The following is general legal information, provided as a public service by Oregon’s lawyers. The information is not intended to be legal advice regarding your particular problem. Note that changes may occur in this area of the law.
What is bankruptcy?
When you owe money, you are a debtor, and the people or companies you
owe money to are your creditors. "Bankruptcy" is a federal
law that establishes an orderly process to provide protection to
debtors and fair treatment to creditors. Bankruptcy proceedings,
though not for everyone, can be very helpful to solve a financial
crisis.
There are five different types of bankruptcy proceedings. The two most common types are referred to as Chapter 7 and Chapter 13 bankruptcies. Usually when people talk about filing for bankruptcy, they mean Chapter 7. Chapter 7 is a roughly 90-day process that gives you the opportunity to wipe the slate clean, avoiding almost all of your debts without having to make any future payments. "Discharge" is the legal term that means you no longer have a legal obligation to repay a debt. In a Chapter 7 bankruptcy, your assets can be at risk and some debts will not be discharged. In addition, some transfers of property can be undone in bankruptcy.
A Chapter 13 bankruptcy is a three- to five-year repayment proceeding. In Chapter 13 you gain protection for your assets, and you are able to repay certain debts such as child support arrearages, taxes, car payments and home mortgage arrearages over a three- to five-year time period rather than having your wages garnished or your assets seized. In exchange for this added benefit, you must agree to make a monthly payment of your disposable income to repay a portion (sometimes all) of your debts. Chapter 13 is often an excellent alternative when consumer credit counseling or Chapter 7 are not available options.
Will bankruptcy help my situation?
Bankruptcy can give you a fresh financial start on life and can seem
very attractive to people who cannot afford to pay their bills as
they become due. However, the process is not for everyone. Timing
of the bankruptcy filing is very important. Filing for bankruptcy
may affect your credit for years to come or have other serious consequences
that you will need to consider.
You may wish to consult a lawyer to assess the pros and cons of filing in your particular situation. Perhaps you will be able to work out a debt repayment plan on your own. Possibly you will do best to get help from consumer credit counseling services. Or perhaps bankruptcy will be your best solution later on down the road, but not necessarily at this time. Whatever route you take, you will need to gather some basic information before proceeding further. Many attorneys will give a free consultation to discuss the benefits and risks of a bankruptcy and what alternatives to bankruptcy are available.
Some factors to consider
What are your total living expenses? Calculate the total monthly expenses
for you and your dependents such as food, housing, utilities, transportation,
insurance, clothing, medical care and some reasonable reserve for
the unexpected. You will need an accurate list of these monthly expenses
as well as a list of your total monthly income.
Whom do you owe money to? Make a list of all of your creditors. Identify those creditors you have pledged property to, the value of the property your creditors have an interest in and the monthly payments that you currently owe each creditor, as well.
Are you "judgment-proof"? When a creditor sues you he or she is seeking a "judgment," which is simply a legal order that you owe the debt. Armed with a judgment, a creditor can garnish bank accounts or wages or file liens against your property. You may be judgment-proof if you only have a few assets and they are not worth much; if your only income is from unemployment insurance, Supplemental Security Income or some other type of government benefits; or if you work and your wages are low enough. The effect of being judgment-proof is that creditors may not bother to sue you because they will not be able to "satisfy" their judgments against you. Creditors cannot take any property or garnish the income of a person who is truly judgment-proof. However, even judgment-proof people can and do file for bankruptcy relief — perhaps to stop harassing phone calls.
If your debts were erased, would your financial problems be over? Bankruptcy will give you a fresh financial start and will work best if you will have an income after the bankruptcy that is adequate to support you and your family. On the other hand, bankruptcy will only be a temporary fix if you go right back into debt again with no way of paying off the new debts. Chapter 7 is only available once every eight years. It is usually best to wait until you have reached the end of your financial problems before filing bankruptcy. Even if you have filed a previous bankruptcy, the court may allow you to file a Chapter 13 bankruptcy to deal with any new debts you may have incurred; however, this depends on the particular circumstances of your case.
Bankruptcy does not discharge all debts
It is important to realize that bankruptcy does not necessarily allow
you to avoid paying back every kind of debt. For public policy reasons,
several kinds of debts are specifically excluded from discharge in
bankruptcy. The most common debts which cannot be discharged are
child support obligations, spousal support, criminal restitution
and fines. Some other types of debts are dischargeable in some circumstances
but not others — for example, debts from taxes, bad checks
and the fraudulent use of a credit card may not be erased (depending
on the circumstances). Student loans are sometimes but very
rarely discharged, and if they are discharged, it does not happen
automatically. The details of your own particular situation should
be discussed with a lawyer or other knowledgeable person before you
begin bankruptcy proceedings.
Will I have to give up all my property?
Although Chapter 7 is a "liquidation proceeding," you will
be allowed to keep certain property, as long as the fair market value
of each item does not exceed certain amounts. (Fair market value is
not your original purchase price. It is sometimes described as "garage
sale value," or how much actual cash you would receive by selling
the item to an unrelated party.) Certain property such as your working
tools, household furnishings, radio, television, musical instruments,
some savings and checking accounts, your car and your home may be entirely
protected, or "exempt," through bankruptcy. Unlike a Chapter
7 bankruptcy, a Chapter 13 case usually allows you to retain all of
your "non-exempt" assets, and over a three- to five-year
period of time you pay to the court the value of those non-exempt assets
for distribution to your creditors.
Do I have to go to court?
In almost all situations the answer is no. However, in both Chapter
7 and Chapter 13 you have to attend the meeting of creditors, which
is usually scheduled about 30 days after you file the case. This
meeting is held by the bankruptcy trustee who is the administrator
of the process. You will be sworn in under oath, and the meeting
will be recorded. Most of the questions will pertain to information
in the bankruptcy papers you file with the court. The meeting typically
only takes five to ten minutes, and most creditors never come.
How long does the bankruptcy process take?
Once a Chapter 7 bankruptcy is filed, it generally takes three months
to complete. However, you are protected from your creditors on the
day the bankruptcy is filed — they may not repossess your car,
foreclose your house, garnish your accounts or take any other collection
activity. If all of your assets are exempt, and no one objects, you
will receive your discharge from the debts about 60 days after the
meeting of creditors.
Timelines for Chapter 13 are different. Chapter 13 cases run between three to five years, depending on the circumstances.
What is the fee to file bankruptcy?
The fee to file a Chapter 7 bankruptcy is currently $299. However,
you have the option to pay this fee in three installments over an
84 day period, and you do not need to pay any fee at the time you
file the bankruptcy. If your income is low enough, you may be eligible
for a full waiver of the filing fee.
What will happen to my credit rating?
A Chapter 7 bankruptcy case will be reported by credit reporting agencies
for 10 years. A Chapter 13 bankruptcy case will be reported by credit
reporting agencies for seven years. Creditors are sometimes willing
to approve credit after bankruptcy, because they know that a financial
burden has been lifted and that you may now be able to make regular
payments on any new debt. Also, they know that if you filed a Chapter
7 proceeding, you will not be able to declare Chapter 7 bankruptcy
again for eight more years, so in some ways you are a better credit
risk after filing bankruptcy. If you have completed a Chapter 13
plan, then you have demonstrated that you can handle regular payments
on your debt obligations. Keep in mind that credit is a privilege,
not a right, and some creditors will require an extended period of
time after bankruptcy before extending further credit. This is certainly
one reason to be cautious about filing bankruptcy.
Do I need a lawyer to file a bankruptcy case?
The law does not require individuals and sole proprietors to hire a
lawyer. However, you may want to consult a lawyer to make sure that
bankruptcy is the best option for you at this time, and if so, that
you are taking the correct steps to file. Also, know that filling
out all the required documents can be difficult. If you wish to pursue
this on your own, you can obtain a packet of information by contacting
the Bankruptcy Court.
Changes to bankruptcy effective Oct. 17, 2005
On Oct. 17, 2005, Congress significantly changed bankruptcy laws and
procedure. Make sure any information or forms you possess have been
updated to take into account these changes. The following are some
of the most significant changes under the new law:
- Prior to filing bankruptcy, you must take an educational course through an approved counseling agency. For a list of approved counselors, see the U.S. Trustee’s website. In some cases, the filing fee to the court and costs of credit counseling classes can be waived under the new law depending on your income.
- Within 45 days after the meeting of creditors, you must take a course in financial management and receive a certificate from an approved counseling agency.
- Income and expenses can determine whether you are eligible to file a Chapter 7 bankruptcy. You must provide additional documentation to the court, trustee and U.S. Trustee, such as copies of your most recent federal tax return or a transcript thereof, bank statements and pay stubs. Under the new law, while Congress has placed additional burdens on people to file bankruptcy, the benefits of filing bankruptcy are generally still available to all people.
Are there alternatives to bankruptcy?
Yes. There are many credit counseling agencies that exist to help people
who have money problems. Most are nonprofit services offering free
advice on how to get out of debt and how to use credit wisely. There
is no charge to have a counselor review your financial situation
and help analyze your problem. If the service handles your payments
to creditors under a debt-management plan, a small monthly contribution
may be requested. This fee would be waived if the counselor finds
it is not possible because of a very tight program. Note that if
you do not have enough money to make even partial payments to your
creditors, then most counseling services will be unable to help you
and may refer you to bankruptcy.
Legal Editor: Richard Slottee, Lewis & Clark Legal Clinic, March 2008