If you are thinking about filing for bankruptcy, you probably have a lot of questions. You’re not alone; there are certain things that almost everyone we help wants to know. While every bankruptcy case is unique, most cases have many things in common. These frequently asked questions may give you many of the answers you’re looking for.
Your spouse may file for bankruptcy jointly with you, but he or she does not have to. However, you must document your spouse’s assets and debt on your bankruptcy petition. Doing this prevents your spouse’s creditors from pursuing your community property to satisfy your spouse’s debts. If you choose to file for bankruptcy individually, your filing will not appear on your spouse’s credit report.
No, don’t waste your limited money paying off debt. You are an honorable person, and you want to do what’s right. Paying off as much debt as possible before filing for bankruptcy seems like the right thing. But the reality is that you might deplete all your resources and still not be able to get ahead of your debt. Bankruptcy exists to allow you to shed debt now so that you won’t be dependent on government support later. Paying off as much debt as you can now only to need to file for bankruptcy later defeats that purpose.
Paying money to a friend or family member shortly before filing for bankruptcy could be considered a “preferential transfer” that unfairly favors one creditor over others. If you make a payment (or transfer assets) of over $600 to a friend or family member within a year before filing bankruptcy, it is considered a preferential transfer. A total payment of over $600 to any creditor within the 90 days before filing bankruptcy is also considered a preferential transfer.
If your bankruptcy trustee discovers that you have made a preferential transfer, they may be able to “claw back” the payment and distribute those assets among all your creditors. After your bankruptcy has been finished, you are free to voluntarily pay back anyone, even family members, but you are not required to do so.
The short answer is yes. You must list all of your debts and all of your assets in your bankruptcy filings.
Chapter 7 bankruptcy is often called “fresh start” bankruptcy, and it will wipe out most of your debt, but there are some types of debt that are not dischargeable in bankruptcy. These include:
- Alimony and child support
- Most student loans (unless you can prove “undue hardship,” which is very difficult to do)
- Tax liens and certain unpaid taxes
- Debts you didn’t list in your bankruptcy filings—so put it all in there
- Judgments against you for drunk driving personal injury cases
- Debts related to fraud or embezzlement
Many people put off filing for bankruptcy because they are worried that their credit score will take a hit if they do. There’s no getting around it: your credit score is likely to drop if you file for bankruptcy. But that’s not the whole story, or the end of the story. Most people see a significant increase in credit score in the first year after bankruptcy.
If you have a lot of debt and not many assets, chances are that your credit score is already pretty poor. In that case, it probably makes sense to get out from under the burden of your debt and begin to build a strong financial future; that may be the quickest path to an improved credit score. If you currently have a good credit score, you can expect it to drop more after filing than if you had a bad one, but it will come back up quickly.
A Chapter 7 bankruptcy filing can legally remain on your credit report for up to 10 years. Credit reporting bureaus typically remove a Chapter 13 bankruptcy filing from your credit report after 7 years. That may seem like a long time, but remember that you can typically bring your credit score up much sooner than that by developing good financial habits after bankruptcy.
Your bankruptcy paperwork will take into consideration your income over the last six months before you file the case. If you are unemployed or have minimal income during this six month period, you will easily meet the means test and qualify for a Chapter 7 bankruptcy. However, if your average monthly income is well over a certain limit during that six month period it may be very difficult for you to file for Chapter 7 bankruptcy and erase all of your unsecured debt.
It should be noted that COVID-19 pandemic assistance in the form of additional unemployment assistance is not counted in this 6 month calculation. If your income is over the limit, then an experienced bankruptcy attorney can help you qualify by asserting certain deductions from your income.
Filing bankruptcy can actually help your job because it will force creditors to stop calling your workplace and sending wage garnishments that are annoying your employer. Under the bankruptcy code, employers cannot fire you just because you filed for bankruptcy. Unless you tell your employer that you have filed for bankruptcy, they may not even become aware that you have filed.
Technically, bankruptcy filings are public record, so someone could search for and find documentation of your case. In practice, however, friends, coworkers, and neighbors rarely go snooping to see if someone they know has filed. The only people who are likely to find out that you have filed are creditors and others who have legitimate reason to pull your credit report.
If your car is not paid off, and you are willing to continue making payments on it, you can reaffirm the debt and keep the vehicle. Obviously, you cannot keep the car but erase the debt that goes with it. If your car is paid off, it may be covered by your exemptions depending on value, in which case you will also be able to keep it.