Debt & Bankruptcy

Bankruptcy has been around for thousands of years. It is discussed in the Old Testament, (see Deuteronomy 15, and Leviticus 25), and has existed in one form or another throughout all of recorded history. The basic idea goes like this: When honest people get into trouble, and if there is no real chance that they can pay off their debts on time, it is better to let them wipe out those debts (or to give them a realistic chance of paying them) than it is to let creditors take away all of their belonging and hound them forever. It is not only better for the debtors; it is also better for the creditors.

Our present Bankruptcy system is based on a set of federal laws, which deal with any debt situation that you can imagine. The Bankruptcy laws actually contain the words “breathing room” and “fresh start,” as ways of describing what the laws are supposed to do for you. The minute a bankruptcy case is filed, a court order is automatically issued which stops all of your creditors from bothering you. That's the “breathing room.” From that point on, they have to go through Bankruptcy Court to do anything at all. They can not do anything that might even look like they are trying to take money or property away from you. For a list of examples, see the FAQ on What kinds of collection actions does bankruptcy stop?

Most of the same laws and rules apply to both chapters, but there are some important differences. A few of the most important differences will be discussed here.

Chapter 7 is what is often called “straight bankruptcy” or “liquidation.” In a nutshell, you walk away from your debts, and surrender any secured property to the creditor, unless you can work out a deal with the creditor to keep paying for that property after your case is over. More than 90% of all people get to keep everything. The Chapter 7 process is almost always over within four or five months.

Chapter 13 is often called “wage earner,” even though you don't actually have to earn wages. As long as you have regular income from any source, whether it is from a paycheck, or from Social Security, or a pension plan, or something else, you can file a Chapter 13. In a nutshell, this is a budget process, where we figure out how much money you have coming in, and how much you have to spend for things like rent, utilities, food, gas, insurance, etc. Whatever is left over is paid into your Chapter 13 case, and your debts are paid out of that over the next 3 to 5 years. Secured debts are paid up to the value of the property, (with interest, but usually at a much lower monthly rate than you are paying now), and unsecured debts get whatever is leftover. Even if those debts are not paid in full, they are discharged when the case completes successfully. (For further explanation, see the FAQ on the Difference between Secured and Unsecured Debt.)

There are some debts that cannot be discharged in a Chapter 7, but can be discharged in a Chapter 13 after part of the debt is paid. This is the government's way of persuading you to pay back some of your debts, if at all possible. Some examples of this are debts based on fraud, theft, intentional injuries, and certain divorce debts.

It depends on exactly what you are trying to achieve, and on how your numbers work out. Sometimes the decision is not yours to make. If we subtract your normal monthly living expenses from your normal monthly income and get zero, or less, then you are looking at a Chapter 7 because there is simply no money left to pay into a Chapter 13 case. On the other hand, if there is some money left over after we do that calculation, then you are looking at a Chapter 13. You could file a Chapter 7, but your case would either be dismissed or you would be forced back into a Chapter 13.

But there are times when it could go either way. Every case has to be analyzed on its own before the decision can be made. Two people might have the exact same income, the same level of debt, and similar assets, and one might end up in a Chapter 7, and the other in a Chapter 13. Here is one example of how this could happen: Imagine that you are making payments on a new car that you bought last year. You are current on your car payments, but behind on many other debts. If you filed a Chapter 7, and if the finance company is willing to reaffirm the debt with you, those car payments would remain the same, and that would be counted as one of your legitimate monthly expenses. The calculation of income minus expenses would put you into Chapter 7 territory. On the other hand, if you surrendered that car to the creditor, it would no longer be an expense, and your calculation would no longer put you into a Chapter 7. On top of all of that, in the exact same situation you would be able to file a Chapter 13, keep the car, and lower your monthly payments through the Chapter 13 process, and possibly save enough money to save some other secured item that you would otherwise have to surrender. Obviously, in this situation, we would want to carefully consider all of your options, and all of your personal goals.

Another way to look at it is that in a Chapter 13 case you have an absolute right to keep secured property (such as your home, car(s), furniture, appliances, etc.), as long as you can make certain payments, but in a Chapter 7 you are risking losing some or all of those things. If you want to save the house or the car, and if we can make your numbers work, then you want to file a Chapter 13. If all you have is unsecured debt (medical bills, credit card debt, etc.) Then you want to file a Chapter 7, if the numbers will permit it.

For most people, it doesn't cost as much as you might think. The filing fee for a Chapter 7 is $200.00 and for a Chapter 13 it's $185.00. That money goes to the court clerk, and it must be paid in full before the attorney can take any fees. In a true emergency, the case can be filed before the filing fee is paid, but I usually insist that it be paid upfront.

The attorney fee for a Chapter 7 is usually between $600.00 and $800.00, depending on how complicated the case is, and how much money you pay upfront. If the case is going to be very complicated, the fee might be higher. Most attorneys demand that the full attorney fee be paid in advance, but I can usually make payment arrangements with you. The only way to pay the attorney fee in a Chapter 7 is direct to the attorney.

The attorney fee for the standard Chapter 13 case is $1,500.00. In most cases, all or part of that can be paid through the Chapter 13 Plan. In other words, I will be treated just like one of your creditors, getting a little bit of money every month. Also, in most cases, I give you an extra $50.00 of credit for every hundred dollars that you pay upfront. For instance, if you pay the $185.00 filing fee, and then pay the first $200.00 of the attorney fee, you get an extra $100.00 worth of credit, and the remaining $1,200.00 is paid through the Plan. If you pay $1,000.00 in advance, you get another $500.00 of credit, and the fee is paid in full. Of course, most people are not able to do that, but there are times when you can save yourself some money by paying upfront.

Chapter 11 is like a Chapter 13 for rich people and big companies, except that it is more complicated and much more expensive. The filing fee alone is $800.00. Attorney fees start at $5,000.00, and for companies like Enron, the attorney and accountant fees can be in the millions. I do not take Chapter 11 cases, because I prefer to help the little guy.

Chapter 12 is a special thing that has been set up to allow family farmers to reorganize their debts, with special rules that allow them to keep property and equipment that they would lose in a Chapter 13. It also keeps them from having to spend as much money as a Chapter 11 would cost. It was supposed to be temporary, but Congress has renewed it several times, and it will probably be around for many years to come.

Practically anything you can think of, except for criminal trials. The list is too long to spell out in full, but here are some examples: Foreclosures, evictions, garnishments, lawsuits, tax liens or penalties, harassing letters and phone calls, and anything else that might in any way be interpreted as an attempt to collect on a civil debt. Depending on your exact situation, some of those debts may still have to be dealt with after filing, but at least you will now have some control over the process. There are certain debts that can almost never be discharged, such as criminal fines, certain taxes, and child support. But even those debts can be spread out over time in a Chapter 13 plan.

It all depends on your exact circumstances. Many people can be helped by credit counseling, but be careful who you go to. The only credit counselors that I recommend are Consumer Credit Counsel Service; a nationwide network of nonprofit centers. They have several locations in Memphis, and one in West Memphis, Arkansas. Your church or neighborhood group may also have a good credit counseling program.

In my opinion, most people will not be helped by a debt consolidation service. In fact, there are many people who have paid for debt consolidation services, only to end up owing a lot more money than they did when they started. You have probably seen a lot of commercials advertising “nonprofit” services, promising to negotiate your debts with all of your creditors and to solve all of your problems. Many of those “nonprofit” services were created by credit card companies and finance companies, and most of their counselors are not properly trained. None of them can offer the absolute results that federal bankruptcy law does. On top of that, there are certain creditors who absolutely refuse to work with consolidation services. They don't have that option in bankruptcy, where creditors have to follow the same rules as everyone else.

The first thing to do is to sit down write out a budget, which is actually the first thing that I do when you come in to see me. I usually take about two hours with you, but if you do it yourself the process should take a few days. If you have access to a computer, there are programs such as Quicken that do a very good job of setting up and tracking a budget. Or someone at the public library or your bank or credit union or church may have a computer program or a set of forms that you can copy.

All you really need to set up your budget is a pencil and some paper. Try to guess how much money you will have coming in over the next year or so, including earned income, tax refunds, and regular payments from disability, retirement, unemployment, etc., and any other source. Then make your best guess about how much money you are going to have to spend for household expenses such as rent or mortgage, car payment(s), food (both groceries and eating out), utilities, phone (home phone, cell phone, pagers, etc.), cable or satellite service, Internet service, laundry, taxes, insurance, school books, tuition, daycare, prescriptions and medical expenses that are not covered by insurance, and anything else that you have to spend money on. Be sure to include everything that you actually spend money on, even alcohol and tobacco. But also remember that you are making a budget, and the main idea is to keep your expenses down.

Set it all up on a monthly basis. (There are four and one-third [4.333] weeks in an average month; 52 weeks divided by 12 months = 4.333.) Then, subtract your average monthly living expenses (not including your debts) from your monthly income. If there is not anything left over, then you have a problem. Either your expenses have to be reduced, or your income has to increase, or both.
If there is some money left over, then make a plan for using that extra money to pay your other creditors. It is not easy to decide who gets paid first, but I like to pay the smaller bills first. That way, you can get rid of one or two creditors pretty soon, and actually see some progress. You should also give priority to the creditors that charge the highest interest rates, or to those who are threatening to sue you or have already sued you. Those are the bills that can grow the fastest, so you will be getting the most out of your money by paying them first.

If you can get a second job, or a job paying more money, do it. You might be amazed at how much difference a few hundred dollars per month can make.

You may want to consider borrowing money from family or friends. If you are sure that you can pay them back, and pay back all of your other debts over the next few years, then do it. If you have equity in your home and can borrow against that, do it. Just be sure that you don't end up with two house notes that you cant pay.
Most of all, don't dig a deeper hole by borrowing more money than you can payback. Be especially careful about borrowing money from your retirement plan. The money that is already in there is yours to keep forever, but if you borrow some of it and then file bankruptcy, you may never get it back into your retirement account.
You might consider credit counseling or debt consolidation, but read the warnings in the FAQ right above this one. If you expect to have more money coming in soon, you should call your creditors directly, and explain the situation to them. If you call the creditors before they start calling you about missed payments, then they are more likely to work with you.
Bankruptcy is a very serious step, and it should not be done casually. There is almost nothing worse to have on your credit record. On the other hand, if its the right thing to do, there is no sense in putting off the relief until later.

Home mortgages get special treatment in bankruptcy. The mortgage company gets extra protection, but the debtor also has certain special rights. In a Chapter 13 you have the absolute right to keep the house if you can do these two things: (1) Keep paying your regular house note (not including late fees) on time every month; and (2) pay back the full arrearage (the amount that you are behind at the time of filing), plus interest, over the next 3 to 5 years.

If you are filing a Chapter 7 and want to keep the house, the mortgage company has to agree to it first. Usually, they will, if you are current on your house payments, or maybe only one or two payments behind. The farther behind you are, the less likely they are to agree to it. If you file a Chapter 7 hoping that the mortgage company will reaffirm, but they don't, then you will lose the house.
If you want to surrender the house (or any other secured property), you have the absolute right to do that in both Chapter 7 and in Chapter 13. In a Chapter 7, you would also walk away from any debt which you might still owe on the house. (See section on Repossessions and Foreclosures for more discussion about what happens to the property and to the debt.) In a Chapter 13, you might still end up owing some money to the mortgage company, but it would no longer be a secured debt; it would become a general unsecured debt. (See FAQ on the Difference between Secured and Unsecured Debt.)

One of the best things about Chapter 13 is that you can usually reduce your payments and still keep your property. For instance, let's say you have a car that is worth $10,000.00. Your car note is $500.00 per month at 20% interest. We can always lower the interest rate down to at most 15%, and best of all, we can lower the monthly payment to $250.00. (This is just one example. No two cases are ever the same.) The same thing applies to furniture, appliances, electronics, and any other secured property, except for houses.

There are certain things that you get to keep, no matter what happens. We call these things “exemptions,” because they are exempt from collection as long as you list them as part of your bankruptcy filing. An individual gets to keep up to $4,000.00 worth of property, and a married couple keeps $8,000.00. You also get to keep all of your clothes, suitcases, family bible, school books, any money that has already been paid into a pension plan or retirement account, as well as many other things.

As a practical matter, the only things that might be taken away from you are things that might be sold for enough money to cover the cost of selling them. For instance, nobody is going to bother with trying to sell your small appliances, your old VCR, your family photos, and most of your personal property. More than 90% of bankruptcy filers get to keep everything that they own. If you are in a Chapter 13, and if you are paying 100% to all creditors, then you will not lose anything unless you want to voluntarily give it back.
There are times when you will have no choice but to give certain things back to creditors, but if you can make certain payments over time you will always get to keep your property. If you are one of the rare people who has a lot of valuable property, such as stocks, bonds, antique furniture, artwork, cars, etc., and if you are filing Chapter 7, then yes, there is a good chance that you will lose some of your things.

In both Chapter 7 and Chapter 13 you have the absolute right to give any secured property back to the creditor. That may or may not wipe out the debt completely, but if there is any remaining debt it is no longer a secured debt; it becomes a general unsecured debt. (See FAQ on the Difference between Secured and Unsecured Debt for more explanation. Also, see the section on Repossessions and Foreclosures for discussion of what happens to the property and to the debt.)

This can get complicated, but assuming that the property was lost, stolen, or destroyed and that whatever happened was beyond your control, that debt changes from a secured debt to a general unsecured debt. (See FAQ on the Difference between Secured and Unsecured Debt.) If you sold it or pawned it without the creditors' permission, you could be forced to pay them back as if you still had it.

The bankruptcy process is by far the quickest, easiest, and cheapest way to get rid of a problem like that. A creditor is required to file a claim for any debt and must be ready to prove that the money is really owed. If the creditor does not file a claim within the time limit (even if the debt is legitimate), then the debt is wiped out (“discharged”) as soon as the case completes successfully. If they do file a claim, then we will file an objection to that claim. If he cannot prove that the debt exists, then his claim is denied, and again, that debt is discharged in full when your case completes successfully. Without the bankruptcy process, the only other way to get rid of this problem would be to have a trial in state court, which could cost you more than the amount of the alleged debt.

The law was recently changed to allow the credit reporting agencies to keep that notation on your report for as long as 10 years.

The Trustee is usually the most important person in your case. He or she can be your best friend in one situation, and your worst enemy in another situation. The judge only looks at your case if something unusual comes up, but the Trustee is involved in every step of the process. He reads everything that we file, and we have to get his permission before we do anything at all. The Trustee presides over the Meeting of Creditors, which is the one court hearing that absolutely everyone attends. It is his job to make sure that both debtors and creditors are treated fairly. If something unusual comes up, the first thing the judge will want to know is whether the Trustee has any opinions or concerns. The Trustee's word is not necessarily law, but it usually ends up that way.

Most of the time the answer is yes, but there are two exceptions. You can only file a Chapter 7 once every six years. If you have filed more than two Chapter 13 cases within the past few years, there is a chance that your last case was dismissed “with prejudice.” That means that you cannot file a new case for six months after your last was dismissed.

Other than those two things, there is nothing to stop you from filing again. If you filed a Chapter 13 case recently, you can still file a new Chapter 7, as long as your Chapter 13 case is no longer active. And vice-versa. If you have filed a Chapter 7 recently, that does not keep you from filing a new Chapter 13 case.

You can only have one case open at a time. It is possible for you and your spouse to have separate cases going at the same time, but it is usually better for both spouses to file together. If only one of you has an active bankruptcy case, sometimes the best thing to do is to dismiss that case and file a new one jointly.

The short answer is “no.” Many people do it alone, but they will never know if they got all of the relief that they could. You can bet that all of your creditors will have attorneys who know every law and every rule. They will use their knowledge to help their clients as much as possible, and they will look you in the eye and smile while they are doing it. There is absolutely nothing illegal about them doing that. They are just doing their job. This is exactly why you should hire an attorney if there is any chance that one of your creditors is going to argue about anything.

This is a very complicated question, but we only have so much space for an answer. In a nutshell, if a claim is secured, that creditor has a right to take something away from you if you don't pay them on time. The most common examples of secured claims are home mortgages, car notes, and furniture, appliances, and electronics that were bought on time.

Those are what we call “purchase money” secured claims because the money that was borrowed was used to buy those goods directly. There is also a separate category called “non-purchase money” secured claims. This happens when you use something that you already own as collateral on a new loan. In bankruptcy, we can often turn a non-purchase money claim into a general unsecured claim. That can sometimes make a big difference in your case, so be sure to tell us if you have borrowed money and signed a piece of paper listing certain items that you own. (This does not apply to refinancing a home, or to a second mortgage or home equity loan. Those almost always get paid in full, with interest.)

A creditor with a secured claim gets special treatment in bankruptcy. The bankruptcy process puts you in a much better position than you would have been in otherwise, but a secured creditor still has the right to take that property away from you if you don't pay them. The good news is that you can usually lower the payments, lower the interest rate, and/or reduce the amount that you owe them.

In a Chapter 13 (“wage earner”) you have the absolute right to keep secured property, as long as you can make certain payments. (For an example of how the payments might work, see FAQ Will I lose my home? and/or Will I lose all of my things?)

In a Chapter 7 you can often keep certain secured property, but the creditor has to agree to it first. (One other rare option is discussed below. Also remember that we are only talking about secured property now. Over 90% of all debtors get to keep all of their other personal belongings in a Chapter 7, and 99% of Chapter 13 debtors get to keep all of their personal belongings.)

The most common way to keep secured property in a Chapter 7 is by “reaffirmation.” Both you and the creditor sign an agreement which essentially says that you agree to keep paying them as if you had never filed bankruptcy and that if you miss any payments they still have the right to take the property away from you. Again, both sides have to agree on this. You don't have to do it if you don't want to, and the creditor can refuse to do it and insist on taking the property away from you. This applies to all types of secured claims, including home mortgages. Most creditors are willing to reaffirm if you are current on the payments, or if you can catch up immediately. The farther behind you are, the less likely they are to agree to it.

The other rare option for keeping secured property is called “redemption” or “redeeming.” According to federal bankruptcy law, in a Chapter 7 if the debtor can pay the creditor a lump sum of what the property is worth, regardless of what he actually owes, then he can keep it. For example: lets say that you have a car that is worth $5,000.00, but you owe $8,000.00 on it. You can pay $5,000.00 to that creditor, keep the car, and walk away from the rest of the debt. Of course, this is rare because most people in bankruptcy can not come up with that kind of money. But you might be able to borrow the money from family or friends, or instead of a car we might be talking about a few hundred dollars worth of furniture, and you might be able to handle that.

If you have an item of secured property that you don't want to keep, you have the absolute right to give it up in a Chapter 7 case, (or at the beginning of a Chapter 13 case). If you do, that debt is no longer secured; it becomes a general unsecured debt. In a Chapter 7 case, any debt that remains after surrendering the property would be erased. In a Chapter 13 case, the remaining debt would be thrown into the pool of general unsecured debt, to be paid without interest at whatever rate is set for payment to unsecured creditors, which could be anywhere from zero to 100%, depending on many other factors.

A creditor has an unsecured claim (or “general unsecured” claim) if they have a right to collect money from you, but they don't have any special rights to any of your property. The most common examples of unsecured debts are medical bills, most credit cards, most personal loans, and in a Chapter 13 case, any debt that exceeds the value of the property. Using the same example from two paragraphs up, in a Chapter 13 case if you have a car that is worth $5,000.00, and you owe a total of $8,000.00 on it, that creditors claim would be split into two separate claims. You would make secured payments with interest on only the first $5,000.00. The other $3,000.00 is thrown into the pool of general unsecured debt, along with the medical bills and credit card debts.

In a Chapter 7 case, unsecured debts are almost always completely wiped out. In a Chapter 13 (“wage earner”) case, unsecured creditors might be paid 100%, or nothing, or anywhere in between, depending on your particular circumstances. If the case completes successfully, all debts to unsecured creditors are completely wiped out, even if they were paid less than 100%.

Think of a priority debt as falling in between secured and unsecured. The creditor does not have any special right to any of your property, but the bankruptcy laws give them special rights. There is a long list of possible priority claims, but the most commons ones are child support, taxes, and any debt owed to a governmental agency, like income taxes, property taxes, and overpaid benefits.

In a Chapter 13 case, priority debts have to be paid in full, unless the creditor agrees to only take partial payment. For instance, if you are way behind on child support payments, you will have to make arrangements to make the ongoing payments every month, but Juvenile Court may agree to let you pay only part of the arrearage, as long as you understand that you will still have to pay the rest of it after your Chapter 13 case is over. You do not have to pay interest on priority claims.

In the long run, a Chapter 7 will not have much effect on most priority debts. Those creditors will be temporarily stopped from pursuing you, but not for long. Those debts will not be discharged, and they will still have to be paid in full.

Yes. The minute your bankruptcy case is filed the IRS becomes just like any other creditor. They have to stop all collection efforts, and they cannot charge you any more interest or penalties. (But any penalties that were added to your tax debt before filing the bankruptcy case remain in place.)

Not all IRS debts get priority treatment. The laws that control whether income tax debts are classified as priority or as general unsecured are far too complicated to discuss here, but it is safe to say that all federal tax debts that were less than three years old at the time of filing will get priority treatment. If you filed proper tax returns, and if the tax debts are more than three years old, then most of the time those will be treated as general unsecured claims.

As discussed in more detail in the FAQ just before this one, a priority debt like this has to be paid in full. A Chapter 7 will get rid of unsecured tax debts, but will not have any effect on priority tax debts.

You probably can, especially if you have a good reason. For instance, in a Chapter 13 if you owe money to a doctor or a dentist, and you need to keep seeing that doctor, you can arrange for him to be paid just like a priority creditor would be paid. He would not get any interest, but he would be paid in full over time (assuming you can afford to do that).

In a Chapter 7 you can reaffirm any debt, as long as both the debtor and the creditor are willing. In a reaffirmation, you sign a written agreement to keep paying that debt, even if it is unsecured and could have been completely discharged. In fact, you don't even have to do that. Even if the debt is discharged, you can voluntarily pay it after the case is closed. But without a signed reaffirmation agreement, the creditor cannot do anything to force you to pay, so if you want to keep that particular creditor happy, you might want to consider proposing to reaffirm that debt.

No; not as long as your business makes money. You will probably be asked to show your tax returns for the past few years, and other basic profit and loss information that will prove that your business does make money. Even if it does not make money, or if you do not have a good chance of starting to make money in the near future, they would not make you close the business. You would simply not be allowed to use that as a source of income in a Chapter 13 (“wage earner”) case. In extreme cases, assets of the business might have to be surrendered.

The most awkward thing about being self-employed is making your Chapter 13 Plan payments directly. Self-employed people are accustomed to making all of their own decisions about what bills to pay, and when to pay them, so maybe it's understandable that they choose to skip this month's Plan payment while planning to catch up next month.

But the Trustee doesn't look at it that way. He watches self-paying Plans very carefully because he knows that those are the cases that fail more often than anything else. If payments are missed, or if they are too irregular, he will quickly file a motion to dismiss your case, especially if the mortgage payments fall behind. The Trustees motions are always granted, unless you can catch up on all of your missed payments, or unless you get a job with a paycheck that your Plan payment can be deducted from.

Yes; every debt of every kind must be listed, including leases, loans, or notes that you have cosigned for someone else, and even debts that you honestly believe that you do not owe, but someone else is claiming that you do. Not only is it the law, and not only can you be charged with bankruptcy fraud (a federal crime) in extreme cases, but it is also the right thing for you to do for yourself. For whatever reason, too many people fail to list one creditor or another, and it almost always ends up costing them more money and aggravation in the long run. Please, please, please, don't think that you are doing yourself or anyone else any favors by leaving someone out. It just makes it harder for me to help you.

There are one or two exceptions to this. If you have cosigned a loan or a note for someone else, and if they are really making the payments, then you still have to list it, but you don't have to set payments in a Chapter 13. If there is someone that claims that you owe them money, but you really don't owe them anything, you might not get in trouble for leaving them out, but as I said earlier, it is still the best thing for you to do. The bankruptcy court is by far the best, fastest, and cheapest way to get rid of a disputed debt.

Yes, as long as they haven't sold it at auction yet. But it might cost you a few hundred extra dollars, so if you think the repo man is out looking for your car, and if you are probably going to file a bankruptcy anyway, it might be better to go ahead and file. That will stop the repo man, and it might save you a lot of money, too.

If its too late, and the car has already been taken out of your driveway, and if it has not been sold yet, you can get the car back in a Chapter 13. You have to be able to make normal Chapter 13 car payments (which are almost always smaller than the payments that you were making before filing. See Will I lose all of my things? for an example of how the car payments might work.) You usually also have to pay $300.00 or $400.00 in repossession fees and wait anywhere from one week to a couple of months before getting it back. I can usually get the car back to you in one week, and lately, I have had some good luck getting the car back without having to pay the repo fees. But I wouldn't count on that. That's why it is better to avoid this situation than taking the chance of having to deal with the hassle and expense of a repossession. (For more information, see the separate section on Repossession and Foreclosure.)

In a Chapter 7 you cannot get the car back without the creditors' permission. The only way that most creditors are going to agree to give the car back is if you can catch up on the payments right away. But if you could do that, you probably wouldn't be in this situation in the first place. A Chapter 7 will stop the repo man temporarily, but it won't take long for the creditor to get the court's permission to take the car anyway. The only definite way to save a car is in a Chapter 13, unless you can find a way to pay the value of the car in one lump sum. There is a new finance company that will loan you the money to do that, but their rules are very strict, so there is no guarantee that you can get one of those loans. I would not count on that.

Most of the time these are treated like taxes. These debts cannot be discharged, and in a Chapter 13 they have to be paid in full. In some situations, the student loans might not be paid in full in the Chapter 13 case. If that happens, you still have to pay the rest of that debt after the case is closed.

Criminal fines and restitution cannot be discharged in a Chapter 7, but you can make payment arrangements in a Chapter 13. Also, some part of those fines might actually be court costs and not fines. Court costs can be discharged, while fines and restitution cannot.

In a Chapter 7 there is usually nothing that you can do about these kinds of debts. The only exception is if you have any extreme hardship situation, such as a permanent crippling total disability, or a disease that will be fatal within a few years. In other words, if there is no real chance that you will ever be able to pay the debt anyway, then there is a chance that you can get a “hardship discharge.”

That depends on exactly where those tickets came from. If they are parking tickets or anything that is not a moving violation, they can be discharged. If it has to do with a charge of driving while intoxicated or under the influence of drugs, it is not dischargeable. There is a broad range of possibilities in between those two extremes which must be dealt with on a case-by-case basis.

Yes. As long as we get the case filed before the foreclosure sale is finished, the foreclosure is stopped, even if they don't know that we have filed it. In an extreme emergency, we don't even have to file everything; just a basic petition and a list of all of your creditors. We can file the rest later.

But waiting until the last minute is not a good idea. Any little thing that goes wrong could stop us from getting to the courthouse on time. It could be car trouble, or a power failure, or an illness in the family. And once the auctioneer's hammer goes down on the foreclosure sale, the house is gone. It is practically impossible to undo a foreclosure once its over, even if the mortgage company or their attorney made a serious mistake in the process. Don't take that chance.

Both Chapter 7 and Chapter 13 will stop a foreclosure, but if you want to keep the house you need to file a Chapter 13, because you have the absolute right to keep the house if you can make the payments. If you have reached the point of foreclosure, it is extremely unlikely that the mortgage company will let you reaffirm the debt in a Chapter 7. For more discussion of this subject, go to the separate page on Repossessions and Foreclosures.

No. When you bought the house and signed the mortgage papers, you gave the mortgage company the right to do two things if the payments were not made: (1) take the house away; and (2) collect money from you.

Filing a quit claim deed, (giving the house to someone else), does not have any effect at all on the mortgage company's rights to do those two things. All you have done is given away whatever ownership interest you had in the house. The mortgage company still has the right to foreclose on the property, and to collect any unpaid money from you.

Most of the time, yes. But it's not something that you should worry about. A lot of my new clients say that they don't want the boss to know what they are doing, but most of them soon realize that they were worried about nothing. In the first place, most employers who have been in business for any length of time dealing with things like bankruptcies and garnishments and child support every day. While it might seem like a big deal to you, it's just another day at work for them.

Second, the law prohibits employers from firing you or punishing you in any way for filing bankruptcy. Most employers know that. Finally, in a Chapter 13 case, you have no choice but to set up a payroll deduction, unless your only income is from self-employment, retirement benefits, or government benefits. (But if you were in one of those categories you wouldn't be asking this question.)

Probably not, unless you have some kind of business relationship with them, or if one of you owes money to the other. Unless the news media have some other reason to be interested in you, the only place it will ever be published is in the Memphis Daily News, along with the hundreds of other cases that have been filed that week.

Just like the question right above this one, most of the time you are making mountains out of molehills if you spend any time worrying about it. There were almost 28,000 bankruptcy cases filed this district in 2002, well over 20,000 for each of the past several years. It is highly likely that several people that you know have filed bankruptcy before, and that practically everybody knows at least one person who has filed before. Think about it. You probably know someone who has filed. Do you think any less of them? Do you ever think about it at all?

Bankruptcy is not something to be ashamed of. Contrary to what you may have heard from some politicians and a bunch of big-mouthed know-it-alls, the vast majority of bankruptcies are filed by people who have gone through a major life-changing event that was beyond their control, such as divorce, or a medical crisis, or losing a job. Bankruptcy is simply an organized way for a civilized society to deal with one of its most common problems.

I firmly believe that our bankruptcy system is one of the main reasons that our nation's economy has grown so steadily for the past 50 years. Average people and small businesses get a chance to start over fresh, and creditors don't spend all of their time and money trying to collect money that they will never get.

There may be a few people with very sensitive jobs that might actually have a reason to be embarrassed. For instance, a politician, or a news reporter, or someone in the public eye, might attract more attention than most of us. But there are many politicians and public figures who have filed bankruptcy, as well as several wealthy people and even doctors, lawyers, and accountants. Even if they do get some attention, people forget pretty quickly.

The definition of “debt consolidation” depends on who it is saying those words. It either means Chapter 13 bankruptcy or service that makes arrangements with your creditors to pay your debts for you.

There are private debt consolidation services popping up all over the place. In my opinion, most of them can not do what they claim to be able to. For more discussion about private debt consolidation service, see the FAQ Should I go to a credit counselor or a debt consolidation service?

If you see a TV commercial or an advertisement from a lawyer that mentions “debt consolidation,” they are really talking about Chapter 13, or “wage earner.” They use the words “debt consolidation” because they know that some people are afraid of bankruptcy, and they want you to think that they might not be talking about bankruptcy. If the ad mentions federal law or stopping foreclosures or garnishments, they are really talking about Chapter 13. For more discussion about Chapter 13, see the FAQ What is the difference between Chapter 7 and Chapter 13?

Nobody really knows. The bankruptcy system is not perfect. No system is perfect. But it has worked very well for creditors and debtors alike for many years. Credit card companies and other lenders are making more money than ever, but they are also giving more money than ever to politicians, trying to get them to pass new laws that make it harder for average people to file bankruptcy. Everybody outside of the credit industry agrees that the proposed changes are bad for everybody, including the creditors. Even most creditors will tell you that.

But they still keep pushing for it. Congress has tried to push the changes through every year for the past several years. They got it through one time, but President Clinton vetoed it. It was just about to come up for a vote again when the terrorists attacked New York and Washington, D.C. That almost certainly would have passed, and there is no doubt that President Bush would have signed it into law. He has promised to sign any new bankruptcy bill that Congress gives him.

Some people say that Congress has tried and failed so many times that they will finally give up. I doubt that, but I hope I'm wrong. If the changes are passed, they won't become law for 6 months. That will give us a little bit of time to prepare.

The main thrust of the new laws is to make it more difficult and expensive for you to file bankruptcy. You will have to go through a credit counseling process, which in my opinion will almost always be a waste of time and money. You will have to pay the full amount of some of your debts, which for many people will not be possible. That will take away your reason for filing in the first place. There will be several other changes, but they are all along these same lines.

The real purpose of most of the changes is to discourage you from filing bankruptcy. The end result will be that more people will be stuck in the cycle of poverty, with no way out. Creditors can and will hound you until every cent is paid, plus interest. They won't rest until they take every little thing of value away from you.

The funny thing is that this is actually bad for the creditors. They will spend more and more time and money going after less and less money. Many of them will reach a point where they would actually be better off letting it go, but they wont be able to stop themselves. Why? Because that's just the way they are built. After all, they are just enforcing their rights, and who is to say where they should stop?

The end result will be bad for everyone. There will be fewer productive citizens because they will be busy dodging the repo man. There will be fewer people starting new businesses because the risk of failure will be too great. This is not just my opinion. Get on the Internet, or go to the library and read the business and financial magazines. If you have Internet access, here is a good place to start: http://www.abiworld.org. The American Bankruptcy Institute (“ABI”) is a nationwide organization of bankruptcy experts, including economists, bankruptcy judges, bankers, and other lenders, debtors lawyers, creditors lawyers, and many other financial experts. Their web site itself may not be very interesting to you, but it has links to articles from everyone who has any interest in bankruptcy.

It depends on the nature of the lawsuit. Most civil suits are based on negligence or breach of contract. In those cases, bankruptcy can do a lot for you. In a Chapter 7, you can stop the lawsuit completely, or if someone has already taken a judgment against you, you can erase the judgment and any liens that have been placed on your property because of the judgment.

Its a little more complicated in a Chapter 13, but most contract or negligence lawsuits can be stopped or cut short, at least temporarily. Sometimes the lawsuit will go forward anyway, and sometimes you can settle it faster because the suit is not worth as much anymore. Any judgment that has already been taken against you is treated as a general unsecured debt unless they have taken a lien on your house or other property. But even those liens can usually be wiped out in bankruptcy.

This does not apply to most divorce judgments, or to lawsuits based on fraud, criminal activity, or injuries resulting from accidents involving drugs or alcohol. There are some debts that can be discharged in a Chapter 13, but not in a Chapter 7.

There will probably be very little effect on your lawsuit. The attorney who represents you in the lawsuit will need to get permission from the Bankruptcy Court before continuing, but that is a very simple procedure. I have done it several times. If your share of the settlement (after paying fees and expenses) is more than $7,500.00, then you may have to turn some of it over to the Trustee to pay your bills, which is probably what you were going to do with it anyway.

It all depends on the timing. If the money comes in before your creditors take action (such as foreclosure, eviction, repossession, or taking a judgment against you in a lawsuit), then there is no reason to file bankruptcy. Or maybe you can persuade your creditors to wait until the money comes in. But don't settle your case for less than its worth just to keep a creditor away. You can always file a Chapter7 or Chapter 13 to stop the creditors long enough to get the settlement that you deserve.

It depends on your exact circumstances, but most of the time it is better for both spouses to file together. It doesn't cost any more, and it usually prevents more problems down the road. Many married couples think that they can “save” part of their credit rating by only having one of them file. There are times when that can work, but most of the time a bankruptcy by one spouse will be reflected on the other spouse's credit record. Also, if you have been married for more than a year or two, chances are you have debts in common, so even if those debts are discharged as to you, the creditor will still have the right to collect from your wife or husband.

What's even worse is that after you have been married for several years, your credit records tend to get “married” together, too. Even if you know for a fact that you are the only person who signed that credit card application, and you are the only person who ever used that credit card, there will be times when the creditors computer tells them that both of you are responsible for that debt. You will be in the impossible position of having to prove a negative. You can win that argument in the long run, but with bankruptcy, you can cut the whole process off in no time.

Without a doubt, bankruptcy is the worst thing that you can have on your credit record. A bankruptcy filing can stay on your credit report for as long as 10 years. Especially in the beginning, it will be harder to get credit, and when you do get the credit you may have to make a larger down payment and pay a higher rate of interest.

Even with all of that, there is a bright side. The bankruptcy will remove many (but not all) of the negative notations on your credit report. It can also prevent things like judgments and foreclosures that would also hurt your credit for years to come. Also, you are always allowed to add comments to your own credit report. For instance, you could insert a note explaining the circumstances that lead you to bankruptcy, or if you filed a Chapter 13 and paid it off early, you could insert a note showing that you paid everything in full ahead of schedule.

This is an extremely complicated question, and it would take far too long to cover all of the possible situations, so I can only offer a very general answer. Also, a divorce lawyer and a bankruptcy lawyer might look at the exact same situation and give you two completely different answers, because we have different points of view.

Unfortunately, divorce is one of the biggest causes of bankruptcy, and the reverse is also true; financial problems often lead to divorce. The main problem is that divorce law and bankruptcy law do not mix. Parts of divorce law are designed to make sure that one person pays money to the other, while parts of bankruptcy law are designed to do exactly the opposite. The Bankruptcy Code does make some allowances for this problem, by not permitting child support or some kinds of alimony to be altered or discharged.

Still, if possible, I usually advise people to get one over with before starting the other. In other words, get the divorce finalized before starting the bankruptcy, or file the bankruptcy together, get the debts discharged, and then deal with the divorce. Of course, sometimes that just won't work. Then we just deal with it as best as we can.

If the bankruptcy is over when the divorce starts, the bankruptcy does not have to be considered at all. On the other hand, some divorces never end, especially when child support and/or alimony are still going on. Even if the divorce was finalized years ago, there might still be things to consider.

Child support payments can never be discharged or altered in any way. In a Chapter 13, ongoing payments will continue to be paid as always. The only question would be whether the child support would be paid by the Trustee through the Plan, or through a separate payroll deduction, or directly from one parent to the other. If you are behind on the child support, the ongoing payments remain the same, and the arrearage is treated as one of your debts, with priority payments.

A Chapter 7 should not affect child support payments very much. There may be a temporary break in payments right after the bankruptcy case is filed, but it should get back to normal pretty quickly.

Alimony is a much more complicated subject. Some types of alimony can be discharged and others cannot. It usually comes down to a question of whether the alimony was intended as support, or as a property settlement. Support can never be discharged, but property settlements are usually treated like any other debt. That is easy enough to say, but there is a lot of litigation in both bankruptcy court and in divorce court over which category applies a certain case.

Everything that happens in Memphis Bankruptcy Court is at 200 Jefferson Ave.; the solid black, 15 story building at the corner of Jefferson Ave. and Third St., in downtown Memphis. There are at least three different places in that building where you might need to go. Click on this link to go directly to the Memphis Bankruptcy Court website, which has links to maps, directions, phone numbers, and other valuable information about the Court. It even has a link to the Court's calendar, so you can see when your own case is set for hearing.

The Meeting of Creditors is always held in Room 175, on the first floor. There is a door on Jefferson Ave. side of the building that leads directly into that room. You can also go through the revolving door at the front of the building, past the elevators, and down a long winding hall to Room 175.

If you have a hearing that is set for 8:30 or 9:30 a.m., then you will need to go to the sixth floor of that building, into the open area past the metal detectors. Look for me there, or have a seat in one of the rows of chairs.

If your hearing is set for 9:59, 10:00 a.m., or some other time, most of the time you will need to go to one of the courtrooms on the sixth floor. If your case number ends with the letter “K,” then you might need to go to the courtroom on the ninth floor, but before going up there you should check for me in the open area on the sixth floor.

All the difference in the world. When a case completes successfully, your debts are discharged (except for long-term debts like home mortgages, student loans and child support, and debts that you have reaffirmed). “Discharge” is good. It means that those debts are wiped out, and those creditors can never bother you about those debts again.

When a case is dismissed, that is usually bad news. It means that your case was closed, but it did not complete successfully. Your creditors would then have to right to take any legal collection actions against you, including lawsuits, garnishments, repossessions, and foreclosures. The worst thing is often that they can go back and add penalties, interest, and late fees as if your bankruptcy case had never been filed.

If a case has been dismissed “with prejudice,” it means that the judge felt like that debtor was abusing the bankruptcy system, so that debtor is not allowed to file a new case for 6 months. That usually gives creditors enough time to do whatever they need to do, such as foreclosing on the mortgage, repossess property, or start a wage garnishment.

If you have a Chapter 7 case, take cash, check, or a money order to the Bankruptcy Clerks office on the 4th floor of the Bankruptcy Building at 200 Jefferson. Make sure that you have your case number with you.

If you have a Chapter 13 case, you could follow those same instructions from the preceding paragraph, but it might be better to pay it into the Chapter 13 Trustee, using the instructions for making Chapter 13 Plan payments in the next paragraph.

Payments must be made by cashiers check or money order. Always put your case number on the check or money order, and print your name on the front of it.

The Trustee does not accept cash. He will take your personal check, and he will cash it right away, but he will wait 30 days before crediting the payment to your account because he has had so much trouble with bad checks in the past. That delay can sometimes cause trouble in your Chapter 13 case, especially during the first few months after it is filed.

Most people choose to but the payment in the dropbox next to the elevators on the first floor of the Bankruptcy Building at 200 Jefferson Ave. You can also mail the payment to:

Chapter 13 Trustees
200 Jefferson Ave. Suite 1113
Memphis, TN 38103.

Do not attempt to take the payment to the Trustees office on the 11th floor.

Payments must be made by cashiers check or money order. Always put your case number on the check or money order, and print your name on the front of it.

The Trustee does not accept cash. He will take your personal check, and he will cash it right away, but he will wait 30 days before crediting the payment to your account because he has had so much trouble with bad checks in the past. That delay can sometimes cause trouble in your Chapter 13 case, especially during the first few months after it is filed.

Most people choose to but the payment in the dropbox next to the elevators on the first floor of the Bankruptcy Building at 200 Jefferson Ave. You can also mail the payment to:

Chapter 13 Trustees
200 Jefferson Ave. Suite 1113
Memphis, TN 38103.

Do not attempt to take the payment to the Trustees office on the 11th floor.

Any missed payments must be made up as soon as possible. If it just happens once, don't worry about it. But if it is going to happen more than once, you need to find a way to make up the difference. If you have two jobs, we may need to set up a second payroll deduction. If you or your spouse have government benefits or other money coming in, you need to pay some indirectly. Follow the instructions in How do I make Chapter 13 Plan payments directly to the Trustee?

In a Chapter 7, you do not have to do anything (unless you are suddenly making a lot more money). In a Chapter 13 you must tell the Trustee right away. The same thing applies if you have been making your Plan payments directly to the Trustee, but change to a job where you get a paycheck. If you are my client, the easiest thing to do is to call me, and I will contact the Trustee for you.

Can I buy a car, or furniture, or something else on time while my case is still active?

You have to get the court's permission before taking on a new debt. In most Chapter 7 cases you would simply wait until the case is closed.

Chapter 13 is more complicated. If you have been in the case for more than one year, and if you are scheduled to pay at least 70% to unsecured creditors, and if you have made all of your Plan payments on time so far, then all you have to do is call the Trustees office and tell them what you want to do. They will usually give you a letter authorizing the purchase within a few days.

If you do not meet all of those tests, then you will have to file a written motion explaining exactly what you want to do, why you want to do it, and how it is going to be handled. There will be a court hearing, and in the end, the request may or may not be granted.

There are two different time periods when the Trustee might file a motion to dismiss. The first time will come within the first couple of months after filing, and the hearing will be set for 9:30 in the morning. If you are my client, meet me on the 6th floor of the Bankruptcy Building at that time.

At this early stage, the Trustee wants to know that you are going to make your Plan payments. The best way to do that is to pay ahead of time if at all possible. Bring your paycheck stub(s), showing that the money is coming out of your paycheck. If you are paying directly, bring your copy of the cashier's check or money order that you used to pay.

The other time that the Trustee will file a motion to dismiss could be any time within the next few years, and the problem will be that your Plan payments have not been coming in as they should. You may have lost your job, or changed jobs without telling the Trustee, or you might have been injured and off work for a few months. That motion will be set for hearing at 8:30 a.m. Regardless of the circumstances, as long as you show up for the hearing, the Trustee will usually give you a few more weeks to get back to work. If you do not show up, the case will be dismissed.

Unless something unusual happens, I do not attend 8:30 hearings. The Trustee wants to look you in the eye, and I can't help you there.

Its as if your case had never been filed, but time has still gone by. Your creditors can take any legal collection action, such as lawsuits, garnishment, eviction, and foreclosure.* They can go back to the date you filed and recalculate any penalty and interest that they could have charged during all that time. In most cases, you can file a new Chapter 13 case and start over, but you will still be stuck with all of that extra interest, etc. It is almost always better to save your existing case than to dismiss and refile, but still, there are times when it is the right thing to do.

*(Unless they already had permission from the Bankruptcy Court, the mortgage company has to start the foreclosure process all over again, so it will take at least one month for them to get back to the foreclosure sale.)

The Plan is the blueprint that guides the Chapter 13 Trustee in paying your debts. In the beginning, I draw up a plan based on your debts and your goals. If you have a mortgage that has to be paid, it will provide for payment of the ongoing mortgage payments every month, and for payments to catch up on the arrearage (the amount that you were behind on the mortgage at the time of filing). If you have secured debts, such as payments on cars, furniture, appliances, or electronics, we will suggest monthly payments and interest rates (in amounts that are usually smaller than what you have been paying). If you have priority debts, such as taxes or child support, we set monthly payments on those things, as well. All unsecured debts are lumped together in one amount, to be paid after everything else is paid in full. Those unsecured debts might be paid in full, or they might get pennies on the dollar, or anywhere in between.

Our proposed Chapter 13 Plan is given to the Trustee and to all of your creditors. By the time we get to the Meeting of Creditors (about 6 weeks after filing), everyone has had a chance to review the Plan. We might come to agreements with certain creditors to make certain minor changes, or the Trustee might insist on other changes, but by the time the Meeting of Creditors is over, the Plan is usually set in place. After that, if nothing unusual happens, the Plan is confirmed, and the Trustee starts making payments to your creditors every month.

Sometimes the Trustee or a creditor will file an objection; usually, because there is something about your Plan that they don't like. In those cases, it might be weeks or months before your Plan is confirmed. In the meantime, all of the money that you are paying in is just building up in your Plan account with the Trustee. Nothing is being paid, and interest is accruing on your secured debts. Obviously, we want to avoid that situation if possible, but sometimes we get involved in long arguments with creditors over certain details. If there is just one creditor with one particular problem, we can usually confirm the Plan “without prejudice” to that creditor, so payments can start being made. If that creditor wins his legal argument later on, then the Plan has to be restructured to make room for that debt to be handled his way.