Frequently Asked Questions

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What are the types of bankruptcy?

There are three kinds of bankruptcy:

  • Chapter 7—Straight bankruptcy wipes out most if not all unsecured debts (except those listed below) and provides an immediate fresh start. It is also called liquidation bankruptcy, because assets and other valuables not protected by exemptions or burdened with secured debt will be sold by the trustee to pay creditors. However, 95 percent of all Chapter 7 filings are "no asset" cases. This means that after considering secured debt and bankruptcy exemptions, there are no assets for the trustee to liquidate.
  • Chapter 11—Corporate reorganization bankruptcy allows a company to restructure debts to pay creditors back under more advantageous terms. They may also liquidate certain assets to pay creditors.
  • Chapter 13—Wage earner bankruptcy sets up a repayment plan to pay back unsecured debts over three to five years. Some secured debt is restructured and every attempt is made to ensure you end up with a reasonable monthly payment.

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Should I file for personal bankruptcy?

Bankruptcy is an option you might consider if you:

  • Are having difficulty paying normal household bills for food, utilities, etc.
  • Are paying only minimum amounts (or nothing) on your credit cards
  • Borrowing from a credit card to make payments on another debt
  • Can't budget yourself out of debt within five years
  • Are getting notices that your mortgage or loans are being foreclosed
  • Have had a severe financial setback, such as losing your job or a major client, or suffering a divorce or a costly illness

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What is the bankruptcy process?

There are steps everyone filing for bankruptcy must take. However, bankruptcy may become a complex process. Making one mistake can result in severe consequences. That is why most people consult a qualified bankruptcy attorney to protect their rights.

The process for each type of bankruptcy is different. To file for Chapter 7 bankruptcy, for example, you must:

  1. Make a detailed and comprehensive list of past and current debts and assets.
  2. Complete the Official Bankruptcy Forms approved by the federal government to determine actual income, how it compares to others, and whether you are eligible to file for Chapter 7 bankruptcy.
  3. Obtain approved credit counseling.
  4. File any outstanding Federal Income Tax forms.
  5. Petition the bankruptcy court for relief.
  6. A court-appointed trustee will be assigned to your case to verify compliance with the process.
  7. Attend the first meeting of creditors—also called the Section 341 meeting. The court-appointed bankruptcy trustee may question you under oath. Creditors are invited and may also ask questions, but seldom attend or ask questions.

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What debts does bankruptcy not cover?

Bankruptcy cannot relieve you of all debts. The following are generally still your responsibility:

  • Alimony
  • Child support
  • Drunk driving judgments
  • Criminal fines
  • Criminal restitution
  • Debts incurred by fraud or intentional wrongdoing
  • Back taxes under three years old
  • Mortgages and car loans (secured debt)
  • Student loans
  • Luxury goods purchases of more than $550 made within 90 days of filing
  • Cash advances of $825 or more within 70 days of filing

A qualified bankruptcy lawyer can review the list with you to give you a full understanding of the debts covered and not covered.

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What form of bankruptcy is right for me?

An attorney experienced in bankruptcy law can help you determine the options that best suit your particular situation.

  • For consumers, filing for Chapter 7 relieves most debts, but not all. Businesses, corporations, and partnerships may also file for Chapter 7.
  • Filing Chapter 13 helps consumers and sole proprietorships pay off debts with a structured repayment plan over three to five years.
  • Commercial enterprises and certain individuals may file Chapter 11, repaying creditors through a court-approved plan of reorganization.

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I am a creditor. Are there advantages to suing a debtor in court?

Without a judgment against the debtor, you run the risk of your claim falling to the bottom of the repayment list. If you receive a judgment, you can place a lien on real estate property or personal property the debtor owns. The lien will be paid when the property is sold. However,  most judgment liens are stripped from the property through a bankruptcy in Michigan.

Keep these advantages in mind as you analyze the costs of litigation—both financially and of your time. An experienced bankruptcy attorney can help you understand the likely outcome of a court case.

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Which bankruptcy option wipes the slate clean?

Chapter 7 comes the closest to giving you an immediate fresh start, although it does not discharge all your debts. Some debts you will still have to pay. But with Chapter 7, an appointed trustee takes your nonexempt assets and liquidates or sells them to pay your creditors. You may have a cleaner slate, but that does not mean you can walk away from all your debt scot-free and without some pain.

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When does filing Chapter 7 make sense?

When the following conditions exist, filing Chapter 7 may be your best bankruptcy option:

  • You cannot pay your debts
  • Your creditors are pestering you or threatening to sue you
  • You do not have any debts with co-signors

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When does filing Chapter 13 make sense?

If you need some breathing room to pay your debts, Chapter 13 could be your best bankruptcy options, especially if you—

  • Are behind on your mortgage payments
  • Owe the IRS
  • Do not qualify for Chapter 7
  • Need relief from collection proceedings
  • Have debts with co-signers
  • Can pay a portion of your unsecured debts over three to five years

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If I file Chapter 13, what are my creditors' rights and responsibilities?

When you file, you must include your proposed plan to pay all priority claims against you, including taxes, in full (unsecured debts are handled separately). Once the bankruptcy court appoints a trustee, who manages your plan, your creditors will be mailed a copy of your plan. Your creditors may object to your plan if they have a legal basis to do so. If your plan is approved, you make monthly payments to the bankruptcy trustee, who then distributes the funds to your creditors according to your plan.

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What does a trustee do?

The trustee's responsibility is to:

  1. Administer the bankruptcy
  2. Make sure your unsecured creditors receive payments from your best efforts
  3. Run the first meeting of creditors (called the Section 341 meeting)
  4. Collect and sell non-exempt property (Chapter 7) or collect and pay debt according to a repayment plan (Chapter 13)
  5. Get information from you

Trustees can be private individuals or corporations. They are not necessarily lawyers and the courts do not pay them. Their fees come from the bankruptcy filing fee or are a set percentage of the money distributed in the bankruptcy.

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What happens to my home mortgage during bankruptcy proceedings? I do not want to lose my home.

Statutes dictate the amount of equity you can have in your home when you file for personal bankruptcy. Trustees may not sell your house if your equity is less than the applicable exemption. A bankruptcy attorney can review your bankruptcy options with you to meet your personal and financial recovery goals, including the equity in your home and the applicable exemptions.

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How long does a bankruptcy stay on my record?

Bankruptcies remain on credit reports a minimum of ten years. Deciding to declare bankruptcy is a serious decision. That is why it is important to consult an experienced bankruptcy attorney so you fully understand your bankruptcy options and their consequences.

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Will filing for bankruptcy end those calls from creditors and collection agencies?

Once your bankruptcy petition is filed, you are protected. If a creditor still tries to collect directly from you after that point, you should immediately notify your attorney.

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When does filing Chapter 11 make sense?

In Chapter 11 bankruptcy, your commercial enterprise or certain individuals pay creditors according to a court-approved reorganization plan. This allows you or your business the opportunity to get back on its feet and back on a path to profitability. The bankruptcy court approves or rejects your plan. You should consult both your financial and legal advisors to determine whether this serious step is right for you and your business. Not every Chapter 11 case results in restored profitability. Chapter 11 could also ultimately result in liquidation through conversion to Chapter 7.

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What happens to my corporation if I file personal bankruptcy?

Personal bankruptcy does not affect the corporation, since the corporation is a legal entity separate and distinct from its shareholders.

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What happens to me as a shareholder when a corporation declares bankruptcy?

A corporate bankruptcy may directly affect its shareholders in a number of ways. If the officers or shareholders are personally liable for the business debts, the automatic stay in the corporation's case does not prevent creditors from trying to collect from others who may be liable. Shareholders do not have to be notified of a Chapter 7 filing, because they usually do not receive anything in return for their investment. If the creditors are paid in full, the court notifies shareholders to give them the opportunity to file claims to whatever money remains.

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Can a business be forced into bankruptcy?

Yes. Creditors can initiate an involuntary bankruptcy proceeding against a business. This occurs in infrequent situations when creditors are concerned that the business is squandering or misappropriating assets that should otherwise go towards paying debts owed to its creditors.

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