Bankruptcy is a legal action that you can take to free yourself from all or part of your debts.
In a straight bankruptcy ('Chapter 7' or 'Liquidation' bankruptcy) a debtor is released or 'discharged' from some or all of the debts. A debtor is allowed to keep exempt property. (See the chart on page 12.) All other property is sold to pay off the debts. Property that you are buying on credit usually must be returned to the creditor. You can only file for this type of bankruptcy once every six years; you won't be able to bankrupt new debts during that six year period. Bankruptcies may affect your credit rating for at least ten years.
Questions you should ask if you're thinking about filing for straight bankruptcy:
1) Are your debts larger than your income and the value of your property?
If not, you may not be able to discharge your debts.2) Are your debts for child support, spousal support, taxes, or school loans?
In most cases, you cannot discharge unpaid child support.
Personal income taxes may be discharged if (1) you filed a tax return for the year in which you earned the taxable income; (2) the return was not fraudulent; (3) more than two years have passed since the date you filed the return; (4) more than three years have passed since the date the tax was due to be paid (i.e., taxes generally must be paid on April 15th of the year following the year in which the income was earned); and (5) the Internal Revenue Service assessed the tax at least 240 days before the date you filed bankruptcy. For example, taxes for income earned in 1998 were due to be paid on April 15, 1999. Three years from April 15, 1999 is April 15, 2002. Provided that you filed your tax return sometime before April 15, 2000, you could discharge your tax liability in a bankruptcy filed on April 16, 2002 (assuming that the IRS assessed your tax liability in the normal course).
Most educational obligations, such as student loans, are not dischargeable in bankruptcy unless you are able to prove that the denial of a discharge would cause you and your dependents an undue hardship. This means that (1) your income does not exceed your expenses by such an amount that you can pay the debt and still maintain a minimal standard of living; (2) you have made a good faith effort to maximize your income and minimize your expenses; and (3) some special circumstances exist which make it unlikely that your inability to make payments on your debt will continue for the term of the debt. Even if all of these elements exist, you must raise and prove them in a special proceeding during the bankruptcy process.
3) Do you
expect to have more debts soon?
If so, it may not be a good idea to file for bankruptcy
at this time. Your bankruptcy petition should include all the debts
that you have. You can only file for straight bankruptcy once every
six years; you won't be able to bankrupt any additional debts during
that six year time period.
4) Are you
judgment proof?
If so, it is probably not a good idea to file
for bankruptcy at this time. If you owe money for unpaid bills,
your creditors can
get judgments against you. But, if you are judgment proof, creditors
cannot collect on the judgments. As long as you are judgment proof,
you don't need bankruptcy to protect your income and property from
your
creditors. See 'What it means to be judgment proof' on
page 9.
5) Are you
entitled to tax refunds?
If you file for bankruptcy prior to the time you receive
and spend any state or federal tax refunds to which you are entitled,
the right to these refunds will transfer to the bankruptcy trustee.
In this situation, you may exempt the first $400 of any refunds (or
under most circumstances $800 if you are married and you and your spouse
file bankruptcy) to which you are entitled on the date you file bankruptcy,
but the trustee would be entitled to any excess amount. So, if you you
expect to receive a refund of state or federal taxes which will exceed
$400 (or $800 if applicable), you may wish to consider delaying bankruptcy
until after you receive and spend the refunds. The right to receive
a federal earned income credit is totally exempt. This can be a complicated
matter. If you received tax refunds in excess of $800 in the prior year,
you should contact a lawyer who specializes in bankruptcy for advice
about this issue.
For more information about the answers to these questions and for advice as to whether bankruptcy is a good idea in your situation, you should talk with a lawyer who specializes in bankruptcy cases.
What is a
Chapter 13 Plan?
A Chapter 13 plan is another type of case you may file
in bankruptcy court. With a Chapter 13 plan the judge can require your
creditors to take payments through a payment plan that usually lasts
three years. You must have a regular income to make payments under the
plan.
A Chapter 13 plan may be filed at any time and you usually don't have to pay all of your creditors the full amount that is owed. You may also be able to keep non-exempt property. For more information about Chapter 13 plans, see the 'Resource Section' on Page 13.
Do you need
a lawyer in a bankruptcy case?
Many companies sell forms and booklets for people to use
in filing for bankruptcy on their own. But bankruptcy rules can be complicated
and mistakes might mean that you still owe on bills that you thought
were bankrupt. It is best to consult with an attorney.
In addition, bankruptcy can affect your ability to buy a car, a house, or other property for at least ten years. An attorney can help you decide if filing for bankruptcy is the best solution in your situation.
For specific information about bankruptcy or for representation
or help in a bankruptcy case, you should
contact a lawyer who specializes in bankruptcies. See the Resource Section
on page 13 of this booklet.
Congress is currently considering significant changes to the bankruptcy laws. When these changes become law, the advice in this pamphlet regarding bankruptcy may no longer be accurate.