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Bankruptcy & Debt Relief FAQs

Should I file for bankruptcy?

Bankruptcy shouldn’t be taken lightly. Ultimately, this is a decision only you can make. However, if your financial situation has become desperate, bankruptcy may be able to provide you with the fresh start you need.

Having a disability significantly limits your ability to gain income, especially if you have never been able to work. While filing bankruptcy might seem like the easiest way to get yourself out of debt, before you pursue this route, you should understand all your options. You also need to understand the long-term impact on your finances each of these choices will have.

What options are there?

There are two chapters under the bankruptcy code available to individuals with personal debt. Chapter 7 bankruptcy and Chapter 13 bankruptcy may allow you to discharge or wipe out most or all personal debt.

Who is eligible for bankruptcy?

A person is usually eligible to file Chapter 7 if their family’s income over the last six months is below the median income for their state. These income limits are given by the U.S. Census Bureau. Due to changes under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, your best bet is to speak with a local attorney who regularly files bankruptcy cases to determine if you are Chapter 7 eligible.

How does Chapter 7 bankruptcy work?

In a Chapter 7 Bankruptcy filing, a case trustee is assigned to your case to review the petition and later examine you at a meeting. Called the first meeting of creditors, this is where the trustee will examine you under oath to see if all of the information in the petition is true and complete and that you have not left anything out, whether on purpose or inadvertently.

The trustee will then review your assets to see if there are any they can seize and sell. They will be able to seize an asset where there is no lien against it, or the lien is less than the value of the asset, provided no exemption exists to protect the asset.

Can I keep any of my assets?

If you are able to take an exemption in an asset, you can protect the asset, even if there is equity and no lien. For example, if you own the home you live in, which has a value of $150,000, and you only owe $110,000 to the mortgage company, you have $40,000 in equity in your home. In New York State, you could be able to protect that equity by using the homestead exemption. That being said, exemptions vary by state. To determine if you will be able to exempt or protect your assets, it is best to review your options with a local, knowledgeable bankruptcy attorney.

What do I need to do in a Chapter 7 bankruptcy?

As a debtor in Chapter 7, your duties include disclosing information about every asset you own or have an interest in, and every liability you owe. Additionally, you will need to provide your attorney with information regarding your income through pay stubs, W2s, and tax returns if applicable. It will also be your responsibility to remain current on any mortgage payments, car loan payments, and the like, provided you want to keep those items.

If you can successfully file and complete a Chapter 7 bankruptcy, you will receive a discharge from the bankruptcy court, which indicates that those debts which have been discharged can never be collected from you again—a financial “fresh start” courtesy of the bankruptcy code.

What is Chapter 13 bankruptcy?

Chapter 13 has always been an option for individuals, couples, and sole proprietors (not corporations) who are struggling financially. Since the changes to the bankruptcy code under BAPCPA in 2005, more people may have to file Chapter 13. When a debtor’s income exceeds the state’s median income, they may not be able to file Chapter 7 because the law determines that there is a surplus available to repay a portion of the debt.

Debtors are subjected to a calculation called “the means test” if their current monthly income is higher than the state median for a family of the same size.

Your attorney will conduct the means test. If there is disposable income remaining in your budget after you have deducted allowable basic living expenses set by the IRS, you will likely have to file Chapter 13 bankruptcy.

How does Chapter 13 bankruptcy work?

Most of the time, payments required for a Chapter 13 plan are substantially smaller than if the debtor made payments to the creditors directly. This is in part because the creditors will not be paid with the contract and/or default rate of interest. Quite often, the unsecured creditors will not be paid any interest. Monthly payments are made to the trustee of the bankruptcy court over three to five years, and the trustee is responsible for disbursing the funds to the creditors.

Chapter 13 also provides a great opportunity to bring past due mortgage payments current, to pay recent tax debts in full, or to catch up on unpaid child support obligations.

What should you do when meeting a bankruptcy attorney?

Always make sure that you tell your attorney the full truth concerning your financial situation. Your attorney will ask you several questions. Each question is asked because it is relevant to your bankruptcy case, and it is likely information that will need to be disclosed on your petition.

Your attorney will ask you questions, such as:
  • Do you own any real estate? Have you ever owned any real estate?
  • Have you paid back any family or friends over the last year?
  • Have you sold or transferred any property?
  • Have you taken any recent cash advances from your credit cards?
  • Do you have any stocks or bonds? What bank accounts do you have?
  • Have you been in business for yourself at all in the last six years?

Failure to tell the whole truth can have serious consequences. Any knowing or fraudulent concealment or false statement is punishable under federal law. The U.S. Attorney’s Office and the Federal Bureau of Investigation investigate bankruptcy fraud. A conviction comes with up to a $250,000 fine, up to five years in jail, or both. Your discharge can be denied as well, and typically the discharge is the main reason people file for bankruptcy in the first place.

Keep this in mind as you assist your attorney in preparing your case and as you testify at your meeting of creditors. Is concealing a sum of money or some asset worth risking prosecution, time in jail, and hefty fines? If so, then bankruptcy will not be an option for you.

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