Bankruptcy 101

Why would someone file for bankruptcy? Well, a Supreme Court Justice once put it this way: "[Bankruptcy] gives to the honest but unfortunate debtor… a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt." LocalLoan Co. v. Hunt, 292 234, 244 (1934).

In other words, bankruptcy creates a fresh financial start for consumers in serious debt who are committed to being honest with the court and their creditors. This page provides some important information that you should know about bankruptcy.

1. The Benefits of Bankruptcy

The ultimate benefit of a bankruptcy is peace of mind. That’s because when bankruptcy is appropriate it will free you from crushing debt. It gives you a new day.

More specifically, when bankruptcy is done correctly, it can have the following benefits:

• Wipes away or "discharges" your legal responsibility to pay most or all of your debt.
• Stops the foreclosure of your home (or mobile home) and gives you the ability to catch up on missed payments.
• Prevents the repossession of your car or other property.
• Often forces creditors to return repossessed items to you.
• Puts an end to creditor harassment.
• Ends wage garnishment.
• Prevents termination of utility service and/or restarts service to you.
• Provides a forum for you to challenge creditors who are trying to collect more than what you really owe them or who have defrauded you.

For the answers to common questions about bankruptcy, please visit our Debtor Resources page and download the reports titled "Answers to Common Bankruptcy Questions" and "Your Legal Rights During and After Bankruptcy."

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2. Bankruptcy and Credit Cards

In most cases, credit card debt is what we call "unsecured." That means no one can take your house, car or other personal property if you fail to pay the bill. The credit card company has to try other tactics to satisfy the debt. (Compare this with a home mortgage secured by your house as collateral.)

In a bankruptcy, your unsecured credit-card debt is eliminated. Absent fraud or some other bad act, it simply disappears.

If we file for bankruptcy, you’ll want to make sure we don’t leave any credit card (or other unsecured) debt off the schedule. Doing so means you won’t get relief for what’s missing.

It’s critical that you don’t make significant purchases with your credit cards during the three to five months before you file. The judge will not look kindly on that. (This is also why clients must pay their bankruptcy attorney by check before they file.)

Just because you file for bankruptcy does not mean you won’t get another credit card. In fact, you’ll probably get solicited in the mail even before the final discharge! Don’t be tempted by these! The terms will likely include outrageous interest rates, at least for a while. For more information, please visit our Debtor Resources page and download the report titled "Using Credit Wisely After Bankruptcy."

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3. Chapter 7 - Liquidation

Most consumers file for bankruptcy relief under either chapter 7 or chapter 13 of the Bankruptcy Code. If you and your attorney decide to file under chapter 7, which is by far the most common type, you can expect most of your debts to be eliminated. You will be able to keep most of your personal property.

A. Chapter 7 in General

Discharge. After a chapter 7 case is completed, our goal is to have as much of your debt wiped away ("discharged") as possible. Usually, the only things we can’t eliminate are criminal fines, child support/alimony, student loans and most taxes.

Stopping All Collection Efforts by Creditors. Once we file, creditors aren’t allowed to communicate with you directly. They’ve also got to stop any collections process and have to leave your property in your possession. That means a reprieve from foreclosures, repossessions, utility disconnections, tax sales, and evictions.

Exemptions. When we file under chapter 7, the United States Trustee will determine which of your assets, if any, can be sold to pay your debts. In California, much of your property is exempt from sale (also known as "liquidation"). This can often allow you to keep, among other things, your car, clothing, jewelry, retirement accounts, and money for living expenses.

Means Test. Because the benefits are so tremendous in chapter 7 cases, the law will only allow a filing if you really need it. To figure out if chapter 7 is available, we’ve got to determine your income and see if you qualify. If your income is below what the law says is the "median family income" for a family like yours in California, then we can file without a problem. If your income is greater than the median, we apply the "means test." The means test is simple to understand, but complicated to apply. We take your income and deduct certain allowable expenses to see if the difference is below a certain amount. If it is, we file. If it isn’t, the court would presume that you have the means to pay your creditors, so we usually won’t file under chapter 7. (Chapter 13 may still be an option.)

Reaffirming Debts. If you want to save your home in a chapter 7 case, you will have to reaffirm the debt. That means you’ll need to promise to continue to pay the mortgage under its current terms. You can do this with auto loans as well. For folks who file under chapter 7, it’s often easy to reaffirm their mortgage/auto loan once those credit card bills are wiped away (i.e., "discharged").

B. Our Timeline for Chapter 7 Cases

Credit Counseling. If you’re going to file under chapter 7, you must receive counseling from an approved credit counseling agency within the 180 day period before the filing is made. The class must be taken from an approved agency. For a list of Sacramento-area vendors, you can go to our Debtor Resources page and download the document titled "Approved Credit Counseling Agencies for Sacramento Area Residents." The cost is usually $30 to $50. Some counseling classes are available online, and we recommend that approach.

File Petition. After you see us for an initial consultation, we will review all the relevant documents and then prepare the petition.

Meeting of Creditors. About 30 days after your petition is filed, you will attend what’s called the "meeting of creditors" with the bankruptcy trustee. Usually, this meeting goes for 5 to 10 minutes and, despite the name, no creditors actually attend. It is an opportunity, however, for creditors and other interested folks to ask questions about your financial situation. The meeting is mandatory.

Financial Management Counseling. As soon as possible after the meeting of creditors, you must attend a class about financial management. Within 45 days of the meeting of creditors, we must file a certificate of completion for this class, which is very similar to the credit counseling class you had to take before we filed your petition. If you don’t attend this financial management class on time, your case will be dismissed.

Discharge. Unless we have to address unexpected issues, your discharge and fresh financial start will typically be granted in approximately 60 days from the meeting of creditors.

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4. Chapter 13 - Reorganization

When a chapter 7 bankruptcy isn’t appropriate, a chapter 13 reorganization will often work. Chapter 13 allows you to reorganize your finances and more easily pay creditors at least some of what you owe them. It is not a liquidation of your assets. If you complete your reorganization plan, you will be discharged (even when the plan calls for payment of less than 100% of your debt).

A. Chapter 13 in General

Discharge. After you complete your reorganization plan, you’ll typically have most (if not all) of your debts discharged.

Eligibility. Chapter 13 is for individuals who have "regular income," such as a salary, alimony, or support. You must have less than $336,900 in unsecured debt and $1,010,650 in secured debt (as of the time of this writing).

Stopping All Collection Efforts by Creditors. Once we file, creditors aren’t allowed to communicate with you directly. They’ve also got to stop any collections process and have to leave your property in your possession. That means a reprieve from foreclosures, repossessions, utility disconnections, tax sales, and evictions.

Your Chapter 13 Plan. Under chapter 13, you will be required to submit a reorganization plan. It will calculate your disposable income and determine how much should be paid to your creditors over the next three to five years. In some cases, the amounts paid could be as low as 5% to 20% of what you owe. The payments will usually go through the United States Trustee, who is responsible for distributing the payments to creditors. It’s only after completion of your plan that discharge occurs.

B. Our Timeline for Chapter 13 Cases

Credit Counseling. If you’re going to file under chapter 13, you must receive counseling from an approved credit counseling agency within the 180 day period before the filing is made. The class must be taken from an approved agency. For a list of Sacramento-area vendors, you can go to our Debtor Resources page and download the document titled "Approved Credit Counseling Agencies for Sacramento Area Residents." The cost is usually $30 to $50. Some counseling classes are available online, and we recommend that approach.

File Petition. After you see us for an initial consultation, we will review all the relevant documents and then prepare the chapter 13 petition.

Meeting of Creditors. About 30 days after your petition is filed, you will attend what’s called the "meeting of creditors" with the bankruptcy trustee. Usually, this meeting goes for 5 to 10 minutes and, despite the name, no creditors actually attend. It is an opportunity, however, for creditors and other interested folks to ask questions about your financial situation. The meeting is mandatory.

Confirmation Hearing. At some point between 20 and 45 days after the meeting of creditors, the bankruptcy court will evaluate your plan at a confirmation hearing.

Plan Payments. Within 30 days after the filing of the petition, the debtor usually begins making the plan payments to the trustee.

Financial Management Counseling. Before you make your last payment under your chapter 13 plan, you must attend a class about financial management. We will have to file a certificate of completion with the court prior to discharge.

Discharge. Once you make your final payment, the bankruptcy trustee will file a final report to the court. Your discharge will follow.

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