Frequently Asked Questions
How will the new bankruptcy laws affect me?
Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which was enacted on April 20, 2005 and which will take effect on October 17, 2005, consumer debtors may find it more difficult to be eligible for protection under Chapter 7 of the Bankruptcy Code. Under the new law, a consumer debtor must first obtain certification from an approved nonprofit credit counseling agency within 180 days of the filing of the bankruptcy case. To obtain the certification, you must undergo, at a minimum, a briefing which has “outlined the opportunities for available credit counseling and assisted such individual in performing a related budget analysis.”
Second, you must satisfy a “Means Test” to determine eligibility for Chapter 7. Under the means test, Chapter 7 will be permitted only after a determination that you cannot repay a scheduled amount or percentage of your debts. Generally, after analyzing your income and expenses, if you are able to make a minimum payment of $100 per month over 60 months, then you are presumed to have failed the means test making you ineligible for Chapter 7. In such a case, your only other bankruptcy option is to file Chapter 13, which is a repayment plan. It is quite a complicated formula to determine whether a person satisfies the means test, and it will very likely require the assistance of an attorney.
Third, you will be required to have filed all income tax returns which have come due and provide the bankruptcy trustee with the most recent year’s federal tax return prior to the Meeting of Creditors. You must also give a copy to any creditor requesting it. A transcript may be provided instead of the actual return. Failure to provide the return or transcript will result in dismissal of your case unless you can show that the failure is due to circumstances beyond your control.
Fourth, before you can receive a discharge of your debts under Chapter 7, you will be required to complete a personal financial management course from an approved nonprofit budget and credit counseling agency. Essentially, this means that you will be required to undergo credit counseling twice, once in the form a briefing for which you will be required to obtain a certificate before you file your petition, and again in the form of a personal financial management course after you file so that you can then receive a discharge.
Fifth, compliance with the Statement of Intention. Under the present law, if you have a debt which is secured by collateral, such as a car, you may file a Statement of Intention which indicates that you intend to retain the car and continue to make the current monthly payments. You are not required to reaffirm the debt. Under the new law, the option of maintaining current payments is no longer available. You will be required either to reaffirm the debt, or redeem the collateral. Reaffirming the debt is a binding legal contract which you enter into after the filing of your bankruptcy case. If you fail to perform your duties under the new reaffirmation agreement, e.g., if you default on your payments, you will be liable for the balance due, notwithstanding your bankruptcy. In other words, under the new law, your bankruptcy filing will not protect you from any deficiency balance on a repossessed vehicle (or other personal property which is the subject of a security agreement), after you have entered into a post-filing reaffirmation agreement. Under the present law, where no reaffirmation agreement is required, if you default on your payments after your bankruptcy filing and your car is repossessed, you are still protected by your bankruptcy since the underlying debt was discharged. This is a significant protection which will be lost under the new law. The other option is redeeming the collateral. Redemption requires you to make a lump sum payment to the creditor based on the current fair market value of the collateral. This option will be impossible for most consumer debtors if the collateral is a vehicle, since most consumers will not be able to come up with the money to pay for the car all at once.
There are other important changes under the new law, and the above list only generally describes the most significant ones. It is clear, however, that obtaining a discharge of your debts under Chapter 7 of the new Bankruptcy Code will be far more difficult and will require you to perform of duties which are far more burdensome.
Who can find out about my debt?
Any prospective employers, landlords and other creditors. If you don’t pay your bills, you may receive a “bad credit rating”, which is a report on your finances. These reports are issued by credit reporting agencies who receive information about your debt from your creditors, and in turn make their report available to others.
Can my creditors pester me?
Creditors or bill collection agencies (companies that try to collect past due bills) cannot legally call you over and over again on the telephone. It is also against the law to threaten you with harm, or to contract you at your work after you have told them not to. In addition, the law says that if you write and ask them not to contact you at all, they must stop. Then, they can get in touch with you only to let you know that they are suing you. So, be sure to keep copies of all letters you write.
Creditors and collection agencies are not supposed to contact your employer, except to make sure that you are employed. And, they cannot send you anything that is meant to look like a legal document when it is not.
If you are bothered in any of these ways, you should get in touch with a consumer protection or law enforcement agency. Or you can ask a lawyer for help.
Can my property be taken to pay a debt?
Usually, a creditor must go to court and win a lawsuit against you before taking your property. However, let’s say you make a written promise to either pay you debt or give the creditor something you own. The item you promise to give is called the “security,” and the money you owe is called a “secured debt.” If you fail to pay a secured debt, the creditor usually can take the security.
Let’s say you borrow money to buy a car and the car is the security. If you fall behind on payments, the lender can repossess, of take back, the car without going to court. However, the car must be on public property when it is repossessed.
Even if the car is repossessed, you still might end up owing the lender money. For example, suppose you owe $8000 on the car when it is repossessed, and the lender gets only $7000 be selling the car at an auction. Then, you can be sued for the $1000 that the lender is out — plus any money spent to repossess the car and sell it.
Companies that repair and store items also can take property from you without going to court. For example, is a shop cleans your rug and you do not pick it up and pay for the cleaning. the shop can keep the rug and sell it after a period of time.
What happens if I am sued?
If you have a secured debt (see #7), the creditor can sue you for either the security or the amount of money it is worth, or both.
Beginning in 1991, if you are sued for $5000 or less, a creditor might decide to take you to small claims court. You cannot be represented by a lawyer in the court, but you can talk to one beforehand.
Lawsuit for larger amounts are filed in a higher court, where it is important to have a lawyer represent you.
In any event, do not ignore any court summons that you receive. This is a paper that says you are being sued. If you do not respond to the summons within a certain time. you automatically lose the case — and your property can be taken.
As soon as you receive a summons, you should consult a lawyer and get in touch with the lawyer hired by the person suing you can try to negotiate, or work out, a way to settle the dispute.
You can try to negotiate a settlement even after the suit is filed, but you should do so only if you have the first responded in writing to the summons.
What happens if I lose the lawsuit?
Suppose the lawsuit demanded that you return a secured item. Then, the creditor can get an order from the judge allowing a sheriff or marshal to take the item from you and give it to the creditor. Once this happens, your debt usually is canceled.
Maybe the suit demanded money and you did not pay the amount that the judge ordered you to pay. In this case, something you own can get attached, or taken. The property — such as a car or bank account — would be about the same value as the amount of your debt. A car, for example, will be sold, and the creditor would get the money it brings in. You may be able to keep certain items, however (see #7).
A judge also can order your employer to withhold up to 25 percent of you take-home pay to pay a debt. This is called a “garnishment of wages.”
Can I protect my property if I am sued?
If you lose the case, you also may lose some of your property. However, the law lets you claim that some property is exempt, which means that it cannot be taken from you.
When you receive a notice that your property is being attached, you have 10 days to deliver a “Claim of Exemption” form to the sheriff or marshal. This form describes the property and explains why it legally cannot be attached. Most sheriff, marshal and court clerk offices have these forms.
The creditor can either accept your claim or challenge it at a court hearing. At this hearing, you must prove that the property is exempt. If you do not go to the hearing, you automatically lose the exemption.
You cannot file a Claim of Exemption if your debt is for unpaid federal income taxes or for a necessity of life such as food, shelter or medical treatment. These debts must be paid.
However, among other things, you and your spouse together can claim exemptions for:
- Up to $50,000 equity or interest in the home you live in if single, up to $75,000 if married. If you are 65 or older, disabled or 55 or older with a low income, you can claim exemptions for up to $125,000.
- A $2,300 equity or interest in one or more cars.
- Up to $6,075 in tools and other items that you need for your work (or up to $12,150 for items used by both spouses who do the same work).
- 75 percent of your salary for the last 30 days or wages that have not yet been paid.
- Up to $6,075 worth of jewelry, heirlooms and works of art.
- Life insurance policies on which you can borrow up to $9,700.
In addition, you and your spouse each can claim exemptions for:
- Household furnishings and clothing that your family needs.
- A cemetery plot.
- All or part of retirement, disability and health insurance, workers’ compensation, welfare, unemployment, union and other benefits that are needed to support your family.
Can I get more time to pay my debt?
First, ask your creditors for the time you need. Or ask if you can make a series of small payments over a period of time. If any creditor agrees to one of these arrangements, write a letter to confirm the agreement. Be sure to keep a copy of the letter.
Or, you might try using the services of a credit and debt counseling agency, but be sure to shop carefully until you find one that you believe gives good advice. Consumer Credit Counselors, a non-profit organization sponsored by department stores and banks, often helps people work out plans with their creditors. Look in the white pages of your telephone directory to see if this group has an office in your area.
Be careful about getting a debt consolidation loan that is used to pay off debts. If the interest, the money that lenders charge for loans, is too high, you may end up with a bigger problem. If you do get a loan, however, make sure that all the financial statements that you give the lender are true and complete.
What do I do if my creditors won't give me more time?
You can file a “Chapter 13 debt repayment plan” in the nearest United States Bankruptcy Court. The repayment plan allows you to pay your debts over a period of time — usually three but sometimes five years. At the end of this time, all your debts are canceled– even if you have not paid them in full — as long as you tried hard to pay them.
Or you can file for bankruptcy, which also is called “Chapter 7.” This means you ask the bankruptcy court to cancel most of your debts because you don’t have enough money or property to pay them off.
To apply for a Chapter 13 plan or for bankruptcy, you must pay a filing fee in a bankruptcy court, either by yourself or with your spouse. If you are allowed to go ahead, the judge will appoint a trustee. If you have a Chapter 13 plan, this person collects your payments and pays your creditors. If you file for bankruptcy instead, the trustee sells any of your property that is not exempt (see #14) and distributes the money it brings in among your creditors. Once you have filed for Chapter 13 or bankruptcy, the creditors you had before you filed cannot attach your salary or other possessions.
What if you lose your job or have a long illness while you are paying off your debts through a Chapter 13 plan? You can switch from a Chapter 13 to bankruptcy at any time. You can file for bankruptcy only once in a six-year period. But you can file for a Chapter 13 plan as often as you need to. However you must have a good excuse if you fail to complete the plan.
What if I am billed for something I didn't buy?
Try to settle the problem as soon as possible. If you receive a bill for something that you did not agree to purchase, you should write the person or company that say you owe the debt. Also, write a company if you do not believe you received everything you are being asked to pay for. Be sure to keep copies of all letters you send.
If you can’t work things out on your own, try to find a consumer protection agency that handles the kind of problem you have. Look in the white pages of your telephone directory under “Consumer Complaint and Protection Coordinators.” Or call the State Department of Consumer Affairs for advice. You can hear recorded messages on some consumer questions by calling the department’s toll-free consumer information line at 1-800-344-9940.
You may also wish to consult a lawyer because most debts are based on a contract. This is a legally binding agreement that can be written or spoken. In any case, you should be sure to do something because you may find out that you do owe the debt. And you may end up with serious money or legal problems.
Can I be forced to pay someone else’s debt?
Yes, sometimes you can. For example, if your spouse obtains a necessity of life (such as food, clothing or medical care) and can not pay for it, you can be made to pay. This may even be true of a former spouse, as well, if you were married when your spouse got into debt.
In most cases, people under the age of 18 can get out of agreements to buy something. However, you are responsible for the debt if you co-sign a contract or loan agreement for someone under 18 or for anyone else. This means you promise to make the payments if the other person fails to live up to the agreement.
And if you co-sign an agreement for someone else and they file bankruptcy, they may not to have to pay the debt and you will. You also may have to pay certain debts, such as medical bills, for your minor child.
When should I use a Chapter 13?
You should consider a Chapter 13 plan if you can work out a way to pay off part of your debts over a period of time and still afford the reasonable cost of living.
The law says you can use a Chapter 13 plan if you have a steady income. This means you work for wages, own a small business or receive pension, social security or other benefits. You also must owe less than $922,975 in secured debts, such as a mortgage, and less than $307,675 in other debts.
If you qualify for Chapter 13, you and your lawyer must work out a plan for the court to approve. The plan must show how you intend to pay all of a reasonable part of your debts. Certain debts must be paid in full. These include secured debts, federal or state income taxes that you have owed for the past three years, and court, trustee and attorney fees involved in setting up and carrying out the plan.
How do I know if I should file for bankruptcy instead?
If you can’t work out any other reasonable way to pay your debts, you might consider bankruptcy. It allows an honest debtor to make a fresh start by having a court discharge, or cancel, most debts. So, bankruptcy is a way to get out of debt when you owe more money than you can be expected to pay in a reasonable amount of time.
The lay says that an employer can’t fire you or refuse to hire or promote you because you filed bankruptcy. However, bankruptcy can have a bad effect on your credit rating (see #2) for a long time. Also, bankruptcy may solve the problems you have now, but it won’t protect you if you can’t pay new bills
If you choose bankruptcy, you or your lawyer must file a number of forms and papers with the bankruptcy court. These include a list of your debts and property, plus information on your income and how you spend it. The court decides if you are better suited for Chapter 13 than bankruptcy. It can order you to have a Chapter 13 plan or dismiss your case.
Also, a judge can refuse to discharge all of some of your debts through bankruptcy. For example, you may not be allowed to have your debts canceled if you run up a lot of bills on purpose or borrow money just before filing.
Will bankruptcy remove all of my debts?
No. Bankruptcy does not cancel:
- Secured debts.
- Debts to creditors that you did not list on your bankruptcy forms.
- Most income taxes and tax penalties for the last three years.
- Most student loans.
- Child and spousal support.
- Any money that you owe as a result of being sued for drunken driving.
Your debts also will not be canceled if a creditor proves that you lied about how much money you have or tried to hide some of your property.
It the court and the creditor agree, you may choose to reaffirm a secured debt. This means that you decide to pay the debt and keep the security, even though bankruptcy would cancel the debt.
If I file for bankruptcy, can I keep any of my property?
If you property is exempt, it cannot be used to pay off debts. When you file for bankruptcy, you can choose between two sets of exemptions. One set is the same as the one you can use to protect your property from creditors in a lawsuit (see #8). Homeowners generally prefer this set, since it allows a much larger home equity exemption that the other set.
These are examples of this that you and your spouse together can keep if you use the second set of exemptions:
- A $18,675 interest in a home and/or burial plot. If you do not own either one, you can apply the $18,675 elsewhere to keep such non-exempt property as an income tax refund (plus an additional $1,000 when combined with CCP 703.140(b)(5) “wildcard” exemption).
- A $2,975 interest in one car or other motor vehicle.
- Any items worth up to $475 in each of these categories: household furnishings and goods, clothing, appliances, books, animals, crops and musical instruments.
- $1,225 in jewelry.
- $1,875 worth of books or tools that you need to earn a living.
- A life insurance policy up to $9,975 cash surrender value.
- Social security and veterans’ benefits, unemployment insurance money and pension and profit-sharing plans.