A: Americans generally have overextended themselves by using too much easily accessible credit to finance overspending, combined with lack of savings. With no financial safety net, sudden crises such as medical emergencies, job losses or failed businesses, death or disability of spouses, or divorce can result in insurmountable debt. On average, a typical bankruptcy debtor is employed and middle-aged with a high school education and relatively low income.
Q: What alternative courses of action are there to filing bankruptcy when facing overwhelming debt?
A: Short of bankruptcy, a debtor may enter into mediation with creditors or negotiate workout agreements to extend due dates, lower interest rates, partially forgive debt or alter other terms. A debtor may execute an assignment of property for the benefit of creditors (ABC), wherein the debtor puts assets in the trust of a neutral third party to pay creditors. A business debtor can sell the business, negotiating the satisfaction of debt as part of the deal. Other creative options to bankruptcy exist.
Q: What types of bankruptcy are there?
A: Consumers usually file Chapter 7 "liquidation" or Chapter 13 "reorganization" bankruptcies. Under Chapter 7 bankruptcy, the debtor transfers nonexempt property to a trustee who liquidates it to pay creditors. In practice, many Chapter 7 consumers only own property exempt from liquidation under the law and most of their debt is cancelled without actually losing property. Under Chapter 13 bankruptcy, the debtor repays certain debts in up to five years. In 2005, a bankruptcy law change instituted a complex means test. Relatively stable debtors must file under Chapter 13 and repay debts if possible. Less stable debtors may file for Chapter 7.
Q: Can bankruptcy free me from my student loans?
A: Student loans are not dischargeable in bankruptcy unless the debtor can show the court that his or her educational loans inflict an "undue hardship" on the debtor and his or her dependents. Courts throughout the US have devised a variety of tests to determine what constitutes undue hardship and it is generally extremely difficult to show. Therefore, student loans are seldom dischargeable.
Q: Are spousal maintenance or alimony, and child support obligations dischargeable in bankruptcy?
A: 2005 changes to the federal bankruptcy laws provided that "domestic support obligations" like alimony and child support are not dischargeable, nor does the filing of a bankruptcy petition stay most court proceedings dealing with family law issues. Under Chapter 7, but probably not under chapter 13, other obligations to a spouse or child incurred in a divorce, separation or by court or government order are also not dischargeable, such as property settlement obligations.
Q: Can I stop paying my alimony and child support during my bankruptcy?
A: 2005 changes in the bankruptcy laws require a debtor to remain current on all domestic support obligations such as alimony or spousal maintenance, and child support, throughout the duration of the bankruptcy. If a debtor falls behind on his or her domestic support obligations during bankruptcy, the bankruptcy could be dismissed or converted from a Chapter 13 to a Chapter 7 proceeding.
Q: How long may credit bureaus include bankruptcy information on a credit report?
A: Consumer credit reports may reveal Chapter 7 bankruptcy cases for 10 years from filing. Chapter 13 information can be included for seven years from discharge or 10 years from filing if there is no discharge. Account information for debts discharged under either chapter may be included in credit reports for seven years after the accounts go inactive.
Q: Should I consult a lawyer for legal advice about bankruptcy?
A: It is in the best interest of a debtor in bankruptcy to consult a knowledgeable and skilled attorney. A bankruptcy lawyer can help a debtor determine whether bankruptcy is the best course of action to take in the face of seemingly insurmountable debt and can guide a debtor through the details and procedures of the bankruptcy process. Bankruptcy attorneys also represent creditors throughout the debt collection process, including advising creditors about their rights when debtors file for bankruptcy.
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