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Understanding the basics of bankruptcy

January 2020 | HoganWillig Law (Participating Referral Firm)
What is Chapter 7 bankruptcy?
Chapter 7 bankruptcy is a process whereby a debtor can eliminate a significant portion of their total debt through the liquidation/sale of certain assets. Contrary to popular belief, many people that file for Chapter 7 bankruptcy are able to keep their home, vehicle and other necessary items while also obtaining credit.

What is Chapter 13 bankruptcy?
Chapter 13 bankruptcy involves working with an attorney to create a structured payment plan to pay off a reduced amount of the total debt over a three- to five-year period. The payments are made using the debtor's disposable income, meaning the money left over after all necessary expenses have been paid.

How can I re-establish my credit rating after bankruptcy?
The best way is to obtain new credit and then make payments on time. An existing creditor may sometimes continue to grant you credit based upon a reaffirmation agreement made during the bankruptcy. You may also be able to obtain a secured credit card (where the credit limit is based on the amount of security given) or obtain credit using a co-signer.

How long does a typical bankruptcy case take?
The life of a typical Chapter 7 case is normally four to six months. A Chapter 13 bankruptcy case can take anywhere from three to five years to complete.

Will I have to go to court?
In a Chapter 7 proceeding, the only Court appearance required is your appearance before the Court-appointed Trustee at your Meeting of Creditors. This meeting usually takes place 20 to 45 days after a petition is filed.

In a Chapter 13 case, you are also required to appear at a Meeting of Creditors with your Chapter 13 Trustee. Your appearance may also be required at the hearing in which the Bankruptcy Court considers final approval of your repayment plan. This hearing (called a Confirmation Hearing) usually takes place approximately three to six months after a Chapter 13 petition is filed.

What is a meeting of creditors?
Section 341 of the U.S. Bankruptcy Code affords creditors the right to meet with the debtor to determine if a discharge or reorganization of debt is appropriate – based upon the facts and circumstances presented by a debtor in their bankruptcy petition. While creditors technically do have the right to attend these proceedings and question the debtor, creditors rarely appear at these proceedings.

In Chapter 7 proceedings, the Meeting of Creditors serves two important purposes. The Court, through examination by the Court-appointed Trustee, verifies all of the representations contained in your bankruptcy petition are true and correct to the best of your belief and knowledge. In addition, the Bankruptcy Court Trustee utilizes this meeting to verify on behalf of the Court there are no assets that may be considered non-exempt, which could be sold by the Trustee to repay part or all of your debt. A typical meeting of creditors in a Chapter 7 proceeding takes approximately five to 10 minutes to complete.

In Chapter 13 proceedings, a debtor is also required to appear before the Chapter 13 Trustee. In a Chapter 13 case, the meeting of creditors serves a slightly different purpose. In addition to verifying all of the representations made by a debtor are true and correct, the Chapter 13 Trustee will verify the debtor has the financial ability to make the payments detailed in the proposed Chapter 13 plan.

Verification of a debtor’s ability to make payments in a Chapter 13 case is based upon both the debtor testimony at the meeting and various documents (usually tax returns and/or pay statements) that must be presented to the Chapter 13 Trustee to verify the representations made in your petition. As in a Chapter 7 case, a typical meeting of creditors in a Chapter 13 case takes approximately five to 10 minutes.

How often can I file for protection under Chapter 7?
An individual debtor can obtain relief under Chapter 7 every eight years. However, it’s important to note the eight-year period does not run from the date of the filing of the first petition, but rather from the date the court issues the bankruptcy discharge. If you have filed for Chapter 7 protection in the past, you can file a second Chapter 7 petition so long as the applicable time period has passed since the issuance of the discharge in your prior case.

Can utility bills be discharged in a bankruptcy proceeding? If so, will my utility services be terminated?
Obligations to utility services can be listed in a bankruptcy petition. In addition, it is a violation of Public Service Commission regulations for a utility service to terminate the service to an individual based on their filing a bankruptcy petition. However, a utility may, and in most cases will, require you pay a security deposit to guarantee post-petition obligations are paid in a timely manner.

Can my employer discriminate against me because I have filed for bankruptcy?
Absolutely not. Federal law prohibits governmental units and private employers from discriminating against you for filing a bankruptcy petition or because you have failed to pay a dischargeable debt.

Are student loans dischargeable in bankruptcy?
Generally, student loans are not dischargeable in a bankruptcy proceeding. 11 U.S.C. Section 523(a)(8) cites two exceptions to this general rule:

The student loan may be discharged if it is neither insured or guaranteed by a governmental unit nor made under any program funded in whole or in part by a governmental unit or nonprofit institution.

The student loan may be discharged if paying the loan will “impose an undue hardship on the debtor and debtor’s dependents.”

The Big Question: Will I lose my house?
The Bankruptcy Reform Act of 2005 actually makes that possibility more likely than before. In addition, depending upon the state in which you reside, you may have more or fewer legal protections about whether your house could be forfeited. Up to a certain amount, your house is exempt; over a particular value, it could possibly be sold to satisfy your creditors.