Bankruptcy Frequently Asked Bankruptcy Questions

  1. Once I file can I change from one chapter to another?
  2. How long will a bankruptcy affect my credit record?
  3. What Is a Bankruptcy Discharge and How Does It Operate?
  4. What Is a Reaffirmation Agreement?
  5. What is a discharge in Bankruptcy?
  6. When does the discharge occur?
  7. How does the debtor get a discharge?
  8. Are all of the debtor's debts discharged or only some?
  9. Does the debtor have a right to a discharge or can creditors object to the discharge?
  10. Can the debtor receive a second discharge later in a case?
  11. Can the discharge be revoked?
  12. May the debtor pay a discharged debt after the bankruptcy case has been concluded?
  13. What can the debtor do if a creditor attempts to collect a discharged debt after the case is concluded?
  14. May an employer terminate a debtor’s employment solely because the person was a debtor or failed to repay a discharged debt?
  15. Dividing the debts in a Divorce
  16. The Effect of the Debt Division on Creditors
  17. Bankruptcy Issues regarding ex spouses
  18. Avoiding Common Mistakes

What are the differences between Chapter 7, 11, 12 & 13, and what are the qualifications for each?

  • When You File Bankruptcy, you can choose the kind of bankruptcy that best meets your needs (provided you meet certain qualifications):

    • Chapter 7 – A trustee is appointed to take over your property. Any property of value will be sold or turned into money to pay your creditors. You may be able to keep some personal items and possibly real estate depending on the law of the State where you live and applicable federal laws.

    • Chapter 13 – You can usually keep your property, but you must earn wages or have some other source of regular income and you must agree to pay part of your income to your creditors. The court must approve your repayment plan and your budget. A trustee is appointed and will collect the payments from you, pay your creditors, and make sure you live up to the terms of your repayment plan.

    • Chapter 12 – Like chapter 13, but it is only for family farmers and family fishermen.

    • Chapter 11 – This is used mostly by businesses. In chapter 11, you may continue to operate your business, but your creditors and the court must approve a plan to repay your debts. There is no trustee unless the judge decides that one is necessary; if a trustee is appointed, the trustee takes control of your business and property.

    • If you have already filed bankruptcy under chapter 7, you may be able to change your case to another chapter.

    • Your bankruptcy may be reported on your credit record for as long as ten years. It can affect your ability to receive credit in the future.

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Once I file can I change from one chapter to another?

  • If you have already filed bankruptcy under chapter 7, you may be able to change your case to another chapter.

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How long will a bankruptcy affect my credit record?

  • Your bankruptcy may be reported on your credit record for as long as ten years. It can affect your ability to receive credit in the future.

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What Is a Bankruptcy Discharge and How Does It Operate?

  • One of the reasons people file bankruptcy is to get a “discharge.” A discharge is a court order which states that you do not have to pay most of your debts. Some debts cannot be discharged. For example, you cannot discharge debts for–

    • most taxes;

    • child support;

    • alimony;

    • most student loans;

    • court fines and criminal restitution; and

    • personal injury caused by driving drunk or under the influence of drugs.

  • The discharge only applies to debts that arose before the date you filed. Also, if the judge finds that you received money or property by fraud, that debt may not be discharged.

  • It is important to list all your property and debts in your bankruptcy schedules. If you do not list a debt, for example, it is possible the debt will not be discharged. The judge can also deny your discharge if you do something dishonest in connection with your bankruptcy case, such as destroy or hide property, falsify records, or lie, or if you disobey a court order.

  • You can only receive a chapter 7 discharge once every eight years. Other rules may apply if you previously received a discharge in a chapter 13 case. No one can make you pay a debt that has been discharged, but you can voluntarily pay any debt you wish to pay. You do not have to sign a reaffirmation agreement (see below) or any other kind of document to do this.

  • Some creditors hold a secured claim (for example, the bank that holds the mortgage on your house or the loan company that has a lien on your car). You do not have to pay a secured claim if the debt is discharged, but the creditor can still take the property.

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What Is a Reaffirmation Agreement?

  • Even if a debt can be discharged, you may have special reasons why you want to promise to pay it. For example, you may want to work out a plan with the bank to keep your car. To promise to pay that debt, you must sign and file a reaffirmation agreement with the court. Reaffirmation agreements are under special rules and are voluntary. They are not required by bankruptcy law or by any other law. Reaffirmation agreements–

    • must be voluntary;

    • must not place too heavy a burden on you or your family;

    • must be in your best interest; and

    • can be canceled anytime before the court issues your discharge or within 60 days after the agreement is filed with the court, whichever gives you the most time.

  • If you are an individual and you are not represented by an attorney, the court must hold a hearing to decide whether to approve the reaffirmation agreement. The agreement will not be legally binding until the court approves it.

  • If you reaffirm a debt and then fail to pay it, you owe the debt the same as though there was no bankruptcy. The debt will not be discharged and the creditor can take action to recover any property on which it has a lien or mortgage. The creditor can also take legal action to recover a judgment against you.

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WHAT IS A DISCHARGE IN BANKRUPTCY?

  • A bankruptcy discharge releases the debtor from personal liability for certain specified
    types of debts. In other words, the debtor is no longer legally required to pay any debts that are discharged. The discharge is a permanent order prohibiting the creditors of the debtor from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters, and personal contacts.

  • Although a debtor is not personally liable for discharged debts, a valid lien (i.e., a charge upon specific property to secure payment of a debt) that has not been avoided (i.e., made unenforceable) in the bankruptcy case will remain after the bankruptcy case. Therefore, a secured creditor may enforce the lien to recover the property secured by the lien.

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WHEN DOES THE DISCHARGE OCCUR?

  • The timing of the discharge varies, depending on the chapter under which the case is filed. In a chapter 7 (liquidation) case, for example, the court usually grants the discharge promptly on expiration of the time fixed for filing a complaint objecting to discharge and the time fixed for filing a motion to dismiss the case for substantial abuse (60 days following the first date set for the 341 meeting). Typically, this occurs about four months after the date the debtor files the petition with the clerk of the bankruptcy court. In individual chapter 11 cases, and in cases under chapter 12 (adjustment of debts of a family farmer or fisherman) and 13 (adjustment of debts of an individual with regular income), the court generally grants the discharge as soon as practicable after the debtor completes all payments under the plan. Since a chapter 12 or chapter 13 plan may provide for payments to be made over three to five years, the discharge typically occurs about four years after the date of filing. The court may deny an individual debtor’s discharge in a chapter 7 or 13 case if the debtor fails to complete “an instructional course concerning financial management.” The Bankruptcy Code provides limited exceptions to the “financial management” requirement if the U.S. trustee or bankruptcy administrator determines there are inadequate educational programs available, or if the debtor is disabled or incapacitated or on active military duty in a combat zone.

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HOW DOES THE DEBTOR GET A DISCHARGE?

  • Unless there is litigation involving objections to the discharge, the debtor will usually automatically receive a discharge. The Federal Rules of Bankruptcy Procedure provide for the clerk of the bankruptcy court to mail a copy of the order of discharge to all creditors, the U.S. trustee, the trustee in the case, and the trustee’s attorney, if any. The debtor and the debtor’s attorney also receive copies of the discharge order. The notice, which is simply a copy of the final order of discharge, is not specific as to those debts determined by the court to be non-dischargeable, i.e., not covered by the discharge. The notice informs creditors generally that the debts owed to them have been discharged and that they should not attempt any further collection. They are cautioned in the notice that continuing collection efforts could subject them to punishment for contempt. Any inadvertent failure on the part of the clerk to send the debtor or any creditor a copy of the discharge order promptly within the time required by the rules does not affect the validity of the order granting the discharge.

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ARE ALL OF THE DEBTOR’S DEBTS DISCHARGED OR ONLY SOME?

  • Not all debts are discharged. The debts discharged vary under each chapter of the Bankruptcy Code. Section 523(a) of the Code specifically excepts various categories of debts from the discharge granted to individual debtors. Therefore, the debtor must still repay those debts after bankruptcy. Congress has determined that these types of debts are not dischargeable for public policy reasons (based either on the nature of the debt or the fact that the debts were incurred due to improper behavior of the debtor, such as the debtor’s drunken driving).

  • There are 19 categories of debt excepted from discharge under chapters 7, 11, and 12. A more limited list of exceptions applies to cases under chapter 13.

  • Generally speaking, the exceptions to discharge apply automatically if the language prescribed by section 523(a) applies. The most common types of nondischargeable debts are certain types of tax claims, debts not set forth by the debtor on the lists and schedules the debtor must file with the court, debts for spousal or child support or alimony, debts for willful and malicious injuries to person or property, debts to governmental units for fines and penalties, debts for most government funded or guaranteed educational loans or benefit overpayments, debts for personal injury caused by the debtor’s operation of a motor vehicle while intoxicated, debts owed to certain tax advantaged retirement plans, and debts for certain condominium or cooperative housing fees.

  • The types of debts described in sections 523(a)(2), (4) and(6) (obligations affected by fraud or maliciousness) are not automatically excepted from discharge. Creditors must ask the court to determine that these debts are excepted from discharge. In the absence of an affirmative request by the creditor and the granting of the request by the court, the types of debts set out in sections 523(a)(2), (4) and (6) will be discharged.

  • A slightly broader discharge of debts is available to a debtor in a chapter 13 case than in a chapter 7 case. Debts dischargeable in a chapter 13, but not in chapter 7, include debts for willful and malicious injury to property, debts incurred to pay non-dischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings. Although a chapter 13 debtor generally receives a discharge only after completing all payments required by the court-approved (i.e., “confirmed”) repayment plan, there are some limited circumstances under which the debtor may request the court to grant a “hardship discharge” even though the debtor has failed to complete plan payments. Such a discharge is available only to a debtor whose failure to complete plan payments is due to circumstances beyond the debtor’s control. The scope of a chapter 13 “hardship discharge” is similar to that in a chapter 7 case with regard to the types of debts that are excepted from the discharge. A hardship discharge also is available in chapter 12 if the failure to complete plan payments is due to “circumstances for which the debtor should not justly be held accountable.”

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DOES THE DEBTOR HAVE THE RIGHT TO A DISCHARGE OR CAN CREDITORS OBJECT TO THE DISCHARGE?

  • In chapter 7 cases, the debtor does not have an absolute right to a discharge. An objection to the debtor’s discharge may be filed by a creditor, by the trustee in the case, or by the U.S. trustee. Creditors receive a notice shortly after the case is filed that sets forth much important information, including the deadline for objecting to the discharge. To object to the debtor’s discharge, a creditor must file a complaint in the bankruptcy court before the deadline set out in the notice. Filing a complaint starts a lawsuit referred to in bankruptcy as an “adversary proceeding.”

  • The court may deny a chapter 7 discharge for any of the reasons described in section 727(a) of the Bankruptcy Code, including failure to provide requested tax documents; failure to complete a course on personal financial management; transfer or concealment of property with intent to hinder, delay, or defraud creditors; destruction or concealment of books or records; perjury and other fraudulent acts; failure to account for the loss of assets; violation of a court order or an earlier discharge in an earlier case commenced within certain time frames (discussed below) before the date the petition was filed. If the issue of the debtor’s right to a discharge goes to trial, the objecting party has the burden of proving all the facts essential to the objection.

  • In chapter 12 and chapter 13 cases, the debtor is usually entitled to a discharge upon completion of all payments under the plan. As in chapter 7, however, discharge may not occur in chapter 13 if the debtor fails to complete a required course on personal financial management. A debtor is also ineligible for a discharge in chapter 13 if he or she received a prior discharge in another case commenced within time frames discussed the next paragraph. Unlike chapter 7, creditors do not have standing to object to the discharge of a chapter 12 or chapter 13 debtor. Creditors can object to confirmation of the repayment plan, but cannot object to the discharge if the debtor has completed making plan payments.

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CAN A DEBTOR RECEIVE A SECOND DISCHARGE IN A LATER CHAPTER 7 CASE?

  • The court will deny a discharge in a later chapter 7 case if the debtor received a discharge under chapter 7 or chapter 11 in a case filed within eight years before the second petition is filed. The court will also deny a chapter 7 discharge if the debtor previously received a discharge in a chapter 12 or chapter 13 case filed within six years before the date of the filing of the second case unless (1) the debtor paid all “allowed unsecured” claims in the earlier case in full, or (2) the debtor made payments under the plan in the earlier case totaling at least 70 percent of the allowed unsecured claims and the debtor’s plan was proposed in good faith and the payments represented the debtor’s best effort. A debtor is ineligible for discharge under chapter 13 if he or she received a prior discharge in a chapter 7, 11, or 12 case filed four years before the current case or in a chapter 13 case filed two years before the current case.

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CAN THE DISCHARGE BE REVOKED?

  • The court may revoke a discharge under certain circumstances. For example, a trustee, creditor, or the U.S. trustee may request that the court revoke the debtor’s discharge in a chapter 7 case based on allegations that the debtor: obtained the discharge fraudulently; failed to disclose the fact that he or she acquired or became entitled to acquire property that would constitute property of the bankruptcy estate; committed one of several acts of impropriety described in section 727(a)(6) of the Bankruptcy Code; or failed to explain any misstatements discovered in an audit of the case or fails to provide documents or information requested in an audit of the case. Typically, a request to revoke the debtor’s discharge must be filed within one year of the discharge or, in some cases, before the date that the case is closed. The court will decide whether such allegations are true and, if so, whether to revoke the discharge.

  • In a chapter 11, 12 and 13 cases, if confirmation of a plan or the discharge is obtained through fraud, the court can revoke the order of confirmation or discharge.

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MAY THE DEBTOR PAY A DISCHARGED DEBT AFTER THE BANKRUPTCY CASE HAS BEEN CONCLUDED?

  • A debtor who has received a discharge may voluntarily repay any discharged debt. A debtor may repay a discharged debt even though it can no longer be legally enforced. Sometimes a debtor agrees to repay a debt because it is owed to a family member or because it represents an obligation to an individual for whom the debtor’s reputation is important, such as a family doctor.

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WHAT CAN THE DEBTOR DO IF A CREDITOR ATTEMPTS TO COLLECT A DISCHARGED DEBT AFTER THE CASE IS CONCLUDED?

  • If a creditor attempts collection efforts on a discharged debt, the debtor can file a motion with the court, reporting the action and asking that the case be reopened to address the matter. The bankruptcy court will often do so to ensure that the discharge is not violated. The discharge constitutes a permanent statutory injunction prohibiting creditors from taking any action, including the filing of a lawsuit, designed to collect a discharged debt. A creditor can be sanctioned by the court for violating the discharge injunction. The normal sanction for violating the discharge injunction is civil contempt, which is often punishable by a fine.

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CAN AN EMPLOYER TERMINATE A DEBTOR’S EMPLOYMENT SOLELY BECAUSE THE PERSON WAS A DEBTOR OR FAILED TO PAY A DISCHARGED DEBT?

  • The law provides express prohibitions against discriminatory treatment of debtors by both governmental units and private employers. A governmental unit or private employer may not discriminate against a person solely because the person was a debtor, was insolvent before or during the case, or has not paid a debt that was discharged in the case. The law prohibits the following forms of governmental discrimination: terminating an employee; discriminating with respect to hiring; or denying, revoking, suspending, or declining to renew a license, franchise, or similar privilege. A private employer may not discriminate with respect to employment if the discrimination is based solely upon the bankruptcy filing.

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DIVIDING THE DEBTS IN A DIVORCE

  • Information comes from www.legalvoice.org.
  • Under Washington law, the court which enters a decree in a dissolution (divorce) proceeding must fairly divide the debts between the parties. If the parties can agree on how the debts should be divided, they may ask the court to approve the agreed division. If the parties cannot agree,
    they may ask a court or other person (mediator, arbitrator, etc.) to divide the debts.

    Regardless of whether the debt division is agreed or not, a court is required to follow some rules when dividing debts:

    1) Separate debts should be the responsibility of the spouse who incurred the debt;
    2) Community debts should be divided fairly and equitably between the parties;
    3) The whole dissolution (debts, assets, etc.) must be fair and equitable to each party.

    The court will generally approve an agreed division of the debts unless it is very unfair to one party. The first rule above is important because a spouse should not be asked to bear a much greater portion of community debt just because the other has large separate debts to pay. The
    third rule above is important because a court will generally look to asset division as a measure of how fair the debt division is.

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The Effect of the Debt Division on Creditors

  • Information comes from www.legalvoice.org.

  • This point cannot be stressed enough: No matter who is ordered to pay a community debt in a dissolution or separation proceeding (even if agreed by the parties) both parties are still liable to the creditor for the community debt. In other words, if your ex-spouse fails to pay the debts he or she was ordered to pay in the dissolution, the creditor can come after you and the creditor is not required to cease collection just because of the dissolution decree.

    This may seem harsh, but actually makes sense if you think about it this way: Let’s say you lend $100 to your cousins Abe and Ben, who are starting a business. Each signs a written note, to you, to be liable for the full $100. You lend it to them because although each cousin alone is less than totally reliable, each should be good for about $50. After a couple of months, Ben decides to leave the business. Abe proposes that he keep all the assets of the business, and all of the debts (including the loan to you). Ben agrees. You then go to collect on your note from Ben, to which he replies: “I am no longer liable to pay you – Abe and I agreed he would take the debt.” The actual collectability of your $100 has just been cut in half by a contract which you had no part of! This example shows why it is not possible to modify the rights of a creditor by virtue of the dissolution decree. Like Ben, the divorcing parties cannot modify the rights of creditors by their agreement with each other.

    This does not mean that the decree is worthless, however. If your ex-spouse fails to pay and you are forced to, you can sue for damages and contempt of the decree.

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Bankruptcy Issues regarding ex spouses

  • Information comes from www.legalvoice.org.

  • Perhaps your ex-spouse was assigned several debts in the divorce, and you have just received notice that he or she is filing for bankruptcy. Are you now liable for all those debts? Perhaps you received several debts in a divorce and are considering filing for bankruptcy. Can you
    discharge these debts in the bankruptcy? Perhaps you and your spouse want to draft an agreed order dividing the debts, but you want to be sure to protect yourself if the other ever files bankruptcy. Perhaps the divorce has left you both financially depleted and you both know you
    will have to file a bankruptcy. Is it better to file now, before the divorce is over, or after? It is almost always best to consult an attorney in these matters. A little pre-divorce planning in this area may save you a lot of headache in the long run. Some general principles to use if you decide to try it yourself are:

    1. The general rule is that community debts taken in connection with a dissolution decree are not dischargeable in bankruptcy unless: a) the debtor absolutely cannot pay because all his or her money is needed for the basics of survival; or b) the benefit to the bankruptcy debtor outweighs the detrimental consequences on the ex-spouse.

    2. Some debts that are normally dischargeable in bankruptcy can become non-dischargeable if they are included within a dissolution decree. For example, a single person may have a credit card debt which is discharged in bankruptcy, but a formerly married person who took the same type of debt may be obligated to repay it if it was included in a dissolution decree (subject to #1, above);

    3. The time period that you have to object in a bankruptcy proceeding is very short (about 60 days after the first meeting of creditors). If you feel as though your ex-spouse is trying to get out of a debt he or she should be forced to pay, you must file an objection in the allotted time period or the discharge will be effective against the debt, whether you have a great case or not. Do not wait too long or you may be stuck with all the debts, regardless of how unfair it may be!

    4. You can be physically separated and still file a joint bankruptcy petition. Joint petitions are generally cleaner and cheaper than two separate bankruptcies. If you can both agree that filing bankruptcy is the way to go, you don’t have to still be married and under the same roof to file at the same time. Filing before the divorce is final may also be advantageous, but you should consult an attorney on that particular issue.

    5. Filing for bankruptcy does not change the child support which has already been ordered by the court; it also does not generally change spousal maintenance obligations. Once a bankruptcy petition is filed, the court handling the divorce cannot change or modify child support or maintenance payments unless the Bankruptcy Court specifically permits modification proceedings.

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Avoiding Common Mistakes

  • Information comes from www.legalvoice.org.

  • Here are some common errors in this area which you can avoid by being a little proactive:

    1. Get Creditor Information as Quickly as Possible. If you and your spouse have separated, you should make a rapid assessment of your creditors. Get information from your spouse, through discovery in the dissolution, or get a credit report. Find out all the creditors you really have—just guessing can hurt you.

    2. Notify Creditors Promptly and In Writing that You Will Not be Liable for Future Debt. You don’t want to get into costly and lengthy litigation about when you separated and what you are liable for. A simple certified letter to a creditor can save you a lot of time and expense in the long run.

    3. Don’t Agree to Pay Your Spouse’s Separate Debts or More Community Debt to Offset Their Separate Debts. Remember that that is their obligation, and most courts will not really consider those separate debts when dividing community debts.

    4. Don’t Defend Against a Collection Based on Your Dissolution Decree. Many people fail to answer or respond to collection lawsuits because they think their divorce decree protects them from the collection. It doesn’t. As noted above, you cannot alter the creditor’s rights by virtue of your decree with your ex-spouse.

    5. Consider a Joint Bankruptcy Filing Before You Proceed with Divorce. It may be difficult to even consider doing anything together during this time, but remember that a joint filing does not require you to live together. Many joint filings can be accomplished without any real contact between the parties, and may be the cleanest and most economical solution to debt problems.

    6. Don’t Wait to File Objections to Discharge Upon Receiving Notice of a Bankruptcy. If you are concerned that your spouse is trying to file bankruptcy against debts he or she took in the divorce, don’t delay! Waiting too long can be the difference between eating groceries and eating the debts.

    7. Consult an Attorney or Consider Other Legal Services Agencies. These generic principles are helpful, but every individual case has its own concerns which are best addressed by a lawyer.

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