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Frequently Asked Questions About Bankruptcy

There is a lot of misinformation and confusion about bankruptcy.   It pays to be informed though, so we will try to answer some of the most frequently asked questions right here.


Will bankruptcy stop creditors from trying to collect the debts I owe?
Yes. When you file bankruptcy an “automatic stay” goes into effect. It’s automatic because no action is required to obtain the stay, other than filing your bankruptcy petition. I tell my clients this is like a force field in a science fiction movie that comes down and protects them. However, the automatic stay has less protection if you file bankruptcy more than once in 12 months.

If a creditor willfully violates the stay, the creditor can be punished by the court. Usually, this takes the form of a court-ordered monetary payment. Because of this, creditors know better than to continue pursuing collection action (calls, letters, lawsuits, and so on) after a bankruptcy case is filed.

Will I have to give up my property?
Usually not, unless you want to. When you file bankruptcy, you are given “exemptions” in your property. Simply put, exemptions are all the things you get to keep safe from your creditors, up to a stated value (a certain amount of equity in your house, car, clothing, jewelry, bank accounts, household goods, and so on). Equity is what the property is worth minus what you owe on it. So, if your car is worth $10,000 and you owe $5,000 on it, there is $5,000 in equity.

Give me some examples...
Under South Carolina law, you are allowed to protect up to $51,450 of your home’s equity. For married debtors who own their home together, that amount doubles. Equity is the value of your home less any mortgages or other liens. For example, if your house is worth $200,000 and you owe $98,000 on a first mortgage, $10,000 on an equity line and $2,000 in taxes, you would have $90,000 in equity. ($200,000 less total mortgages and liens of $110,000).

Exemptions vary from state to state, and if you moved to South Carolina within two years before filing bankruptcy, we must look to the exemptions allowed in the state from which you moved. Depending on what state you lived in prior to coming to South Carolina, you can claim either that state’s exemptions or the federal exemptions allowed in the Bankruptcy Code.

You might wonder why everyone doesn’t just use the exemptions allowed in the Bankruptcy Code. That’s a good question. The Bankruptcy Code allows states to “opt out” of the federal exemptions. South Carolina has done that. The state you moved from may or may not have opted out. That state may also require you to be a current resident or “domiciliary” to claim that state’s exemptions. The bottom line is that things can get complicated if you moved from another state within the last two years. You need an attorney who will take time to examine the exemptions to which you are entitled and will carefully recommend appropriate options for your unique situation.

If I have too many assets, can’t I just transfer the assets out of my name so I don’t own them when I file bankruptcy?
This reminds me of my 3rd grade friend, Tyler. He was the master of the “cuts, cuts back” trick in the lunch line. If he needed to cut in line, he’d utter the magic words: “cuts, cuts back?” This meant that if I gave my pal Tyler cuts, he’d give me cuts back. What happened was that he assigned me his right to his place in line, then I would turn around and re-assign that right back to him. Cool, right? This is basically the same as giving that parcel of property to your brother with the understanding that he’ll give it back to you when your bankruptcy’s over. Cool again, right? Wrong. If a debtor does this in the adult world, it’s called a “fraudulent transfer” or “fraudulent conveyance,” even if there is no actual fraud involved. And it will really hurt your case.

How?
When you file bankruptcy, you must answer a lot of very detailed questions in your paperwork, and you must attend at least one hearing (and sometimes more). In your paperwork, and sometimes at your first hearing, you will be asked if you have transferred anything of value for less than fair market value. If the answer is yes, the bankruptcy trustee will probably try to “avoid” the transfer. That doesn’t mean the trustee will stay away from it; rather, it means that he will undo the transfer. He’ll sue the transferee (the person who received the property) to get the property back, so that he can sell it for a better price and distribute the sale proceeds of the property to your creditors. In our lunch line example, that would be Tyler—I gave him my right to that place in line for free. In bankruptcy lingo, he didn’t pay “reasonably equivalent value.”

But then I can exempt that property, right?
No. Even if it’s property you would have been able to exempt had you claimed ownership in it, you lose the right to claim an exemption in property the trustee gets back using his “avoidance powers” (powers to undo transfers).

At least I’ll get my debts wiped out.
Maybe not. If you made the fraudulent transfer within a year of your filing, or within a longer period, if the transfer was to a family member, you may be denied your “discharge” (the court order saying you no longer owe your debts) if the transfer was done with the intent to hinder, delay, or defraud your creditors.

The bottom line to all this is that playing a shell game with your assets is a really, really bad idea. It’s far better to just tell your attorney what you have up front. There are legitimate strategies that can be used to deal with assets that you wish to keep. And if you’ve already transferred property, TELL YOUR ATTORNEY. Fraudulent transfers can be undone or otherwise remedied if your attorney knows about them.

What is Chapter 7?
Chapter 7 is referred to sometimes as “straight bankruptcy.” Unlike Chapter 13, there is no repayment plan. The Trustee sells any non-exempt assets (see "Will I have to give up my property?"), and distributes the proceeds among all the creditors. However, a typical Chapter 7 case is a “no asset” case, meaning there are no assets that the trustee could sell for a profit, so the debtor usually gets to keep all his property. But keep in mind that you usually only get to keep your house and car (and other property under lien) if your payments are current at the time you file chapter 7.

Once the Chapter 7 petition and schedules are filed with the court, the Trustee conducts a 341 hearing (also called a “First Meeting of Creditors”) about six weeks after the case is filed. The Trustee usually abandons the scheduled assets at the hearing or soon after, and the debtor gets a discharge of his or her indebtedness (see "What’s a discharge?") within about three months of the 341 hearing.

What is Chapter 13?
Chapter 13 is a payment plan bankruptcy, also called a “reorganization” bankruptcy, or a “wage earner” bankruptcy. If you have enough money to repay at least some of what you owe to your creditors, the bankruptcy law requires you to do so. How the system determines who has enough money and how much has to be paid back is the rest of the story. (See "Will I qualify for Chapter 7?") Under certain circumstances, the only way to get your debts discharged is to file a Chapter 13.

Chapter 13 lets you do things you can’t do in a Chapter 7, like catch up on past due mortgage payments (called mortgage “arrearages”), even if your house is already being foreclosed on; keep cars even if your car payments are past due; lower the interest rate on most of your debts; discharge certain debts that are not dischargeable in a Chapter 7; or “cram down” the amount required to be paid to secured creditors (that is, repay only the value of what the collateral is worth, rather than what you actually owe on it). Chapter 13 can also allow you to keep property that might otherwise be taken by the bankruptcy trustee if it is not exempt (see “Will I have to give up my property?”). It’s a useful tool when the need arises.

How are my debts repaid in Chapter 13?
When you file Chapter 13, you propose a repayment plan. You make set monthly payments to the Chapter 13 Trustee for 3-5 years, and the Trustee pays that money to your creditors each month. However, even while in a chapter 13 bankruptcy, you may be responsible for paying certain debts, such as your mortgage payment, directly to your creditors.

Creditors must file Proofs of Claim (“POC”) in your case if they wish to be paid by the Chapter 13 Trustee. They are given notice of your case and informed of the deadline to file claims. They have until 90 days after the 341 hearing to file their claim, and governmental claims (like the IRS, for example) may be filed up to 180 days after that hearing. If you believe the POC is incorrect, you may object to it and ask the judge to disallow the claim.

Some debts are paid in full in a Chapter 13 case, and some may be paid only a small percentage of the total amount due. This is determined by many different factors, including how much your household income is; how large your family is; what type of debts you have; and what assets you are keeping. We examine every client’s individual circumstances closely to make sure you only repay as much as you have to, and as much as you can afford.

How is the Chapter 13 Trustee paid?
The Chapter 13 Trustee is not a federal employee, but his salary is set by the federal government. His office is considered a non-profit agency. The trustee receives a commission from the payments he makes to your creditors each month as required by your plan. Fees for Chapter 13 Trustees vary from District to District, but are capped at 10% by the federal Bankruptcy Code. Our local Charleston Trustee’s commission is set at 7.5% of the funds he disburses. The Trustee uses this commission income to pay all the operating costs of his office, including staff, rent, utilities, equipment costs, as well as his own salary (which is set by the United States Trustee’s Office). Given the duties the Chapter 13 Trustee has, the fee is very modest.

What if I get to a point where I can’t make the Chapter 13 payments?
If you are having trouble making your plan payments while in chapter 13, contact your attorney to discuss several possible options. If your financial problems are temporary (such as a short period of unemployment or unexpected car repairs), you can request a “moratorium,” which allows you to stop making plan for a period of time (usually a few months). Or, if your problems are more serious or permanent, you can request a “hardship discharge,” which means you might be allowed to complete your case and receive a discharge even without making all the plan payments. Or, if you don’t qualify for that, you might be able to convert your case to Chapter 7. You would have to file some amended schedules, showing your current income and expenses, listing any new debts you incurred while you were in Chapter 13, attend another 341 hearing, then receive your discharge. This assumes you otherwise qualify for a Chapter 7. However, if you simply stop making your Chapter 13 plan payments and do nothing else, your case will eventually be dismissed, and you will lose all bankruptcy protection.

What’s a discharge?
A discharge is an order from the bankruptcy court stating that you are no longer obligated on any of the debts you listed in your bankruptcy case, so the creditors no longer have the right to collect those debts. In most cases, it is the reason a person files bankruptcy. In a chapter 7 case, the court issues the discharge order about three months after the 341 hearing. In a chapter 13 case, the court issues the discharge order about one month after you have made all the payments required under your chapter 13 plan.

What’s a First Meeting of Creditors or “341” hearing?
This is a hearing you must attend. First of all, it’s not all that bad. Second, this is the only hearing (in most cases) you will have to attend. You might think that if there’s a “first meeting,” then there’s a “second meeting” and maybe a few others. Not so. Unless there are special circumstances involved in your bankruptcy, this is likely to be the only hearing you’ll have to attend during your entire bankruptcy case.

At this hearing, the Trustee will verify your identity, so be sure to bring your driver’s license as well as your original social security card. (If you don’t have these documents, there are other acceptable substitutes we can discuss using.) You will then testify, under oath, that all the information contained in the bankruptcy paperwork you filed is accurate. The Trustee will then ask you some routine questions, such as whether you have transferred or sold property in the last six years. If so, be prepared to discuss the transfer. Most of the time these transfers are routine. For example, you may have sold a home three years ago, then taken the proceeds of that sale and used them to purchase the home in which you now live. That’s no big deal. We just need to disclose it. The Trustee just needs to make sure you are not hiding assets and that you did not fraudulently transfer property to avoid having to list it on your bankruptcy paperwork.

The Trustee may also ask a few questions tailored to your individual situation. Each case is unique, so there’s no way to know exactly what he will ask. In all of our cases, we meet with each client a few days prior to the 341 hearing to go over the case and to discuss possible issues of inquiry by the Trustee. We will ensure that you are as prepared for the hearing as possible.

What’s the filing fee for Chapter 13?
$274

What’s the filing fee for Chapter 7?
$299

What’s this credit counseling course I must take prior to filing bankruptcy?
It’s a waste of $50. When Congress changed the bankruptcy laws in 2005, one of the new requirements was that every debtor must take a credit counseling course from an approved credit counseling provider PRIOR to filing a bankruptcy case. I say it’s a waste of $50 because no good attorney would advise a client to file bankruptcy unless it was appropriate. The credit counseling can be done in person, on the phone, or over the internet. I would recommend you do it via phone or internet from your home. It will not take very long, usually only 20-30 minutes. The counselor will ask you about your debts, your income, and expenses. The counselor cannot stop you from filing bankruptcy. He’s not a gatekeeper. You are simply required to give the information to the counselor and complete the session. It’s just a hoop you must jump through so we can file your case.

I ask my clients what they are told at the credit counseling session. Invariably, my clients report: “They told me to file bankruptcy.” Brilliant system, right? Like I said, it’s a waste of $50. But not really, because it’s a required step before you can file – think of it as your ticket into bankruptcy. So you just do it, act polite, and they will send me your certificate. I then file that with the court when we file your case.

What about the course I take after I file bankruptcy?
That’s called the debtor education course, and it also became a requirement when the new bankruptcy laws went into effect in October 2005. You can take this course from the same approved counseling agency where you got your ticket in (that is, your credit counseling certificate).

The certificate from the debtor education course is your ticket out of bankruptcy. You must do this to get your discharge, the order stating that you are no longer liable for your debts.

The debtor education course is actually a good idea. Most of my clients find the information provided helpful. The debtor education course will teach you basic financial management like budgeting. This process usually takes two hours or so and involves going through a workbook.

Are all debts discharged in bankruptcy?
No. Certain debts, such as student loans, alimony or child support, debts caused by willful and malicious conduct, debts resulting from fraud, and various tax debts are generally not discharged in bankruptcy. Determining which debts might be discharged and which might not be is sometimes complicated, and will depend greatly on your particular circumstances. We will be happy to work with you to gather all the necessary information about your unique situation to determine whether or not your debts will be discharged.

Are taxes discharged in bankruptcy?
The answer is maybe. For income tax debts, the Bankruptcy Code has what I call a 3/2/240 rule. To be dischargeable, the taxes must have become due more than three years prior to the filing of the bankruptcy; the tax returns must have been filed at least two years prior to the filing of the bankruptcy; and lastly, the taxes must have been assessed at least 240 days prior to the bankruptcy filing. Some examples may be helpful:

Example 1:
Joe filed his 2004 income tax return on time, before April 15, 2005, but did not pay the tax debt owed with that return. Joe then filed bankruptcy on May 23, 2008. Since more than three years elapsed from the time the taxes came due (April 15, 2005) and the bankruptcy filing, the tax debt would be discharged.

However, if Joe got an extension to file his 2004 tax return and did not file it until October 1, 2005, he would not be able to discharge taxes if he filed his bankruptcy on May 23, 2008. Instead, he would have to wait three years from when his extension ended, which would be October 15, 2008. By extending the due date of the tax return, this causes the three-year period to be extended.

Example 2:
Joe has not filed tax returns for 2003, 2004, and 2005. All are due. If Joe files bankruptcy on March 1, 2009, the taxes would normally be discharged. But since they were not filed more than two years ago or assessed more than 240 days ago, they would not be discharged.

If Joe files all his past due tax returns on May 1, 2009, he would have to wait two years from that date to file bankruptcy, and also would have to ensure that any taxes owing were assessed more than 240 days prior to his bankruptcy filing, in order to have that tax debt discharged.

Are payroll taxes dischargeable?
The employee’s share is never dischargeable. Those taxes are to be held in trust by the employer and remitted to the government. However, the employer’s share sometimes is dischargeable, subject to the 3/2/240 rule discussed above. (See “Are taxes discharged in bankruptcy?”).

Are sales taxes dischargeable?
This differs from state to state depending on each state’s tax laws. There is no South Carolina case answering this. The questions to consider are whether sales taxes are held in trust and paid by the customers, or whether they are simply a tax on the merchant for sales made. Given South Carolina’s tax code, there is a good chance that sales taxes might be dischargeable.

Can I voluntarily pay back a debt after my bankruptcy case is closed?
Yes. In fact, the Bankruptcy Code specifically states that you have this right. However, paying someone back before bankruptcy can cause problems for that creditor, especially if you are paying back a relative (the person you repaid might have to give back the money, so that the bankruptcy trustee can divide it up instead among your other creditors). You should discuss this matter with your attorney before paying anyone. Also, if you have already paid back any creditors (other than normal payments on your car, house, and other secured debts), you and your attorney should discuss these payments before you file your case. Many times these payments will not cause problems, but the attorney must understand who you paid, why you paid them, how much you paid them, as well as the terms of the contract you had with that particular creditor.

When will I know whether I get my debts wiped out in Chapter 7?
Creditors have 60 days from the date of your 341 hearing to file a complaint with the court asking that your debt be declared “non-dischargeable,” that is, not erased or wiped out in the bankruptcy. Creditors rarely file these requests, and if they do, it’s usually the result of some alleged fraud. If this happens, the creditor must prove its case, and you have the right to present evidence in your defense, testify, and cross examine any witnesses called by the creditor.

In addition, during this 60-day period following your 341 hearing, the United States Trustee (UST) has the opportunity to review your case and, if he deems it appropriate, file a motion to dismiss your case. Usually, the only reason the UST would file a motion to dismiss is that he believes you have enough income to fund a Chapter 13 plan with monthly payments, and repay your creditors at least some of what you owe them. In legal terms, the UST would be filing this motion to dismiss because he thought your Chapter 7 filing was an “abuse” of that chapter. This underscores the need for you to disclose all requested information to your attorney and for your attorney to recommend the appropriate bankruptcy chapter (7 or 13) for your situation.

When will I know whether I get my debts wiped out in Chapter 13?
In a Chapter 13, you receive your discharge after you complete your plan. The plan will provide for repayment to your creditors (usually just partial repayment) for a period of 3 to 5 years. On rare occasions debtors might repay their creditors in full in less than 3 years. Once you complete your plan, as long as you have also kept any required alimony and child support payments current, and after you file the certification showing that you completed the debtor education course discussed above, any remaining balances owed on your debts will be discharged.

Since I’m filing bankruptcy, can I just charge up my credit cards?
Absolutely not. This would be considered fraud and would likely trigger a non-dischargeability complaint being filed by that creditor – and if they were to win that complaint, you would have to repay the whole amount you borrowed, plus probably some extra as a penalty. Also, it would make it appear that your filing was in bad faith, so it could jeopardize your ability to discharge other debts as well, at least in extreme circumstances.

You should discuss all your recent credit card charges with your attorney. I ask my clients about their charging activity within the year before they file their bankruptcy case. Cash advances also tend to look suspicious to creditors.

If these charges are for luxury goods and cash advances, and they occur near your bankruptcy filing, there is an automatic presumption that these charges were made fraudulently. Even if the truth is that when you made these charges you had no intent of filing bankruptcy—maybe you were just trying to survive and thought your situation would improve—the charges may still appear to be fraudulent to the creditor. The easiest solution to this problem is to hold off filing bankruptcy for a few months if you can. Each situation is unique, so you need to discuss yours with your attorney.