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Bankruptcy Education

Bankruptcy Education

A decision to file for bankruptcy should be made only after determining that bankruptcy is the best way to deal with your financial problems. This factsheet cannot explain every aspect of the bankruptcy process. If you still have questions after reading it, you should speak with a bankruptcy attorney.

What Is Bankruptcy?
Bankruptcy is a legal proceeding in federal court to stop creditors from seeking to collect debts until the debts are sorted out according to law.

What Can Bankruptcy Do for Me?
Bankruptcy may make it possible for you to:

  • Eliminate the legal obligation to pay most or all of your debts to give you a fresh financial start. This is called a “discharge'' of debts.
  • Stop foreclosure on your house or mobile home and allow you an opportunity to catch up missed payments.
  • Prevent repossession of a motor vehicle or other property, or force the creditor to return property even after it has been repossessed.
  • Stop wage garnishment, bank attachment, debt collection harassment, and similar actions to collect a debt.
  • Restore or prevent termination of utility service.
  • Allow you to challenge the unlawful or inaccurate claims of creditors.

What Bankruptcy Cannot Do
It can’t fix all credit problems.  It usually cannot:

  • Eliminate certain rights of “secured'' creditors who have taken a mortgage or lien on property as collateral for the loan such as for a car loan or home mortgage.  You can force secured creditors to take payments over time.  Bankruptcy can eliminate your obligation to pay additional money if your property is taken.  However, you generally cannot keep the collateral unless you continue to pay the debt.
  • Discharge certain types of debt such as child or spousal support, most student loans, court restitution orders and fines, and some taxes.
  • Protect cosigners on your debts. When a relative or friend has co-signed a loan, and the consumer discharges the loan in bankruptcy, the cosigner may still have to repay all or part of the loan.
  • Discharge debts incurred after bankruptcy has been filed.

What Will Happen to My Home and Car If I File Bankruptcy?
In a chapter 7 case, you can keep all property which is ‘exempt’ by law from the claims of creditors.  That means you may not lose your home or motor vehicle during your bankruptcy case if your equity in the property is fully exempt. The exemption amount for a motor vehicle is $3675 and $132,900 for home equity.  The amounts of the exemptions are doubled when a married couple files together.  

If your home or vehicle is worth more than the exemption, there are still options.  You can agree to keep making your payments on the debt until it is paid in full.  Or you can pay the creditor the amount that the property is worth.  That can be less than you owe. 

Can I Own Anything After Bankruptcy?  
You can keep exempt property and property obtained after the bankruptcy is filed.  However, if you receive an inheritance, property settlement, or life insurance benefits within 180 days after filing for bankruptcy, it may have to be paid to your creditors if it is not exempt.

Will Bankruptcy Affect My Credit?
Yes.  The fact that you've filed a bankruptcy can appear on your credit record for ten years. But since bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills. 

What Else Should I Know?

Utility services - Public utilities, such as the electric company, cannot refuse or cut off service because you have filed for bankruptcy. The utility can require a deposit for future service. You will have to pay new bills after bankruptcy is filed.

Discrimination - An employer or government agency cannot discriminate against you because you have filed for bankruptcy.

Driver's license
 - If you lost your license solely because you couldn't pay court-ordered damages caused in an accident, bankruptcy will allow you to get your license back, unless the damages were for death or personal injury as a result of a DUI.

 - If someone has co-signed a loan with you and you file for bankruptcy, the co-signer may have to pay your debt. If you file a chapter 13, you may be able to protect co-signers, depending upon the terms of your chapter 13 plan.

What Does It Cost to File for Bankruptcy? 
Currently, it costs $299 to file for bankruptcy under chapter 7 and $274 to file under chapter 13, whether for one person or a married couple.  It is less costly to file jointly.  The court may allow you to pay the filing fee in installments if you cannot pay all at once. Attorney's fees are another cost.

Can I Keep My Tax Return? 
 If you file for bankruptcy, the trustee may demand that it be given to him to settle your debts.  Talk with your attorney about your tax return and the timing of filing your bankruptcy.  

Can I Make Purchases Before I File for Bankruptcy?
Yes.  You will need to continue to purchase necessities.  However, you should not incur debt when you know you will be filing for bankruptcy.  Your creditors could claim that you are engaging in fraud.

How does the “means test” affect my bankruptcy?  
The “means test” compares your last six months actual household income to the median household income level in your area.  Currently, the median household income level is $41,964 for a household of one; $72,764 for a household of four and $7500 for each additional household member.  If your income is above the median household income level you cannot file a Chapter 7 bankruptcy.  If your household income is below the median, you can file either a Chapter 7 or a Chapter 13 bankruptcy.  

What are the time limits on filing Bankruptcy?   
You cannot file a chapter 7 bankruptcy if you received a chapter 7 bankruptcy discharge in the past eight (8) years.  Different rules apply for a chapter 13.  If you have filed a chapter 13 bankruptcy, you must wait six (6) years before filing for a chapter 7.


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