What is Bankruptcy?

Bankruptcy is a legal process provided by federal law which gives those who are experiencing financial hardship an opportunity for a fresh start. It is provided for by Article I, Section 8, of the United States Constitution and is codified in Title 11 of the United States Code. Bankruptcy has its roots in the Old Testament Book of Deuteronomy (15:1-2) and Book of Nehemiah (10:31). The fundamental role of the bankruptcy laws was formally defined in a 1934 decision by the United States Supreme Court:

"[I]t gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt." Local Loan Co.v. Hunt, 292 U.S. 234, 244 (1934).

The "new opportunity and a clear field for future effort" is provided by the bankruptcy discharge which releases one from personal liability for certain debts and prohibits creditors from ever again taking any action to collect on those debts. There are six basic types of bankruptcy proceedings: Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13 and Chapter 15.

Can I Still File Bankruptcy?

Yes. Although the Bankruptcy Code was changed on October 17, 2005, the law is essentially the same as it has always been. Bankruptcy remains as an honorable, powerful and effective tool that can be utilized by anyone facing financial crisis. Bankruptcy is NOT a shaming process! It is federal law that stems from the United States Constitution and is available to everyone.

Overview of the New Bankruptcy Laws

The changes in the bankruptcy laws that took effect on October 17, 2005, were based on the credit industry's argument there was widespread abuse of the bankruptcy system by people who could afford to pay their debts. The changes were designed to steer those who have the ability to pay back some of their debts away from filing Chapter 7 bankruptcy and into Chapter 13 bankruptcy. From my perspective, the only thing the change really accomplished was to make the bankruptcy process a little more complex, expensive and time-consuming.

The Means Test

One of the provisions in the 2005 changes to the bankruptcy laws is the"means test." If the gross income of one's household exceeds the median gross income for a household of their size then a series of calculations known as the means test must be performed to determine if that person should file under Chapter 7 or whether it is more appropriate to file under Chapter 13.

Approximately 85% to 90% of all bankruptcy filers do not need to complete the means test because they do not have gross income that exceeds the median gross income for a household of their size. For those who do not need to complete the means test the "disposable income" standard will determine which chapter of bankruptcy (Chapter 7 or Chapter 13) is most appropriate.

The bankruptcy laws have always provided a method for determining whether one should file bankruptcy under Chapter 7 or Chapter 13. If one has "disposable income" (as determined from bankruptcy schedules I and J) they should probably file Chapter 13 and devote that disposable income to a 3 year plan characterized as their "best efforts" at repaying unsecured creditors. If one has no disposable income to devote to a plan to pay unsecured creditors it is probably more appropriate to file for Chapter 7 bankruptcy.

Determining whether one has"disposable income" is basically a matter of calculating what is left of one's monthly income after payroll deductions and payment of the typical monthly living expenses comprised of their rent (or mortgage), electric, phone, internet, food, clothing, car payments, gas, insurance, and the like. Depending on the particular circumstances of each case, the Bankruptcy Court might dismiss a Chapter 7 or convert it to a Chapter 13 if there is a certain amount of disposable income available to devote to unsecured creditors. The requisite disposable income that will bring scrutiny to a case is typically anywhere from $100 - $300, or more, depending on the amount of the unsecured debt. Things are more complicated for the small minority who will have to complete the means test.

The means test starts with one's "current monthly income" as now defined by 11 U.S.C. §101(10A). One's current monthly income is calculated as one-sixth of the last six months gross income received from all sources with certain exceptions. From current gross monthly income one deducts the monthly expense amounts that are set forth in the "National Standards" and the "Local Standards" that are published by the Internal Revenue Service (see the "Links" section). With certain exceptions, it matters not that one's actual monthly expense amounts in a particular category are higher or lower than those published in the National Standards and Local Standards. One exception is that a filer is allowed to deduct actual monthly expenses for the categories specified by the IRS as "Other Necessary Expenses" for the health and welfare or production of income.

After the deduction of monthly expenses one turns to the deductions allowed for secured debts and priority debts. To determine the amount someone is allowed to deduct for secured debts requires that they first add the total of all amounts that are scheduled as contractually due in each month of the 60 months following the date you file for bankruptcy plus any additional payments to secured creditors that would be necessary (if you were to file a plan under Chapter 13) to maintain possession of your residence, motor vehicle, or other property necessary for their support, provided it serves as collateral for the secured debts. The total amount due to secured creditors is then divided by 60 and deducted from one's current monthly income. Next one calculates the total amount of debts entitled to priority (including priority child support and alimony claims) and divides that number by 60. That amount is then deducted from current monthly income. Finally, if one is eligible to file for Chapter 13, they are allowed to deduct from current monthly income the actual administrative expenses that would be incurred in the district where they reside. In the Western District of Washington the allowed amount is 9.3%.

A presumption of abuse arises if the amount that remains from one's current monthly income (after all the allowable deductions) times 60 is the lesser of $10,000.00 or 25% of their general unsecured debts, so long as the 25% is at least $6,000.00. If one has over $40,000.00 in general unsecured debts, $10,000.00 is the amount above which a presumption of abuse arises. If one has under $24,000.00 in general unsecured debts, $6,000.00 is the amount above which a presumption of abuse arises. Finally, if one has between $24,000.00 to $40,000.00 in general unsecured debts, 25% of that general unsecured debt is the amount above which the presumption of abuse would arise.

If one's Chapter 7 case is presumed abusive the presumption may be rebutted by showing "special circumstances." The special circumstances must dictate an adjustment in one's income or expenses that changes the result of the means test formula sufficiently to eliminate the presumption of abuse. The Bankruptcy Code gives as examples of special circumstances a serious medical condition or call to active duty in the armed forces. Disabled veterans whose debts were incurred primarily during active duty or homeland defense are exempt from the means test. A reduction in one's current monthly income, because of loss or job, illness, or the like would likely qualify as a special circumstance.

Counseling Requirements

The bankruptcy laws require that each person filing for bankruptcy must complete two separate counseling sessions with a nonprofit budget and credit counseling agency that has been approved by the Executive Office of U.S. Trustees. The first counseling session must be completed within the 180 days immediately prior to filing for bankruptcy and the second counseling session must be completed prior to receiving a discharge.

Budget Briefing Session: The first counseling requirement is a budget briefing session which involves a review of the participant's household budget, a review of the household debt and analysis of the various options that may be available.

When I initially meet with a client I review their income, expenses, debt and particular circumstances and discuss the various options available to them. The client is then able to make an informed decision concerning how to best resolve their financial problems. I question the purpose behind requiring those who have already consulted with an attorney to spend their time and resources reviewing their finances a second time with a credit counselor who cannot give legal advice. It seems redundant, time consuming and an unnecessary expense. Nevertheless, the counseling is required. Since my clients and I review their income, expenses, debt and particular circumstances during the initial consultation, they are well prepared for the pre-bankruptcy counseling session which essentially covers the same ground.

Personal Financial Management Instructional Course: The second counseling requirement is a personal financial management instructional course which must be completed prior to receiving a bankruptcy discharge. The personal financial management instructional course is designed to help consumers better understand their personal finances by teaching the basics of money management, budgeting and the proper use of credit in everyday life. This second counseling requirement should actually provide a tangible benefit consumers and creditors alike.

Each counseling session can be completed by telephone, Internet or in person (only in some areas). At the conclusion of the session the counseling agency will issue a certificate of completion which must be filed with the bankruptcy court. The cost of each session is typically around $50.00 without regard to whether the person is filing individually or jointly with their spouse (provided both spouses complete the session at the same time). I have an account with a nonprofit budget and credit counseling agency through which my clients can complete the counseling sessions. After I am retained I provide my clients with a client code and the specifics necessary to contact the agency and obtain the necessary counseling. The cost of the counseling is included in my fee so my clients do not have to concern themselves with paying for the counseling directly. See the "Links" section for a link to the list of credit counseling agencies approved by the Executive Office of the U.S. Trustees.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is often referred to as "straight" bankruptcy. It is a four month process at the conclusion of which certain debts (credit cards, collection accounts, medical bills, payday loans, repossessed cars, etc.) are "discharged" (wiped out) meaning the bankruptcy filer is relieved of the responsibility to pay them, thereby giving them a "fresh start." One does not have to be destitute and living on the street or in their car in order to qualify for bankruptcy. Nor will the person be destitute and living on the street or in their car at the conclusion of their bankruptcy.

One of the fundamental purposes of bankruptcy is to give those in financial crisis a clean slate and a fresh start. In order to facilitate that fresh start certain property is protected in the bankruptcy process from the reach of creditors and the trustee. Washington State has very liberal exemptions which permit the overwhelming majority of my clients to keep everything they own. In Washington, the federal exemption scheme is also available and is often utilized due to its liberal wildcard exemption which is currently $11,975.00 for single filers and $23,950.00 for those who are married and file jointly.

Within limits (and depending on which exemption scheme you choose) you are permitted to keep the equity in your family home, cash, bank accounts, household goods and furnishings, jewelry, clothing, retirement accounts, automobiles, tools of your trade, and more. If you own property which does not fit within an allowable exemption (which is rare) it could be sold with the proceeds going to creditors in accordance with bankruptcy law.

Chapter 9 Bankruptcy

Chapter 9 is titled "Adjustment of Debts of a Municipality" and provides for the reorganization (similar to a reorganization under Chapter 11) of municipalities. The definition of municipality includes cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts.

Chapter 11 Bankruptcy

Chapter 11 Bankruptcy is known as "reorganization" and is designed to provide a means by which a financially distressed business can restructure its finances so that it may continue to operate. It is most commonly used by corporate debtors but in some instances it is utilized by individuals who have very large debts and/or an exceptional amount of assets. In a Chapter 11 bankruptcy the debtor proposes a plan for reorganizing and repaying its debts which is voted on by creditors and must be approved by the Bankruptcy Court. In some cases a liquidation plan is proposed which provides for the orderly sale of assets, distribution of the proceeds and termination of the business. Chapter 11 bankruptcy is more expensive and time consuming than a Chapter 7 or Chapter 13 bankruptcy. It is appropriate under certain circumstances.

Chapter 12 Bankruptcy

Chapter 12 Bankruptcy is reserved for a limited category of family farmers and fishermen. The chapter is designed to assist in the restructuring and reorganization of their business as farmers or fishermen and contains a blend of consumer and commercial bankruptcy concepts with provisions for debt reduction that exceed what can be accomplished in either a Chapter 11 or Chapter 13 bankruptcy. The farmer or fisherman proposes a plan to repay their creditors over a 3 to 5 year period which must be approved by the Bankruptcy Court. Plan payments are made through a Chapter 12 trustee who monitors the debtors' farming operations during the pendency of the plan.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is an excellent tool whereby one can reorganize their financial affairs. It is a 3 to 5 year process during which you would devote your disposable income toward what's referred to as your "best efforts" at repaying your creditors. While Chapter 7 is the most common type of bankruptcy, Chapter 13 is more appropriate under certain circumstances and when it is utilized properly it is an excellent tool for regaining financial stability. Chapter 13 bankruptcy is basically a debt consolidation process that actually works (unlike the debt reduction programs advertised on late night television). Chapter 13 provides the participant with the ability to consolidate all of their debt into a single monthly payment and eliminates penalties and interest from continuing to accrue. In Chapter 13 you typically need only to pay what your can afford ("disposable income") to unsecured creditors.

Chapter 13 is commonly utilized to stop a home foreclosure. Immediately upon filing for Chapter 13 the foreclosure is stopped and the lender is prohibited from proceeding. The filer then submits a Chapter 13 plan of reorganization that will include provisions that address the delinquent mortgage payments or other issues that led to the foreclosure. The Chapter 13 plan of reorganization could provide that the delinquent payments will be cured over the 3 to 5 year life of the plan or it might provide that you will request a loan modification or some other workout plan that will cure the default on mortgage. There are certain limits on what can be done with a home loan on a primary residence but the important thing is that a Chapter 13 bankruptcy will immediately stop the foreclosure and give you an opportunity to explore the various options that are available to you without the pressure of an impending sale. If you are upside down on your home it is often possible to remove a second mortgage in a Chapter 13 bankruptcy.

Say a family has a monthly mortgage payment of $1,200.00 per month and $18,000.00 in credit card debt. Due to an illness, loss of job, or some other eventuality, they are now 3 months delinquent on the mortgage payment. They now owe $3,600.00 in delinquent mortgage payments, $150.00 in late fees, $50.00 in miscellaneous fees and $300.00 in foreclosure attorney fees. The lender has delivered a Notice of Default and started the foreclosure process. The home is scheduled to be sold in one week and they must pay the entire $4,100.00 in delinquent payments, costs and fees to stop the sale. They don't have it and have nowhere to borrow the money. This family could file a Chapter 13 bankruptcy which would immediately stop the foreclosure sale and allow them 3 to 5 years in which to pay off the $4,100.00. In this example the family could make a monthly Chapter 13 payment of $1,436.00 from which the trustee would pay the lender $1,200.00 for the current mortgage payment, $114.00 to the lender to cure the delinquent payments ($4,100 divided by 36) and $122.00 would be applied to the administrative costs of the bankruptcy (trustee administration fees and any balance owing for bankruptcy attorney fees). The trustee would not pay anything to the credit cards because the family, in this example, does not have any excess income to devote to credit cards after paying the $1,436.00 plan payment and their basic monthly household expenses comprised of electric, phone, internet, food, clothing, gas, insurance, etc. At the conclusion of the Chapter 13 process the participant would be current on their mortgage and the credit cards would be discharged, thereby getting a fresh start.

Another situation in which a Chapter 13 might be appropriate is when a family with $60,000.00 in credit card debt which require minimum payments of $1,300.00 per month only has $200.00 of disposable income each month. In other words, after paying their basic monthly living expenses of rent, electric, phone, Internet, food, clothing, car payment, gas, insurance, etc, they have only $200.00 available from which to try and pay their credit cards. They may have tried borrowing from the credit cards to make the payments but have come to realize that only compounds the problem. They may have tried a debt consolidation program they found on late night television but the company hasn't made the promised payments, or the debt is still going up, or the creditors are continuing to call and harassing them. A possible solution to this scenario would be to file for Chapter 13 and devote the $200.00 the family has available each month toward their "best efforts" at repaying the $60,000.00 in credit card debt. They pay the $200.00 in "disposable income" they have each month to the Chapter 13 Trustee for the next three years ($2,400.00 per year, $7,200.00 over the life of the bankruptcy). The Chapter 13 Trustee then distributes the $7,200.00 to the credit card companies on a pro-rata basis over the life of their bankruptcy. At the end of the bankruptcy the balance of the debt ($52,800.00 in this example) is discharged and the family has their fresh start.

Upon filing for Chapter 13 all creditors are immediately prohibited from attempting to contact or otherwise collect on the debt. Penalties and interest become irrelevant and at the conclusion of the Chapter 13 process any balance remaining on the unsecured debts is discharged giving them a fresh start, free of their unsecured debt.

Chapter 15 Bankruptcy

Chapter 15 is titled "Ancillary and Other Cross-Border Cases" and is designed to provide a mechanism for dealing with cases of cross-border bankruptcy. Chapter 15 applies when a debtor or its property is subject to the laws of the United States and one or more foreign countries.

Why Not Just Do a Debt Consolidation?

The "debt consolidation" programs one hears about on late night television, and which are conducted outside of the bankruptcy context, typically require impossibly large monthly payments which are very difficult to maintain. In my experience, these debt consolidation programs simply don't work and, as often as not, make matters worse.

Unlike a Chapter 13 bankruptcy, the debt consolidation programs are entirely voluntary on the part of the creditors and they are usually limited to credit cards, leaving the participant to fend for themselves in regard to their secured debts, medical bills, collection accounts and the like. I have met with people who have been paying into a debt consolidation program for some period of time (year, year and a half, two years, etc.) and who told me they simply couldn't afford the payments required, or the balances on the cards were actually increasing, or the balances were decreasing at a snail's pace, or the payments were not getting applied properly by the company administering the program, or the creditors were still pursuing collection directly from the participant despite being in a debt consolidation program, or the interest on the credit cards was not lowered as promised and a host of other similar complaints.

In my opinion, Chapter 13 bankruptcy is far and away superior to any debt consolidation program that is conducted outside of the bankruptcy context. Chapter 13 actually works and provides the participant a real opportunity to eliminate their credit card debt, medical bills, payday loans, repossessed cars, etc., in a reasonable period of time, once and for all.

I Feel Guilty and Ashamed About Getting Myself Into This Mess

Debts often get the best of even the most conscientious and miserly. Getting in debt and struggling financially is a fact of life which happens to virtually everyone to varying degrees at some time or another in their lives. Life's circumstances such as divorce or marital problems, pregnancy, illness, disability or other impairment, loss of job and loss of business all lead to periods of changed income, increased expenses and an inability to make payments.

Aside from life's unfortunate turn of events, we are bombarded from cradle to grave with messages that it's good to buy anything and everything we want right now on credit. All day long we are all inundated with enticing images urging us to purchase this, that or the other thing. We are offered endless opportunities to purchase nearly anything which makes it very easy to live beyond one's needs and lose financial control. For whatever reason people get themselves turned around and they fall behind on their financial obligations. Unfortunately, once one falls behind it becomes very difficult to come current and the endless stream of late notices, creditor calls and legal actions begin. The calls from creditors and collection agencies come at all hours of the day and night during which one is mercilessly berated, harassed and threatened which leads to fear, guilt, depression and the general feeling that they are a failures.

Any guilt or shame that you may feel about the financial situation you find yourself in must be put in perspective. Credit and consumer debt is the cornerstone of capitalist economies. And defaults on extensions of credit and consumer debt, repossessions, foreclosures and bankruptcies are an inevitable part of the free market system. Bankruptcy provides a necessary safety mechanism to that system by providing a relief valve whereby people and businesses which find themselves in impossible financial situations can become productive again. It provides an opportunity to reorder finances and obtain a fresh start unhampered by the pressure and discouragement of preexisting debt. It helps stimulate the American economy by encouraging individuals and businesses to take risks by limiting the amount of risk involved and by offering a fresh start to those who fail.

Without bankruptcy people and businesses over their head financially would give up and become an endless drag on the economy. Bankruptcy clears the books, it promotes the expansion of business, it profoundly improves well-being by bringing order and relief to those under immense financial pressures, it helps keeps families together, it reduces drug abuse, alcohol abuse, suicide and homelessness. It's a great tool!

How Will My Bankruptcy Affect Creditors?

The credit industry spent millions upon millions of dollars trying to convince special interest groups, politicians and the general public that there was widespread abuse of the bankruptcy system by people who could afford to pay their debts. In fact, there never was a widespread abuse of the bankruptcy system. Although bankruptcy filings have almost doubled over the last ten years, the dramatic increase is a symptom of financial difficulties stemming from unexpected medical costs, family crises like divorce and loss of jobs. In my opinion, the most significant contributing factor to the dramatic increase in bankruptcy filings has been the deregulation of credit card interest rates and the predatory lending practices of the credit industry as a whole.

Over the past 10 years credit card solicitations have doubled to five billion per year. Credit card profits have increased 163% – from $11.5 billion to $30.2 billion. Credit is doled out to the young, the elderly, and everyone in between, without regard to their particular financial circumstances. Pre-Approved credit cards are issued indiscriminately without running credit checks and with the full knowledge that some 30% of cardholders will be late on a payment at which point the company immediately boosts the interest rate.

The credit industry thrives on charging exorbitant interest, fees and penalties and would prefer it if their card holders could never extricate themselves except by repaying the debt in-full, and on their terms, regardless of one's financial circumstances and ability to repay. The cost of late and other penalty fees assessed by credit card companies have doubled in the last 10 years and now are more quickly levied. In fact, payments arriving after a certain hour on the due date are now considered late.

What is that all about? The penalty rates are retroactive to the entire balance and, with the advent of "universal default" policies, the default on one card equals a default on all cards. This only compounds the problem and has created a domino effect on the consumer's financial situation. Sadly, many companies even facilitate late payments by sending out the statements late, or misdirecting the payments when they are received, or misapplying the payments to another debt for which the payment wasn't intended.

Mortgage lenders allow people to borrow against their homes to 125% of the equity. Payday loans with 350% and higher annual interest are permitted. Creditors take great effort at hiding fees and costs in the fine print. They deceive consumers into paying for very expensive and useless disability insurance or credit life insurance that is rarely honored because it usually takes nothing short of a miracle to meet the numerous prerequisites hidden in the fine print of the insurance provisions. Until the credit industry cleans up its act -- which will be done voluntarily — those in our society that are less educated, come from less fortunate backgrounds, lose jobs, get divorced, get sick or simply overspend are going to find themselves in financial circumstances in which the only viable solution is bankruptcy.

Will Bankruptcy Stop Creditor Harassment?

Upon the filing of a bankruptcy petition you immediately come under the protection of an "automatic stay" which makes it illegal for creditors to call you, write to you, have personal contact with you, garnish your wages, repossess your car or other property, foreclosure on your home, begin or continue lawsuits against you, and more. It is effective against all creditors including government entities such as the IRS.

Although there are some exceptions to the automatic stay they are limited to criminal actions (unless brought to collect a debt), actions to collect alimony, maintenance or support, or actions to enforce a government's police or regulatory power. Under some circumstances a creditor can get permission from the court to proceed but to do so requires the filing of a motion which takes a significant amount of time and gives you an opportunity to raise defenses and counterclaims against the creditor. You will be surprised how creditors suddenly become willing to settle disputes and how they become much more reasonable after the filing of a bankruptcy and the imposition of the automatic stay.

How Long After I File Until the Creditor Harassment Stops?

Once a creditor is notified of your bankruptcy filing they must immediately stop all collection efforts. The bankruptcy court will mail a notice to all the creditors listed in your bankruptcy schedules which typically takes several weeks. However, once you advise a creditor that you have filed for bankruptcy they must stop all further collection activities. If your car is about to be repossessed or there is a foreclosure sale set in the near future you should advise your attorney and he or she will contact the creditor immediately upon filing the bankruptcy petition.

If a creditor repossesses your property, forecloses on your home or otherwise continues with collection activities against you after being advised of your bankruptcy filing it is a violation of the automatic stay provisions of the bankruptcy code and exposes the offending party to a potential claim for damages, including costs and attorney's fees, and, in appropriate circumstances, punitive damages.

What Property Can I Keep?

In a Chapter 7 case, you are allowed to keep that property of yours which is "exempt" under state law and federal law. In the State of Washington, prior to filing your bankruptcy petition, you must choose whether you want to use the state exemptions or the federal exemptions. In some circumstances it is more advantageous to utilize the federal exemptions in other circumstances it is better to utilize the state exemptions. The exemption statutes are complicated and you should talk with a bankruptcy attorney to determine which exemptions are most appropriate for your particular case. In general, and within specific dollar limits, you will be allowed to keep the equity in your home, your car, your household goods and furnishings, your personal effects, the items you need for your job (computer, books, tools, etc.), and your right to receive certain benefits such as social security, unemployment compensation, veteran's benefits, public assistance, and your pension.

While the exemptions available to you will allow you to keep property even in a Chapter 7 case, your exemptions do not allow you to keep property in a Chapter 7 if you are too far behind on the payments on a loan for the property. If you want to keep property like a home or a car and are behind on the payments you should consider filing a Chapter 13 bankruptcy which may allow you to keep the property and pay the amounts you are behind over a 3 to 5 year period. You should also consider filing a Chapter 13 bankruptcy if you have a drivers or occupational license which is suspended for failure to pay some financial obligation such as traffic fines, damage done in a traffic accident, or child support. You may also want to consider filing for Chapter 13 if you own property with equity that exceeds the value of the available exemptions.

What Will Happen to My Home and Car in Bankruptcy?

In most cases you will not lose your home or car by filing bankruptcy provided any equity you have in the property is exempt. Even if there is non-exempt value in the property you can still keep it provided you pay the non-exempt value to creditors through a Chapter 13 plan. If you have a loan against the home or car you will have to continue to pay on that because your obligation on secured loans will not be discharged unless you return the property to the creditor.

Can I Still Own Things After I File Bankruptcy?

Although some people believe they are prohibited from owing anything after they file bankruptcy this is simply not true. There is no such prohibition. You are allowed to keep all the property in your bankruptcy for which there is an exemption. In most cases everything one owns can be protected by an exemption. You are also allowed to keep anything you obtain after the bankruptcy although there are certain rules that apply to inheritances, property settlements and life insurance benefits if they are received within six months of filing for bankruptcy.

How Do I Start?

The bankruptcy process begins by determining which bankruptcy chapter best fits your needs. You will be asked to provide your attorney with information and documentation necessary to complete a petition, various schedules, and statements of your financial affairs which are filed with the bankruptcy court. These various documents provide a comprehensive snapshot of your assets, liabilities, income and expenditures, and other pertinent information as of the date of filing. If your circumstances change after you file under one chapter you may be eligible to convert your case to a different chapter.

Do I Have to Go to Court?

Approximately four to six weeks after the filing of your bankruptcy petition, you will be required to attend a creditors meeting which is presided over by a bankruptcy trustee. The trustee is not a judge, but an individual appointed by the United States Trustee to oversee bankruptcy cases. At the creditors meeting your attorney or the trustee will ask you questions under oath regarding the content of your bankruptcy papers, your assets, debts and other matters.

All your creditors receive notice of the meeting and are entitled to come and question you concerning any information you may have provided them, the information set forth in your schedules and your intentions concerning any property they may have a security interest in. In most cases your attorney will have discussed any issues or concerns creditors have prior to the creditors meeting.

What Happens to My Debts?

At the conclusion of your bankruptcy case you will receive an "Order of Discharge" which is a court order that officially relieves you of the legal responsibility to pay those debts which have been discharged. The bankruptcy laws prohibit your creditors from taking any form of collection action on discharged debts. Discharged creditors can no longer bring a lawsuit against you or otherwise communicate with you about the former debts. Those who file for Chapter 7 usually receive their discharge about 60 days after the creditors meeting. Those who file for Chapter 13 usually receive their discharge 60 to 90 days after they have completed all the payments provided for by their Chapter 13 plan.

Will All of My Debts Be Discharged?

Common types of debts which are usually discharged in bankruptcy are credit card debts, repossessed cars, old cell phone bills, old electric bills, collection accounts, debts associated with judgments, payday loans, medical bills, magazine subscriptions, NSF checks, overdrawn accounts and the like.

There are certain debts that are not discharged in bankruptcy because of public policy reasons, because of the nature of the debt, or because the debt was incurred through improper conduct. The most common types of this category of debts are certain tax claims, debts not listed on the bankruptcy schedules, debts for child support or alimony, debts for willful and malicious injuries to person or property, debts owed to governmental units for fines and penalties, most student loans, debts for personal injury caused by driving while intoxicated, debts owed to retirement plans, and certain debts for condominium and cooperative housing fees.

Some debts stemming from fraud or malicious conduct will be discharged unless the creditor brings a lawsuit against you during the pendency of your bankruptcy case and the bankruptcy court, after a trial on the issues, determines that the debt should not be discharged.

There are exceptions to nearly every dischargeability rule so it is important to not assume that a particular debt will, or will not, be discharged in bankruptcy without first consulting with an attorney familiar with bankruptcy law.

How Will Bankruptcy Affect My Secured Debts?

Generally speaking, you will not receive a discharge of a secured debts unless you give the property back to the creditor. A secured debt is one in which the creditor has a lien in your real or personal property. Common examples of secured debts are car loans and home mortgages. If you want to keep the car or home you have to continue to make the payments on the debt. If you decide you can't afford (or just don't want to) make the payments you can always give the property back to the creditor and eliminate your responsibility for the debt entirely. There are some options available in Chapter 13 bankruptcy whereby you can force a creditor to accept repayment of secured debts on terms favorable to you.

How Will Bankruptcy Affect My Credit?

To what extent and how your credit will be effected by filing of bankruptcy depends on a number of individual factors. If your credit is perfect there is no doubt that bankruptcy will have a negative affect on you. If your credit is already bad, or will be that way in the near future, filing bankruptcy may actually be one of the best things you could do and may actually improve your credit. Evidence of job and income stability and a reasonable debt load are typically more important considerations for potential creditors than the fact that your debts were discharged in a bankruptcy.

The bankruptcy drastically reduces or completely eliminates your debts. It also stabilizes your employment prospects and your home life by eliminating the endless stream of late notices, creditor calls, wage garnishments, repossessions, disconnect notices, and other legal actions. Many creditors view bankruptcy as meaning you can make more timely payments on new credit because you typically have no debt and you cannot file for another Chapter 7 bankruptcy for eight years.

In about two years you can probably rebuild your credit to the point that you won't be turned down for a major credit card or loan. Most creditors look for steady employment and a history of making payments after the bankruptcy. The decision of whether to extend you credit belongs to each particular lender but the fact that you filed bankruptcy, if properly explained, is less damaging than a history of unpaid accounts.

How Do I Rebuild My Credit After Bankruptcy?

Many people find that they are able to rebuild their credit after bankruptcy. In reviewing a credit application, creditors typically look for steady employment, a history of making and paying for purchases on credit, and the maintenance of a checking and savings account. Department stores and credit unions are a good place to begin rebuilding your credit. After bankruptcy it is important that you make prompt payments on your remaining debts, such as rent, utilities, automobile loans and home mortgages. Remember that establishing credit is usually accomplished one loan at a time by building up a history of consistent and timely payment.

Who is Going to Find Out I Filed Bankruptcy?

Bankruptcy filings are public records but usually only the creditors and co-debtors you have listed on the schedules receive notice of the bankruptcy proceeding.

Will I Lose My License Because of Filing Bankruptcy?

Bankruptcy law prohibits the government from denying, revoking, suspending or refusing to renew a license, permit, charter franchise or similar grant because of filing bankruptcy of bankruptcy.

Can I Lose My Job Because of Filing Bankruptcy?

The government and private employers are prohibited from discriminating with respect to employment solely because of bankruptcy, insolvency or the discharge of a debt.

Can I Still Get a Student Loan After I File Bankruptcy?

Bankruptcy prohibits the government and those making loans guaranteed or insured under a student loan program from denying a grant, loan, loan guarantee, or loan insurance to a person that is or has been a debtor in a bankruptcy case.

Can We Stop the Foreclosure on Our Home?

Absolutely. Filing for bankruptcy (if done prior to the sale date) will stop a foreclosure dead in its tracks and give you an opportunity to evaluate your options with an attorney. One of the options available to save your property is to file a Chapter 13 bankruptcy with a plan that provides for repayment of the missed payments over a reasonable period of time – typically 3 to 4 years. Bankruptcy is an extremely powerful tool that is often the best solution to a pending foreclosure.

Can We Stop Our Car and Other Possessions From Being Repossessed?

Yes. Bankruptcy can stop the repossession of your car, or other personal property, and provide you with an opportunity to catch up on missed payments during the pendency of your case.

What Can Be Done About Lawsuits and Judgments?

The filing of bankruptcy immediately stops any lawsuit from being filed or judgment being taken against you. If a law suit is already pending it can go no further. If judgment has already been entered it cannot be enforced. If a garnishment is pending it can be stopped. Depending on the circumstances you may be entirely relieved of your obligation to pay the judgment or have time in which to satisfy the judgment over a period of time. If there is a judgment lien on your home it can be removed if it impairs your homestead exemption.

Can I Reduce My Monthly Payments to Creditors?

A Chapter 7 Bankruptcy can significantly lower your monthly payments by discharging your obligation on certain debts. A Chapter 13 bankruptcy allows you to repay debts on terms which may be significantly more favorable than those provided for in the original loan.

Can My Co-signers Be Protected?

Under a Chapter 13 bankruptcy co-signers who are liable with the you on consumer debts are protected from the collection activities of creditors.

What About Student Loans?

Student loans are not discharged unless you can prove that repaying the student loan would create an undue hardship on you and your dependents. Undue hardship is difficult to establish but it can be done.

Should I Consider Taking Out a Debt Consolidation to Pay Debts?

No. Speak with a bankruptcy attorney before making the decision to take out a debt consolidation loan. If the debt consolidation loan is secured by your home it changes unsecured debt, which is typically dischargeable in bankruptcy, into secured debt which is typically not dischargeable in bankruptcy. Consolidation loans raise many other issues as well. Speak to an attorney first.

Do Both Husband and Wife Have to File Bankruptcy?

No. There are a number of circumstances in which only one spouse would file for bankruptcy. It is common for someone to file bankruptcy before they get married. It is also common for only one spouse to file for bankruptcy if all, or the majority, of the debt is in just one spouse's name.

Can I Keep Any Credit Cards?

Filing for bankruptcy does not disqualify one from keeping a credit card or applying for a new credit card. There are several factors that must be considered when deciding to keep a particular credit card including the balance owing on the card, what the credit card issuer is willing to accept and one's ability to repay the debt.

Do I Need an Attorney to File for Bankruptcy?

It is possible to file for bankruptcy without an attorney. Nevertheless, you should always consult with an attorney prior to making the decision to file for bankruptcy. Given the complexity of the new bankruptcy laws, and the potential for serious consequences if it prepared and filed incorrectly, it is very risky to file bankruptcy on one's own, or through a document preparer, except in the most basic of cases.

How Do I Remove Inaccurate Information From My Credit Report?

Under the Fair Credit Reporting Act, both the credit reporting agency and the creditor are required to correct inaccurate or incomplete information on a credit report. An important method of clearing up a credit record is to dispute negative items appearing in your credit file directly with the reporting agency. Unless the dispute is frivolous or irrelevant the credit reporting agency must investigate the matter and correct it or delete it if the information is inaccurate or cannot be verified.

You should dispute all items that are inaccurate, incomplete, or which do not tell the whole story. For example, a creditor may have orally agreed that you could make late payments but nevertheless reported the debt as delinquent or you may have paid late because the merchandise was defective and you didn't make any payments until the problem was resolved. The credit reporting industry has a policy that requires a creditor to respond to a dispute within 30 days. After the reinvestigation is complete you will be notified of the outcome. All future reports must contain the corrected information and must not contain the deleted information. You can also require the agency to notify past report users of the correction or deletion.

The Federal Trade Commission, Bureau of Consumer Protection has publications and an education program to help consumers reestablish credit and address credit problems. Contact the credit reporting agencies at:

Equifax Informations Service Center
Attn: Consumer Dept.
P.O. Box 740241
Atlanta, GA 30374
(888) 909-7304

Consumer Assistance
PO Box 2350
Chatsworth, CA 91313-2350
(888) 397-3742

Trans Union Consumer Relations
National Consumer Disclosure Center
PO Box 7000
North Olmstead, OH 44070
(312) 408-1400


Foreclosure is the process whereby real property (typically your home) is sold to satisfy an unpaid debt. The most common reason for foreclosure is the failure to make the payments on the mortgage but failure to pay other debts can also lead to foreclosure (i.e., tax liens, mechanics' liens, etc). The foreclosure process in Washington state takes a number of months during which time the process can be stalled and often stopped altogether. You have the right to continue living in your home throughout the foreclosure process. At the conclusion of the foreclosure process the homeowner's rights in the property are extinguished and ownership of the property is transferred to the party that buys at the foreclosure sale.

If you are late on your mortgage payments you should not just abandon the home. You should be proactive and investigate your options. You should act as quickly as possible after you default on your home loan. Do not procrastinate, hide your head in the sand and hope the problem will go away because that can make things worse and may effect your ability to pursue certain programs. You should speak with an attorney that is familiar with the foreclosure process to learn what options are available to save the home or what steps you can take to minimize the consequences of a foreclosure should you prefer to let the home go back to the bank.

If you are facing foreclosure your options depend on the current holder of your mortgage, the type of loan that you have and what your servicer is authorized to negotiate. Possible workout options include forbearance agreements, temporary interest rate reductions, recasting of missed payments, mediation pursuant to the Foreclosure Fairness Act, loan modifications, short-sales, deed-in-lieu, injunctive relief, etc. It often makes sense to file a Chapter 13 bankruptcy because it will immediately stop the foreclosure process and give you time to explore the various options that are available to you.

Loan Modification

Over the past couple of years, loan modifications have become the primary strategy for addressing home mortgage defaults. A loan modification is a written agreement between the lender (or servicer) and the homeowner which permanently changes one or more of the original terms of the mortgage. The modified loan might have lower payments, a reduced interest rate, extend the loan term (i.e., from 30 to 40 years), recast missed payments into principal, reduce the loan balance to the value of the home, etc. A permanent loan modification is appropriate when a homeowner has suffered a permanent change in circumstances which justifies the modification and it doesn't make sense for the lender to foreclose.

Getting approved for a modification, or other workout plan, can be a complicated process with confusing guidelines and can require a daunting amount of paperwork and supporting documentation. Some lenders and servicers have been extremely slow to respond to homeowner requests for assistance and often, inexplicably, require the homeowner to submit multiple applications containing the same information and supporting documentation.

Foreclosure Fairness Act

On July 22, 2011, Washington state Governor Christine Gregoire, signed into law the "Foreclosure Fairness Act" to help Washington state homeowners avoid foreclosure. The law establishes a foreclosure mediation program requiring a mortgage lender to meet face-to-face with the homeowner, and their attorney or housing counselor, in front of a neutral mediator to determine if the homeowner qualifies for a loan reinstatement, loan modification, loan restructuring, or some other workout plan that will cure the default on their home loan.

The foreclosure mediation program presently applies only to borrowers who are referred to the program by an attorney or housing counselor. The process is initiated when the attorney or housing counselor sends a notice to the Washington State Department of Commerce stating that mediation is appropriate for the homeowner. Within ten days of receiving the referral, the Department of Commerce must select a mediator (from an approved list) who is required to convene a mediation session within forty-five days (unless extended by agreement of the parties).The homeowner is entitled to be represented by an attorney or other advocate at the mediation session which must address the issues surrounding the foreclosure and possible resolutions.

Short Sale

This involves selling your home for less than is owed on the mortgage. It requires the approval of your mortgage holder and is a very arduous process for the homeowner because of the strict requirements imposed by lenders. There are real estate agents that specialize in dealing with the details necessary to obtain lender approval for a short sale. In my experience they rarely make sense.

Deed in Lieu of Foreclosure

It is sometimes possible to negotiate to have the lender accept your voluntary surrender of the property to avoid foreclosure. This is referred to as a "deed in lieu of foreclosure. The mortgage company will not accept a deed in lieu if there is a junior mortgage or other lien on the property. In that case a foreclosure would be necessary to clear title to the property.

Foreclosure Rescue and Loan Modification Scams

There are a number of fraudulent companies and individuals who prey on homeowners, particularly those in desperate situations, who are trying to save their home. Be very careful of Internet and television advertisements with false promises to save your home from the auction block. Foreclosure rescue schemes are out to steal your home from you. Loan modification scams are out to separate you from your hard earned money which you will need to pursue the legitimate and viable options available to you.

Tax Consequences of Forgiven Debt

When you borrow money from someone you do not need to report it as income because you have an obligation to repay it. If the lender later cancels or forgives the amount you borrowed it may be reportable as income to you and the lender may be required to report the amount of the canceled or forgiven debt to the IRS on a 1099-C, Cancellation of Debt. As always, there are certain exceptions to every rule so you should check with the IRS and be certain of the tax ramifications of your intended course of action before making any final decisions.

One exception is the Mortgage Debt Relief Act of 2007 currently allows taxpayers to exclude the income that is realized as a result of modification of the terms of their mortgage, or the foreclosure of a qualified principal residence. Currently, up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately) and applies to home mortgage debt forgiven in calendar years 2007 through 2012. Another exception to the general rule is if you are insolvent when the debt is canceled, some or all of the canceled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.

Debt discharged in bankruptcy is not a taxable event so, when in doubt, file for bankruptcy first. After the bankruptcy filing you can modify the loan, do a deed-in-lieu of foreclosure, short-sale, or whatever, without sweating over the tax implications.