A decision to file for bankruptcy should be
after determining that bankruptcy is the best way to
with your financial problems. This brochure can not
every aspect of the bankruptcy process. If you still
questions after reading it, you should speak with an
familiar with bankruptcy.
There have been many news reports suggesting that
changes to the bankruptcy law passed by Congress in 2005
prevent many individuals from filing bankruptcy. It is
that these changes have made the process more
But the basic right to file bankruptcy and most of the
of bankruptcy remain the same for most individuals.
What Is Bankruptcy?
Bankruptcy is a legal proceeding in which a person who
can not pay his or her bills can get a fresh financial
right to file for bankruptcy is provided by federal law,
all bankruptcy cases are handled in federal court.
bankruptcy immediately stops all of your creditors from
seeking to collect debts from you, at least until your
are sorted out according to the law.
Bankruptcy Do for Me?
Bankruptcy may make it possible for you to:
• Eliminate the legal obligation to pay most or all of
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
• Prevent repossession of a car or other property, or
the creditor to return property even after it has been
• 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 Can Not Do
Bankruptcy can not, however, cure every financial
Nor is it the right step for every individual. In
it is usually not possible to:
• Eliminate certain rights of ‘‘secured’’ creditors. A
creditor is ‘‘secured’’ if it has taken a mortgage or
lien on property as collateral for a 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 on the debt
if you decide to give back the property. But you
can not keep secured property unless you continue
to pay the debt.
• Discharge types of debts singled out by the bankruptcy
law for special treatment, such as child support,
most student loans, court restitution orders,
criminal fines, and most 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
Types of Bankruptcy Cases
Should I Consider?
There are four types of bankruptcy cases provided
• Chapter 7 is known as ‘‘straight’’ bankruptcy or
It requires an individual to give up property
which is not ‘‘exempt’’ under the law, so the property
can be sold to pay creditors. Generally, those who file
chapter 7 keep all of their property except property
which is very valuable or which is subject to a lien
which they can not avoid or afford to pay.
• Chapter 11, known as ‘‘reorganization,’’ is used by
businesses and a few individuals whose debts are very
• Chapter 12 is reserved for family farmers and
• Chapter 13 is a type of ‘‘reorganization’’ used by
individuals to pay all or a portion of their debts over
period of years using their current income.
Most people filing bankruptcy will want to file under
chapter 7 or chapter 13. Either type of case may be
individually or by a married couple filing jointly.
Chapter 7 (Straight Bankruptcy)
In a bankruptcy case under chapter 7, you file a
asking the court to discharge your debts. The basic idea
a chapter 7 bankruptcy is to wipe out (discharge) your
in exchange for your giving up property, except for
empt’’ property which the law allows you to keep. In
cases, all of your property will be exempt. But property
which is not exempt is sold, with the money distributed
If you want to keep property like a home or a car and
behind on the mortgage or car loan payments, a chapter 7
case probably will not be the right choice for you. That
because chapter 7 bankruptcy does not eliminate the
mortgage holders or car loan creditors to take your
to cover your debt.
If your income is above the median family income in your
state, you may have to file a chapter 13 case (the
median family income for a family of four in 2006 was
approximately $65,796—your state’s figures may be higher
or lower). Higher-income consumers must fill out ‘‘means
test’’ forms requiring detailed information about their
and expenses. If the forms show, based on standards
in the law, that they have a certain amount left over
could be paid to unsecured creditors, the bankruptcy
may decide that they can not file a chapter 7 case,
there are special extenuating circumstances.
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
three to five years. The most important thing about a
13 case is that it will allow you to keep valuable
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
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
You should consider filing a chapter 13 plan if you:
• Own your home and are in danger of losing it because
of money problems;
• Are behind on debt payments, but can catch up if given
• 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 during your chapter
13 case to pay for your necessities and to keep up with
required payments as they come due.
What Does It
Cost to File for Bankruptcy?
It now costs $299 to file for bankruptcy under
and $274 to file for bankruptcy under chapter 13,
for one person or a married couple. The court may allow
to pay this filing fee in installments if you can not
pay it all
at once. If you hire an attorney you will also have to
attorney fees you agree to.
If you are unable to pay the filing fee in installments
chapter 7 case, and your household income is less than
percent of the official poverty guidelines (for example,
figures for 2006 are $19,800 for a family of two and
$30,000 for a family of four), you may request that the
waive the chapter 7 filing fee. The filing fee can not
waived in a chapter 13 case, but it can be paid in
What Must I Do Before Filing
You must receive budget and credit counseling from an
approved credit counseling agency within 180 days before
your bankruptcy case is filed. The agency will review
possible options available to you in credit counseling
assist you in reviewing your budget. Different agencies
provide the counseling in-person, by telephone, or over
Internet. If you decide to file bankruptcy, you must
certificate from the agency showing that you received
counseling before your bankruptcy case was filed.
Most approved agencies charge between $30–$50 for the
pre-filing counseling. However, the law requires
agencies to provide bankruptcy counseling and the
certificates without considering an individual’s ability
to pay. If you can not afford the fee, you should ask
agency to provide the counseling free of charge or at a
If you decide to go ahead with bankruptcy, you should be
very careful in choosing an agency for the required
It is extremely difficult to sort out the good
agencies from the bad ones. Many agencies are
but many are simply rip-offs. And being an
‘‘approved’’ agency for bankruptcy counseling is no
that the agency is good. It is also important to
that even good agencies won’t be able to help you
much if you’re already too deep in financial trouble.
Some of the approved agencies offer debt management
plans (also called DMPs). A DMP is a plan to repay some
or all of your debts in which you send the counseling
a monthly payment that it then distributes to your
Debt management plans can be helpful for some consumers.
For others, they are a terrible idea. The problem is
counseling agencies will pressure you into a debt
plan as a way of avoiding bankruptcy whether it makes
sense for you or not. You should not consider a debt
management plan if making the monthly plan payment will
mean you will not have money to pay your rent, mortgage,
utilities, food, prescriptions, and other necessities.
important to keep in mind these important points:
• Bankruptcy is not necessarily to be avoided at all
In many cases, bankruptcy may actually be the best
choice for you.
• If you sign up for a debt management plan that you
can’t afford, you may end up in bankruptcy anyway
(and a copy of the plan must also be filed in your
• There are approved agencies for bankruptcy counseling
that do not offer debt management plans.
It is usually a good idea for you to meet with an
before you receive the required credit counseling.
credit counselor, who can not give legal advice, an
can provide counseling on whether bankruptcy is the best
option. If bankruptcy is not the right answer for you, a
attorney will offer a range of other suggestions. The
can also provide you with a list of approved credit
agencies, or you can check the website for the United
States Trustee Program office at
Can I Keep?
In a chapter 7 case, you can keep all property
law says is ‘‘exempt’’ from the claims of creditors. It
important to check the exemptions that are available in
state where you live. (If you moved to your current
from a different state within two years before your
filing, you may be required to use the exemptions
from the state where you lived just before the two-year
period.) In some states, you are given a choice when you
bankruptcy between using either the state exemptions or
using the federal bankruptcy exemptions. If your state
‘‘opted’’ out of the federal bankruptcy exemptions, you
be required to chose exemptions mostly under your state
law. However, even in an ‘‘opt-out’’ state, you may use
special federal bankruptcy exemption that protects
funds in pension plans and individual retirement
If you are allowed to use the federal bankruptcy
• $18,450 in equity in your home;
• $2950 in equity in your car;
• $475 per item in any household goods up to a total of
• $1850 in things you need for your job (tools, books,
• $975 in any property, plus part of the unused
in your home, up to $9250;
• Your right to receive certain benefits such as Social
Security, unemployment compensation, veteran’s benefits,
public assistance, and pensions—regardless of the
The amounts of the exemptions are doubled when a married
couple files together. Again, you may be required to use
exemptions which may be more or less generous than the
In determining whether property is exempt, you must
keep a few things in mind. The value of property is not
amount you paid for it, but what it is worth when your
bankruptcy case is filed. Especially for furniture and
this may be a lot less than what you paid or what it
cost to buy a replacement.
You also only need to look at your equity in property.
means you count your exemptions against the full value
minus any money that you owe on mortgages or liens. For
example, if you own a $50,000 house with a $40,000
mortgage, you have only $10,000 in equity. You can fully
protect the $50,000 home with a $10,000 exemption.
While your exemptions allow you to keep property even
in a chapter 7 case, your exemptions do not make any
difference to the right of a mortgage holder or car loan
creditor to take the property to cover the debt if you
behind. In a chapter 13 case, you can keep all of your
property if your plan meets the requirements of the
law. In most cases you will have to pay the mortgages
or liens as you would if you didn’t file bankruptcy.
Happen to My Home and Car If
I File Bankruptcy?
In most cases you will not lose your home or car
your bankruptcy case as long as your equity in the
is fully exempt. Even if your property is not fully
you will be able to keep it, if you pay its non-exempt
to creditors in chapter 13.
However, some of your creditors may have a ‘‘security
interest’’ in your home, automobile, or other personal
This means that you gave that creditor a mortgage on
the home or put your other property up as collateral for
debt. Bankruptcy does not make these security interests
away. If you don’t make your payments on that debt, the
creditor may be able to take and sell the home or the
property, during or after the bankruptcy case.
In a chapter 13 case, you may be able to keep certain
secured property by paying the creditor the value of the
property rather than the full amount owed on the debt.
you can use chapter 13 to catch up on back payments and
current on the loan.
There are also several ways that you can keep collateral
or mortgaged property after you file a chapter 7
You can agree to keep making your payments on the debt
until it is paid in full. Or you can pay the creditor
that the property you want to keep is worth. In some
involving fraud or other improper conduct by the
you may be able to challenge the debt. If you put up
household goods as collateral for a loan (other than a
purchase the goods), you can usually keep your property
without making any more payments on that debt.
Can I Own
Anything After Bankruptcy?
Yes! Many people believe they can not own
a period of time after filing for bankruptcy. This is
You can keep your exempt property and anything you
after the bankruptcy is filed. However, if you receive
inheritance, a property settlement, or life insurance
within 180 days after filing for bankruptcy, that money
property may have to be paid to your creditors if the
property or money is not exempt.
Wipe Out All My Debts?
Yes, with some exceptions. Bankruptcy will not
• Money owed for child support or alimony;
• Most fines and penalties owed to government agencies;
• Most taxes and debts incurred to pay taxes which can
not be discharged;
• Student loans, unless you can prove to the court that
repaying them will be an ‘‘undue hardship’’;
• Debts not listed on your bankruptcy petition;
• Loans you got by knowingly giving false information to
a creditor, who reasonably relied on it in making you
• Debts resulting from ‘‘willful and malicious’’ harm;
• Debts incurred by driving while intoxicated;
• 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).
Will I Have to
Go to Court?
In most bankruptcy cases, you only have to go to
proceeding called the ‘‘meeting of creditors’’ to meet
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
your bankruptcy forms and your financial situation.
Occasionally, if complications arise, or if you choose
dispute a debt, you may have to appear at a hearing. In
chapter 13 case, you may also have to appear at a
when the judge decides whether your plan should be
If you need to go to court, you will receive notice of
the court date and time from the court and/or from your
What Else Must
I Do to Complete My
After your case is filed, you must complete an
course in personal finances. This course will take
two hours to complete. Many of the course providers
give you a choice to take the course in-person at a
location, over the Internet (usually by watching a
video), or over the telephone. Your attorney can give
list of organizations that provide approved courses, or
can check the website for the United States Trustee
office at www.usdoj.gov/ust. If you can not afford the
you should ask the agency to provide the course free of
charge or at a reduced fee. In a chapter 7 case, you
sign up for the course soon after your case is filed. If
a chapter 13 case, you should ask your attorney when you
should take the course.
Affect My Credit?
There is no clear answer to this question.
if you are behind on your bills, your credit may already
bad. Bankruptcy will probably not make things any worse.
The fact that you’ve filed a bankruptcy can appear on
credit record for ten years from the date your case was
But because bankruptcy wipes out your old debts, you are
likely to be in a better position to pay your current
you may be able to get new credit.
If you decide to file bankruptcy, remember that debts
discharged in your bankruptcy should be listed on your
credit report as having a zero balance, meaning you do
own anything on the debt. Debts incorrectly reported as
having a balance owed will negatively affect your credit
score and make it more difficult or costly to get
should check your credit report after your bankruptcy
and file a dispute with credit reporting agencies if
information is not correct.
Should I Know?
Utility services—Public utilities, such as the
can not refuse or cut off service because you have filed
for bankruptcy. However, the utility can require a
future service and you do have to pay bills which arise
bankruptcy is filed.
Discrimination—An employer or government agency can
not discriminate against you because you have filed for
bankruptcy. Government agencies and private entities
in student loan programs also can not discriminate
against you based on a bankruptcy filing.
Driver’s license—If you lost your license solely because
you couldn’t pay court-ordered damages caused in an
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
your debt. If you file under chapter 13, you may be able
protect co-signers, depending upon the terms of your
How Do I Find a
As with any area of the law, it is important to
select an attorney who will respond to your personal
The attorney should not be too busy to meet you
individually and to answer questions as necessary.
The best way to find a trustworthy bankruptcy attorney
to seek recommendations from family, friends or other
members of the community, especially any attorney you
know and respect. You should carefully read retainers
other documents the attorney asks you to sign. You
not hire an attorney unless he or she agrees to
throughout the case.
In bankruptcy, as in all areas of life, remember that
person advertising the cheapest rate is not necessarily
best. Many of the best bankruptcy lawyers do not
Document preparation services also known as ‘‘typing
services’’ or ‘‘paralegal services’’ involve non-lawyers
offer to prepare bankruptcy forms for a fee. Problems
these services often arise because non-lawyers can not
advice on difficult bankruptcy cases and they offer no
services once a bankruptcy case has begun. There are
many shady operators in this field, who give bad advice
When first meeting a bankruptcy attorney, you should be
prepared to answer the following questions:
• What types of debt are causing you the most trouble?
• What are your significant assets?
• How did your debts arise and are they secured?
• Is any action about to occur to foreclose or repossess
property, to attach your wages or bank account, or to
shut off utility service?
• What are your goals in filing the case?
Can I File
Bankruptcy Without an
Although it may be possible for some people to
bankruptcy case without an attorney, it is not a step to
taken lightly. The process is difficult and you may lose
property or other rights if you do not know the law. It
patience and careful preparation. Chapter 7 (straight
cases are somewhat easier. Very few people have
been able to successfully file chapter 13
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