What is Bankruptcy?

Many people put off filing bankruptcy because they have unanswered questions and concerns. We want to take some of the mystery out of the process and hopefully answer some questions that you may have. Below you’ll find a series of the most frequently asked questions submitted to McFarlin LLP on this very topic.

Q. What is Bankruptcy?

A. It is a consumer protection law. It is a federal process, which allows you to have your qualifying debts forgiven. California insolvency laws are based on forgiveness rather than punishment. The law recognizes that bad things can happen to good people and sometimes you simply do not have the ability to comply with your creditor’s repayment demands.

This law does not seek to deter or regulate certain behavior, as other laws do; it simply recognizes that there are sometimes circumstances that are beyond your control, which can only be addressed through the cancellation of debts.

Q. Will Filing For Bankruptcy Stop Calls From Creditors?

A. It puts an automatic stay into effect, which stops creditors from trying to collect any debt from you. The automatic stay immediately stops creditor phone calls, collection letters, wage garnishments, lawsuits, bank levies, and all other types of harassment, intimidation and scare tactics from creditors.

Once your case is successfully completed, you will receive a discharge, which is a legal release of all of your debts. Creditors are left with no legal cause to contact you or pursue debts listed in the documents.

Q. I’m making Child support payments, but I still owe plenty in back support, does chapter 7 help?

A. Child support is one of the few things that cannot be discharged in chapter 7.

Q. How long does it take to file chapter 7?

A. For a chapter 7, from the time the case is filed, it takes about four months to complete. However, most of that time is just waiting for the court to process the discharge paperwork. Your responsibilities (as the debtor) are usually over in about one month.

Q. What type of questions are asked at this meeting by the trustee and creditors?

A. The trustee will ask you the following questions: What’s your name? , What’s your address? Is this your signature on the petition? Did you read it when you signed it? Did you understand it? Did you list all your assets? Did you list all your debts? Do you want to make any changes? Creditors may also ask questions, however, it is rare for a creditor to show up.

Q. If I go into bankruptcy, can they take my car which is paid for in full?

A. We would need more information from you to tell you exactly what to expect. There is a motor vehicle exemption of approximately $3,250. That amount applies toward the value of your car. If it’s worth more than that amount, and you don’t own a house then you can apply the balance of your “wildcard” exemption to the car up to about $22,500. If it’s worth more than about $25,500 and has no lien on it (you’ve got the pink slip), there is a chance the trustee would sell it, but you’d get the first $25,000 from the sale.

Q. If a law firm is granted confirmation of an arbitration award through the court, that was originally awarded to them through an arbitration forum, can they then take that judgment confirmation and get a legal hold on bank accounts? Can they just go in to a bank and withdraw funds from a person’s account without notice?

A. The arbitration award allows the creditor to shorten the “default judgment” process. The arbitration award by itself does not have legal effect, but it does allow the creditor who holds it to very quickly turn it into a default judgment if you don’t immediately respond once they file it with the court.

Once the default judgment is entered, then the creditor can begin enforcement, which can include wage garnishment and bank levy. The creditor still has to give you notice and an opportunity to respond before the court will enter the default. You can file insolvency at any point in the process to make the arbitration award/judgment unenforceable against you (so long as it is for a qualifying debt).

Q. How much does it cost to file for insolvency?

A. The cost for filing varies with the complexity of the case. However, most chapter 7 cases can be handled for a flat fee starting at $2,500 plus a filing a fee (charged by the court) of $299 for a total of $2,799.00. If you like, you can make payments on that amount, but we can’t file the case in court until the full $2,799 is paid.

During the time it takes you to pay it off you can refer creditor phone calls to us, just tell them you’ve retained an attorney and provide them with our number.

Q. My bankruptcy was discharged in 1996. At the time I was told the negative impact on my credit report would be seven years. Apparently the reporting guidelines changed and now it’s 10 years. Can you tell me if the 10 year change was only for filings after the change…i.e. is there a grandfather clause in the reporting change?

A. The credit reporting agencies reporting period varies. Public record filings can stay on for 10 years. However, every consumer should monitor their credit closely. There are many opportunities for creditors (or the courts) to report incorrect information, every debtor should consider a credit repair program after bankruptcy, our office can make a referral to a very good company that will work to get all negative items removed.

Q. Can you avoid having your vehicle repossessed by filing bankruptcy? And can your debt on your vehicle be forgiven to be able to keep it after filing for insolvency and what is the quickest amount of time to file?

A. Insolvency will slow down the repossession process, but not prevent it from happening. Since the vehicle in questions is secured collateral, the creditor always has a right to come get it because they are the legal owner if payments are not made. With insolvency, you’ll have the choice to surrender the vehicle, and owe nothing more, or continue to make payments and stay current and keep the vehicle.

Q. My brother got into financial problems with a credit card and he went to a legal aid who filled out the papers for him to file for bk, my brother stated he wanted three things…(1) to do nothing that would get him into trouble (2) to not have his house involved in any way (3) to have small payments when it was all done.

They said “not a problem” filled out what they needed to, my brother took the papers to the right place, filed them and then waited for the meeting. At the meeting he was told he is not allowed to say anything and they proceeded to have the meeting during which they said “Yes, you can have the chapter 7 and the debtor will take the equity in the house.”

His house is worth $310,000.00 (upon which he only owes $45,000.00) and the credit card bill is only $10,200.00. He asked “You’re taking my house?” and they said “No…just the equity,” so he said, “I don’t want to file anymore” and they said “Oh well, there is no backing out now, you already filed!”

NOW my question is this: Isn’t there some way for this poor guy to get out of this? Surely there is some way to stop the liquidation process once it is started? He has another meeting on the 26th for which they suggested he get a lawyer.

A. Unfortunately, it is not possible to simply voluntarily dismiss a chapter 7 without the trustee getting the opportunity to object. At this point, since the trustee is now aware of the equity in the house, there is very little chance of getting out of the insolvency. I know you don’t need me to tell you, but it is so dangerous for people to file for liquidation without a lawyer.

Insolvency is a legal process; it is not simply filling out forms. Programs like legal aid or document preparation programs or paralegals are not attorneys and cannot give legal advice. They make it sound like they’ve done it before and it’s easy, but it’s the consumer taking the risk. The best option now is probably to convert the case to chapter 13 and sell the house through that process. It gives you a chance to remain in control, rather than have the trustee just sell it for you.

Q. I have a creditor that was not included in my chapter 7 from 1999. I was unable to make payments to him as of last year and they have now sold my account to another firm for collection. I offered to make payments last year but the company wanted at least $5,000 lump sum or they would not accept payments. I did not have that amount to give them. And I still don’t. For the most part, I have made payments to my other creditors in a timely manner and it shows on my credit report as such.

I have now received summons that was literally left at my front porch without an envelope or anything to protect the nature of my privacy while I was out of state. It is to be heard at our local superior court and is listed as a “limited liability case” for the credit card company I had tried to make payment arrangements with. I still own a residence out of state, two cars over ten years old, but no stock, bonds, retirements or savings. I am now on workers’ compensation with a very limited income and am not able to pay at this time.

When I return to work I could start the payment offer I made before and repay the debt but my attempts as I said were thwarted last year. I did not owe any money to this creditor when I filed the insolvency but I transferred monies from my mom’s credit account to mine because it was money I owed to her. I have not bought any large ticket items since before my bk. Is there anything I can do to try and negotiate further since this is now going to court and my financial resources are even more restricted due to my work injury?

A. It sounds like you had the account open prior to the 1999 filing. If that’s the case, you may have an argument to make. I would say your best bet is to go to court on the day listed on the summons with a copy of the cover sheet of your 1999 filing.

There is some case law to support the position that even if an account is not listed on the petition, it is still discharged because you had the opportunity to discharge it. When you get in front of the judge, just give him the facts and let him make the determination. Tell him you filed insolvency in 1999 and this account was open prior to that filing. Make sure to bring a copy of the 1999 filing cover sheet to give to the judge.

Q. I moved here seven years ago from another state. Recently, I was contacted by a collection agency in another state saying that I had 14k in debt owed. I asked them what this was in regards to and I was told to “just pay my debt.”

I asked them to please send me what it was they were trying to collect for and I never received anything. (They did read back to me my current mailing address, and I am not hard to find.) Now I just received a notice that they are garnishing my wages via a court order. I was never informed of this and, quite frankly, I barely make ends meet as it is being a single parent. Can filing BK get rid of this?? I don’t have any other debt other than this. I have one credit card that I use sparingly and pay off every month.

A. If the judgment is for a credit card, medical bill, or other unsecured, non-priority debt then it is dischargeable through liquidation. Dischargeable means it can no longer be enforced against you.

Q. I’ve built up around $35K in credit card debt as a result of some entrepreneurial ventures over the last four years. In addition, I have student loan payments due soon which had been in deferment. By robbing Peter to pay Paul I’ve kept all but one of my credit cards from being sent to collection – about $6,600. I have just accepted a new job that I will start soon but when I look at the combination of my living expenses (truly not extravagant), student debt, and credit card debt I am still up to my eyeballs with no real end in sight.

Three questions:

1. Is Chap. 7 or 13 my best option given the amount of unsecured debt and do I have a choice as to which one or is that simply based on income?

2. My wife and I have been married for two years but most of the debt was racked up before we were married. Would it be better and is it an option for me to file separately?

3. Does it make more sense to start the process before or after I’ve started my new job?

A. It sounds like you’re in good shape to do a chapter 7, which is the quickest, easiest, and least expensive way to go. Chapter 7 would allow you to discharge the credit card debt with no repayment plan. The money you would have spent on credit card payments over the next few years can go into savings for a down payment on a house. After about two years, you can have your credit rebuilt to the point of qualifying for a good mortgage interest rate, and a down payment to close the deal.

Without the bankruptcy, you’d have to pay off the $35K in full, and then start saving for the down payment. This would set you back. The student loans are not dischargeable, however, mortgage lenders don’t count student loans against you like credit cards.

Q. I don’t have any credit cards or owe any car loans. The only debt I have is court fines and recently a judgment against me for $2,500.00. I have no job and live with my grandmother. I cannot pay any of this, I have been making small payments to the other fines working with friends, but in June I cut my hand with a table saw and its only now starting to heal. I can’t even move what fingers I have left. Can someone give me some advice here?

A. Generally, court fines are not dischargeable. This means even if you filed bankruptcy the court could still come after you for the money after the case was finished. One option you do have is a chapter 13. This is a repayment plan. You’d end up paying the court fines in full, but you’d get five years to do it.

However, chapter 13 requires regular income. You’ll have to wait until you have predictable monthly income to get into a chapter 13. I wish I had a better solution for you, it’s a tough situation.

Q. I received a letter from my finance company for my car. They asked if I plan to reinstate and resume making post-petition payments as agreed in my contract. If so, I need to pay the past due amount and all subsequent payments. If not, they want to file a Motion for Relief from Stay. Can you explain to me what all this means?

A. Anytime you fall behind on car payments, the creditor can repossess the car. Bankruptcy doesn’t really change anything because the property is “secured.” The creditor has the same rights in bankruptcy as they had before the case was filed, the only difference is they have to ask the Court for permission to repossess the car once you file.

A Relief from Stay motion is just that. The creditor asking the court for permission to go recover their secured collateral. If you are current on the car payments in BK, however, the creditor cannot repossess the car because the court will not allow them Relief from Stay.

Q. Hi, My husband and I make good money and have two young children. As of right now, my husband alone is in a $30k debt in credit card bills. I owe approximately $6k. If you add our car, that’s an additional $15k that we owe. I’m currently going to school and this does not include my upcoming student loans. We don’t own our home, and we are not behind in any of our bills.

We manage (somehow) to make minimum payments on everything. We don’t have perfect credit, but we also don’t have poor credit. I know it will take decades for us to pay everything off, is BK the right solution for us in order to get a fresh start?

A. It sounds like you’d benefit greatly from a chapter 13. Chapter 13 stops the foreclosure sale, and gives you up to five years to catch up on the arrearages. It gets creditors off your back, and gives you some time to decide what to do. You can also sell your house out of the chapter 13 voluntarily rather than having it sold for you by the bank.

If the goal is to have no debt and serviceable credit as soon as possible, it certainly sounds like bankruptcy would be the quickest way to get there. Making only minimum payments each month is a dead end because you’ll never get out of debt that way; you’re just putting off the inevitable. You could find yourself in the exact same position, with all the same debt two years from now. Bankruptcy does damage your credit, but more importantly it gives you a chance to start over with no debt.

Once you’re debt free, you can concentrate on rebuilding your credit and saving money for a down payment on a house. In two years, you can have your credit rebuilt, and enough money saved to get into a house. Liquidation is the quickest way to get there for most people because a lender won’t consider you for a mortgage until most unsecured debt is paid off.

Q. I have 16 payments left on my vehicle. I recently fell 60 days past due. I am 28, have always made a decent living 50-60k year, sometimes as much as 85k. Over the last three years I have had a hard time keeping steady work. I work in the collections industry. (Ironic) I have about 20k in IRS and 5k in California state tax debt.

A large portion more than 3 years old. I have heard and read that there might be a small possibility that I can be relieved of this through chapter 7. I have no assets other than the aforementioned vehicle and my personal belongs, i.e. clothes, television, and bedding. Outside of the tax debt I have maybe 2k in unsecured debt, and my vehicle which I am upside down on but, relatively close to a pay off.

Is there any way that the finance company will reaffirm the debt and defer the delinquent payments to the end of the loan? And is there any relief from the tax monkey on my back? I tried an offer and compromise sometime ago, however, they denied the off based on an undetermined income.

A. You’ve raised a number of issues. I’ll take them one by one:

  1. Two months behind on car payments could become a problem, generally speaking, the finance company will probably go to the court for relief from stay if you fall three or more payments behind. If you are only one payment behind they probably will do nothing, but two payments is the gray area. BK doesn’t really change anything though, they could come repo the car now, bankruptcy just makes it a little more difficult for them to do it.
  2. Taxes are generally not dischargeable. However, there are narrow exceptions, one of which is when taxes are three or more years old and you filed a return over three years ago. Even so, it’s not always a sure thing. The IRS and FTB make the rules, enforce the rules, and then tell you if you’ve broken the rules. It can be a little tricky, but it sounds like you’ve got a pretty good shot at discharging the taxes (or at least a good portion of them).
  3. General unsecured debt is dischargeable in most circumstances.

Q. I have some state and federal tax charges. Can those be taken care of with Chapter 7? Can Creditors take your workers’ comp settlement? I have been on workers’ comp for nine years. I have so many bills; I am way over my head. Now I am getting Perm disability, and waiting to see what I will get for a settlement.

I have been wanting to file a chapter 7, but I am afraid the creditors will take my money. I am also on SSA which I am getting a total of $600.00 a month. What can I do and what is the amount you would take to at least start my Chapter 7? The bills I owe have accumulated through the years. I thought I was going back to work. After surgeries there telling me I can’t. Now I cannot work at all. Can they take my settlement?

A. Unfortunately, taxes are often not dischargeable in bankruptcy. Every situation is different; there aren’t any quick answers when it comes to taxes. It is probably not possible for creditors to levy your worker’s comp. money directly. However, there are other ways they can enforce the judgment, like a bank levy.

This device is rarely used, but if the creditor has a judgment against you, they can ask the Sheriff to clear out your bank account and that money will be used to offset the judgment. If you know there are judgments out there, it’s not a good idea to leave any large sum of money in a bank account.

Let Us Assist You With Your Bankruptcy

If you are interested in filing for bk and have a question that you do not see answered above, contact us today, or schedule a free consultation. At McFarlin LLP we have handled literally thousands of bankruptcy cases. We will give you personal attention, and the best legal services possible. Now is the time to start to rebuild your credit. We want to help you with your bankruptcy. Give us a call us today (888) 728 0044, or email us.


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