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Bankruptcy FAQ

Someone who owes me money filed for bankruptcy. How do I know if I can still collect my debt?

The bankruptcy court provides notice to creditors regarding pending bankruptcy proceedings about two weeks after the debtor’s bankruptcy filing. The notice informs you, the creditor that the debtor filed for bankruptcy. If the debtor has assets for liquidation, you must tell the court about the money that you are owed. The notice also tells you about the Meeting of the Creditors and deadlines to file objections in the bankruptcy case. If the debtor obtains a successful discharge, the court will send notice of the discharge order to creditors.

How will filing for bankruptcy affect credit?

Filing for bankruptcy certainly has an adverse effect on an individual’s credit score. For chapter 7 and 11 cases, the filing will appear on your credit report for ten years. For chapter 13 cases, the filing will appear on your credit report for seven years.

However, filing for bankruptcy does not mean that you cannot obtain credit in the future. Realistically, it will be extremely unlikely for you to obtain a new loan or credit card for at least a year or two. Some creditors may extend credit, albeit with a higher interest rate, to those who have recently filed for bankruptcy because of the time constraints of bankruptcy filings. For example, most people are eligible for a mortgage within two years of filing for bankruptcy.

Can I erase my student loans by filing bankruptcy?

Student loans are especially hard to discharge under bankruptcy absent a showing of “undue hardship.” Under the 2005 Bankruptcy Act, without undue hardship, any educational benefit debt or loan is excepted from discharge. The debtor has the burden of proving that a lack of discharge would impose an undue hardship on the debtor and his/her dependents.

Courts apply a case-by-case balancing test to determine whether to discharge the debt. Some of these factors include (1) the amount of debt involved; (2) the current income of the debtor, the objecting creditor(s) and their respective spouses; (3) the current expenses of the debtor; (4) the current assets, including exempt assets of the debtor, of the debtor, objecting creditor(s) and their respective spouses; (5) the current liabilities, excluding those discharged by the debtor’s bankruptcy, of the debtor, objecting creditor(s) and their respective spouses; (6) the health, job skills, training, age and education of the debtor, objecting creditor(s) and their respective spouses; and (7) the amount of debt which has been or will be discharged in the debtor’s bankruptcy.

How is a spouse affected?

Each spouse is responsible for his/her own debt. Thus, the debtor filing bankruptcy should not affect the credit of the other, non-filing, spouse. However, if the non-filing spouse is a co-debtor, both individuals will be responsible for payment.

How often can you file for bankruptcy?

Debtors are allowed one chapter 7 bankruptcy discharge every eight years from a previous chapter 7 filing or six years from a chapter 13 filing. Debtors are allowed one chapter 13 bankruptcy discharge every

What is a joint petition?

A joint petition is an option for married couples who are deciding to file bankruptcy. Joint petition is when an individual and his/her spouse voluntarily file a single bankruptcy petition. Filing a joint petition allows a couple to pay a one-time filing fee as opposed to two separate filing fees. It also provides protection for spouses for joint debt. By filing a joint petition, you can prevent creditors from pursuing your spouse from a shared debt.

Unmarried partners, corporations, and partnerships do not qualify for joint petitions.

What happens if one spouse files for bankruptcy and not the other?

Married couples must make the difficult decision of whether to file bankruptcy jointly or separately. A joint filing makes sense if the finances of the spouses is shared and mixed up. If a debt is shared by both spouses, the non-filing spouse will still be responsible for the debt. Similarly, if the non-filing spouse is a cosigner on a debt, creditors can pursue the non-filing spouse after the debtor files for bankruptcy. In contrast, if the spouse filing for bankruptcy has filed for bankruptcy previously, or has most or all of the debt in his/her name, separate filing may be smarter.

Who’s Paid First? Subrogation of Bankruptcy Claims

The Bankruptcy Code tries to allocate assets to the various claimants as fairly and equitably as possible. First, before any money is paid to the claimants, a debtor gets to keep his/her exempt property. This includes basic items such as clothing, and common household items. Then, claims are paid out in order of priority. Priority claims such as certain administrative expenses, support obligations, debts and taxes are paid out before lower priority claims. Subrogation of claims refers to when a person or business stands in the place of another.

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