Frequently Asked Questions about Bankruptcy

Q: Why are so many consumers filing bankruptcy?

A: Most Americans with excess debt have acquired their debts over long periods of time. While they intend to repay the debts, they may find themselves unable to do so because of unanticipated changes in circumstances such as medical emergencies, job losses or failed businesses, disability, divorce or loss of spouse. Any of these circumstances, combined with late fees, over limit fees and the extraordinarily high interest rates that creditors now charge can result in insurmountable debt.

Q: What alternative courses of action are there to filing bankruptcy when facing overwhelming debt?

A: Short of bankruptcy, a debtor may attempt to mediate with creditors or negotiate workout agreements to extend due dates, lower interest rates, partially forgive debt or alter other terms. A debtor may execute an assignment of property for the benefit of creditors (ABC), wherein the debtor puts assets in the trust of a neutral third party to pay creditors. A business debtor can sell the business, negotiating the satisfaction of debt as part of the deal. Other creative options to bankruptcy exist. Many debtors, however, find that their creditors are unwilling to agree to reasonable terms or are completely unwilling to negotiate.

Q: What types of bankruptcy are there?

A: Consumers usually file Chapter 7 "liquidation" or Chapter 13 "reorganization" bankruptcies. Under Chapter 7 bankruptcy, the debtor transfers nonexempt property (if any) to a trustee who liquidates it to pay creditors. In practice, most persons considering Chapter 7 only own property exempt from liquidation under the law and most of their debt is cancelled (discharged) without actually losing any of their property. Under Chapter 13 bankruptcy, the debtor repays certain debts over time (from three to five years). In 2005, a bankruptcy law change instituted a complex means test. Debtors with disposable income (as determined by the means test) must file under Chapter 13 and repay a portion of their debts, based upon their ability to do so. Debtors without disposable income are eligible for relief under Chapter 7.

Q: Can bankruptcy free me from my student loans?

A: In some instances you can include student loans and taxes in a Chapter 13 repayment plan and pay them off over time. In many cases, this will save debtors money. Also, in rare instances, these debts may be dischargeable.

Q: Are spousal maintenance or alimony, and child support obligations dischargeable in bankruptcy?

A: 2005 changes to the federal bankruptcy laws provided that "domestic support obligations" like alimony and child support are not dischargeable, nor does the filing of a bankruptcy petition stay most court proceedings dealing with family law issues. Under Chapter 7, but probably not under chapter 13, other obligations to a spouse or child incurred in a divorce, separation or by court or government order are also not dischargeable, such as property settlement obligations.

Q: Can I stop paying my alimony and child support during my bankruptcy?

A: 2005 changes in the bankruptcy laws require a debtor to remain current on all domestic support obligations such as alimony or spousal maintenance, and child support, throughout the duration of the bankruptcy. If a debtor falls behind on his or her domestic support obligations during bankruptcy, the bankruptcy could be dismissed or converted from a Chapter 13 to a Chapter 7 proceeding.

Q: How long may credit bureaus include bankruptcy information on a credit report?

A: Consumer credit reports may reveal Chapter 7 bankruptcy cases for 10 years from filing. Chapter 13 information can be included for seven years from discharge or 10 years from filing if there is no discharge. Account information for debts discharged under either chapter may be included in credit reports for seven years after the accounts go inactive.

Q: Should I consult a lawyer for legal advice about bankruptcy?

A: Yes, if you are contemplating bankruptcy, or have questions about bankruptcy, you should contact a bankruptcy attorney immediately. As you will likely only file for bankruptcy once in your life, you should hire an experienced bankruptcy lawyer for this very important job.

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