No doubt you have questions. Legal situations can be confusing and frightening. One of my primary goals is to offer predictable outcomes.
All information in this website should not be interpreted as legal advice for your specific situation. Because each case is different, we can not provide legal advice on this website. However, we can provide some general responses for questions frequently asked by those facing similar circumstances.
After you have reviewed these FAQs, if you want legal advice applicable to your situation, please contact my office if you live in a Wisconsin county where I regularly practice.
If you live elsewhere, please consult with another licensed attorney in your area familiar with bankruptcy laws and practice. As much as I would like to help everyone I must limit help to those people in Outagamie, Winnebago, Marquette, Fond Du Lac, Waushara and surrounding Counties in Wisconsin.
Q. What does it cost to file bankruptcy?
A. Costs vary depending on the type of bankruptcy and where you live.
Q. Should I file bankruptcy?
A. Bankruptcy is a powerful legal solution to financial problems. I call it the bulldozer of consumer protection laws because it can quickly move a mountain of financial problems that a person would otherwise pick away at for years.
A person does not use a bulldozer to move mole hills, but what is one person’s mole hill is another person’s mountain. Someone making $45,000 per year may not need to file bankruptcy on $15,000 of debt, but someone else making $20,000 a year may need to file on that same amount of debt.
My general rule is if a person’s unsecured debt is at least 1/2 of their annual income, or more than $20,000, a bankruptcy might be worth considering. In addition, you may want to talk to an attorney about bankruptcy if you find yourself doing any of the following:
- borrowing from one credit card to pay another
- getting pay check loans to cover regular living expenses or pay other loans
- avoiding answering the phone for fear of the call being from a bill collector
- regularly using a credit card for everyday living expenses and then not being able to pay off the credit card
- regularly finding yourself with only enough money to make minimum credit card payments
- making small payments on medical or other unsecured debts that will take more than five years to pay off.
There are many other reasons a person may need to file a bankruptcy. Please contact my office if you live in a Wisconsin county where I regularly practice or consult with another licensed attorney in your area with your specific questions.
Q. Are there different types of bankruptcies?
A. There are several different types of bankruptcies under different chapters of the law.
The most common for individuals and some businesses are Chapter 7 and Chapter 13. Chapter 12 is only for certain farmers and fishermen who are qualified family businesses. Chapter 11 is for very large debtors, usually businesses. The vast majority of people will file a Chapter 7 or Chapter 13 bankruptcy.
Q. What is a Chapter 7 bankruptcy?
A. Basically, a Chapter 7 bankruptcy is protection for people in financial difficulty who do not have the ability to pay their existing debts. People who have the majority of debt not related to business are subject to a "means test" designed to determine whether the case should be permitted to proceed under Chapter 7.
If their annual income, based on the previous six months, is greater than the median income for their state and family size, they may have to file a Chapter 13 instead (see: means test). If they have certain out-of-the-ordinary, necessary expenses they might still be able to file a Chapter 7.
What type to file is a very important and legally complicated decision. After the bankruptcy petition is filed, it is up to the court to decide whether the case should be allowed to continue as a Chapter 7, require it be converted to a Chapter 13 or be dismissed.
The purpose of filing a Chapter 7 petition is to obtain a discharge (see: discharge) of your existing debts. If the bankruptcy court determines you have committed certain kinds of improper conduct described in the Bankruptcy Code, the court may deny your discharge of some or all your debts.
Even if you receive a general discharge, some particular debts are not discharged under the law. Usually, most taxes and student loans; debts incurred to pay most taxes; domestic support and property settlement obligations; most fines, penalties, forfeitures, and criminal restitution obligations; certain debts which are not properly listed in your bankruptcy papers; and debts for death or personal injury caused by operating a motor vehicle, vessel, or aircraft while intoxicated are usually not dischargeable.
Also, if a creditor can prove that a debt arose from fraud, breach of fiduciary duty, or theft, or from a willful and malicious injury, the bankruptcy court may determine that the debt is not discharged.
Q. What is a Chapter 13 bankruptcy?
A. Chapter 13 is designed for most individuals with regular income who are over the median income (see: means test) or have special reasons to pay all or part of their debts in installments over a period of time (see: which is better a chapter 7 or chapter 13)
In addition to your bankruptcy petition, a chapter 13 also requires you file a carefully prepared and detailed plan to repay your creditors all or part of the money that you owe them, using your future earnings. The period allowed by the court to repay your debts may be three years or five years, depending upon your income and other factors. The court must approve your plan before it can take effect.
During your chapter 13 bankruptcy you will have to make regular payments to the trustee or have them deducted from your paycheck. The amount of the payment must be enough to pay off certain debt, like past due mortgage amounts and property taxes if you are trying to save your house from foreclosure. You will also need to be able to make payments on your secured debt, if you are not surrendering the secured property (see: secured debt). Other factors are also considered which will increase the amount you must pay “into your plan”
After completing the payments under your plan, your unsecured debts are generally discharged (see: discharge) even if they have not been paid off in full. Some debts that are not discharged are: domestic support obligations; most student loans; certain taxes; most criminal fines and restitution obligations; certain debts which are not properly listed in your bankruptcy papers; certain debts for acts that caused death or personal injury; and certain long term secured obligations.
Q. What happens after my Chapter 7 bankruptcy is filed?
A. Your legal bankruptcy protection starts after the petition (see petition) is received (filed) by the bankruptcy court.
A trustee (see: trustee) is appointed to review your petition to see if the legal “t’s are crossed and i's are dotted.” A letter is sent to all your creditors telling them you have filed and they must stop any further attempts to collect money. This includes calling you, garnishing your wages, continuing with law suits or taking anything away like your car or house.
Unless your creditors get special permission to continue to try and collect, this protection stays in place until your case is fully administered by the court.
About four to six weeks after filing, there will be a meeting with you, your attorney and the trustee to go over your bankruptcy petition. Creditors have a right to come to this meeting and ask you questions (see: section 341 hearing).
If you have any property of value that is not exempt (see: what is an exemption), the trustee may be able to sell it or turn it over to your creditors. As frightening as this sounds, a good bankruptcy attorney will carefully review all the client’s assets before filing to determine if there is a risk the client may lose something. The attorney might be able to suggest ways to minimize that risk. Be sure to read my warnings about giving away or selling things before you file!
For at least 60 days after the meeting with the trustee, creditors can file written objections to your bankruptcy. If no objections are received, the trustee is satisfied with the meeting with you, and certain other requirements are met, the court will approve your discharge. This is the beginning of your “fresh start”.
Q. What is a “bankruptcy petition”?
A. A bankruptcy petition is a legal document that requests the bankruptcy court protect you from your creditors. It contains detailed information regarding your financial situation and the reasons why you should qualify for protection. This information must be truthful and accurate and may be audited. When the petition is received by the court, you have officially “filed bankruptcy”.
Q. What type of bankruptcy should I file? Which is better, Chapter 7 or Chapter 13?
A. While these may seem like simple questions, there is no simple answer. Both have their advantages. Assuming your situation is similar to the majority of other people with financial problems, you would likely file a Chapter 7.
In the simplest of terms, a Chapter 7 is most beneficial to those people who can make their regular monthly payments on things like their car, home and living expenses, but cannot make significant payments on their credit card, medical bills or other unsecured debts. In most cases, a Chapter 7 bankruptcy will allow those unsecured debts to be forgiven and still allow you to keep your car, home and other necessities as long as you can afford to keep making the regular monthly payments on them. One of the major qualifications to file a Chapter 7 requires you be under certain income limits (see: means test) for the size of your household, or if you are over those limits, have certain necessary, out of the ordinary expenses.
A Chapter 13 bankruptcy has many different applications. Again, in the simplest of terms, it is beneficial to someone whose debt has become unmanageable, but the person does not qualify for a Chapter 7 or does not want to file one. Chapter 13 might be filed if someone is over the median income (see: means test). Another typical application is in the situation where a person has gotten several months behind in their mortgage and a foreclosure is imminent or already in progress.
If the person could now make their regular mortgage payment but cannot catch up fast enough on the past due amount to satisfy the lender, a Chapter 13 bankruptcy may force the lender to take payments on the past due amount for up to five years, as long as the other regular mortgage payments are kept current. This would stop the foreclosure. In addition, the unsecured creditors typically would only get paid a percentage of what is owed over the same period. A Chapter 13 can also spread out some car payments over 5 years. This modification of payments is unavailable in a Chapter 7.
Keep in mind this information just hits a few points. You should discuss your situation with an attorney familiar with bankruptcy laws and practice.
Q. What is the means test and median income?
A. There are many factors that the court considers to allow a person to file a Chapter 7 bankruptcy. Among these are the “means test” and “median income.” If the household income is below a specified amount, called the “median income” the person or married couple is presumed to be able to file a Chapter 7. The median income is determined by the amount of money brought into the household over the previous six months and then annualized. This will include more than just earned income, but will not include some money, like Social Security benefits.
The calculation can be complicated and the limit can change over time and vary by area and household size. If you live in my practice area, my office can give you the current limits or you can find them here: http://www.justice.gov/ust/eo/bapcpa/20100315/bci_data/median_income_table.htm
If the income is over the median income amount, it is presumed the debtors will have to file a Chapter 13 and complete a more complicated detailed analysis of the debtor’s income and expenses called the means test. If completing the means test shows they have certain extra necessary expenses which reduce their disposable income below certain levels, that will allow them to file a Chapter 7.
Q. Will I lose my house or my car if I file a bankruptcy?
A. Filing a bankruptcy does not guarantee you will lose or keep your possessions. It often does give you more control over what happens. For example, if you owe money on your house or car and want to keep it, you usually can, if you can afford to make the payments. In a Chapter 7, if you do not want to keep either because you owe more that it is worth, or you cannot afford the payments, you could in many cases return (surrender) them and not owe the difference between what they are worth and what you owe.
Q. What if I do not want to file bankruptcy on my house, car, doctor’s bill, or some other debt, but want to file on everything else?
A. Bankruptcy law requires you list ALL your debt on your bankruptcy petition. You then have choices about what you will do with that debt. Filing a bankruptcy does not automatically mean you will lose your possessions. This needs to be discussed in detail with an attorney that understands bankruptcy law. You are not expected to live in a cardboard box under a bridge because you filed a bankruptcy.
Q. Will my bankruptcy be published in the paper?
A. There is no requirement that a bankruptcy be published; however people may request a copy of your petition from the court. Some papers do publish bankruptcies. Look in your paper or call them and ask.
Q. What is the section 341 (pronounced three forty-one) hearing? What is the “Meeting of the Creditors and Examination of the Debtor” all about?
A. After you file bankruptcy, the court will assign another bankruptcy attorney to review your petition and ask you questions about it in person. Your creditors may also come to this meeting to ask questions, but they seldom do if your petition was properly prepared. This meeting is required by Section 341 of the bankruptcy code and is called the “Meeting of the Creditors and Examination of the Debtor.”
A good bankruptcy attorney will go over all the questions he/she expects the trustee will ask you before the meeting and will also have gone over your petition a page at a time with you when you signed it. It is normal for the debtor to feel nervous before the meeting. In my practice, this meeting with the trustee usually takes about 5 to 10 minutes and creditors almost never show up.
You, however, MUST show up. If you do not show up, the trustee can dismiss your case. Acceptable reasons, with advance notice, for not showing up are being in the hospital or jail. Unacceptable reasons are being sick, on vacation, at work, over sleeping, having a car break down, or taking your child to baseball practice.
Q. What is secured debt?
A. In broad terms, secured debt takes two forms: the most common is money you owe someone for something, also called a purchase money security interest. This is when the lender gives you money to buy a certain car, boat or other item and gets a lien or security interest in it.
The second type is a non-purchase money security interest. This is when you get a loan and agree to give the lender a lien or security interest in something you already own. A good example is when people go to a “title loan store” and the lender loans money if the borrower lets the lender put a lien on their car. In both cases the item secures the loan, meaning that if the loan is not repaid on time, the lender can repossess the item they have a lien on.
Q. What is unsecured debt?
A. In general terms, unsecured debt is credit that was given without any security (see secured debt). Typical unsecured debt is credit card debt, doctor and medical debt, legal fees and other personal services. Sometimes unsecured debt can be converted by the lender to secured debt. What appears to be credit card debt can also be secured debt. For example, if you have what appears to be a “credit card” but it is only good at the store that issued it, quite likely that debt will be secured by what you purchased.
Q. Will I ever get a loan again?
A. Some of my clients tell me they get credit card applications in the mail before their case is even completed. They also tell me they tear them up! Up until the recent financial meltdown, I had clients who followed my advice, managed their post-bankruptcy finances well and actually qualified for mortgages after less than two years. They did not get great rates, but they did qualify.
Even people with good credit are having trouble getting financing now. What happens to you will largely depend on the economy and how you manage your finances. Think of it from a lender’s perspective. Would you loan money to someone who hasn’t filed bankruptcy but has a lot of debt, or would you rather loan money to someone who has no debt because they filed bankruptcy a year ago and has managed their money well, ever since.
Q. What is an exemption?
A. One idea behind bankruptcy is that when the case is over, the person gets a fresh financial start. To get off to a good start and be economically self supporting, the law recognizes that people need to keep basic possessions.
The federal bankruptcy code and most states have established general categories of possessions that people who file bankruptcy can keep if the possessions are below certain dollar value limits on these categories. For example, the 2010 federal exemptions allow an individual person to keep $20,200 worth of equity in a house, $3,225 equity in vehicles, $10,775 equity in household possessions, $1,350 equity in jewelry and so on.
The 2010 Wisconsin exemptions allow an individual person to keep $75,000 worth of equity in a house, $4,000 equity in vehicles, $ 12,000 equity in household possessions and jewelry and so on. Keep in mind that these are net liquidation values; in other words the value of the item if sold at auction, after any loans against it had been paid.
These amounts are subject to change and a person has to use either their state’s exemptions or the federal ones; they cannot mix the two. In addition some of any unused home exemption might be added to another category, and the amount of exemption is doubled for married joint filers.
One very important decision is whether to use the state or federal exemptions and into which categories to put possessions. In the rare case that a person has too much value in one category, an attorney can sometimes figure out ways around that problem BEFORE the bankruptcy is filed.
Q. Should I give away or sell things to my friends and relatives to keep the items safe, before I file?
A. Bad, bad idea. This could be considered a fraudulent transfer. If that doesn’t scare you, "Google" the term.
If you do something like this before you file (the length of time before varies on a number of factors), you may have created a lot of problems for yourself and achieved the opposite desired effect. For example, suppose you sell your prized motorcycle to your brother-in-law for a dollar six weeks before you file. You can no longer claim it as exempt on your bankruptcy petition because you do not own it.
The trustee can force your brother-in-law to sell it back to the trustee for the dollar and then the trustee can sell it for fair market value and distribute the money to your creditors. A good bankruptcy attorney might have figured out how to exempt your value in the motorcycle before you sold it. Bankruptcy laws are very powerful and effective relief for those in financial trouble, but they are also meant to be fair to creditors. Do not try to cheat the system!
Q. I might be getting a divorce. Should I file now or after I am divorced?
A. There is no simple answer to that question. Even general advice is dependent on too many different factors and their interrelationships to attempt an answer other than: discuss it with an attorney familiar with divorce and bankruptcy law in your state.
Disclaimer: The answers to frequently asked questions are for general information only. Laws vary from state to state and frequently change. Tiny variations in facts, or information left out of a question can completely change advice and outcomes. No one should ever rely on this general information as legal advice for their situation.
NEVER FORGET THAT THE INTERNET AND REAL LIFE ARE TWO COMPLETELY DIFFERENT THINGS!!