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Bankruptcy FAQ

Bankruptcy FAQ

If you've been considering filing for bankruptcy, now's the time to learn about bankruptcy laws. We offer answers below to commonly asked questions about bankruptcy. However, to get answers for your specific financial situation, it's best to contact a bankruptcy attorney.

What exactly is consumer bankruptcy?

Consumer bankruptcy is a legal process for people, known as debtors, who can no longer afford to pay their bills to those they owe, who are known as creditors. Bankruptcy allows them either to come up with a plan to repay their bills over time, or eliminate – the legal term is discharge -- most of their debts altogether.

What are the different types of bankruptcy?

The most common types of consumer bankruptcy are Chapter 7 and Chapter 13. Chapter 7 bankruptcy is also known as straight bankruptcy. In Chapter 13 bankruptcy, you'll get to restructure your debt, that is, come up with a plan to pay off the debts over a longer period of time. You may be able to hold onto more of your personal property with Chapter 13.

To figure out which one is better for you given your circumstances, it's best to review your finances with a bankruptcy lawyer.

Who qualifies for Chapter 7 bankruptcy?

Under federal bankruptcy laws, if you want to file Chapter 7 bankruptcy, you will have to qualify by passing a means test. The means test determines whether you have the ability to pay off a portion of your debts above and beyond the income you need to survive. If you do, you may be required to file for Chapter 13 bankruptcy.

Generally, with a means test, debtors will not be permitted to file for Chapter 7 bankruptcy if their income is above their state's median income or they can afford to pay 25 percent of their unsecured debt.

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What is secured and unsecured debt?

Secured debt means a debt you owe that is tied to some property, either voluntarily through an agreement, such as a mortgage, or involuntarily, such as with a court judgment or taxes. Unsecured debts have no property tied to them, so a creditor cannot try to reclaim property as part of a bankruptcy proceeding.

Can I keep my house if I file bankruptcy?

Maybe. It depends on the laws in your state, if there is any equity in the home and whether you are current or delinquent on your payments. A bankruptcy attorney can speak to your individual situation.

How does bankruptcy affect my credit?

A bankruptcy remains on your credit record for 10 years. This may make it tougher to get a loan and lower interest rates, especially right after your bankruptcy. You may be able to qualify for a government-insured FHA mortgage in as little as two years after your bankruptcy filing and a private mortgage after five years of responsible credit-building. Credit-card companies may also offer you credit, but you may pay higher interest rates.

What about credit counseling?

Under federal bankruptcy laws, you will be required to attend credit counseling. In the six months prior to filing for bankruptcy, debtors must meet with an approved credit counselor in their area for a 90-minute session. Additionally, before the debts are discharged, the debtor must attend money-management classes at his own cost.

Will all my debts be wiped clean?

No. The different chapters of bankruptcy vary in which debts they will discharge, but in general, you cannot get rid of:

  • Taxes owed to local, state or federal agencies
  • Debts for items you obtained fraudulently
  • Debts that weren't in the initial list of debts
  • Child support, alimony or any other payments to a spouse as part of a separation agreement, divorce decree or any other court order
  • Debts tied to any court judgment
  • Government-sponsored education loans, unless you can show that they remain an undue hardship
  • Any debts you accrue after filing for bankruptcy