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Bankruptcy Basics

Disclaimer: The information contained in this FAQ is provided for general information purposes only and is not intended to be a legal opinion, legal advice or a complete discussion of the issues related to the area of consumer bankruptcy. Every individual's factual situation is different and you should seek independent legal advice from an attorney familiar with the laws of your state or locality regarding specific information.

What is Bankruptcy?

To put it bluntly, bankruptcy is a legal way to avoid paying people what you owe them. Bankruptcy has biblical antecedents, however. Look at the "Jubile Year" and the forgiveness of debt in Leviticus 25. (For a more detailed discussion, see the article "The Bible and Bankruptcy.") Since there is no Jubilee Year today, in many situations bankruptcy is the only way that you can keep your home from foreclosure, your car from repossession, your possessions from auction and creditors from making your life miserable.

When a person is discharged in bankruptcy, he or she is relieved from liability for most debts incurred before the bankruptcy was filed and protected from future collection of those debts. The purpose of bankruptcy is to give you a "fresh start," and the bankruptcy code is interpreted by the Courts to give effect to these words.

What Kinds of Bankruptcy Are There?

There are two main types of consumer bankruptcy: Chapter 7 and Chapter 13. (The other two chapters, Chapter 11 and Chapter 12, apply to corporations and people who don't qualify for a Chapter 13, and to family farmers.)

Chapter 7 is what most people think of when they think of bankruptcy. All of the debtor's assets—with the exception of exempt items or assets with no equity—can be sold and the proceeds are distributed among the creditors. A typical Chapter 7 bankruptcy will last about four months from filing to discharge.

Chapter 13 provides a way for you to pay back your creditors, in whole or in part, usually over five years. You must have less than $307,675 in unsecured debt (such as credit cards and doctor's bills) and less than $922,975 in secured debt (such as mortgages and car loans) to qualify for Chapter 13. Due to the Court-approved payment plan, a Chapter 13 bankruptcy will usually last five years, although attorney involvement usually ends after about four months. In many cases, no interest will be paid on the amounts being repaid through the Chapter 13 Plan, you pay your unsecured creditors only pennies on the dollar, and you keep all of your assets.

What's Involved in Filing for Bankruptcy?

A bankruptcy is started by filing a Petition and detailed Schedules with the U.S. Bankruptcy Court. The requirements for these documents vary depending on the Chapter under which the bankruptcy is filed and local practice, but involve detailed forms and schedules which are not available at the Bankruptcy Court. The filing package averages about 25 pages for a typical Chapter 7 and 30 pages for a typical Chapter 13. Filing fees are $299 for a Chapter 7 and $274 for a Chapter 13.

You are also required to take a short (5 to 90 minute) credit counseling course before you file. The course is available by telephone and over the internet. We generally recommend not taking the course until you have spoken with an attorney.

Will I Lose Everything If I File?

A person who files for bankruptcy may exempt certain items from the bankruptcy. In most cases, this lets you keep your home, your car, your furniture, your household items, your retirement and most, if not all, of what you have. Georgia and South Carolina have different allowances for exemptions. You also can keep assets that have no equity, such as a car that's worth less than is owed on it, or a house where the mortgage is higher than the net property value. Even if there is a small amount of equity, you can normally keep the asset. 

Can All My Debts Be Wiped Out?

Most of your general unsecured debt—credit cards, personal loans, doctor and hospital bills, attorney's fees, utility bills—can be wiped out. If you surrender an asset securing a loan, any loan balance can be wiped out as well. There are certain debts that cannot be discharged. Federal and state taxes incurred less than three years before the date of filing (although you may get more time to pay them back in a Chapter 13), student loans (except where you can show "undue hardship"), and domestic support obligations are the big ones.

If you're behind on a mortgage, car payment, taxes or domestic support obligation, a Chapter 13 can give you up to five years to pay these arrearages back, usually without additional interest.

What Happens Once I File?

Once the case is filed, the Court issues an Automatic Stay. This stops all legal proceedings against you. Foreclosures, repossessions and garnishments are halted, creditors cannot call or write you, and lawsuits against you can not be filed or pursued if they are pending.

The Meeting of Creditors, or 341 Meeting, is usually scheduled 3–6 weeks after your case is filed. Not to worry—it sounds much worse than it is. A better name for this hearing would be the Trustee's Meeting, since creditors very rarely appear. Most 341's last 3-5 minutes, and consist of the Trustee verifying you are who you say you are,  asking a series of standard questions, and going into detail about anything unusual that appears on your Schedules.

In a Chapter 7, once the Meeting of Creditors has been held, nothing usually happens until the discharge is entered and your case is closed about 3 months later. In a Chapter 13 case, a second hearing, the Confirmation Hearing, is held two to three months after the case is filed. The purpose of this hearing is for the Court to approve the Chapter 13 Plan. In many cases, it is not necessary for you to attend this hearing; your lawyer makes all the arrangements with the Chapter 13 Trustee.

What About the New Bankruptcy Law?

On October 17, 2005, the newly adopted Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") took effect. This 500 page bill makes significant changes to the bankruptcy law. Among the many changes are:

• A Means Test, which applies a formula, based on your average income for the six months before you file for bankruptcy and IRS-determined expenses, to determine whether you will be eligible to file for Chapter 7. The means test applies only to the poor and middle class, and only to those with mostly non-business debt.
• A requirement that you obtain a certificate of credit counseling from an approved credit counselor no more than 180 days before your case is filed, and take a credit education course after your case is filed before you can receive a discharge.
• Requirements that consumer bankruptcy attorneys who represent the poor and middle class call themselves "Debt Relief Agencies," and provide written Consultation Agreements and lengthy disclosure notices.
• Certain types of debt that were dischargeable in Chapter 13 cases, such as unfiled taxes, intentional torts and fraud, and certain domestic support obligations, no longer can be discharged.
• Extensive document filing requirements (such as filing with the Court pay stubs for the previous 60 days and tax returns or transcripts).
• Restrictions on repeat filers.
• Restrictions on your ability to "cram down" secured debt, so that you only have to pay the value of the item instead of the full balance.
• Requirements that domestic support obligations be kept current during a Chapter 13 case, and be current to receive a discharge.

Are Different Creditors Treated Differently?

Creditors are broken down into three main classes: priority, secured and unsecured. Priority creditors are those creditors which are given special (and priority) treatment under the law for collection of the money owed them. They are paid first. Some examples of priority creditors are the IRS and people owed domestic support obligations (such as alimony and child support). Secured Creditors have next call. These are creditors who have a security interest or lien in or on your property, such as a bank holding a mortgage on your home or a finance company holding a lien on your car. Most of the time, secured creditors will be paid arrearages they are owed, and regular payments must be kept current. Everyone else is an Unsecured Creditor. Credit cards, loans from banks and individuals, medical bills, some taxes that are old enough, and general claims for money are all unsecured debt. In most cases, unsecured creditors get nothing or only a portion of what they are owed. You may also terminate Executory Contracts, such as leases for an apartment, car or equipment, in a bankruptcy.

Can I Keep My House and Car?

If you want to keep a car, truck, home or business equipment that is collateral for a loan, you need to keep your payments current. If the payments are current and there's no equity (or you can exempt the equity), you can rest assured you will be able to keep these items.

If your payments are behind, you can pay the arrearage through a Chapter 13 Plan and re-start the payments after you file.

Where Can I Get More Information?

The Administrative Office of the Courts puts out a rather detailed brochure, Bankruptcy Basics, that is available on-line by clicking here. It is in PDF format, and you will need to download the reader, if you don't already have it installed, by clicking here.

Bankruptcy is a complex and confusing area of the law. You need legal advice you can count on to guide you through the process. We are experienced in helping you through your financial difficulties. If you have any questions, please call us at (706) 724-4000 to set up an appointment.

We are required to inform you under BAPCPA that we are a federally-designated debt relief agency, proudly helping people file for bankruptcy since 1979.