The decision to file or not to file for Bankruptcy as well the timing of any Bankruptcy filing involves many complex legal issues. We are not permitted to provide legal advice and recommend that you consult with an experienced bankruptcy attorney who will be able to advise you. If you decide to act as your own attorney you should do the necessary legal research to evaluate the specific issues presented by your individual situation and should be aware that the Bankruptcy Court will hold you to the same standards applied to licensed attorneys.
The purpose of this section is to give you an overview of the Bankruptcy process and it does not constitute legal advice.

Should I file for bankruptcy?

Whether to file for bankruptcy is a very personal decision. Some people do not have any assets over and above what the law allows them to keep, even if they do not pay their creditors. If this is true of you, then you don't need a bankruptcy in order to protect your assets.

Some people find it helpful to file a bankruptcy case anyway, because their financial situation is causing them emotional distress or depression, or because they are looking forward to a bright future and would like to free themselves of debt now and have their income and assets to themselves in the future. Also, some people may find that a bankruptcy is worth filing, even if they do lose some of their assets.

Considering Bankruptcy Checklist

If several of the following apply in your situation, you might consider bankruptcy:

Your wages have been garnished or your bank account has been attached
Most of your debts are unsecured debts like credit card bills, hospital or doctor's bills, etc.
Your total debt, not including your a car or house loan, is more than you could pay, even over five or more years
Collection agencies are calling you at home and/or at work
Your payments are more than 30 days behind on more than one bill
There are lawsuits pending against you
You have high medical bills not covered by insurance
You owe income taxes that you are unable to currently pay
You have few assets
You have little or no savings
You have had property repossessed (such as a vehicle)

People who have had their wages garnished can especially benefit from a bankruptcy because the bankruptcy will stop the garnishment and may even help you get some of the garnished money back.

General Concepts

1. What are the main purposes of bankruptcy?

Bankruptcy laws serve two main purposes. First, bankruptcy law gives creditors some payment on their debts if a debtor (the one who owes the debt) can afford to pay them. Second, bankruptcy law gives debtors a fresh start, by canceling many of their debts, through an order of the court called a discharge.

2. What are the different kinds of bankruptcy?

There are four types of bankruptcy available to individuals:

Chapter 7 (a liquidation-style case for individuals or businesses),
Chapter 13 (a payment plan or rehabilitation-style case for individuals with a regular source of income),
Chapter 12 (a payment plan or rehabilitation-style case for family farmers and fishermen), and
Chapter 11 (a more complex rehabilitation-style case used primarily by business debtors, but sometimes by individuals with substantial debts and asset).

The two most important types of cases for consumers are chapter 7 and chapter 13. Both provide for some possible payments to creditors, a discharge for debtors and supervision by a trustee. Chapter 7 involves surrendering some of your property (at least in theory) in return for a discharge of many of your debts. The trustee sells any non-exempt property and pays your creditors. In chapter 13, you keep your property but must commit to a three- to five-year repayment plan. You then obtain a discharge of most of the debts not paid in the plan.

In both types of bankruptcy, most creditors must stop efforts to collect debts after your case is filed. This protection is called the "automatic stay." In a chapter 7, this relief is often temporary.

3. What is the difference between chapter 7 and chapter 13?

Chapter 7: A Brief Overview

Chapter 7 is designed as a liquidation or sell-out type of bankruptcy. Under this model, debtors give up certain property that they own at the time they file the bankruptcy case, which is sold by a trustee. The trustee uses the proceeds of the sale to pay creditors. This is the way many cases proceed. In other cases, probably most cases, the debtor does not have any assets over and above what the law allows the debtor to keep. Thus, in most chapter 7 cases, the debtor does not give up any property. Still, we call chapter 7 cases liquidation cases.

About 90 days after a chapter 7 case is filed, most debtors get most of their debts discharged. This means the debts have gone away. Some debts do not go away, and must be paid after the case. Examples include past-due child support payments, some taxes and student loans. Debts for which the debtor has pledged collateral for the loan (such as cars, homes and household goods) also do not go away in a bankruptcy.

The bankruptcy case addresses only the debts the debtor has at the time of the bankruptcy case. Future debts must always be paid as usual. Debtors are allowed to keep the money that they earn after filing the bankruptcy case, as well as most other property that they obtain after the filing.

Chapter 13: A Brief Overview

Chapter 13 is very different. The model is one of pay out rather than sell out. Debtors pay some of their debts over time.

Debtors in chapter 13 usually keep all of their property, whether or not it is exempt, but they make regular payments on their debts out of the money that they earn after filing the bankruptcy case. The plan payments must total at least as much as creditors would have received if the debtor had just liquidated under chapter 7. The payments are made to a trustee, who distributes the payments to the creditors.

The payments are made in regular installments, according to a payment plan (called a chapter 13 plan) that the debtor proposes, usually with the help of an attorney. The plan lasts either until the debts are paid in full or until the end of a three- to five-year period. The debtor receives a discharge at the completion of the plan.

This was just an overview. More detail is provided throughout this FAQ.

4. Does a debtor have to "qualify" for bankruptcy? How will I know if I am eligible?

Chapter 7 Eligibility

Today's law allows debtors, for the most part, to choose the type of bankruptcy they want to file, though there are reasons a debtor might choose one chapter over another.

For example, a chapter 13 case allows a debtor to catch up on missed payments owed to creditors holding a security interest in collateral, such as a mortgage or auto lender, and therefore might be a better choice for some debtors. As long as the debtor's plan has been approved by the court and the debtor is maintaining payments to the trustee, the collateral will be protected from repossession.

For cases filed on or after October 17, 2005, access to chapter 7 will be more limited. Individual debtors with primarily consumer debts who want to file a case under chapter 7 will have their finances examined to determine if they can afford to pay creditors. If they can, based on a set formula know as the "means test," they will not be eligible to file a chapter 7.

If they want to file a bankruptcy, they will need to file a chapter 13. The "means test" is designed to force people who can afford to pay some of their creditors to do so rather than discharging all their debts in a chapter 7.

The means test compares the debtor's excess monthly income to the amount of unsecured debt to determine how much a debtor could repay to creditors if he were in a chapter 13. Because this calculation is hypothetical and does not necessarily reflect the debtor's true financial condition, a debtor who appears to be able to repay the minimum portion of his debts but who, in reality, cannot, may be permitted to stay in a chapter 7 case. Unfortunately, the means test is more complicated than we can explain well here.

Chapter 13 Eligibility

There are two principal requirements for eligibility in a chapter 13 cases. First, the debtor must have regular income, although this need not be from a job-regular benefit payments or rental income would qualify. Second, the debtor must not have debts over a certain amount. The debt limits are $922,975 in secured debt (like home mortgages and auto loans), and $307,675 in unsecured debt (like most credit card debt). These numbers are good through April 1, 2006, and go up every year.

5. How does bankruptcy help me in the short run?

By imposing an injunction against all collection efforts by creditors, which means creditors must stop calling, sending letters or suing you over your debts. This is called the automatic stay and is discussed in more detail below.

6. What is a discharge?

If a debt is discharged, the debtor no longer has an obligation to pay the debt and the creditor may not make any effort to compel the debtor to repay. However, if some other person (such as a relative or friend) also has an obligation to pay, their obligation is not discharged. In addition, if the debtor has property that is collateral for a loan, the creditor may still be able to repossess that collateral.

7. Do all debts get discharged?

No, not all debts will be discharged through the bankruptcy, even if a debtor has satisfactorily performed all of his duties in a case. First, a bankruptcy case only discharges debts that the debtor owed at the time the case was filed, not those incurred after the case was filed.

Debts that are not discharged include debts for certain taxes, certain unscheduled debts (creditors with debts not listed in your paperwork), alimony, maintenance or support debts, pre-petition fines or restitution, debts for injury or death caused by a debtor's use of drugs or alcohol, some government backed student loans and certain condo or co-op fees.

Other debts that may not be discharged include debts incurred through fraud or by willful or malicious actions of the debtor. If the creditor does not ask the court to rule on these debts, they will be discharged.

Bankruptcy Procedures

1. If I decide to file for bankruptcy, what do I have to do before I file?

Today, a debtor simply needs to carefully consider whether bankruptcy is the right choice for them, and then gather the paperwork we talk about later in this FAQ.

As of October 17, 2005, in order to be eligible to file bankruptcy, debtors will be required to receive credit counseling within the 180 days prior to filing. Specifically, the law requires debtors to receive, from an approved agency, a briefing outlining the opportunities for credit counseling and help with a budget analysis. This may be done alone or in a group, either in person, on the phone, or even on the Internet. If, due to an emergency, a debtor is unable to obtain credit counseling services from an approved agency during the 5-day period prior to filing, the requirement will be excused, but must be fulfilled within 30 days after filing.

Once it is available, a list of approved non-profit budget and credit counseling agencies can be found at the office of the United States Trustee or at the bankruptcy court Clerk's office.

2. What documents do I need to file in a chapter 7 case?

Today a debtor needs to file these forms, all of which are best prepared by an attorney, but are also available in any bankruptcy court:

the bankruptcy petition;
a list of creditors;
a schedule of assets and liabilities;
a schedule of current income and current expenditures; and
a statement of the debtor's financial affairs.

As of October 17, 2005, debtors will be required to file more paperwork. Failure to file these documents, or to be excused by the court from filing them, will result in an automatic dismissal of your case. As a result, it is more necessary than before to use an attorney to file your case. In cases filed on or after October 17, 2005, debtors must file:

the bankruptcy petition;
a list of creditors;
a schedule of assets and liabilities;
a schedule of current income and current expenditures;
a statement of the debtor's financial affairs;
a certificate from the attorney or bankruptcy petition preparer (if there is one) indicating that the debtor received a notice describing the different bankruptcy chapters and the services available from the credit counseling agencies as well as a statement specifying that anyone who knowingly or fraudulently conceals assets or makes a false statement under oath is subject to fine, imprisonment or both; (if no one assisted the debtor, then the debtor must file a certificate that such notice was received from the court and read by the debtor);
copies of all pay stubs received by the debtor within 60 days before filing;
a statement of the debtor's monthly net income itemized to show how it is calculated;
a statement disclosing a reasonably anticipated increase in income or expenditures over the following 12 months;
if the debtor has property that secures a debt, such as a car or home, a statement of intention with respect to treatment of the property in bankruptcy;
a certificate from the approved non-profit budget and credit counseling agency that describes the services provided to the debtor and a copy of the debt repayment plan, if any, developed by that agency;
a record of any interest that the debtor has in an individual retirement account; and,
an analysis of the means test.

If the debtor fails to file all of information noted above, with the exception of the last 4, within 45 days of filing the petition, the case will be automatically dismissed.

Your attorney will need certain documents from you to file these documents with the court, which are listed below.

Information to Take With You When Consulting a Bankruptcy Attorney

A copy of every bill or letter you have received from a collection agency,
A copy of any lawsuit or pleading you have received in a case in which you are involved,
Two pay stubs representing an average pay period. Include pay stubs for your spouse, even if they are not filing bankruptcy with you,
Deeds to real estate in which you have any (even a partial) interest. This includes real estate you are purchasing or that you already own,
The original or memorandum title for any cars, trucks, trailers, boats, motorcycles, mobile or motor homes you own or are purchasing, or other documents showing the value of your assets,
Appraisals of your home, jewelry, etc., if you have them,
Any policies of life insurance you have on your life, and/or the life of your spouse or children. Where possible, you should contact the agent who sold you the policy and find out if the policy has any "cash surrender value." If your policy has "cash surrender value," please provide your attorney with that value, and
Income Tax Returns filed in the previous two (2) years.

3. What will happen in my chapter 7 case after I file all these documents?

Chapter 7 cases are pretty simple for the most part. In most cases, you will attend one creditors' meeting and just wait for your discharge notice to come in the mail.

The creditors' meeting, which is also called a 341 meeting (named after the section of the bankruptcy law that requires the meeting), is run by your bankruptcy trustee, who will question you about all of the information contained in your bankruptcy documents.

In a simple case, the meeting will usually last just 5 minutes or so. While all creditors are invited to attend, very few actually do. Be sure to bring a form of identification to the meeting, as well as proof of your Social Security number (usually your Social Security card). The trustee may ask you to provide additional documentation during the meeting, and give you a few days to produce it.

The discharge notice will arrive in the mail about 60 days after you attend the creditors' meeting. This piece of paper is proof that most of your debts have been discharged. You should keep it in a safe place.

4. Are there additional documents and other requirements in a chapter 13 case? What is required in the chapter 13 plan?

If you are filing a chapter 13 case, rather than a chapter 7, in addition to the documents mentioned above, you must file a plan that describes how much you will pay your creditors and over what time period. Your plan must provide that you pay creditors at least what they could have received in chapter 7 liquidation case, which basically means creditors must receive payments equal to the value of your non-exempt assets.

In addition, the plan must provide that you contribute all of your "disposable income" to the plan. Disposable income is the income above what is necessary for the support of the debtor and family. However, in many cases that amount is determined by the means test formula.

The means test is a very complicated test, but essentially requires that you average your income over the past six months (from any source including regular gifts from family members), then deduct a series of allowed expenses, and see what is left to pay creditors. You will most likely need an attorney to complete this analysis.

The chapter 13 plan lasts either until the debts are paid in full or until the end of a three- to five-year period. (For certain low income debtors the maximum plan period without court approval is three years. For other debtors, creditors may be able to insist that the debtor pay a five-year plan).

Within 30 days of filing your petition, you must begin making payments under your plan. The payments are made to a trustee, who distributes the payments to the creditors.

Like in a chapter 7 case, after filing the bankruptcy petition, you will be required to attend a creditors' meeting (also known as a 341 meeting, named after the section of the bankruptcy law that requires the meeting). The meeting will be run by the chapter 13 trustee, who will question you about the paperwork you filed in your case. This creditors' meeting will last longer than a meeting in a chapter 7 case. The trustee will likely question you about your income and your expenses, and may also require additional documentation at the meeting.

Before the court will approve your plan, you must file all required tax returns due within the last four years. Prior to October 17, 2005, you can normally just give your prior tax returns to your chapter 13 trustee.

After completing payments under the plan and completing any financial counseling required, the debtor will receive a discharge of any debts not paid under the plan.

5. Must I produce tax returns before and after my bankruptcy?

Today, many trustees require tax returns for chapter 13 cases, and some also require them for chapter 7 cases. In most jurisdictions, it is enough to produce the past two tax returns, but this varies throughout the country.

For cases filed on or after October 17, 2005, you may be required to provide the trustee and/or any creditor with copies of any federal tax return that was filed for the year prior to filing. If you do not comply with this request, your bankruptcy case may be dismissed.

You will also be required to file with the bankruptcy court copies of any federal tax returns filed during the case.

Any taxing authority may request dismissal of a bankruptcy case if you fail to file all required tax returns.

6. Do all creditors have to be listed on bankruptcy schedules?

All of your debts have to be listed, with the name and address of the creditors. This is so creditors receive notice of the bankruptcy and get their fair share of any money that is paid to creditors. Sometimes debtors think that they should omit a creditor because they want to continue to pay the debt. This would violate the law, and it is unnecessary, because you can always choose to pay a debt voluntarily, even though the debt has been discharged and there is no legal obligation to make payment. However, creditors are prohibited from taking any action to collect discharged debts.

7. What should I do if I discover that I forgot to list a creditor in their bankruptcy schedules?

As soon as you realize that a creditor has been omitted, you should notify your attorney and provide him or her with all of the information necessary to complete the schedule (the amount of the debt, the type and value of any collateral, and the name and address of the creditor).

In some cases, failure to list a creditor will result in harm to the creditor, such as if the creditor missed an opportunity to participate in the bankruptcy and/or receive payments. If this happens, your attorney can advise you about what additional action, if any, is necessary.

If an omitted creditor demands payment of the debt, you should inform the creditor of the bankruptcy, as discussed below.

8. What should I do if a creditor demands payment of a debt after my case is filed?

Most efforts by a creditor to collect a pre-petition debt (one that is owed by you as of the filing for your case) or to obtain your property without the permission of the bankruptcy court are violations of the automatic stay.

A creditor who knowingly violates the automatic stay may be punished by the court and is liable to the debtor for harm caused. If a debt has not been listed on the schedules filed with the court, the creditor may not be on notice of the bankruptcy. Therefore, you should inform the creditor of your bankruptcy and request that the creditor stop the collection efforts.

If you are represented by an attorney, you should give the creditor your attorney's name and telephone number. If you are not represented by an attorney, you should give the creditor additional information about the case-the date of filing, the court in which the case was filed and the case number. If improper collection action continues, you should consult with an attorney, notify the trustee or seek protection from the court.

9. Is there anything I should know about the timing of my case?

Probably the most important thing you need to know is that once you have decided to file for bankruptcy, you need to stop using your credit cards. Anything that you charge knowing you will not pay the money back is fraud under the bankruptcy law and the debt will not be discharged. Also, if you charge luxury goods within two or three months of the filing, or take out cash advances right before your case, the debt is presumed to be non-dischargeable even if you did not know you were filing for bankruptcy when you charged the items or took out the cash advances. In many cases, it is better to wait a while after these transactions before filing for bankruptcy.

More Details on the Bankruptcy Process

1. How much property can I keep after filing?

Chapter 7

Every state has "exemption" laws that allows people to keep some assets, free from creditors' claims, even if they do not pay their creditors. The idea is that it would do little good to take all of a person's assets because he or she would not have a place to live, clothes to wear or a way to get to work. Most exemptions allow a person to keep clothes, household goods, a car of some limited value, tools of trade, as well as other property. Some exemptions allow the debtor to keep some equity in a house.

In addition, bankruptcy law contains federal exemptions, which can be used when a person is in bankruptcy, at least in some states. Those laws list the type and amount of property you can keep. These federal exemptions are available to debtors who live in Arkansas, Connecticut, the District of Columbia, Hawaii, Massachusetts, Michigan, Minnesota, New Jersey, New Mexico, Pennsylvania, Rhode Island, Texas, Vermont, Washington and Wisconsin. People who live in these states can essentially choose the state or the federal scheme, based upon the assets the person has. One scheme may be great for one person, but horrible for another.

As we described above, the debtor must give all non-exempt assets (the ones that do not fit within the exemptions) to the bankruptcy trustee. However, for many people the amount of the exemptions exceeds the value of the property they own, and thus they do not need to surrender any property. Despite the exemptions, you always need to take care of secured creditors. Their claims are not affected by your exemptions.

Chapter 13

Under chapter 13, you will not have to surrender any property. Remember that you can instead essentially buy back the non-exempt assets by paying at least this value to your unsecured creditors under your chapter 13 plan. You may, however, have to give up property that is collateral for a debt.

2. What is the difference between secured creditors and unsecured creditors?

A "secured creditor" is a creditor that has a lien on property. A lien is an interest in property that a creditor can use to satisfy a debt. Some liens are voluntary, for example a mortgage or a security interest in a car. Other liens are involuntary, for example a lien on property resulting from unpaid taxes or a judgment.

An "unsecured creditor" is a creditor who has no interest in any particular property of the debtor. Outside of bankruptcy, there are only two ways an unsecured creditor can get paid. First, the debtor can pay voluntarily. This is the way most debts are paid. The other way unsecured creditors get paid is much harder. They must sue the debtor, get a judgment against the debtor, and ask the sheriff to seize some property of the debtor and sell it to satisfy the creditor's claim.

Even in bankruptcy, the secured creditor has greater protection because its lien on the debtor's property is usually honored. The bankruptcy does not remove it.

3. Does a bankruptcy case automatically remove liens-such as mortgages-against a debtor's property?

No, not at all. Secured creditors get extraordinary rights in a bankruptcy case. Bankruptcy may temporarily delay secured creditors, but most voluntary liens (those granted by agreement on houses, cars and household goods) have to be satisfied one way or another.

However, the debtor has some opportunities to remove or avoid involuntary liens and a small category of voluntary liens. "Avoid" is the term used in the Bankruptcy Code for removing liens.

Chapter 7

Debtors can avoid some involuntary liens (except for liens securing alimony or support obligations) that are on property that the debtor could exempt. Debtors can also avoid some voluntary liens on property that the debtor could exempt. For these voluntary liens, debtors can only remove liens on certain household goods, "tools of the trade" and professionally prescribed health aids. Moreover, the term "household goods" includes only certain types of items (for example, clothing, 1 radio, 1 television, 1 VCR).

Chapter 13

The chapter 13 debtor has the additional ability to remove liens by completing payments under the plan. In some cases, the plan will reduce the amount that the debtor must pay or change the time period over which the debt must be paid. In the case of homes and cars (at least as of October 17, 2005), the ability to change the payment terms is very limited.

4. How does the automatic stay work, to stop foreclosures, repossessions or other collection efforts from taking place?

Just by filing a bankruptcy petition, an "automatic stay" against all collection efforts is put in place. This is a powerful tool of bankruptcy, and one of the law's primary protections for debtors. Most creditors have to stop all efforts to collect from a bankruptcy debtor. Creditors must stop making calls to the debtor, stop sending letters, stop all lawsuits to collect, etc.

The automatic stay also stops foreclosures, repossessions or sales of property from going forward. If you don't pay your house payments, however, the creditor will have the right to continue the foreclosure once the dust settles. Thus, the benefits of the automatic stay are often temporary when the creditor is a secured creditor.

There are a number of exceptions to the automatic stay. For example, attempts to establish or collect alimony or support obligations are not stayed, nor are criminal suits or suits by governmental agencies to protect the public.

Moreover, the automatic stay does not arise if you are filing a case within a year of filing two other bankruptcy cases that were dismissed because you did not file all the paperwork or otherwise follow through in your cases. If this happens, the stay is not automatic, but you can still request the protection of a stay.

Just remember that as to secured creditors, the automatic stay is temporary. It means only that creditors must ask the court before taking action. No bankruptcy filing allows a debtor to keep property that is security for a loan without making payments on the loan. If the debtor is behind on the payments and the property is of insufficient value to satisfy the debt, or there is risk of loss of the property, a secured creditor may obtain court permission to seize and sell the property.

In addition, in a chapter 7 case, as soon as the bankruptcy case is closed, the automatic stay terminates, and the creditor can proceed with foreclosure or repossession if the debtor is behind on the payments.

People with problems with secured debt are frequently better off filing a chapter 13 case than a chapter 7 case because the chapter 13 will allow the debtor to pay off the past-due secured debt over time.

In chapter 13, the automatic stay also protects people other than the debtor who are "co-debtors." Co-debtors are people who also have an obligation to pay the same debt as the debtor. That includes people who have guaranteed the debt for the debtor.

5. What must I do to prevent foreclosures and repossessions?

Chapter 7

Soon after filing the petition, the debtor must declare whether he will return the property, purchase the property or enter into a reaffirmation agreement with the creditor. However, if the debtor does not do one of these things, the stay will terminate and the creditor may take the property.

Chapter 13

Depending upon the plan, you may be able to keep property despite secured claims. You can modify some obligations, for example by stretching out payments and reducing interest rates (where interest rates have fallen since you created the obligation).

6. How does a chapter 13 case help me with my secured debts?

Generally, all loans secured by the debtor's residence must be paid in full in a chapter 13. The good thing is that the case gives the debtor time to pay this off in the plan, unlike a chapter 7. Overdue payments must be repaid over the course of the plan, along with the regular monthly payments. Practically speaking, this means that a chapter 13 debtor who was behind on the mortgage payment will be making a larger mortgage payment to make up for the past due debt.

Today, other collateral securing loans are treated differently. For cases filed before October 17, 2005, a debtor must only pay for the "value" of the collateral, rather than the amount of the loan, through the plan. For example, if the debtor's car is worth $5,000 but the loan on the car is $6,000, the debtor's plan must pay the car lender $5,000. The remaining $1,000 (the difference between the value of the car and the loan amount) will receive the same treatment and payments as any other unsecured debt. This analysis also applies to other debts incurred to purchase personal property and secured by the property.

For cases filed on or after October 17, 2005, the treatment of collateral other than home mortgages will change significantly. Cars purchased for the personal use of the debtor within 910 days (approximately 2Â½ years) prior to the filing of the bankruptcy are required to be paid in full through the bankruptcy. Any other secured property of value that was purchased in the year before filing must also be paid in full. However, the debtor still may be able to reduce the interest rate on secured debts.

7. What can be done if a debtor falls behind in payments after filing a chapter 13 case?

Debtors who have unexpected financial problems in a chapter 13 case should immediately consult with their attorneys. It is often possible to deal with changed circumstances by amending the chapter 13 plan. Also, it is sometimes possible to add to the plan debts that were incurred after the chapter 13 case is filed, so that they will be discharged with other debts at the completion of the plan.

8. What is a reaffirmation agreement and how does it work?

A reaffirmation agreement is essentially an agreement providing that the debtor will pay a creditor's debt even though the debt would otherwise be discharged in bankruptcy. In theory, the debt can be renegotiated but most reaffirmation agreements simply require the debtor to pay the debt as originally agreed.

While unsecured debts can be reaffirmed, this is usually not a good idea. Thus, most reaffirmation agreements deal with secured debts and are entered into to keep the creditor from repossessing or foreclosing on the property. A valid reaffirmation agreement puts the debtor under a legal obligation to repay the otherwise dischargeable debt. If the debtor defaults on the payments required under the reaffirmation agreement, the creditor can repossess or foreclose on property and seek a personal judgment against the debtor.

In order for a reaffirmation to be valid, the parties must sign the agreement and file it with the court before the debtor receives a discharge. In addition, either the debtor's attorney or the court must determine that the agreement does not impose an "undue hardship" on the debtor's family. There are other requirements as well.

A reaffirmation agreement is voluntary. Neither the debtor nor the creditor must agree to it. In addition, the debtor usually has some time to rescind the agreement.

If the parties do not comply with any of the requirements for a reaffirmation, the agreement may not be binding. In that event, the debtor would have no personal obligation to make payments under the agreement.

As a rule, debtors should think very carefully about whether to reaffirm debt as this limits the debtor's bankruptcy discharge.

9. Can a debtor make payments on a discharged debt without a reaffirmation agreement?

Yes. The debtor can make a voluntary payment of the debt. This often happens, for example, with debts to family members or friends. However, the key to this kind of payment is that it must be entirely voluntary; the debtor has no legal obligation to pay a discharged debt, and the creditors can take no action to pressure or persuade the debtor into making the payments.

10. Can I obtain bankruptcy protection again if have filed a bankruptcy in the past and am now falling behind in payments again?

You may not be able file a bankruptcy petition if a prior case was dismissed because of your failure to abide by a court order. In addition, you cannot file again if, within the last six months, you requested dismissal of the prior case after a creditor sought relief from the automatic stay. The new law also imposes the following rules on debtors who have filed prior bankruptcy cases, effective October 17, 2005.

Chapter 7

A debtor can file another chapter 7 case, but there might not be a right to discharge. If the prior bankruptcy was in chapter 7, the debtor filed the case less than eight years ago (six years up to October 17, 2005) and obtained a discharge, he cannot obtain a discharge in a case filed today.

Finally, having filed a recent previous bankruptcy may affect the automatic stay. This is true in some situations where the prior case had been dismissed or a creditor had obtained relief from the automatic stay.

Chapter 13

A debtor can file another chapter 13 case, but there might not be a right to discharge. On or after October 17, 2005, if the prior bankruptcy was in chapter 7, the debtor filed less than four years ago and obtained a discharge, he cannot obtain a discharge in a case filed today. If the prior bankruptcy was in chapter 13, the debtor filed the petition less than two years ago, and obtained a discharge, he cannot obtain a discharge in a chapter 13 filed today.

The End of Your Bankruptcy Case

1. Once a chapter 7 or chapter 13 case is completed, are there other requirements before a debtor receives a discharge?

After October 17, 2005, all debtors (with limited exceptions) must complete an instructional course in personal financial management from an approved agency prior to receiving a discharge.

In a chapter 13 case, a debtor who owes a domestic support obligation must also certify to the court that all amounts due have been paid.

2. How do I know when my bankruptcy case is completed, and I am no longer in bankruptcy?

At the conclusion of an individual's bankruptcy case, the court enters an order closing the case, and a copy of this order is sent to the debtor. Unless the trustee has assets to distribute to creditors, case closing takes place fairly quickly in chapter 7 cases. In chapter 13, the case will not be closed until after the debtor finishes making payments under the plan. The case will also be closed if the court dismisses the case.

Bankruptcy and Your Future Relationship with Credit

1. How does bankruptcy affect my credit rating?

Issuers of credit (like banks and credit card companies) are free to consider the fact of a bankruptcy filing in deciding whether to extend credit. Credit reports may list bankruptcy filings for up to 10 years. Some issuers of credit may decide to extend credit regardless of a bankruptcy. Others may be willing to extend credit only after a number of years have passed, or until the bankruptcy filing is no longer on the credit report. After bankruptcy, it may be difficult to rent an apartment.

Lately, some creditors have been offering credit to bankruptcy debtors more freely than other people in financial difficulty because the debtor cannot file another bankruptcy for many years to come. In that sense, the debtor is a good credit risk. For the most part though, for obvious reasons, it is best for bankruptcy debtors to avoid credit as much as possible after bankruptcy.

2. What can debtors do to reestablish their credit after filing bankruptcy?

In some jurisdictions there may be debtor education programs offered in connection with chapter 13 cases that can help debtors reestablish credit. Where such programs are not available, debtors may be able to obtain a "secured" credit card, which requires that the debtor deposit funds with the credit card issuer. This provides the opportunity to show responsible use of credit, which is a major factor in any lender's credit decisions. Other major factors are length of employment and length of residency.

3. How can debtors obtain a copy of their credit reports and correct any errors?

All persons are entitled to one free creditor report per year, from each of the three approved credit agencies. Additionally, whenever a debtor's application for credit is denied, the credit issuer is required to give any debtor who requests one a copy of any credit report that was used in making the decision.

If there are errors in a report, such as an incorrect Social Security number or a debt that is not owed, the debtor should make a request for correction in writing to the bureau, enclosing copies of any documents that would establish the correct facts.

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