Bankruptcy

When can filing bankruptcy help me? What kinds of bankruptcy are there? If I file bankruptcy once, can I file again? Can I buy anything after filing bankruptcy? Read this document for answers to these and many more questions.

When can filing bankruptcy help me?

• Bankruptcy can help when you have property to protect and large past-due debt.

• It stops most lawsuits, garnishments, foreclosures and many evictions. Your creditors must get permission from the Bankruptcy Court to start them back up.

• Before filing bankruptcy, you should look hard at other ways to solve your problems. Look into consumer credit counseling, working out repayment agreements and filing claims of exemption.

• Before you can file bankruptcy, you almost always have to get government-approved credit counseling. You will also have to take a financial management course before you can get a discharge.

• Before you can file, you must have last year's federal tax returns. If you did not file a return and pay any taxes due for the last year, you must file before you can proceed with a bankruptcy.

• You also will have to submit pay stubs to the Court when you file the petition.

What kinds of bankruptcy are there?

• For most people, there are only two kinds of bankruptcy, Chapter 7 and Chapter 13.
• Many people call Chapter 7 "straight bankruptcy".
• Most call Chapter 13 wage-earners plan or debtor's court. Some call it a consolidation bankruptcy.
• Family farmers may be able to file a Chapter 12 bankruptcy.

When might a Chapter 7 bankruptcy help me?

• It can help if you have very few assets and are faced with a big problem that cannot be solved any other way.
• Examples include some garnishments and some lawsuits against you.
• You usually must have less monthly income than most Alabamians.
• If you have more income than most Alabamians, and you can afford to pay $100 per month toward debt, you must use Chapter 13 instead.
• The court looks at your monthly income, expenses, and your total debt to decide whether you can file Chapter 7.

What happens to my property if I file Chapter 7?

• You can protect $7,500 in personal property and $15,000 in equity on your house and land. If you are married, you can protect $30,000 in equity on your house and land.
• You can also keep exempt money, which includes social security, SSI and earned income disregards. You can also keep money from a 401K, state retirement or worker's compensation.
• If you own something that is collateral for a debt, such as a car you are buying over time, you must either give it up or work out a reaffirmation agreement. You cannot get rid of the debt for your car and keep the car.

Does Chapter 7 get rid of all my debts?

• No. Bankruptcy does not get rid of several kinds of debt: child support; alimony; fines; debts for hurting someone while driving drunk; or debts from fraud or malicious acts.
• For the most part, it does not get rid of tax debt or student loans.

If I file Chapter 7 once, can I file again?

• If you file Chapter 7 and get rid of your debts, you cannot file again for at least eight years.
• That is why you want to be sure you are ready for a fresh start.
• If you have on-going medical bills and no insurance, etc., bankruptcy might not be best for you.

When might a Chapter 13 help me?

• Chapter 13 can help people who have fallen far behind on house payments or rent.
• It can help you only if you have steady income.
• You need to make both your regular house payments and payments on what you are behind.
• Chapter 13 can also help you catch up on a car loan. However, that usually is only worthwhile if the car is worth a good deal more than you owe for it.
• After someone repossesses your car, it is too late to save it by filing Chapter 13.

What else can Chapter 13 do for me?

• In a Chapter 13 bankruptcy, your lawyer works with the Court to bring your debts in line with your income, so you can pay them over three to five years.
• You may be able to make unsecured creditors accept less than what you owe.
• You may be able to pay pennies on the dollar on unsecured debts. How much you have to pay depends on your secured debts, your income and how much equity you have in your house.
• If the bankruptcy court approves your plan, and you make your payments and keep property insured, your creditors cannot take your property.

What do I have to do in a Chapter 13 bankruptcy?

• You must make payments on time to the Chapter 13 bankruptcy trustee.
• You must also keep making your house and car notes and paying on your other secured debts.
• You must keep any collateral insured.

Does a Chapter 13 bankruptcy wipe out all my debts?

• If you pay your plan out, you get rid of most debts.
• Unless you pay them in full, you do not get rid of most student loans, child support or alimony debts; debts for personal injury resulting from drunk-driving, fines and restitution and some long-term debts.

What happens if I don't make all my Chapter 13 payments?

If you wind up unable to make the payments, you can dismiss your Chapter 13 bankruptcy or change to Chapter 7. Sometimes, you can get the court to lower your payments.

What does it cost to file bankruptcy?

• The court charges a filing fee. The Chapter 7 bankruptcy fee is $335. The Chapter 13 bankruptcy filing fee is $310.
• You also have to pay a private lawyer to handle your case.
  • In a Chapter 7 bankruptcy, you will probably have to pay your lawyer in full in advance.
  • In a Chapter 13 bankruptcy, you usually can pay your lawyer through the bankruptcy court as part of your plan.

• In a Chapter 13 bankruptcy, your payments will also include an extra amount for the bankruptcy court's costs of handling your payments. This can range from 4% to 10%.

Can you buy anything after filing bankruptcy?

• Yes, you can.
• While you are in Chapter 13, you need to get the court's permission before you can buy anything on credit.
• Once your bankruptcy is over, you are free to enter into any consumer contracts or other contracts you deem wise.
• Be careful not to make new debt that you may not be able to afford to pay.
• Be especially careful not to sign a long-term agreement on an "as is" car that may break down before you finish paying. For information about buying cars, read Buying a Used Car.

Will bankruptcy affect my credit?

• Bankruptcy probably will affect your credit.
• A bankruptcy can stay on your credit record for up to 10 years.
• Some people will deny you credit because of it. Those people may have denied you based on the problems that pushed you into bankruptcy anyway.
• Since bankruptcy gets rid of many old debts, you may be in a better position to pay your current bills once your discharge has been granted. Therefore, you may be able to get credit when you have the ability to pay it back.
• Some creditors may even view you as a better credit risk, since they know you will not be able to file another Chapter 7 bankruptcy for eight years. Be careful not to let some of these creditors take advantage of you.

Reviewed July 2015

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