Bankruptcy FAQ

Filing for bankruptcy is a difficult decision in a complicated legal area. But if you can grasp some of the most important bankruptcy FAQ's, that will go a long way toward knowing whether to look more serious into bankruptcy or seek another solution to your financial difficulties.

Q. Can Bankruptcy Really Help?

A. Yes. But that help can come at a price. That price isn't just the bill from an attorney for thousands of dollars to handle your case. Chapter 7 bankruptcy, if you qualify, can wipe out virtually all of your unsecured debts in one fell swoop. Chapter 13 requires a repayment plan that is usually 5 years, but can leave you virtually debt-free as well, even though you may have repaid 10 percent or less of your total debt. But both plans will wreck your credit. The damage could mean being unable to get credit for 6 months or longer after bankruptcy, and having to pay a lot more to borrow money if you are able to find someone to give you a loan or issue you a credit card. Buying a car or house will cost considerably more money than someone who hasn't filed for bankruptcy.

Q. Has it become nearly impossible to qualify for Chapter 7 bankruptcy?

A. Not for most people. The changes to the bankruptcy law that went into effect in 2005 were designed, in part, to stop individuals from taking advantage of bankruptcy and to funnel more people into Chapter 13 repayment plans, rather than Chapter 7 liquidation bankruptcy. A Means Test was added to Chapter 7 liquidation so that anyone who earned less than the median income for their state would have to pass a complicated Means Test. While bankruptcy filings fell off dramatically after the law passed in 2005, they have rebounded in the years since. By the first quarter of 2009, roughly the same percentage of people - about 70 percent - qualified for Chapter 7 as in the years before the new law.

Q. Will I lose all my property?

A. The answer is no to what is one of the more commonly asked bankruptcy FAQ's. However, depending on whether you file in Chapter 7 or Chapter 13, you may have some of your property seized. Chapter 13 repayment plans don't involve the taking of any of a debtor's property. The difference between the two is that in Chapter 7, debtors are paid out money and assets the debtor currently has. In Chapter 13, debtors are repaid out of future income - a repayment plan - that can include amounts for past due car or house payments. The Chapter 13 plan usually extends for 5 years. A Chapter 7 debtor loses any property that is non-exempt. However, state and federal exemptions cover most household items and property needed for work. Many states also have generous exemptions for first homes and vehicles, as well. In fact, about 90 percent of all Chapter 7 cases are "no asset" cases - meaning no property was seized by the U.S. Trustee.

Q. Can I ever get a car or house loan after bankruptcy?

A. Yes. While bankruptcy will severely impact your credit score, and the bankruptcy will remain on your credit record up to 10 years, it's possible to improve your credit scores fairly soon after a bankruptcy discharge. Debtors have reported getting car loans within 3 months of discharge, although the terms were not often very favorable. Mortgage loans also are possible again within a year of receiving a bankruptcy discharge.

Q. Are bankruptcy records available for anyone to see?

A. Yes. Some newspapers record weekly or monthly listings of bankruptcies in the community. Additionally, anyone who is a creditor in your case will know about every step of your bankruptcy filing because they will be on the mailing list to receive all official notices in the case. However, in order to access bankruptcy records, a person must either show up at the court or have access to online records that few, if any, individuals would subscribe to.

Q. What if my bankruptcy petition is dismissed, for some reason?

A. In that case, your situation instantly reverts to the pre-bankruptcy state. That means the automatic stay that blocks creditors from calling about debts or trying to initiate collection or foreclosure actions, are no longer blocked from taking action. Debtors who fail to qualify for Chapter 7, but have no fraud involved in their cases, will be given a limited period of time to refile for a Chapter 13 repayment plan. During that limited period of time, the court's automatic stay remains in effect.

Never make a rash or uninformed decision when it comes to something as crucial as bankruptcy. These bankruptcy FAQ's are not intended to provide a debtor with all he or she needs to know before deciding whether to file for bankruptcy. However, they may provide answers to some basic questions and help a debtor decide if the next step is to get more information from an expert on bankruptcy.