FREQUENTLY ASKED QUESTIONS

What is bankruptcy?

Bankruptcy is a legal process in which individuals and businesses can eliminate or repay some or all of their debts under the supervision of the federal bankruptcy court. Generally, there are two types of bankruptcies – liquidation (chapter 7) and reorganization (chapter 11, 12, and 13).

What is the difference between chapter 7 and chapter 13?

Conceptually, the main difference between chapter 7 and chapter 13 is that chapter 7 is a liquidation while chapter 13 is a reorganization.

In a chapter 7 case a trustee collects all of a debtor’s non-exempt assets, reduces them to cash, and then distributes that money to the debtor’s creditors. Most of the time when this happens creditors receive pennies on the dollar for the debts owed to them. In exchange for this process, a debtor is given a discharge of certain debts meaning that he or she is no longer personally liable for the debts discharged. Not all debts are dischargeable in chapter 7 – there are numerous exceptions to the discharge.

Chapter 13 is a reorganization chapter where debtors with regular monthly income can restructure his or her debts. Assets are not liquidated in chapter 13 but a debtor has to pay his or her unsecured creditors at least what they would receive in a chapter 7 case but the debtor can pay that over a 3 to 5 year period.

In a chapter 13 case, a debtor makes monthly payments to the trustee who then disburses that money to various creditors according to a plan filed by the debtor and approved by the court. A chapter 13 case lasts a minimum of 3 years and a maximum of 5 years and a debtor only receives a discharge after making all of the required plan payments.

Chapter 13 lets you cure mortgage defaults and save your house. If you’ve had a car loan for longer than 910 days and you owe more than what the car is worth then in chapter 13 you could pay the creditor the value of the car instead of the actual amount you owe and you can also reduce the interest rate which is important when you have a car loan at a high interest rate. Chapter 13 also lets you repay certain tax debts. Additionally, if you’re behind on child support payments, you can use chapter 13 to cure that delinquency. Lastly, a debtor can discharge more types of debt in a chapter 13 case than he or she can in a chapter 7 case.

For specific questions about your particular case you should consult with a bankruptcy attorney to help you determine which chapter meets your goals.

How do I know whether I need to file a chapter 7 case or a chapter 13 case?

There is no bright line answer because each chapter has different goals as well as requirements; for that reason it is best to consult a bankruptcy attorney to help you make this decision. Generally, there are various factors to consider when determining under which chapter to file including: whether you have had previously file for bankruptcy relief, your income, the amount of debt you have, the type of debts you have, your assets, whether you are current on your mortgage or car payments, etc. These are a few of the factors that should be evaluated when determining which chapter suits your needs.

If I file a chapter 7 case, do I lose all my possessions?

Generally no. However, that does not mean that you may not lose a particular item. When a bankruptcy petition is filed an entity called an “estate” is created and everything that the debtor owns becomes property of that estate. However, you can exempt certain property but those exemptions are frequently based on your equity in the item. Exemptions protect value and not the actual item. Idaho’s homestead example will illustrate this point. A debtor residing in Idaho who files for bankruptcy relief can take advantage of Idaho’s $100,000 homestead exemption which lets you keep the first $100,000 in equity in your house. Unless you have more than $100,000 in equity in your home that you reside in, then you will not lose the house. But, if you had $150,000 of equity in your home then you should expect that the trustee will take the house, pay you $100,000 for your exemption, and then take the remaining money and distribute it to your creditors. So, the exemption does not protect the actual asset, it just protects your equity in it. Most people do not have more than $100,000 equity in their home so therefore most people don’t lose their homes when they file for relief under chapter 7.

Aside from the homestead exemption, Idaho has numerous other exemptions that a debtor can and should claim – vehicles, personal property, tools of the trade, guns, earned but unpaid wages, retirement accounts, etc. However, finding, understanding, and claiming them are difficult without the help of a bankruptcy attorney.

Do I lose my possessions if I file a chapter 13 case?

No, a chapter 13 trustee does not liquidate assets. That said, the chapter 13 trustee is going to require that your plan pay unsecured creditors at least what they would receive if you had filed a chapter 7 case. So, if a chapter 7 trustee could have liquidated any assets then you are going to have to pay that amount to your creditors in your chapter 13 case over a period of 3 – 5 years.

What debts are not dischargeable in my bankruptcy?

All debts that you failed to list on your bankruptcy petition will not be discharged, criminal fines and debts, student loans (except in very rare circumstances), most taxes, fraudulent debts, dischargeable debt you incurred to pay off non-dischargeable debt (such as paying off student loans with credit cards and then filing for bankruptcy), alimony and child support payments, priority debt such as taxes, wages owed to employees and any social security benefits, pensions, etc. that would not be dischargeable under a Chapter 7 bankruptcy, and secured debt. You may be able to get out of paying a significant portion of debt incurred from fraud or malicious and criminal activity in a Chapter 13 bankruptcy but not in a Chapter 7.

Does bankruptcy get rid of my medical bills?

Yes. Unfortunately, medical bills are one of the reasons that people file for relief. Medical bills are dischargeable in bankruptcy.

If I file for bankruptcy relief then do I still have to pay my alimony and child support?

Yes, you do. Bankruptcy does not terminate your obligation to pay your child support and alimony. In fact, in a chapter 13 case you could face dismissal if you fail to stay current on your obligations as they become due after your file for relief.

I am behind on my mortgage payments, can I save my house by filing for bankruptcy relief?

Yes, a chapter 13 would allow you to repay your mortgage default to your creditors over a period of 3 – 5 years. Debtors routinely cure significant defaults ($15,000 - $30,000) to their mortgage lenders in bankruptcy; it is not unusual. However, in order to take advantage of this option, you have to remain current on your mortgage payments to the lender after you file. The default to the lender is paid by the chapter 13 trustee from your monthly plan payment.

Do I have to turn my tax refund over to the trustee?

In a chapter 7 case, yes you do. Failure to do so could cost you your discharge. In a chapter 13 case the answer is not so simple because it is the language of your chapter 13 plan that controls. Generally the plan will require you to turn over the refunds to the trustee during your commitment period. However, if your finances are tight and you take appropriate steps to modify the language of your plan to retain your refunds each year then you may do so. Similarly, if you are required to turn over your refunds to the chapter 13 trustee and you fail to do so, then you face the dismissal of your case.

How long will my case take?

A chapter 7 generally takes about 4 – 6 months to complete if it is a no asset case. A chapter 13 case on the other hand completes when you’ve made all your payments under the terms of the plan. The minimum term requirement for a chapter 13 is 36 months (3 years) and the maximum allowed is 60 months (5 years). It is possible for a chapter 13 case to finish early if all the claims get paid off in less than the term of your plan.

How long does a bankruptcy stay on my credit report?

Generally a chapter 7 will stay for 10 years and a chapter 13 will stay for 7 years.

Will I be able to get credit after I file for bankruptcy?

Yes, but you will pay higher interest rates. Generally after debts have been discharged you will find that creditors are willing to lend you money. You need to be careful though and manage your finances carefully otherwise you start incurring debt and diminishing the benefits of having filed for relief in the first place.

Do I need an attorney to file for bankruptcy relief?

No, you do not need an attorney to file a bankruptcy case. However, the process is difficult and often frustrating to navigate by oneself and if not done correctly it can turn a simple case into a personal nightmare. Filing with the assistance of an attorney makes the process easier.

How much does it cost to file for bankruptcy relief?

There are several costs associated with filing for bankruptcy relief – mandatory filing fees, costs of credit counseling and debtor education classes, and attorney fees. As of December 1, 2014 the filing fee for a chapter 7 case is $335 and the filing fee for a chapter 13 case is $310. Credit counseling and debtor education classes generally cost between $30 and $50. Attorney fees in the Magic Valley area range from $1,000 to $1,800 for a typical chapter 7 case. Attorney fees for chapter 13 cases generally start at $3,500 which is the amount that bankruptcy courts have determined to be reasonable in our district. Because chapter 13 cases are more complex, you can expect to see some attorneys charge hourly rates for their work.