There are no stupid questions, and having concerns about filing for bankruptcy is reasonable. I have answered many recurring questions about bankruptcy over the years. The following sets forth the most common questions and answers about bankruptcy in Washington, D.C. and Virginia.
1. If I file for bankruptcy, will all of my assets will be siezed?
NO. For the vast majority of Chapter 7 personal bankruptcies, you can keep all of the property you own. Federal and state exemption laws are designed to allow you to keep most of your possessions, including your home, car(s), furniture, clothing, 401(k) or other retirement account, cash, and other property, up to codified limits. Chapter 13 bankruptcies provide for the repayment of creditors. On the whole, it is even more likely in Chapter 13 that your possessions will be exempt.
2. Once the bankruptcy is finished, will creditors still be able to collect on the debt?
ABSOLUTELY NOT. From the moment you file for bankruptcy the court issues an “automatic stay” that prevents all creditor action. Creditors may not contact you in any way, nor may they attempt to collect on any debts you may owe them. Once you emerge from bankruptcy–with a discharge order from the bankruptcy judge–your debt is legally extinguished and there is no debt for creditors to collect on. If a creditor violates the discharge order and continues to attempt collection on a discharged debt, then that creditor is liable to you for punitive damages. Once you have completed the bankruptcy and obtained a discharge order, creditors MAY NOT attempt to collect on discharged debts.
3. Must both spouses file for bankruptcy?
NO. If one spouse owes a vast debt that the other spouse has no stake in, then it may make sense for only one of the spouses to declare bankruptcy. If there are more debts that are owed by both spouses, then a joint bankruptcy is an option, but not a requirement. Unique circumstances require thorough examination of which debts and what property between spouses are jointly or individually owned. Either OR both spouses may declare personal bankruptcy.
4. If I’ve already filed for bankruptcy, can I file again?
YES. Currently you can file for Chapter 7 bankruptcy once every eight (8) years, however nearly every client I have represented has had the alternative of Chapter 13. There is no limit to the number or Chapter 13 bankruptcies you may file, as long as you are not attempting to abuse the bankruptcy process for purposes other than obtaining a discharge of your debt. In addition, in any individual case, a conversion between Chapter 13 and Chapter 7, or vice versa, may be to your advantage. Advice from counsel is recommended, especially in cases involving multiple bankruptcy filings, because bankruptcy is procedurally complex, and even minor deficiencies can result in dismissal of your case without discharge.
5. If I file for bankruptcy, will I ever get good credit again?
YES, but that depends on you. Chapter 7 is designed to reset your finances and allow you to “start afresh.” After a typical Chapter 7, you (a) not only have NO debt, but (b) cannot file another Chapter 7 for another eight years. Creditors know this, consider you an excellent credit risk, and want your business. Many of my clients report that, immediately after discharge, they begin receiving credit card offers in the mail. It is true that for the first few years after filing for Chapter 7, you will not get the best home and car loan interest rates. However, after a few post-Chapter 7 years of rebuilding your credit, you will get the same rates as everyone else. After 10 years, the bankruptcy will no longer even appear on your credit report. The ability to obtain credit after a Chapter 7 bankruptcy depends wholly on how you use your financial fresh start. To learn more read Repairing Your Credit After Bankruptcy.
6. How long does the bankruptcy process take?
In the District of Columbia and Virginia, a Chapter 7 takes about 5-6 weeks from the date of filing until the Meeting of Creditors, which is usually the only appearance the client must make. Once the Meeting has taken place, the bankruptcy court takes three to four months to approve a discharge. A Chapter 13 typically takes 36-60 months (3-5 years) to complete. Like Chapter 7, in a Chapter 13, the Meeting of Creditors is usually 5-6 weeks from the date of filing. Other jurisdictions likely vary.
Clients themselves also affect timing. Sometimes it takes time to track down and copy documents. It may also take time to save the money for fees. In some situations it is necessary to move quickly — as in the case of filing to beat a foreclosure auction. Many cases, however, are not time-sensitive. You should not file for bankruptcy if you are not convinced that it is the right choice for your individual situation.
7. Can I keep certain credit cards that I’m current on?
Under the Bankruptcy code, when you file for bankruptcy, you have to list all of your property and all of your debts. Once you file for bankruptcy and your creditors have received notice, every credit card on which you owe money will be promptly deactivated and the account closed. If you have no balance on a credit card at the time of filing, sometimes that company either will not notice the bankruptcy, or for some other reason (i.e., you have been a good customer) will simply take no action. Sometimes, however, even accounts with no balances will be closed.
8. Can I continue to use my credit cards until I file for bankruptcy?
Out of the ordinary expenses will be challenged by the credit card company. Large purchases, or even worse, cash advances that are transacted before the filing of the bankruptcy are scrutinized by most credit card companies. Attorneys for these companies will attend your Meeting of Creditors and will file motions to force you to pay for the purchases and/or advances. Moreover, your case may be dismissed for bad faith if it appears that you intentionally made large purchases or withdrew cash from your cards before you filed for bankruptcy. Do not run up the bills before filing for bankruptcy. For more “Don’t”s of bankruptcy read What Not to Do Before Filing Bankruptcy.
9. How does my bankruptcy attorney get paid?
In a Chapter 7 bankruptcy, your attorney must be paid first or else he becomes just another unsecured creditor with a debt discharged by the bankruptcy. Some clients prefer to pay in installments until their fees are paid in full, at which time the attorney will file the bankruptcy. In a Chapter 13 bankruptcy, attorney’s fees are typically split between up-front payment and payment through the Chapter 13 Plan.
10. What do I bring to my initial consultation?
Get a free credit report at http://www.annualcreditreport.com/. Latest paystubs from your employment may assist your attorney determine what Chapter of bankruptcy — whether 7, 11, or 13 — for which you qualify. If you haven’t seriously considered your finances recently, then verse yourself, before the consultation, with the general numbers of your debt: how much of what kind of debts you have (medical, credit card, mortgage, car loan, business expenses, etc.); the equity value of any vehicles, real estate, or other property and holdings; whether the debt is individually or jointly owned; and whether you want to keep or surrender secured collateral.
11. What is the Meeting of Creditors? Who is the bankruptcy trustee?
Clients usually do not have to appear before a judge in bankruptcy court, but every person who files for bankruptcy must attend the Meeting of Creditors. The meeting is also known as the “341 meeting,” after the section of the bankruptcy code that requires it. At the meeting, the trustee assigned to the case will ask you questions about your debts and assets. You must answer these questions truthfully, and you will be under oath. Read the official Handbook for Chapter 7 Trustees for examples of questions you will be asked at the Meeting.
Most 341 meetings are short and uneventful, and although it is called the “Meeting of Creditors,” in most cases creditors do not attend the meeting. The purpose of the meeting is simply to allow the trustee to discover facts regarding the debtor’s finances. You will not have to justify filing for bankruptcy.
12. What is the “automatic stay?”
Under Section 362 of the United States Bankruptcy Code, upon filing for bankruptcy the debtor is protected from collection efforts by a form of injunction called the “automatic stay.” The automatic stay immediately halts actions by creditors (with a few exceptions) to collect on debts listed by the debtor who has declared bankruptcy. The stay begins at the moment the bankruptcy petition is filed. Secured creditors may, however, petition the bankruptcy court for “relief” from the automatic stay upon a showing of cause.
The automatic stay provides the debtor with powerful protections from creditor. Should a creditor attempt to collect on a debt while the debtor is protected by the automatic stay, that creditor is in direct violation of a court order and may be liable to the debtor for money damages. In Chapter 13 cases, the stay even protects co-debtors who are liable with the debtor on consumer debts.
Exceptions to the automatic stay relating to landlords seeking to evict tenants were enacted by Congress in 2005. First, any eviction proceedings in which the landlord obtained a judgment of possession prior to the filing of the bankruptcy petition may be continued. Second, eviction proceedings filed after bankruptcy proceedings are exempt if it involves evicting the tenant on the basis of using illegal substances or “endangerment” of the property.
13. What is a “discharge?”
When the debtor gets a discharge, the automatic stay is replaced by a permanent injunction prohibiting creditors from ever attempting to collect on pre-petition debts. These become “discharged” debts, and the debtor is no longer legally required to repay them. The entire goal of a bankruptcy is to obtain a discharge of debts. The bankruptcy discharge eliminates the debtor’s liability for a discharged debt. The discharge injunction prevents the creditor from commencing or continuing any lawsuit to enforce a discharged debt against the debtor or the debtor’s property. Any judgment as to a debt arising before the bankruptcy was commenced is void after the discharge.
14. Can bankruptcy help me prevent foreclosure?
YES, at least temporarily. If your home has been scheduled for a foreclosure auction, and you have regained the ability to pay your mortgage, then a Chapter 13 will stop the foreclosure auction. In the Chapter 13 Plan, you will have to repay the missed mortgage payments (known as “arrearage”) over the course of the next 36-60 months. If you do not have the ability to make your mortgage payment plus the Chapter 13 Plan payment, however, then Chapter 13 may still help you realize the equity in your home by allowing you some breathing room to complete a sale of the property.
15. Can I keep my bank accounts?
YES, however if you have a debt with your bank or credit union, then you must withdraw all money and close that bank account prior to filing your bankruptcy petition. If you file for bankruptcy while owing a debt to your banking institution, that institutions may attempt to seize the money in the account you hold with them. Prior to filing for bankruptcy, most debtors will open a new account at a bank or credit union to whom they owe no money.
16. What are the most common reasons someone would declare bankruptcy?
Every case is different, just like every client is different. A recent Harvard study found that illness and medical bills caused half of the 1,458,000 personal bankruptcies in 2001. The study estimates that medical bankruptcies affect about 2 million Americans annually — counting debtors and their dependents, including about 700,000 children. In addition, the recent housing market bust has left millions of homeowners with negative equity (or drastically reduced equity) in their homes, effectively destroying a potential credit source for homeowners. To make matters worse, hundreds of thousands of ARMs (or adjustable rate mortgages) have raised the minimum payments on mortgages, and unemployment is likely to remain above 10% through most of 2010.
Sometimes, clients simply overextend themselves through home or car purchases, or by the injudicious use of credit cards. In other cases, clients are forced into bankruptcy by the actions (or wrongdoings) of a co-debtor or spouse. The circumstances leading to the necessity for a bankruptcy are as many and varied as clients themselves.
ABOUT THE AUTHOR
Brian V. Lee is a bankruptcy lawyer in Washington, D.C. and Virginia.
Lee Legal is a debt relief agency as defined by Section 528(a)(4) of the Bankruptcy Code. Lee Legal assists people in filing bankruptcy in Washington, D.C. and Virginia under the Bankruptcy Code.
Call (202) 448-5136 to learn more or to schedule a free consultation.
D.C. is a non-judicial jurisdiction in which foreclosure begins with a Notice of Foreclosure posted or mailed according to the form prescribed by the Recorder of Deeds. The form requires identification of a “Holder of the Note” and a “Security Instrument” recorded in the land records of the District of Columbia. The attorney general’s enforcement statement invites homeowners to inform the Office of the Attorney General if foreclosures “continue to be commenced or pursued with deceptive foreclosure sale notices” so that the Office may consider bringing enforcement actions to stop foreclosure proceedings and seek restitution for consumers. In other words, if you believe that you are being foreclosed upon by a party other than the properly recorded mortgage holder, then you should call the attorney general’s office at (202) 442-9828.