1. What is bankruptcy?
Bankruptcy is a legal proceeding where an individual (or a business entity) request relief from their creditors. There are different chapters of bankruptcy which each serve different purposes. Most consumers will file either Chapter 7 or Chapter 13 bankruptcy. In either type of case, the person who files (called a “debtor”) is able to wipe out (“discharge”) their debt.
2. What’s the difference between Chapter 7 and Chapter 13?
Chapter 7 bankruptcy is often called a “straight bankruptcy.” As the name implies, it is normally a fairly fast process where a person passes through bankruptcy and wipes out their debt. A Chapter 13 bankruptcy is one where a partial repayment plan is set up through the bankruptcy court where the person who filed will repay some (or in some cases, all) of their debts over a 3-5 year period.
3. I’ve heard you can get rid of some mortgages in bankruptcy, is that true?
Yes. In a Chapter 13 case you can file a motion to “strip” away a junior mortgage lien. If the value of your home is equal to or lower than the balance of your first mortgage, then you can “strip” away any second (or third) mortgages. For example, if you owned a home that was worth $450,000.00 and your 1st mortgage balance was $475,000.00 and you also had a Home Equity Line of Credit (HELOC) of $150,000.00 then you could bring a motion to “strip” the HELOC and remove it from the home.
4. Can bankruptcy really stop a foreclosure?
Yes. You can file a bankruptcy case and stop a foreclosure. When any type of bankruptcy case is filed, the bankruptcy court orders all creditors to cease collection (the order is known as the “automatic stay”), and that includes foreclosure proceedings. While any type of bankruptcy will at least temporarily stop a foreclosure, a Chapter 13 case can allow you to submit a plan to get current and rehabilitate a defaulted mortgage.
5. Will a bankruptcy stop a garnishment or levy? Will the harassing calls stop.
Yes to all of the above. As discussed above, when a bankruptcy case is filed an “automatic stay” goes into effect that stops all collection efforts. Creditors must stop all garnishments, levies and all communication immediately.
6. What types of debt can I wipe out in a bankruptcy case?
Generally, all debts other than some very specific types listed in the bankruptcy code can be wiped out in a bankruptcy case. The most common types of debts that will usually survive bankruptcy are recent income taxes (income taxes that are more than 3 years old can often be wiped out), domestic support obligations (child support or alimony), student loans, certain debts to government agencies, personal injury damages resulting from a drunk driving incident, and criminal restitution.
7. What is the effect of bankruptcy on secured debts (like car loans or home loans)?
In a secured debt (a debt attached to some underlying property like a car or home), there are two distinct components: personal liability and a security instrument (lien). When you sign a note, it’s a personal promise to repay the creditor and you are personally “on the hook” for that loan. There is also a security instrument that gives the creditor an interest in some property of the borrower (for example, in a car loan the note is secured to the vehicle). The security instrument gives the creditor the right to retake the property if the loan goes unpaid. The note and the personal liability it creates is what gives the creditor the right to also come after the individual borrower for any unpaid amount (deficiency). Bankruptcy eliminates a borrower’s personal liability for a secured loan but typically does not remove the security interest (although there are some exceptions like the mortgage lien stripping discussed above). This means that the individual is off the hook but the creditor can still come after the property item.
8. What’s the minimum amount of debt I can have to file?
There is no set minimum amount of debt. The threshold for whether it’s worth it to file bankruptcy is unique for each person. For some people one amount of debt may not be a big deal, but to others the same amount can seem unsurmountable.
9. Can one spouse file without the other.
Yes, married couples can file bankruptcy individually. They do not have to file as a couple.
10. What happens to a co-signed debt?
If you have a loan with a co-signor and the co-signor is someone other than your current spouse, then the debt still survives as to that person. If the co-signor is your current spouse, then the debt survives but is not collectable against the non-filing spouse (assuming you both live in California).
11. Will I lose my car or my home or other property if I file for bankruptcy.
In about 94% of cases, you don’t lose anything. In a Chapter 7 case you are able to claim a large amount of value in property as “exempt” (safe from creditors). Almost all Chapter 7 filers do not have property that exceeds the amounts that they’re able to claim exempt so they do not lose anything. In a Chapter 13 case (restructuring plan), nothing is taken from you regardless of whether it is exempt or not.
12. What are the impacts of a bankruptcy on my credit?
For most people who are looking at a bankruptcy, the impact of the bankruptcy is not significant compared to their current situation. That’s because most of them are significantly in default on multiple credit accounts and have already taken a pretty big credit hit. Missing just a few monthly payments can drop your score hundreds of points. A bankruptcy creates an event that stops the debts from continuing to be in default each month (because they’re discharged). For most people who file, their credit is low right after filing and increases over the next 2-3 years. Some people are able to recover even sooner.
13. How long is a bankruptcy on my record?
A bankruptcy is reported to your credit report for 10 years. But, when most people ask that question what they really care about is how long is a bankruptcy keeping my credit score low? That answer is much different – just because the public record section of a credit report has a bankruptcy, it does not mean it is keeping a person’s score low for the entire 10 years. Most people’s credit score can be rebuilt within 2-3 years after filing bankruptcy.
14. How will a bankruptcy impact a security clearance?
It probably will not negatively impact a security clearance. For most people with a security clearance, the debt that leads to the bankruptcy is more of an issue than the bankruptcy itself. Bankruptcy is a legal and government-sanctioned way to resolve your debt. Having large unpaid, defaulted debt usually puts someone at more risk for bribes or other security-sensitive problems than the bankruptcy does. For a good discussion of the impact of bankruptcy on a security clearance, the Air Force Academy Legal Office has a good discussion here.
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