score will likely take an immediate hit after you file bankruptcy, you may actually see an improvement in your score soon after, because your debt-to-income ratio will go to zero after filing. There are some steps you can take to further improve your credit: 1) avoid suffering further credit setbacks, such as foreclosures, repossessions, judgments, evictions, tax liens, etc., 2) continue paying home mortgages, auto loans and leases, equipment loans and leases, etc., and 3) obtain a secured credit card. Many major financial institutions offer secured lines of credit. You would deposit a certain amount of money, such as $500, and the institution gives you a $500 credit line. If you fail to pay, the institution is at no risk, as it is already holding your money as its protection. If you are making your payments each month and the institution sees that you are a worthy credit risk, it will likely eventually return the deposit to you and make the account a true credit card, or will increase your credit limit without demanding additional deposit funds.