Bankruptcy FAQs

Will filing bankruptcy hurt my credit?

You may have heard some of the advertisements by "debt settlement" companies warning people that they will ruin their credit if they file bankruptcy. In fact, by the time a consumer gets to the point of thinking about bankruptcy, their credit rating (FICO score) is probably already about as low as it can get. In reality, bankruptcy is a consumer's chance to rebuild credit.

Can't I just negotiate with my creditors?

Watch out for "debt settlement" or "debt negotiation" companies that charge you substantial fees just for paying your creditors, and which could leave you with tax liabilities for any forgiven debt. Nothing prevents a creditor from suing you even though you are working with a debt settlement company. A creditor might prefer to obtain a judgment against you and garnish your wages rather than wait for the monthly payments to come from the debt settlement company. The result is that most consumers who have tried to settle with creditors just end up wishing that they had filed for bankruptcy in the first place, and saved time, money and stress.

Will I lose my property?

Some folks worry that they won't be able to keep their possessions, such as their car, jewelry, retirement account, or other valuable items. In fact, most consumers who qualify for Chapter 7 bankruptcy keep most of what they have. But you do need an attorney who is knowledgeable about the exemptions available to you depending on what you own. If you have a house you are trying to save with substantial equity in it, you may be able to file a Chapter 13 instead. Depending on your income and expenses, you could still have 90-100% of your credit card, medical and other debt eliminated while saving your home.

Do I make too much money?

Your eligibility to file Chapter 7 is determined by comparing your annual income to the median income of similarly-sized households in your state. If your income is at or below the median you can usually file a Chapter 7. The median income for California in 2013 is as follows: $47,798 (single earner), $62,009 (2-person), $66,618 (3-person), $75,111 (4-person), and an additional $8,100 for each additional person in your household. However, even if you earn more than the levels listed above, you may still qualify for Chapter 7 depending on your expenses and debts. You need to speak with an experienced attorney to determine for certain whether you qualify or not. If you do not qualify for a Chapter 7, you may still be able to get relief from your debts by filing a Chapter 13. For more information on income qualifications (the "Means Test"), visit my blog.

Will I have to explain to the court how this happened?

No matter how they have gotten there, no one is proud or happy about having to file bankruptcy. But bankruptcy laws were created because it benefits society as a whole when individuals are freed from debt that it would be impossible for them to repay, so that they can take care of themselves and their dependents going forward. The court is only interested in determining if you are eligible for a discharge, based on your current income and obligations, and if you have any substantial assets with which creditors might be paid. It doesn't matter whether you got to this point through bad judgment or bad luck.

Does my spouse need to file with me?

You are not required to file jointly. However, you need an experienced attorney to help you evaluate what effect this will have on your spouse's separate and community property, and what debts they will or will not still be held liable for.

Are student loans dischargeable?

Student loans are ordinarily not dischargeable in bankruptcy, even if you are only a co-signer, although there is an exception for "undue hardship." It is not an easy standard to meet, but might work for folks who cannot possibly pay because they are elderly or permanently disabled. However, there are other ways you can manage and reduce your student loan payments outside of bankruptcy (See Student Loans). And getting rid of what debt you can through bankruptcy may still be a necessary first step to be able to pay off those non-dischargeable loans.

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