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The minute that you read something that you can't understand, you can almost be sure it was drawn up by a lawyer. -- Will Rogers

I will try to prove Will Rogers wrong by explaining, in English, how bankruptcy works.

What Is Bankruptcy?

Bankruptcy is a legal proceeding in which a person who cannot pay his or her bills can get a fresh financial start. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law.

What Can Bankruptcy Do for Me?

Bankruptcy may make it possible for you to:

  • Eliminate the legal obligation to pay most or all of your debts. This is called a "discharge" of debts. It is designed to give you a fresh financial start.
  • Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. (Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment.)
  • Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
  • Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt.
  • Restore or prevent termination of utility service.
  • Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.

What Bankruptcy Cannot Do

Bankruptcy cannot, however, cure every financial problem. Nor is it the right step for every individual. In bankruptcy, it is usually not possible to:

  • Eliminate certain rights of "secured" creditors. A "secured" creditor has taken a mortgage or other lien on property as collateral for the loan. Common examples are car loans and home mortgages. You can force secured creditors to take payments over time in the bankruptcy process and bankruptcy can eliminate your obligation to pay any additional money if your property is taken. Nevertheless, you generally cannot keep the collateral unless you continue to pay the debt.
  • Discharge types of debts singled out by the bankruptcy law for special treatment, such as child support, alimony, certain other debts related to divorce, most student loans, court restitution orders, criminal fines, and some taxes.
  • Protect cosigners on your debts. When a relative or friend has co-signed a loan, and the consumer discharges the loan in bankruptcy, the cosigner may still have to repay all or part of the loan.
  • Discharge debts that arise after bankruptcy has been filed.

What Different Types of Bankruptcy Cases Should I Consider?

There are four types of bankruptcy cases provided under the law:

  • Chapter 7 is known as "straight" bankruptcy or "liquidation." It requires a debtor to give up property which exceeds certain limits called "exemptions," so the property can be sold to pay creditors.
  • Chapter 11, known as "reorganization", is used by businesses and a few individual debtors whose debts are very large.
  • Chapter 12 is reserved for family farmers.
  • Chapter 13 is called "debt adjustment". It requires a debtor to file a plan to pay debts (or parts of debts) from current income.
Most people filing bankruptcy will want to file under either chapter 7 or chapter 13. Either type of case may be filed individually or by a married couple filing jointly.

Chapter 7 (Straight Bankruptcy)

In a bankruptcy case under chapter 7, you file a petition asking the court to discharge your debts. The basic idea in a chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property, except for "exempt" property which the law allows you to keep. In most cases, all of your property will be exempt. But property which is not exempt is sold, with the money distributed to creditors.

If you want to keep property like a home or a car and are behind on the payments on a mortgage or car loan, a chapter 7 case probably will not be the right choice for you. That is because chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt.

Chapter 13 (Reorganization)

In a chapter 13 case you file a "plan" showing how you will pay off some of your past-due and current debts over three to five years. The most important thing about a chapter 13 case is that it will allow you to keep valuable property--especially your home and car--which might otherwise be lost, if you can make the payments which the bankruptcy law requires to be made to your creditors. In most cases, these payments will be at least as much as your regular monthly payments on your mortgage or car loan, with some extra payment to get caught up on the amount you have fallen behind.

You should consider filing a chapter 13 plan if you

(1) own your home and are in danger of losing it because of money problems;

(2) are behind on debt payments, but can catch up if given some time;

(3) have valuable property which is not exempt, but you can afford to pay creditors from your income over time.

You will need to have enough income in chapter 13 to pay for your necessities and to keep up with the required payments as they come due.

Can I Own Anything After Bankruptcy?

Yes. Many people believe they cannot own anything for a period of time after filing for bankruptcy. This is not true. You can keep your exempt property and anything you obtain after the bankruptcy is filed. However, if you receive an inheritance, a property settlement (such as from a divorce), or life insurance benefits within 180 days after filing for bankruptcy, that money or property may have to be paid to your creditors if the property or money is not exempt.

Will Bankruptcy Wipe Out All My Debts?

Yes, with some exceptions. Bankruptcy will not normally wipe out:

(1) money owed for child support or alimony, fines, and some taxes;

(2) in some cases, debts not listed on your bankruptcy petition;

(3) loans you got by knowingly giving false information to a creditor, who reasonably relied on it in making you the loan;

(4) debts resulting from "willful and malicious" harm;

(5) student loans owed to a school or government body, except if the court decides that payment would be an undue hardship;

(6) mortgages and other liens which are not paid in the bankruptcy case (but bankruptcy will wipe out your obligation to pay any additional money if the property is sold by the creditor).

(7) all debts arising from divorce, including alimony and child support, any debts you owed jointly with your spouse but that you were ordered to pay by the divorce court, and any property you were ordered to sell and split with your spouse.

Are the Names of Persons Who File Bankruptcy Published?

When a case is filed, it becomes a public record. The names of consumers who file bankruptcy in the Northern District of Iowa (headquartered in Cedar Rapids) will be published in the Cedar Rapids Gazette. The names are published in the Quad City Times and possibly in the Des Moines Register for those who file in the Southern District of Iowa (headquartered in Des Moines). Sometimes a debtor’s name will appear in one newspaper or the another regardless of where the case is filed. Some local papers also publish this information. Historically, the Iowa City Press Citizen has not published this kind of information. In recent years, the Muscatine and Washington newspapers have not published this information. Please note that newspapers may change their policies at any time.

Are Employers Notified of Your Bankruptcy Case?

Employers are not notified when a bankruptcy case is filed. However, the trustee in the case may contact an employer seeking information as to the status of the debtor's wages or salary at the time the case was filed, although this is not commonly done. In a Chapter 13 case, you may choose to have a wage withholding order entered, in which case the court will send an order your employer.

Will I Have to Go to Court?

In most bankruptcy cases, you only have to go to a proceeding called the "meeting of creditors" to meet with the bankruptcy trustee and any creditor who chooses to come. Most of the time, this meeting will be a short and simple procedure where you are asked a few questions about your bankruptcy forms and your financial situation.

Occasionally, if complications arise, or if you choose to dispute a debt, you may have to appear before a judge at a hearing. If you need to go to court, you will receive notice of the court date and time from the court and/or from your attorney.

Will Bankruptcy Affect My Credit?

There is no clear answer to this question. If you are behind on your bills or will default in the near future, your credit may already be bad or soon will be, and so bankruptcy will probably not make things any worse.

The fact that you've filed a bankruptcy can appear on your credit record for ten years. But since bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills, and you may be able to get new credit.

What Else Should I Know?

Utility services--Public utilities, such as the electric company, cannot refuse or cut off service because you have filed for bankruptcy. However, the utility can require a deposit for future service and you do have to pay bills which arise after bankruptcy is filed.

Discrimination--An employer or government agency cannot discriminate against you because you have filed for bankruptcy.

Driver's license--If you lost your license solely because you couldn't pay court-ordered damages caused in an accident, bankruptcy will allow you to get your license back.

Co-signers--If someone has co-signed a loan with you and you file for bankruptcy, the co-signer may have to pay your debt. If you file a chapter 13, you may be able to protect co-signers, depending upon the terms of your chapter 13 plan.

What About Debt Counseling or Bankruptcy Preparers?

You are required to consult a government-approved debt counselor before you can file a bankruptcy case.  I recommend Horizons  (www.horizonsfamily.org/consumercreditcounseling.asp), which is a local, reputable counseling agency and can provide the required pre-bankruptcy counseling and, at the same time, give you advice about whether you have options other than bankruptcy.  If you prefer to do your counseling and review your options online, then I recommend CCCS of Atlanta (www.cccsatl.org/). If you are considering hiring a debt settlement company, refer to the page titled "Mistakes to Avoid" in this website.

Document preparation services also known as "typing services" or "paralegal services" involve non-lawyers who offer to prepare bankruptcy forms for a fee. Problems with these services often arise because non-lawyers cannot offer advice on difficult bankruptcy cases and they offer no services once a bankruptcy case has begun. There are also many shady operators in this field, who give bad advice and defraud consumers.

Can I File Bankruptcy Without an Attorney?

Although it may be possible for some people to file a bankruptcy case without an attorney, it is not a step to be taken lightly. The process is difficult and you may lose property or other rights if you do not know the law. It takes patience and careful preparation. Chapter 7 (straight bankruptcy) cases are easier. Very few people have been able to successfully file chapter 13 (debt adjustment) cases on their own.

Remember: The law often changes. Each case is different. This pamphlet is meant to give you general information and not to give you specific legal advice.

   
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Iowa City: (319) 338-9852  Muscatine: (563) 263-8801

email: steve@iclawfirm.com

Steve Klesner of Johnston, Stannard, Klesner, Burbidge & Fitzgerald, P.L.C.