Frequently Asked Questions about Bankruptcy

1. What is bankruptcy?
Bankruptcy is a legal proceeding in federal court in which a person with more debts than they can pay seeks relief from those debts. Put another way, bankruptcy is a legal process in which individuals, couples, families, and businesses can eliminate, repay, or restructure some or all of their debts.

2. How can bankruptcy help me?
People file bankruptcies for a variety of reasons. You may file to obtain a discharge of their debts. The discharge frees you from your oppressive financial situation, and provides you a fresh financial start, by eliminating some or all of your debts. You could also file to invoke the automatic stay, which can stop creditor harassment and lawsuits, and protect your house from foreclosure, your car from repossession or your paycheck from garnishment. Others file to restructure and consolidate debt into a manageable payment.

3. Will I lose everything if I file for bankruptcy?
Thankfully, in most situations, you will not lose anything. The State of Tennessee allows you to protect a significant amount of your assets, equity in your home, retirement, and items used in your business. Most Chapter 7 bankruptcy cases are “no-asset” cases, meaning that the debtor does not lose assets. You can also protect high value items through Chapter 13 bankruptcy.

4. Will bankruptcy get rid of all of my debts?
The short answer is, not necessarily. In most cases, your unsecured debt (e.g., credit cards, medical bills, signature and personal loans, vehicle repo or home foreclosure deficiencies) will be eliminated by your bankruptcy discharge. Most student loans, income taxes, and domestic support obligations will likely not be discharged, meaning you will owe them upon the conclusion of your case. You may also choose to surrender an asset back to a secured creditor without owing a deficiency when the creditor sells it.

5. Are spouses required to file bankruptcy together?
There is no requirement in bankruptcy law that you must file bankruptcy as a couple – there is nothing that says that when one spouse files, the other must as well. However, if there are debts that both spouse owe, then they may want to consider filing together to eliminate the debt, not just one spouse’s liability on the debt. Additionally, whenever you file for bankruptcy, it is necessary to examine the income of the household – the income for both the husband and the wife – even if one of the spouse’s chooses not to file. This is a requirement under the bankruptcy code. The household’s total expenses will also be reviewed. If you are separated from your spouse, usually it is not necessary to look at their income or expenses when filing

6. Does my employer have to know that I filed bankruptcy?
In a Chapter 7, not necessarily. You are required to list your employer’s name and address, but they usually do not receive notice of your filing. In a 13, though, your employer will probably know of your filing. In a 13, the court will issue a payroll deduction order to your employer (if possible) and direct them to send our proposed dollar amount of your paycheck to the Trustee. In either case, if you owe money to your employer (e.g., you borrowed against your 401(k) or took out a personal loan), we must list your employer as a creditor.

7. When is it a good idea to file bankruptcy?
1. You do not have enough income to pay your living expenses and your debts.
2. Your creditors will not stop harassing you or your wages are being garnished.
3. Your have a mountain of debt and it would take your forever to dig out from under it.
4. Your relationships are suffering because of your struggles with debt.
5. You have a mortgage on and possession of a hone that you no longer want or cannot afford.

8. When is it not a good idea to file bankruptcy?
1. Most of your debts are nondischargeable, so bankruptcy would not help you.
2. You have the financial means to get out of debt yourself, and bankruptcy does nothing special for you.
3. Your employment depends upon your credit score.
4. You have assets that you do not want to lose.
5. Even with a discharge, you do not have enough monthly income to meet your monthly expenses.

9. When should I file for bankruptcy?
Timing your bankruptcy filing is a very delicate matter. You may choose to file at such a time that your income qualifies you for Chapter 7, or you might wait until such time that you have the income necessary to support your Chapter 13 repayment plan. You may also choose to wait until you have found a new apartment or vehicle before you file and return a home or car to its lienholder. Alternatively, you have want to file your petition quickly to stop a garnishment or pending foreclosure, and then come back later and fill in the blanks of your bankruptcy petition.

10. How much debt do I need to have to file bankruptcy?
There is no minimum dollar amount of debt or number of creditors required to file a bankruptcy. Everyone’s definition of “a lot of debt” is different – $20,000 of debt may be a lot of one person and not for another. What matters is: does your debt keep you up at night, and you are not able to address it? If so, then bankruptcy may be something for you to consider.

Your Options
11. What is Chapter 7 Bankruptcy?
Also known as a “straight bankruptcy,” Chapter 7 is called Liquidation, and it is the most common form of bankruptcy. In a Chapter 7 petition, a debtor with insufficient income to repay his or her debts asks the bankruptcy court for a discharge (that is, forgiveness) of their debts, while protecting certain exempt property from creditors. Any unexempt property may be sold by a Trustee and the proceeds used to pay creditors. A typical Chapter 7 case lasts 3 to 4 months.

12. What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is commonly referred to as a “wage earner’s plan,” and is called Adjustment of Debts of an Individual with Regular Income. It is a repayment plan, typically between 3 and 5 years in length, which restructures and consolidates your debts into a manageable payment. The size of this payment depends upon your debts, your income and expenses, and the value of your assets.

13. How are Chapter 7 and 13 different?
For most debtors, Chapter 7 is a much shorter, cheaper, and less intrusive experience than Chapter 13. It is great when you have mostly unsecured debt (credit cards, medical bills, and the like), and you are either current on secured debts (your house or car) that you want to keep or you want to surrender a home or car back to its creditor. On the other hand, Chapter 13 is a wonderful option when you are behind on houses or vehicles that you want to keep, but you are facing pending foreclosure or repossession and the creditor will not work with you.

14. How do I “qualify” for Chapter 7?
Qualifying for Chapter 7 requires you to pass the “means test,” which is simply a comparison of your average income to that of a similarly sized household, taking certain standard IRS deductions into account. Provided you pass the means test, you “qualify,” though the United States Trustee, charged with the duty of protecting the Chapter 7 discharge, may still deny you one if your petition, when the totality of your circumstances are considered, does not warrant forgiveness of your debt.

15. What are my options if I do not qualify for Chapter 7?
If you do not qualify for Chapter 7, your options would be to either not file bankruptcy at all, file for Chapter 13, or wait until you income changes such that you would qualify for 7. Your average income may change from month to month, so just because you do not qualify for 7 now does not mean you will not qualify in a month or two.

16. Can I file bankruptcy again if I have previously filed?
Short answer is, it depends. It depends upon what Chapter you have filed previously, when you filed it, and whether you received a discharge in that case. As an example, the bankruptcy code forbids debtors from receiving a discharge in a Chapter 7 if they obtained a previous Chapter 7 discharge in the 8 years before the filing of the newer case.

Your Assets
17. What are bankruptcy exemptions?
Exemptions are the sets of laws that shield a debtor’s assets from their creditors and permit debtors to retain property after the conclusion of their bankruptcy. When you come out of your bankruptcy, you need to retain certain necessities of life in order to make the most of your fresh start. There are limitations to how much property you can protect. Any personal property or home equity that is not protectable can potentially be seized for the benefit of creditors.

18. Will I be able to keep my house or car if I file bankruptcy?
This is one of the most common questions asked by people considering bankruptcy. Answering this question starts with knowing the value of the home/vehicle/other asset and the amount of money owed against it. If you owe more on the asset that it is worth, and if you are current on it, you will likely be able to keep it. If you are not current, the creditor may want it back. If you owe less on the asset than it is worth, then you may be able to apply exemptions to protect the equity from your creditors and retain the asset. If you owe significantly less on the asset that what is it worth, and you cannot fully protect the value of the asset through state exemptions, then you have run the risk of losing the asset in a 7, and you should consider looking into Chapter 13 to protect the asset.

19. Can I get rid of a house or car that I no longer want through bankruptcy?
More and more, you see debtors that file bankruptcy for the sole purpose of surrendering a home. This could be for a variety of reasons: you could not find a buyer, your bank would not work with you on a short sale, your former spouse stuck you with the mortgage. You may be able to give the property back to the creditor in bankruptcy and minimize or eliminate any financial liability to yourself on the mortgage.

20. Will I be able to keep my IRAs, 401(k)s, and other Retirement Accounts if I file for bankruptcy?
Most states, including Tennessee, allow you to protect 100% of your retirement accounts from your creditors. That means that you can file bankruptcy, obtain a discharge of your debt, and not have to touch your retirement accounts.

21. What happens to my assets that are not exempt?
If you have assets that you cannot protect with exemptions, then you run the risk in Chapter 7 of the Trustee taking that asset, selling it, and using the proceeds to pay your unsecured creditors. Depending upon your risk tolerance, you may elect to file Chapter 13, and repay your unsecured creditors what they would have received in your Chapter 7 – in other words, you protect the asset by repaying in your 13 what the Chapter 7 Trustee would have paid your creditors.

Your Debts
22. What is a bankruptcy discharge?
The bankruptcy discharge releases a debtor from their obligation to repay certain debts, and it also protects debtors when creditors attempt to collect on these debts. When you complete your bankruptcy case, you no longer owe the debts that were discharged, and the creditors can never come after you to collect on those debts ever again. But not all of your debts will necessarily be discharged. Certain types of debts will not be discharged as a matter of law, and other debts may not be discharged because of something you have done or not done.

23. Will bankruptcy eliminate my credit cards, personal loans, and medical bills?
Generally speaking, yes, bankruptcy discharges credit card debt, personal loans, cash advances, medical bills, fees owed to professionals (like CPAs and attorneys), loans from family members, and the like. However, if you rack up charges on your credit card or take out cash advances or signature loans right before you file, these creditors may challenge your discharge on these debts, and you could wind up owing these debts going forward.

25. Will bankruptcy eliminate my foreclosure or repo deficiency?
Generally speaking, yes, bankruptcy discharges deficiencies that resulted from a repossession of a vehicle or foreclosure of a home. If you sold your home by short-sale, owed a deficiency to the mortgage company, and signed paperwork to repay the deficiency, the mortgage company could challenge the dischargeability of this debt.

26. Will bankruptcy eliminate my student loans?
Most likely, no. Student loans may be discharged in bankruptcy where they put an “undue burden” on the debtor, but Courts rarely make that determination.

27. Will bankruptcy eliminate my back taxes?
In certain circumstances, bankruptcy will eliminate back taxes. In Chapter 13, the taxes will be repaid through the plan over the course of 5 years. In Chapter 7, eliminating taxes depends upon the due date of the taxes, when they were filed, and when they were assessed. As a general rule, takes that were filed no less than 2 years ago will not be discharged.

28. Will bankruptcy eliminate my back child support or alimony?
No. Back child support and/or alimony are debts that survive a bankruptcy discharge.

Your Protections
29. What is a bankruptcy automatic stay?
The automatic stay is a shield that prevents creditors from contacting a debtor, harassing a debtor, or continuing their efforts to collect against a debtor once they have filed a bankruptcy case. For instance, the bankruptcy automatic stay immediately stops LAWSUITS, FORECLOSURES, GARNISHMENTS, and all collection efforts against you and your property. The stay goes into effect automatically and immediately upon the filing of your case (unless you have had a previous case recently dismissed). but it is not an absolute shield, and will not stop the commencement or the continuation of certain civil and criminal actions.

30. What actions will the automatic stay stop?
1. The beginning or continuing of a lawsuit or other judicial proceeding against you.
2. The enforcement or execution of a judgment against you.
3. Actions to obtain possession or exercise control over your property.
4. Actions to create, perfect, or enforce a lien against your property.

31. What actions will the automatic stay not stop?
1. Criminal actions.
2. Civil action for dissolution of marriage.
3. Civil action for establishment or modification of a domestic support obligation.
4. Civil actions for establishment of paternity.

32. Can bankruptcy stop a pending lawsuits?
Yes, the filing of a bankruptcy will stop lawsuits and most other judicial proceedings, regardless of where you are in the process. The lawsuit could have just been filed, or the creditor could have a judgment against you and be trying to collect, the result is the same.

33. Can bankruptcy stop a pending foreclosure?
Yes, the filing of a bankruptcy will stop a foreclosure from happening. You do need to make sure to provide proper notice to the business that is conducting the foreclosure to make sure that a wrongful foreclosure does not occur.

34. Can bankruptcy stop a pending repossession?
Yes, the filing of a bankruptcy will stop a repossession, even if the tow truck is outside in the driveway. You do need to make sure to provide proper notice to the business and repossession company so that they can know you are telling the truth about having filed. Once you notify them, though, they cannot repossess your vehicle, and if they do so wrongfully, you may be able to sue them in bankruptcy court for willful violation of the automatic stay.

35. Can bankruptcy stop wage garnishments?
Yes, the filing of a bankruptcy will stop a wage garnishment. Sometimes, if you file and notify the Court Clerk’s office quickly enough, you may be able to get back some money that you has already been taken from your paycheck.

36. What can I do if someone tries to collect a debt after I file for bankruptcy?
You can tell them that you have filed bankruptcy, provide them your case number, and tell them that they are not to speak to you again in an attempt to collect on the debt. If an attorney represents you, give them your attorney’s name and contact info as well. That way, if they contact you again, you may be able to sue them for willful violation of the automatic stay.

Your Life After Filing
37. Can my present or future employer fire me or not hire me because I filed bankruptcy?
Bankruptcy law explicitly protects people that have filed for bankruptcy from termination or discrimination by private employers (see 11 U.S.C. § 525(b)). The goal with this law is to help debtors that have sought a fresh start through bankruptcy to get back on their feet. Your current employer will likely not even know you have filed for Chapter 7, but most likely will know if you file Chapter 13, as many Chapter 13s require that your employer send money to the Trustee to pay your creditors. If you owe money to your employer, for a 401k loan, advance against your future earnings, small personal loan, etc., then we must list your employer as a creditor. If that is the case, you should let them know that you will file for bankruptcy before you file so that your filing does not catch them off guard and create ill will or hurt feelings.

38. Can my utility companies deny me future service if I have included them in my bankruptcy?
Debts owed to utility companies are dischargeable. The bankruptcy code states that after the bankruptcy is filed, a utility company cannot discriminate, alter, refuse, or discontinue service to you (11 U.S.C. § 366(a)). The utility company can, however, require “adequate assurance of payment,” usually by deposit, within 20 days from when you file for bankruptcy. For instance, a water company may require you to provide them with a deposit equal to 2 months estimated usage in order to use their services.

39. How will filing bankruptcy affect my credit score?
Filing a bankruptcy would certainly be considered a negative credit event. Chances are, though, that if you are contemplating bankruptcy your credit score is not great anyways. There are ways to rebuild credit after a bankruptcy, and many debtors before you have done so.

40. After bankruptcy, will I be able to ever obtain credit?
Once you have received your bankruptcy discharge and your case is closed, you will receive countless credit card offers in the mail. Creditors know that you will not be able to file bankruptcy again for a while, so they hope that you will have the same troubles that led you to bankruptcy in the first place, but this time you will not be able to get out your debt so easily. So yes, opportunities to rebuild credit will be plentiful, but do so very carefully, and have a plan before you start. Otherwise you may be right back where you started.

41. After bankruptcy, will I be able to ever to buy a home or car?
For most lenders, the question of whether to extend credit to you is a business decision. When you inquire about buying a home or a car, the lender will most likely pull your credit. The bankruptcy will factor into their decision, but so too will your financial responsibility since you filed for bankruptcy. They will look at the good and the bad of your finances since you filed. So while your bankruptcy will be considered, it is one of many factors in their decision. Getting a vehicle loan will likely be easier than a home loan, but over time, if you make buying a home a priority, you will be able to qualify again.

42. How long will my bankruptcy stay on my credit report?
Chapter 7 will typically stay on your credit report for up to 10 years from the date you filed the case. Chapter 13 can stay on your report for 7 years from the date of filing.

*While the information presented below is accurate as of the date of publication, it should not be cited or relied upon as legal authority. It is highly recommended that legal advice be obtained from a bankruptcy attorney or legal association.*

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