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Frequently asked questions about bankruptcy

I can’t pay my debts. Can I file for bankruptcy?
Virtually anyone can file for bankruptcy, but the long-term repercussions should make it a measure of last resort. A bankruptcy will stay on your credit record for at least seven years and probably longer. That will make it harder for you to get loans, credit cards and the like. Some employers run credit checks on their job applicants, and insurers often check your credit history before issuing a policy. Bankruptcy, meanwhile, does not guarantee that your creditors cannot seize at least some of your assets. As a result, you could lose much of what you already own and ruin your credit record at the same time. Before you file for bankruptcy, think of ways to cut your spending and pay off debt. If you own a home, perhaps you could tap your equity to pay creditors. Or, perhaps you have other investments or personal possessions that could be sold to raise cash. A generous relative might be willing to help. Finally, remember that credit card companies and other creditors are sometimes willing to restructure a customer’s debt or even forgive part of it if the alternative is default. They don’t want to see you file for bankruptcy because then they might get nothing.

What are the differences between Chapter 7 and 13 bankruptcy?
There are several types of bankruptcy, but most individuals file under Chapter 7 or Chapter 13 of the federal Bankruptcy Code. A Chapter 13 filing-sometimes called the "wage-earner plan"-will stop your creditors from pestering you and allow you to keep your property. You enter a formal, court-approved plan to pay at least part of your debts over three to five years. A Chapter 13 filing is usually wiped off your record after seven years. A Chapter 7 filing is often called a straight bankruptcy. Most of your debts will be canceled (a notable exception is money owed to the IRS), but you may have to give up some of your property to repay creditors. This type of filing typically stays on your record for 7 to 10 years. Filing for either chapter 7 or chapter 13 bankruptcy will be more stressful and, in the case of chapter 7, more difficult when and if Congress passes major reforms of the bankruptcy code. To file for chapter 7 will require passing various means tests. You will have to make payments under chapter 13 for longer periods of time. There will more paperwork, and your costs are likely to jump substantially.

Are there debts that cannot be discharged through a Chapter 7 bankruptcy?
Many consumers don’t realize it, but several kinds of debt cannot be discharged through a Chapter 7 bankruptcy filing-the so-called straight bankruptcy chosen by many individuals. You can’t cancel some obligations under Chapter 7, including some taxes and customs, unpaid withholding and Social Security taxes and the penalties associated with them; debts incurred because of fraud, embezzlement, or larceny; liability incurred for willful and reckless acts committed against another person or against his or her property; and student loans less than five years old.

Will the type of bankruptcy I file affect my ability to get credit in the future?
If you filed Chapter 7, creditors may be reassured by the fact that you are prohibited from filing again for six years. If you filed Chapter 13 and paid back a major portion of your debts, potential lenders may be willing to take a chance on you.

How long does bankruptcy stay on my credit record?
Financial experts discourage clients from filing for bankruptcy in part because a filing will stay on their credit record for years. How many years depends on the type of bankruptcy you choose. Chapter 13 filing usually stays on your credit record for seven years. Chapter 7 bankruptcy will usually stay on your credit record for 10 years.

Will I be able to get credit if I still have a bankruptcy or foreclosure on my credit record?
Bankruptcies and foreclosures can remain on a credit report for seven to 10 years. Some lenders will consider a borrower earlier if they have re-established good credit. The circumstances surrounding the bankruptcy can also influence a lender’s decision. For example, if you went through a bankruptcy because your employer had financial difficulties, a lender may be more sympathetic. If, however, you went through bankruptcy because you overextended personal credit lines and lived beyond your means, the lender probably will be less inclined to be flexible.

Do I need a lawyer when filing for bankruptcy?
Yes. There’s no law that says you cannot file for bankruptcy on your own. But it’s a complicated process, and one slip-up could cause lengthy delays or even leave your assets unprotected. A local attorney who specializes in bankruptcy law will also know how your filing might be affected by the policies of local courts. Although the rules on bankruptcy are set by a state’s legislature, their interpretation can vary from one jurisdiction to the next.

What mortgage loan options are available if you’ve filed for bankruptcy in the past?
A previous bankruptcy can remain in a credit file for seven to 10 years. Depending on when the bankruptcy was discharged and what kind of credit a borrower has reestablished since then, it needn’t be an obstacle to obtaining loan approval. The longer ago the discharge occurred, the better off a loan applicant will be. Many lenders also will take into account the circumstances surrounding a bankruptcy. For example, they may look more favorably upon you as a borrower if your bankruptcy was due to financial reverses you suffered due to your employer’s own financial difficulties. On the other hand, if you declared bankruptcy because you overextended your personal credit lines and lived beyond your means, a lender probably won’t be as forgiving.

Are my retirement accounts exempt from creditors in a bankruptcy proceeding?
The U.S. Supreme Court has held that savings in a qualified retirement plan, such as a 401(k) or IRA, are exempt from creditor claims in a bankruptcy. However, some courts have allowed the IRS to invade plan assets to recoup amounts owed by the plan participant. In fact, ERISA (the comprehensive pension law enacted in 1974) does not protect plan assets from IRS claims against a participant’s qualified plan or IRA account. It may also depend on the state in which you live.

Can I refinance my mortgage after bankruptcy?
Refinancing may be prudent but could be difficult after a bankruptcy. If you’re considering bankruptcy, you may want to go to your current lender first and explain the situation. If you have been current on your payments, the lender may be accommodating and refinance your loan, easing your financial situation.