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Every situation is different. This handout addresses some of the most common questions and concerns individuals have when filing bankruptcy (bankruptcy FAQs). This is not a substitute for legal help. While this addresses the likely scenarios, there can be exceptions to these answers and/or situations when these rules apply, but certain steps must be taken to prevent possible issue. For example, when protecting assets, certain paperwork must be filed as part of the bankruptcy to make sure the court takes note of any exemptions/protections you may have.
Additionally, sometimes certain evidence must be provided to achieve the desired outcome. Also, sometimes when filing bankruptcy here in Virginia, other state’s laws may apply. This will depend on how long you have resided in the state and any states other states you have recently lived in. This handout addresses general questions but emphasizes Virginia law.
A typical no-asset Chapter 7 case can take between 3 to 5 months from filing date to discharge of the case. If there are assets to be distributed during the case it can be open much longer, depending on the assets involved and whether the Trustee overseeing the case can find buyers for the assets. A Debtor would still receive his or her discharge at the normal course, even if there are assets to sell. The biggest thing that prolongs a Chapter 7 case is the selling of real estate. The case could be open for 8 months to 24 months if there are assets. But the rebuilding and the fresh start of the debtor would be immediately after discharge.
A Chapter 13 case is a repayment of debts that lasts between 3 and 5 years, depending on the specifics of the confirmed plan. A plan may end sooner if certain circumstances are met. You can also voluntarily dismiss a Chapter 13 bankruptcy at any time, but if you dismissed your case without a discharge, then you would lose bankruptcy protections. There also can be restrictions on your ability to refile; before dismissing, you want to discuss all details with an attorney.
You file bankruptcy where you have lived for the majority of the last 180 days or where your largest assets are located. Most people file where they live. Now, if you have recently moved, you usually need to be in a location for 91 days before the new location has jurisdiction over your case.
All assets must be listed. The court needs to know if you have anything of value that can be used to pay your creditors. Just because an asset is listed, it does not mean it is at risk. It will depend on what exemptions/protections apply to your situation. The court also interprets assets in a very broad term. Things like the right to sue someone or the right to collect funds (i.e., insurance proceeds, payments for accidents or injuries, etc.).
It also includes more abstract items like cryptocurrency or domain names. Failure to list any assets could result in issues with your discharge and/or the court could later find that it is still an asset of the estate at a future date, even if it is something that originally could have been exempted. So, it is very important to list any and all assets, including rights, that you may have.
This can vary widely depending on what state you are filing your case in. Every state pass laws that determine what assets are protected in a bankruptcy case. These protections are called exemptions. In a Chapter 7 you can keep any asset that has an exemption. If there is not a law that can protect the asset, then it may be at risk in a Chapter 7. In a Chapter 13 case, you can keep all your assets, just having to pay your creditors up to the value of any non-exempt assets.
99.9% of the time, no. The test that most courts apply across the country require a showing that you have no options to deal with the debt and cannot make even minimal payments. With federal student loans, if you have the option for an Income Based Repayment plan – a payment plan based solely your income – then the courts usually find you have an alternative way of dealing with the student loans outside of bankruptcy. If you have significant private loans, then you have a slightly increased chance of getting relief. However, it is still very difficult. To even attempt and get student loans discharged in bankruptcy, you are required to file a separate lawsuit, called an Adversary Proceeding, to prove an undue hardship. This is separate from the normal bankruptcy case proceeding.
New case law is starting to pop up in specific jurisdictions across the country that are attempting to allow student loan debt to be more easily discharged in a bankruptcy, but those cases are very fact specific and are currently only the presiding law in a few jurisdictions. Additionally, many of the newer cases discharging substantial debt have appeal cases pending, which keep the law from changing since higher courts may overturn the decision. Additionally, the Fourth Circuit (which includes cases from Maryland, North Carolina, South Carolina, Virginia, and West Virginia) has continuously held up this difficult and high standard in cases to date. This means if you are filing bankruptcy in Virginia, you are unlikely to qualify absent a very unique situation. You should consult with your lawyer about your specifics if you think you will qualify.
Bankruptcy may impact your ability to get new student loans. With Stafford Loans (usually loans that are also called subsidized and unsubsidized), you only qualify for those loans if you are need based. Bankruptcy has no impact on those loans. However, if you are applying for Grad PLUS or Parent PLUS loans (PLUS Loans), these are credit based. You cannot usually qualify for these if you have any 90-day delinquency or any other serious negative activity on your credit, like bankruptcy or foreclosure, for a few years prior to application. Parent PLUS loans are used for parents to help pay for their child’s undergrad and Grad PLUS loans help graduate student pay for additional expense over and above what Stafford Loan will pay for. If you are a parent who files for bankruptcy (or has other serious delinquencies on your credit), your child may qualify for additional loans and/or aid, if you show you have applied for Parent PLUS loans and were denied.
Possibly. You have the right to keep paying on your current vehicle loan/lease post-bankruptcy. The court does review the equity in the car. If your car has no liens on it, you may keep it and have no worry about turning it over to the Trustee if the value is less than your exemptions in the state in which you filed your case.
The exemptions apply to equity in the car. For example, if you have a $18,000.00 car with a $10,000.00 lien, you have $8,000.00 in equity. To keep the car without issue, you would need $8,000.00 in exemptions that could apply to your car. If you have a $15,000.00 car with $18,000.00 in liens, then there is no equity, and you should be able to keep the car if you keep making your payments.
Under Virginia law, every person gets $6,000.00 in equity in a car to protect. Depending on the circumstances, you may be able to stack exemptions, common exemptions apply to things like tools of the trade or your wildcard. But these additional exemptions only apply in specific situations.
One issue that most debtors do not know about is cross collateralization. This is a right that only credit unions have. This gives the credit union a lien against your bank account. This is the reason that if you do not make a payment on any debt you have with the credit union, they can take the payment out of your account automatically. Since bankruptcy does not get rid of liens, it usually means that someone who files bankruptcy and has debt with at a credit union cannot continue to bank with that credit union.
Additionally, this right can also impact car loans and credit cards. If the credit union gives you a loan for a car, that lender has a lien against the car to secure the payment. The lien allows the creditor to repossess the car if the borrower does not make all of the payments. The cross-collateralization agreement allows the lien against the car (or any other collateral) to secure additional debts other than the car loan. This means that if you don’t pay a credit card debt or a personal loan, then the creditor can repossess your car. Even if they do not repossess the vehicle, they may hold the title forever (or until all the debs are paid off). Sometimes in bankruptcy we can limit or negotiate this issue away or at least limit the impact.
Reaffirmation is a type of agreement in a Chapter 7 that a debtor makes with a lender to remove a debt from the bankruptcy and repay the debt as agreed. By entering into a reaffirmation agreement, all the terms of the contract remain. The debt would then be reported on the credit report (both on time and late payments). However, any reaffirmation agreement must be signed off on by the bankruptcy court. The court must believe the agreement is in the best interest of the debtor.
This is rare to occur (it sometimes is allowed for cars and almost never for real estate). The reason being is that most creditors allow retain and pay, which means that the debtor continues to make payments and keeps the property. If the property is paid in full, then the title to the property is given to the debtor. But, with retain and pay, a debtor can also choose to give up the property any time in the future without financial repercussions; the creditor can repo/foreclose on the property, but that event would not report on the debtor’s credit and any deficiency would not be the responsibility of the debtor.
Any real estate you own must be disclosed to the court during your bankruptcy. Whether that real estate is subject to surrender/forced sale depends greatly on what state you are filing in, what chapter of bankruptcy you are filing, and the status of any loans/liens on the property. Some states have exemptions that can protect an unlimited equity in your primary residence, other states only allow for $20,000.00.
Currently, Virginia allows a Debtor to protect $25,000.00 in equity of their primary residence, plus possibly an additional $5,000.00 wildcard. Another protection could be the Tenants by the Entirety protection that applied to married couples owning property together when very specific criteria are met. Various additional exemptions may protect your property; it is important to review your situation with an experienced attorney to ensure your home is protected.
A few months after a Chapter 7 bankruptcy discharge, a Debtor usually sees credit around 600-630. For some this will be an improvement and for others it will be a decrease. However, that is about the median credit score across the county. After bankruptcy, someone’s credit report usually will improve steadily after opening one or two new accounts. Immediately after bankruptcy, a person can qualify for a car loan or new credit card. The interest rates will be on the higher side. As more time passes, the lower the interest rate will be.
For something like buying a home, you can usually qualify for FHA financing 2 years after filing for bankruptcy or conventional financing 3 years after bankruptcy. There are a few programs that allow for FHA financing only 1 year after bankruptcy if you can prove the bankruptcy was due to extenuating, uncontrollable circumstances (i.e., death of breadwinning spouse, natural disaster, etc.).
Usually in a Chapter 7 your employer will not find out you filed bankruptcy, unless you tell the employer, or they pull your credit. Bankruptcy will show up as a public record on your credit report for up to 10 years. In Chapter 13, your employer is not usually directly told, but the bankruptcy trustee can request a wage allotment after confirmation which results in your payment being taken directly from your paycheck. Despite finding out, under federal law no private employer may terminate the employment of, or discriminate with respect to employment against, based on a bankruptcy filing.
Bankruptcy does not usually get rid of secured debts, like mortgages and car loans, unless you are giving up the property or special circumstances exist. You must continue making payments after filing to keep the property. If you fail to make payments, the property can be taken (repossession, foreclosure, etc.). A bankruptcy discharge only protects the debtor from liability from the balance of any deficiency balance after a sale of property.
In Chapter 7 and Chapter 13, your secured debts could play a factor and it is important to review those specifics with your attorney to figure out what will happen. The court will often review the equity in the secured property (i.e., home, land, car, etc.) to determine if all the equity is exempt. If there is not more equity than what can be protected under the law, then the creditor will look to your Statement of Intention to see if you intend to keep the vehicle or surrender it. This Statement of Intention allows debtors to tell the court and creditors what their intent is to do with their secured property, this includes retain and pay, redemption, reaffirmation, or surrendering. Each of those options has its pros and cons and may only apply in some circumstances.
NOTE: Some autopayments may stop after bankruptcy (i.e., car, mortgage, etc.). This is done by some creditors since they are making sure they are not demanding payment on property you are surrendering. Make sure to watch your accounts and contact the creditor directly to set up the payments again. It is the debtor’s responsibility to ensure a payment is taken out each month from your bank account.
Spouses do not have to file together. Sometimes there are very good reasons to file together and sometimes there are good reasons not to, it is very fact specific. While you do not have to file together, if you are not legally separated or living in separate households, you must include your spouse’s income in your financial analysis.
The reason being that your spouse is not responsible for your debts, but they must contribute to the household. A spouse will help pay for things like food, rent, utilities, etc. If your spouse has separate expense, like their own debts, supporting other people outside the household, etc. then we usually can take those expenses to lower the income they bring to the household. If a spouse is not filing, their credit, income, debts are not impacted.
There is no minimum amount that is needed to file bankruptcy. If the amount of debt is less than $10,000.00, we suggest looking at the nature of the debt and if there are better alternatives than a bankruptcy case. Anything less than $10,000.00 becomes a cost benefit analysis. The other factor we like our clients to consider is whether they could repay a substantial portion of the debt during a three to five-year period; if the answer is no, then bankruptcy may be appropriate.
Yes. There is no requirement that you be employed to file a bankruptcy. The issue with employment comes into play if you file a Chapter 13 repayment plan case. The court needs to know that you can fund a repayment plan to pay back at least a portion of your creditors during a Chapter 13, and if you are unemployed that may be an issue that leads to your case not being approved. In a Chapter 7, the court considers the lack of income a reason for filing. The major concern our office has with filing bankruptcy while unemployed is whether you will be able to live without incurring new debt going forward. If you will need to incur more debt going forward, then filing bankruptcy at that time is likely not appropriate.
This one is completely based on what state you are filing your case and what chapter you file. If you file a Chapter 7 case, your retirement account may be at risk of liquidation depending on the state in which you file. Here in Virginia, retirement accounts are often 100% protected from liquidation. As a result, you would be able to keep your retirement funds here, even it was more than what you owe your creditors. In many states, retirement accounts have some protections, but it depends on the type of retirement account you have and the amount of money in the account.
For a Chapter 13 case, once again depending on what state you file your case, you may have to pay back your creditors the equity in your retirement that is not protected by local/state exemptions.
You need to list all creditors that have a balance on the date of filing. There is no way to get around that; the court does not allow picking and choosing of debts in bankruptcy. If you want to keep a credit card open there is a chance that if it has a zero balance when your case is filed, the credit card company may not close that account. There is no way to guarantee that happens.
Additionally, some companies will check bankruptcy records unilaterally. For example, Wells Fargo Bank checks bankruptcy records to see if any of their customers file bankruptcy, even if you do not owe them money. Some utility companies/service providers, like Cox or Verizon, will also check records to see if their customers have filed bankruptcy. It will not impact your service, but they will usually waive any interest or late fess that were owed on the account. Since bankruptcy filings are a public record, companies are free to search them for information, if they think it is necessary.
It is rare for a case to be rejected or for a creditor to object to a bankruptcy; but it can happen. For a bankruptcy case to be rejected, it can depend on the type of case. In a Chapter 7, a bankruptcy discharge can usually only be denied if you do not qualify or for some sort of fraud. The bankruptcy court will usually look at your income to determine if you qualify for a Chapter 7. There is a process called a Means Test that looks at your income for the 6 months immediately prior to your file.
They use this look back period to calculate your annual income. If your annual household income is below the median income for your household size in your state, then you automatically qualify. If your income is above the median income, the court does a full analysis of your income and allowable expenses. Some expenses are based on actual expenses, such as taxes, mortgage payments, medical expenses, etc. And other expense is based on the IRS standards for the county you live in, including utilities, food, transportation, rent, etc.
The idea is that in a Chapter 7 you have less than average of $227.50 per month in extra income over the next 60 months. Creditors and the United States Trustee’s Office (the part of the Department of Justice that oversees bankruptcy) sometimes objects to individuals who filed Chapter 7 if any of the expenses are questionable or extreme. This is rare but done to ensure there is no abuse of the system and only people who do qualify get discharges.
It is slightly more common, but still very rare, for creditors to object to their debts being discharged in bankruptcy. Creditors cannot just object for no reason, it must be based on the exceptions in the bankruptcy code. The most common exceptions are for things based on fraud. This usually occurs when someone lies on their credit application about income or financial situation. Additionally, new debt taken out short before filing bankruptcy, may also be objected to by creditors.
Common creditor objects are usually for debts for like new loans within 90 days of filing, cash advances within 70 days of filing, etc. When a creditor wants to object to a situation like this, the bank or lender must file an adversary proceeding within the bankruptcy. In this separate lawsuit, the creditor must explain what they believe happened and what code section this exception to bankruptcy falls under. Since it is a long and expensive process, it is rare, but does happen in a handful of cases every year.
There are a handful of debts that cannot go away with bankruptcy. Recent tax debt or any tax debt other than older income tax debt will not be eligible for discharge. Some older income tax debt may not go away if there is “willful avoidance” of paying the debt. Additionally, things like child support, alimony, valid fraud judgments, drunk driving car accidents, etc. do not go away in bankruptcy.
Yes. Medical debt is a common factor about why people file for bankruptcy across the country.
Yes. Judgments can be zeroed out with a bankruptcy. However, if the judgment has been turned into a lien on property, you may not be able to remove the lien. Liens can only be removed in limited situations, and it will depend on various factors, such as your states exemptions and the equity in the property (value of the property minus any loans). Often, we recommend filing bankruptcy before a judgment is entered, if at all possible. Sometimes it won’t matter; but you should consult with an attorney about the specifics of your case.
This is probably one of the most common bankruptcy questions we get. You can qualify for a new mortgage relatively quickly post-bankruptcy. A Chapter 7 Debtor can qualify for FHA or VA mortgages 2 years after filing and can qualify for conventional financing 3 years after filing. In a limited number to circumstances, you may be able to purchase a house with an FHA mortgage one year after filing, if you can show the financial difficult was caused by something completely outside of your control; only a limited number of banks allow the mortgages one year post filing.
Chapter 13 debtors can apply for financing while still in their Chapter 13 plan, if they have made 12 consecutive payments on their plan, and they must petition the bankruptcy court for approval of bringing on more debt. The bankruptcy court reviews the petition to determine if a new mortgage will impact your ability to make future payments to creditors and/or if any increase in mortgage payment (compared to prior housing payments) would be better used to pay creditors.
Additionally, these restrictions are on qualifying for a mortgage. If you have the cash to purchase a property, you could buy a property a lot sooner. Additionally, if you are buying a home with a family member or spouse, you could be on title before the two to three year waiting period is over, but you would just not qualify for financing.
Not if you take the necessary steps after filing to start building your credit. Most clients have so many accounts in default that filing bankruptcy and clearing those accounts out actually makes improving credit soon after filing a real possibility. Being in the mid-600s shortly after bankruptcy is a reasonable goal. Getting a secured credit card or having family or friends add you as an authorized user on a card can go a long way to helping rebuild your credit. With the bankruptcy on your credit, do not expect an 800 plus score, but if you take the right steps after filing you can be in the high 600s to high 700s (depending on how long after the bankruptcy it is).
Depends once again on the state in which you file your case. In Virginia there is a 100% exemption for wedding/engagement rings. That means that the asset is protected from having to be turned over, no matter the value. Other states do not have this protection. If you have a ring with substantial value, make sure to discuss it with your attorney.
Short answer, not usually. Family pets must be listed as property on your bankruptcy petition and Fido must be given a value, but the court does not want your family dog. If your dog is used for breeding or considered a show dog, it may not be considered a family pet and a money earning asset. However, many states have exemptions specially for pets. For example, in Virginia, there is an unlimited exemption for family pets.
