Bankruptcy FAQs

What is a Chapter 7 bankruptcy?

Chapter 7 bankruptcy, sometimes called “straight bankruptcy” is a liquidation proceeding. The debtor turns over all non-exempt property to the bankruptcy trustee who then converts it to cash for distribution to the creditors. The debtor receives a discharge of all dischargeable debts usually within four months. In the vast majority of cases the debtor’s assets can be protected or “exempted”, so Chapter 7 will give that person a relatively quick "fresh start".

One of the main purposes of Bankruptcy Law is to give a person hopelessly burdened with debt a fresh start by wiping out his or her debts.

What is Chapter 13 bankruptcy?

Chapter 13 Bankruptcy is a reorganization of debt. Chapter13 bankruptcy is available to individuals so as to pay all, or a portion, of their debts over a three to five year period. Chapter 13 is useful for those individuals who are behind on their mortgage payments, and need an opportunity to pay them current over time. Chapter 13 also appeals to individuals who have non-exempt property that they want to keep. It is good option for individuals who have predictable income and whose income is sufficient to pay their reasonable expenses with some amount left over to pay off their debts.

Will my creditors stop harassing me?

Yes, they will! By law, all actions against a debtor must cease once the documents are filed. In every bankruptcy case there is an “automatic stay” put into place, which stays, or stops, all creditor activity. Creditors cannot initiate or continue any lawsuits, wage garnishments, or even make telephone calls or send letters demanding payments. Secured creditors such as banks, for example, with a lien on a car, will get the stay lifted if you cannot make payments.

Will my spouse be affected?

Arizona is a community state, which means that most debt incurred during the marriage will be collectible against both husband and wife, no matter which spouse incurred the debt. If one spouse files and the other doesn’t, the non-filing spouse may retain some liability on debt.

Who will know?

Bankruptcy filings are public records. However, under normal circumstances, no one will know you went bankrupt. The Credit Bureaus will record your bankruptcy and it can remain on your credit record for up to 10 years.

Can I keep any credit cards?

Whether a debtor keeps credit cards after filing bankruptcy is up to the credit card company. If you are discharging a credit card they will cancel the card unless you reaffirm the debt. Even if you have a zero balance the credit card company might cancel the card.

When will I be discharged from bankruptcy?

One of the major purposes of bankruptcy legislation is to afford the opportunity to a person hopelessly burdened with debt to erase his or her debt and thereby get a fresh financial start. The debt is erased when he or she is discharged.

The debtor is discharged 3 - 5 months after bankruptcy is filed. At that time all debts (with some exceptions) are written off.

Will I ever get credit again?

Yes! A number of banks now offer "secured" credit cards where a debtor puts up a certain amount of money (as little as $200) in an account at the bank to guarantee payment. Usually the credit limit is equal to the security given and is increased as the debtor proves his or her ability to pay the debt. Two years after a bankruptcy discharge, debtors are eligible for mortgage loans on terms as good as those of others with the same financial profile who have not filed bankruptcy. The size of your down payment and the stability of your income will be much more important than the fact you filed bankruptcy in the past. The fact you filed bankruptcy stays on your credit report for up to 10 years. It becomes less significant the further in the past the bankruptcy is. You are probably a better credit risk after bankruptcy than before.

What debts are erased by a bankruptcy?

Most unsecured debt is erased in a bankruptcy except for:

• Child support and alimony
• Debts for personal injury or death caused by your drunk driving
• Student Loans
• Some income tax debt

Note on Private Student Loans: On June 7 2007, US Senator Dick Durbin introduced a Bill to make private student loans dischargeable in bankruptcy, as they were before 2005. The 2005 changes to the U.S. Bankruptcy Code made the treatment of private student loans equivalent to the treatment of government-guaranteed student loans, which were not dischargeable. This bill would reverse the 2005 amendment, so that private student loans again would be fully dischargeable in bankruptcy.