Before you get a discharge order wiping out debt, you’ll need to navigate through the bankruptcy process. These answers to some commonly asked questions can help you complete your bankruptcy filing without a hitch.
For more bankruptcy questions and answers, try these bankruptcy FAQs:
People who file for bankruptcy usually have numerous creditors clamoring to collect whatever assets might be left before another creditor can do so. After filing bankruptcy, the collection frenzy stops so the court can ensure that all creditors divide assets appropriately.
It’s the automatic stay that brings orderliness to the case. It’s automatically triggered when you file for bankruptcy and, once in place, prevents any single creditor from grabbing all available assets to the detriment of the others. The bankruptcy trustee (the court-appointed individual tasked with administering your action) can then find and disperse assets (if any) according to a priority ranking system.
The stay stops most common creditor collection actions, including:
If a creditor knowingly violates the stay, you can seek penalties.
The stay isn’t absolute, however. For instance, in some circumstances—such as when you’re behind on your house payment or your landlord wants to evict you—the creditor can file a motion with the bankruptcy court asking the judge to lift (remove) the automatic stay. If the creditor wins, it can proceed with foreclosure proceedings, take steps to remove you from your home, or whatever other action the order allows.
Finally, if you’ve filed multiple bankruptcies within the same year, you should be aware that the automatic stay might remain in place for thirty days only, or might not go into effect at all. To find out, you should consult with an attorney.
(Be aware that the law surrounding the automatic stay is complicated and addressing all exceptions is beyond the scope of this article.)
^Back to topWhen you prepare to file for bankruptcy, you must fill out official paperwork and file it with the court. You’ll list the names and addresses of all of your creditors on a document called the creditor matrix or creditor mailing list.
After you file your case, the court will issue an order called an “automatic stay” instructing your creditors to stop collecting from you. Also, the court will mail a notice of the bankruptcy case to all parties listed in the creditor matrix. You’ll receive a copy, too. You’ll want to keep the notice because it has valuable information on it, including:
Creditors usually respond to the notice promptly. In fact, calls, letters, and other correspondence often stop by the following week.
^Back to topYes. Declaring bankruptcy is an excellent way to stop a creditor from collecting from you, but filing your bankruptcy petition the day before your lender intends to auction off your house will do nothing to prevent the sale. You’ll need to do more. Why? Filing for bankruptcy will stop a collection action only if your creditor knows you filed in the first place. Here’s how it works.
Although the court will send out a notice informing your creditors about the automatic stay (the order that prevents your creditors from collecting against you), it could take several days to a week before the creditor receives it. If you’re facing any of the following pressing problems, the notice might arrive too late:
In time-sensitive situations, such as the above, it’s best to tell the creditor that you filed for bankruptcy by fax or email explaining that the automatic stay is in effect. You’ll want to include your account information, as well as the bankruptcy case number and filing date. It’s also wise to prepare your letter ahead of time and to find out where you should send it. Finally, you’ll want to follow up with a telephone call to make sure that the intended party receives the communication.
^Back to topYes, you have the right to switch or “convert” as long as you meet the eligibility requirements of the new bankruptcy chapter.
You’ll ask the judge to grant the conversion by filing a motion with the court. The judge will likely approve the first request. Courts frown on additional requests, however—especially if the filer appears to be using the system inappropriately or attempting to avoid a particular issue by repeatedly switching chapters.
The most common conversion type involves switching from a Chapter 7 to a Chapter 13 case. Typical reasons for doing so include the following:
Filers will often convert a Chapter 13 to Chapter 7 bankruptcy after the filer loses the ability to pay the monthly payments. It’s important to remember, however, that it’s possible to lose nonexempt property (property that’s not protected by an exemption statute) when doing so.
^Back to topThe bankruptcy trustee is the court-appointed official tasked with overseeing your case. The trustee’s primary responsibility is to find assets that can be used to pay your creditors the debt you owe. But that’s not all the trustee does.
The trustee (or staff) will review your petition for accuracy, verify your identity at the 341 meeting of creditors (the meeting that all bankruptcy filers must attend), investigate your case for hidden assets, and distribute funds to creditors. The trustee’s specific duties depend on whether you file for Chapter 7 or 13 bankruptcy.
While it’s tempting to believe that the trustee is there to help you, it’s not the case. The more property the trustee recovers for creditors, the more the trustee gets paid. The trustee receives a flat fee of $60 per Chapter 7 case (as of August 2016). Also, trustees are entitled to a percentage of the funds they disburse to your creditors. In other words, the more assets the trustee finds, the more that goes into the trustee’s coffers. The fee rules give trustees a financial incentive to look closely at bankruptcy filings, especially if you have valuable property. In essence, the trustee can earn a “commission” if they can grab some property, sell it, and divide the proceeds among the creditors.
(You can find out more about the role of the trustee by reading What Questions Will a Bankruptcy Creditor Ask at the 341 Meeting of Creditors?)
^Back to topWhen you file for bankruptcy, the court schedules a hearing all filers must attend (the 341 meeting of creditors) with the bankruptcy trustee (the court official tasked with overseeing your case). You won’t be the only bankruptcy filer in attendance because the court schedules the trustee to meet with approximately ten cases during each one-hour long meeting—and your turn will go quickly. The trustee will post a list of the attendees outside of the meeting room. When you arrive, you’ll want to check for your name and see where you fall in the lineup. If the trustee calls your matter first, you’ll get it over with quickly. If you’re further down the list, you’ll have the benefit of watching others go through the process and will be prepared when it’s your turn.
Most meetings start with introductory instructions to the group in which the trustee will tell you where to sit and when to present your identification. When it's your turn, the trustee will do the following:
In most cases, the trustee will spend approximately five minutes (or less) on each matter.
Any creditors that appear at the meeting will also have an opportunity to question the bankruptcy filer; however, it rarely happens. If a creditor appears at the meeting, the creditor will be given a short time to ask questions, as well.
For more information, read How Should I Prepare for the 341 Meeting of Creditors in Bankruptcy?
^Back to topFiling for Chapter 7 bankruptcy works by breaking the contract that you entered into with your creditor, and as a result, relieves you of the burden of paying the debt. Although it’s great to reduce the amount you owe, you might have an obligation that you’d like to keep. A reaffirmation agreement—a contract you sign agreeing to remain responsible for a debt—allows you to do so.
So why would you want to keep an old debt instead of wiping it out in bankruptcy? Most people sign a reaffirmation agreement so that they can keep property that they’re still paying on, such as a vehicle needed to get back and forth to work. Entering into a reaffirmation agreement will allow you to reinstate the vehicle loan, and, as long as you continue making payments, keep the car.
Here’s the downside: If you stop paying after you sign a reaffirmation agreement, and the car gets repossessed, the bank can sell it at auction. If it sells for less than what’s owed, you’ll be on the hook for the difference, called a “deficiency balance,” just as if you’d never filed for bankruptcy.
By contrast, if you’re current on your car payment when you file for bankruptcy, the lender might allow you to continue making the payment—and keep the vehicle—even without signing an agreement. The problem is that without a contract, the lender has the right to take the car at any time. The benefit, however, is that without a contract, the lender can’t hold you accountable for a deficiency balance.
(Find out how to reduce your payment when signing a reaffirmation agreement by reading How do I renegotiate my car loan in Chapter 7 bankruptcy?)
^Back to topA Chapter 7 bankruptcy can remain on your credit report for up to ten years. If you file for Chapter 13 bankruptcy, the period isn’t quite as long. Expect it to show up for seven years after completing your three- to five-year repayment plan. Even though the bankruptcy notation will stay for a lengthy period, the effect of the bankruptcy will diminish with time.
You can begin rebuilding your credit once the bankruptcy closes. In fact, you’ll likely be offered a credit card soon after receiving your discharge (the order that wipes out eligible debt, such as credit card balances, personal loans, and medical bills). If you keep your balance low and make timely payments, your score will steadily improve. When you’re ready, you might want to add a manageable car payment because a balanced mix of credit—the type reporting agencies find most people have—will help your overall score, as well.
Also, it’s important to keep your credit report free of errors—and it’s easy to do. After your bankruptcy closes, it’s a good idea to check your credit report for accuracy by requesting a free copy from each agency (you’re entitled to a free report every year). You can get yours by visiting AnnualCreditReport.com.
If the report contains incorrect information, you can remove it by filing a challenge online. Just visit the appropriate dispute page or click on a link below:
If you’re unable to resolve your dispute, you can file a complaint with the Consumer Financial Protection Bureau or contact your state’s consumer protection agency.
^Back to topYes. It’s not unusual for the court to close your case before you receive your discharge (the order that wipes out your debt) if you fail to file required paperwork promptly. Things can happen after you receive your bankruptcy discharge, too. Here are examples of situations that might prompt the court to reopen your case:
You can reopen for other reasons, as well. No matter who wants to revisit the case, doing so requires a court order. Therefore, the court will consider the motion and grant it only if the law supports it.
To find out more about reopening a case, including how to go about doing so, read Reopening a Chapter 7 Bankruptcy Case.
^Back to topNo—your creditors can’t continue to call you, send you letters, deduct money from your paycheck, or anything else, for that matter. One of the most powerful tools in bankruptcy is its ability to stop collection efforts cold. Here’s how it works.
When you file for bankruptcy, the court issues an order called an “automatic stay.” The automatic stay tells your creditors that all efforts to collect your debt must come to a halt. It remains in place for the entire duration of your bankruptcy unless the creditor files a motion to lift it (or in certain Chapter 13 cases—see the discussion below). A lender is likely to file a motion to lift the stay if you’re behind on your house payment or when the creditor wants permission to continue pursuing an ongoing lawsuit.
Many people wonder how creditors find out that the automatic stay is in place. The answer is simple: The court notifies them.
Sometimes a creditor mistakenly calls a filer, however—but it’s rarely purposeful. In most cases you can stop the unwanted contact by giving the caller the following information:
Providing this information works because your creditors know that they could face penalties if the automatic stay violations continued.
Here’s an important point to remember: If you’re filing a second Chapter 13 bankruptcy after a previous dismissal, it’s likely that the automatic stay will be good only for the first 30 days of your case. To extend it requires filing a motion with the court. If you find yourself in this situation, or if a creditor continues to violate the automatic stay, you should contact a bankruptcy attorney.
^Back to topIf you can’t pay your bills and are facing bankruptcy, it’s unlikely that a credit repair company will be able to prevent the inevitable. Credit repair services claim that they can raise a low credit score so that a borrower can get a more reasonable interest rate—not help you eliminate your debt.
Repair companies attempt to improve credit scores by disputing information on your credit report. If the lender fails to respond within a particular number of days, it must delete the disputed information. Any gains can be fleeting, however, because the creditor can replace accurate information later. Also, you can use the online dispute system on the credit bureau’s website to report errors at no cost.
By contrast, a “credit consolidation” company might be able to help you avoid bankruptcy. Such companies negotiate down your debt balance and put a reasonable payment plan in place. Be aware that a creditor is not obligated to reduce the amount you owe, so you should verify that all of your creditors agree to a plan before you start making payments. You might find yourself in a worse position if you can’t complete the plan, too. Not only will you still owe the debt, but you’ll also have paid fees to the consolidation company, as well.
Bankruptcy attorneys can also negotiate your debt with your creditors, and have the added benefit of understanding the tax ramifications resulting from debt forgiveness. Finally, a bankruptcy lawyer will be in the best position to advise you if filing for bankruptcy is a better option for you.
^Back to topAfter you file either Chapter 7 or Chapter 13 bankruptcy, you (and your spouse if you file together) must complete a personal financial management class called the debtor education course. It’s also known as the second bankruptcy course (or post-filing bankruptcy course) to distinguish it from the class you must take before you file for bankruptcy—the pre-filing credit counseling course.
In the debtor education course, you’ll learn techniques that will help you stay financially healthy after the closure of your bankruptcy case. Topics discussed will likely include the following:
To find an approved provider, you’ll want to go to the U.S. Trustee’s website. You’ll find the “Credit Counseling & Debtor Education” link in the column to the left.
You’ll prove that you satisfied the requirement by submitting a certificate. After doing so, you’ll be eligible receive a discharge (the order that wipes out qualified debt). You can report that you’ve met the course requirement by using Official Form 423 Certification About a Financial Management Course.
If you file for Chapter 7 bankruptcy and fail to file your certificate within 60 days of the first 341 meeting of creditors date (the required bankruptcy hearing you must attend), the court will dismiss your case. In that event, you’ll have to file a motion asking the court the following things: to reopen your case, to allow you additional time to file your certificate, and to issue a discharge. (Your local court might require three different motions rather than one consolidated motion.) Also, you’ll have to repay the filing fee before you can file the first motion.
You’ll file your certificate in your Chapter 13 case sometime before the due date of your last repayment installment.
^Back to topFor more bankruptcy information, go to:
