Frequently Asked Questions

What exactly is bankruptcy?
Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts or repay them under the protection of the bankruptcy court. Bankruptcy's roots can even be traced to the Bible (Deuteronomy 15:1-2 "Every seventh year you shall practice remission of debts. This shall be the nature of the remission: Every creditor shall remit the due that he claims from his neighbor; he shall not dun his neighbor or kinsman.").

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Aren't there different kinds of bankruptcy?
Yes. Bankruptcies can generally be described as "liquidation" or "reorganization." There are several types of bankruptcy proceedings. Attorney Michael Sharp will evaluate your particular case and recommend the best option for you.

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What is a Chapter 7?
Chapter 7 is the most common form of liquidation bankruptcy. It is a "fresh start" proceeding in which a consumer or business asks the bankruptcy court to wipe out (discharge) the debts owed. Certain debts cannot be discharged. In exchange for the discharge of debts, the business's assets or the consumer's nonexempt property is sold (or "liquidated"), and the proceeds are used to pay off creditors. Chapter 7 is available to individuals, married couples, corporations and partnerships. Individual debtors typically receive their discharge within 4-6 months of filing the case. Any wages the debtor earns after the case is begun are the debtor's, beyond the reach of creditors who had claims on the date of filing.

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What is a Chapter 11?
Chapter 11 is a reorganization proceeding, typically for corporations or partnerships. Individuals, especially those whose debts exceed the limits of Chapter 13, may file Chapter 11. In Chapter 11, the debtor usually remains in possession of his assets and continues to operate any business. The debtor proposes a plan of reorganization which, upon acceptance by a majority of the creditors, is confirmed by the court and binds both the debtor and the creditors to its terms of repayment. Plans can call for repayment out of future profits, sales of some or all of the assets, or a merger or recapitalization.

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What is a Chapter 12?
Chapter 12 is a simplified reorganization for family farmers, modeled after Chapter 13, where the debtor retains his property and pays creditors out of future income.

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What is a Chapter 13?
Chapter 13 is a repayment plan for individuals with regular income, unsecured debt less than $269,250, and secured debt less than $807,750. The debtor keeps his or her property and makes regular payments to the Chapter 13 Trustee out of future income to pay creditors over the life of the plan (3-5 years). Some debts must be repaid in full; others you pay only a percentage; others aren't paid at all. Some debts you have to pay with interest; some are paid at the beginning of your plan and some at the end. The level of repayment depends on the debtor's income and the composition of the debt. Certain debts that cannot be discharged in Chapter 7 can be discharged in Chapter 13. Chapter 13 also provides a mechanism for individuals to prevent foreclosures and repossessions, while catching up on their secured debts.

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How does Chapter 13 Work?
A Chapter 13 begins with a petition filed at the bankruptcy court where the debtor has a domicile or residence. The debtor also files schedules of assets and liabilities, a schedule of current income and expenditures, and a statement of financial affairs. A husband and wife may file a joint petition or file individually. Joint petitioners pay only one filing fee. If only one spouse files, the income and expenses of the non-filing spouse must be included in the debtor's schedules.

The filing of the petition under Chapter 13 "automatically stays" most actions against the debtor or the debtor's property. As long as the "stay" is in effect, creditors generally cannot initiate or continue any foreclosure, lawsuit, repossession or wage garnishment. Chapter 13 also provides a "co-debtor" stay which stops a creditor from trying to collect a "consumer debt" from another individual who is liable with the debtor on the debt. A consumer debt is an obligation incurred for consumer, as opposed to business, needs.

A debtor facing foreclosure can stop the foreclosure sale by filing Chapter 13. The Chapter 13 plan permits the debtor to cure defaults on mortgage debts by repaying the arrears within a reasonable period of time [usually within 36 months]. If the mortgage becomes all due during the Chapter 13, the plan must pay off that entire debt by the due date.

When the petition is filed, a Trustee is appointed to administer the case. The Chapter 13 Trustee's role is to collect plan payments from debtors and make distributions to creditors according to the debtor's plan. The debtor must file a plan within fifteen days of the petition, unless extended by the court, and the debtor must begin making plan payments to the Trustee within 30 days of the petition date. The plan provides for monthly payments of a fixed amount to the Trustee and must ultimately be confirmed by the court.

Upon confirmation, the Trustee begins distributing funds to creditors according to the terms of the plan. A plan can offer unsecured creditors less than full payment of their claims. Automobile loans can be modified so a debtor pays the lender only the value of the car as of the date of the petition. The undersecured portion of the debt is treated like all other unsecured debts in the plan.

A meeting of creditors is held in every case, and the debtor is examined under oath. The meeting is held about 30 days after the petition is filed. The Trustee conducts the meeting and questions the debtor's financial affairs and the proposed terms of the plan. The debtor must bring a government-issued picture I.D. and a Social Security card to the meeting. Creditors may attend and ask questions. Debtors must attend, and if a husband and wife filed jointly, they must both be present. Problems with the plan are typically resolved during or shortly after the creditors' meeting. If there are no plan objections, a confirmation order is submitted at the creditors' meeting.

If the Trustee or a creditor objects to confirmation of the plan, a hearing is scheduled before the court. The bankruptcy judge will determine whether the plan is feasible and meets the legal requirements for confirmation. A variety of objections may be made, but the most frequent objections are: the total plan payments are less than creditors would receive if the debtor's assets were liquidated; or the debtor's plan does not commit all of the debtor's projected net disposable income for the minimum three-year period.

The debtor must commit all projected "disposable income" during the time the plan is in effect. Disposable income is defined as income not reasonably necessary for the maintenance or support of the debtor or dependents. If the debtor operates a business, disposable income excludes those sums necessary to pay ordinary operating expenses.

If the plan is confirmed by the bankruptcy judge, the Chapter 13 Trustee begins distributing the funds received according to the plan. If the plan is not confirmed, the debtor may attempt to amend the plan. The debtor also has a right to convert the case to a Chapter 7 at any time.

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How do you make a Chapter 13 Plan Work?
On occasion, changed circumstances will affect a debtor's ability to make plan payments, or a debtor may have inadvertently omitted a creditor. In such instances, the plan may be modified either before or after confirmation. Modification after confirmation is not limited to a motion by the debtor. Modifications may be at the request of the trustee or an unsecured creditor.

The provisions of a confirmed plan are binding on the debtor and each creditor. Once the court confirms the plan, it is the responsibility of the debtor to make the plan succeed. Chapter 13 is not designed to solve financial problems that arise after the case is filed. The debtor must make regular payments to the trustee, which will require living on a fixed budget for a long period.

The debtor's employer may be required to withhold the amount of the plan payment from the debtor's paycheck and send it to the Chapter 13 Trustee. Furthermore, while confirmation of the plan entitles the debtor to retain property, the debtor may not incur any significant new debt without consulting the Trustee, if such obligations have an impact upon the execution of the plan. Failure to make plan payments may result in dismissal of the case.

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What is the Chapter 13 Discharge?
The Chapter 13 debtor is entitled to a discharge upon successful completion of all payments. The discharge releases the debtor from all claims provided for in the plan or disallowed by the court. It is the creditor's duty to file a claim in the case. Those creditors who were provided for in full or in part under the Chapter 13 plan, even if not paid because they failed to file a claim, may not initiate or continue legal action to collect the discharged obligations.

In return for adhering to the requirements of a repayment plan for three to five years, the debtor receives a broader discharge under Chapter 13 than in a Chapter 7 case. Generally, the debtor is discharged from all debts provided for by the plan or disallowed, except certain long term obligations (such as a home mortgage), debts for alimony or child support, debts for most student loans, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine. To the extent that these types of debts are not fully paid pursuant to the Chapter 13 plan, the debtor will still be responsible for these debts after the Chapter 13 case has successfully concluded.

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Can Bankruptcy filing stop Foreclosure?
Can declaring bankruptcy prevent a lender from taking your home away from you? It depends.

Homestead Exemption
Texas law says that your homestead is exempt regardless of how much equity you have in your home, if it is not more than one acre in town or 100 acres out of town.

But if you are filing a Chapter 7 you must show that you are current with the mortgage lender and that you can continue to make the monthly payments, among other things. But if you are filing a Chapter 13 you must show that you can propose a feasible plan to pay back the arrears on the house with in the time required by the bankruptcy code and that you can resume making monthly payments the next time a mortgage payment becomes due after filing.

Also, in order to use the homestead exemption the house must be your primary residence. If you own multiple properties you might be forced to give them up to the trustee.

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Will filing for bankruptcy stop harassing phone calls from bill collectors?
When we help you file for either type of bankruptcy, we ensure that an "automatic stay" goes into effect and is enforced. The automatic stay prohibits virtually all creditors from taking any action to collect the debts you owe them unless the bankruptcy court lifts the stay and lets the creditor proceed with collections. Most importantly, once you have retained an attorney (regardless of filing), the creditor will be referred to your attorney, and then, by law, the creditors will cease their harassing calls.

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What is the general process in consumer bankruptcy cases?
In a Chapter 7 case, we will file several forms with the bankruptcy court listing your income and expenses, assets, debts and property transactions. A court-appointed person, the Trustee, is assigned to oversee your case. About a month after filing, we will accompany you to a "meeting of creditors" where the trustee reviews your forms and asks any questions. Despite the name, creditors rarely attend. If you have any nonexempt property, you must give it (or its value in cash) to the Trustee. The meeting lasts only a few minutes. A couple of months later, you should receive a notice from the court that "all debts that qualified for discharge were discharged."

Chapter 13 is a little different. We will prepare and file the same forms plus a proposed repayment plan, in which we describe how you intend to repay your debts over the next three, or in some cases five years. A Trustee is assigned to oversee the case and we will attend the meeting of creditors together. Often one or two creditors attend this meeting, especially if they don't like something in your plan. After meeting the creditors, you attend a hearing before a bankruptcy judge who either confirms or denies your plan. If your plan is confirmed, and you make all the payments called for under your plan, you often receive a discharge of any balance owed at the end of your case.

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What are Secured Debts?
Secured creditors normally retain the right to seize their loan collateral, even after a discharge is granted. The debtor must decide whether to keep the asset. If a debtor returns the collateral, and if a discharge is granted, the debtor will have no further liability to the creditor.

A debtor wishing to keep the asset, such as an automobile, may "reaffirm" the debt or redeem the property. A reaffirmation is an agreement between the debtor and the creditor where the debtor promises to pay all or a portion of the money owed. The reaffirmed debt will still be owed after the discharge. In return, the creditor promises as long as payments are made, the creditor will not repossess the automobile or other property. If the debtor defaults on the payments, the creditor may repossess and sell the collateral. Unfortunately, if the sale price is not enough to pay off the debt, the debtor will still owe a deficiency to the creditor.

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Will all my debts be discharged?
It depends. The following debts are nondischargeable in both Chapter 7 and Chapter 13. If you file for Chapter 7, these will remain when your case is over. If you file for Chapter 13, these debts will have to be paid in full during your plan. If they are not, the balance will remain at the end of your case:

child support and alimony
debts for personal injury or death caused by your intoxicated driving
student loans, unless it would be an undue hardship for you to repay
fines and penalties imposed for violating the law, such as traffic tickets, criminal restitution and certain tax debts.

In addition, the following debts may be declared nondischargeable by a bankruptcy judge in Chapter 7 if the creditor challenges your request to discharge them. These debts may be discharged in Chapter 13. You can include them in your plan, and at the end of your case, the balance may be eliminated:

debts you incurred on the basis of fraud, such as lying on a credit application,
debts from willful or malicious injury to another person or another person's property,
debts from embezzlement, larceny or breach of trust, and
debts you owe under a divorce decree or settlement unless after bankruptcy you would still not be able to afford to pay them or the benefit you'd receive by the discharge outweighs any detriment to your ex-spouse (who would have to pay them if you discharge them in bankruptcy).

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Will I lose my house or other property if I file for bankruptcy?
Many of our clients worried about the possible loss of their home as they considered filing for bankruptcy. Though there have been a few situations where a debtor lost his/her home, keep in mind that bankruptcy is not designed to put you out on the street. You lose no property in Chapter 13. In Chapter 7, you select property you are eligible to keep from a list of permitted exemptions:

Equity in your home. In Chapter 7 bankruptcy, whether or not you will lose your house depends on the amount of equity you have in the property and the amount of any homestead exemption (which varies state-to-state) to which you are entitled. If the total amount of debt against your house is less than the market value, you may lose your house unless a homestead exemption entitles you to all or most of the equity. In Texas, this exemption allows you to keep your home regardless of the equity you have in it (with very few exceptions). If you are behind on your mortgage payments, you will almost certainly lose your house if you file a Chapter 7 bankruptcy. Your mortgage lender will ask the bankruptcy court to lift the automatic stay to begin or resume foreclosure proceedings. In a Chapter 13 bankruptcy, you will not lose your house if you immediately resume making the regular payments and repay your missed mortgage payments through your plan. If you are current on your mortgage payments, you will not lose your house if you file for Chapter 13 bankruptcy, as long as you continue to make your mortgage payments.
Renting. If you are current on your rent payments and file for bankruptcy, it's unlikely your landlord would receive bankruptcy notice. But if you are behind on your rent, there's a good chance that your landlord will begin eviction proceedings.
Insurance. You usually are allowed to retain the cash value of your policies.
Retirement plans. Pensions which qualify under the Employee Retirement Income Security Act (ERISA), and many other retirement benefits are fully protected in bankruptcy.
Personal property. You'll be able to keep most household goods, furniture, furnishings, clothing (other than furs), appliances, books and musical instruments.
Public benefits. All public benefits, such as welfare, Social Security and unemployment insurance, are fully protected.
Tools used on your job. You'll probably be able to keep up to several thousand dollars worth of the tools used in your trade or profession.
Wages. In most states, you can protect at least 75% of earned but unpaid wages.

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What is a Credit Report?
Credit reports are compiled by credit bureaus - private companies that gather information about your credit history and sell it to banks, mortgage lenders, credit unions, credit card companies, department stores, insurance companies, landlords and even a few employers. Credit bureaus get most of their data from creditors. They also search court records for lawsuits, judgments, bankruptcy filings and recorded liens (legal claims). To create a credit file for a given person, a credit bureau searches its computer files until it finds entries that match the name, Social Security number and any other available identifying information. Credit reports include non-credit data such as names you previously went by, past and present addresses, Social Security number, employment history, marriages and divorces. Credit data includes the names of your creditors, type and number of each account, when each account was opened, your payment history for the previous 24-36 months, your credit limit or the original amount of a loan, and your current balance. The report will show if an account has been turned over to a collection agency or is in dispute.

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How can I get a copy of my credit report?
There are three major credit bureaus—Equifax, TransUnion and Experian. The federal Fair Credit Reporting Act (FCRA) entitles you to a copy of your credit report, and you can get one for free if:

you've been denied credit because of information in your credit report and you request a copy within 60 days of being denied credit
you're unemployed and looking for work
you receive public assistance, or
you believe your file contains errors due to fraud.

In addition, you can get one free copy a year if you live in Colorado, Georgia, Maryland, Massachusetts, New Jersey or Vermont.

The law says that if you don't qualify for a free report, you should pay no more than $8.50 to obtain a report from Equifax (P.O. Box 740241, Atlanta, GA 30374, 800-685-1111, http://www.equifax.com/), Trans Union (P.O. Box 1000, Chester, PA 19022, 800-888-4213, http://www.tuc.com/) or Experian (P.O. Box 2104, Allen, TX 75013-2104, 888-397-3742, http://www.experian.com/).

Provide the following information:

your full name (including generations such as Jr., Sr., III)
your birth date
your Social Security number
your spouse's name (if applicable)
your telephone number, and
your current address and addresses for the previous five years.

Or if you retain our office we can obtain a tri-merged credit report for you for approximately $40.00 and it is usually emailed to our office with in a few hours.

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What paper work should I bring to the free half hour consultation?
In order to prepare the consumer bankruptcy papers, the client must bring the following documents:

A list of all creditors, including addresses, account / loan numbers, and the amounts and description of each debt;
For each secured debt, such as a car loan or home mortgage:
1. Copy of the latest statement showing the balance due on the debt;
2. Copy of the DMV registration or recorded trust deed for each secured debt.
Income tax returns for the last two years, including W-2, 1099, and K-1 information;
Copies of the last two pay stubs or copies of bank statements for the last 90 days showing the amount and frequency of the client's income;
A detailed list of the debtor's monthly living expenses, i.e., food, clothing, housing, utilities, taxes, transportation, medicine, etc;
If self-employed, copies of monthly profit-and-loss statements for the past six months;
Copies of any lawsuits or judgments, regardless of whether the client is a plaintiff or defendant; and
Copies of any family trusts or prenuptial agreements.

Note: contact us by phone or e-mail to request a customized questionnaire and bring the completed questionnaire to the office conference.

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