Frequently Asked Questions
Bankruptcy is powerful - it can stop even the IRS. It can stop a sheriff sale of your home, divorce proceedings (equitable distribution only), wage garnishments, frozen bank accounts, and lawsuits. Most unsecured debt can be discharged in bankruptcy: credit cards, personal loans, loans to family members or friends, repo'd car loans, medical bills, and sometimes student loans and income taxes.
Do I really need an attorney?
Even the Administrative Office of the U.S. Courts recommends that people who are considering bankruptcy hire an experienced bankruptcy attorney: "It is very important that a bankruptcy case be filed and handled correctly. The rules are very technical, and a misstep may affect a debtor's rights. For example, a debtor whose case is dismissed for failure to file a required document, such as a credit counseling certificate, may lose the right to file another case or lose protections in a later case, including the benefit of the automatic stay. Bankruptcy has long-term financial and legal consequences — hiring a competent attorney is strongly recommended."
How often can I file bankruptcy?
What is the Automatic Stay and how long does it last?
In a Chapter 13, if you do not maintain your payments for secured debts, such as making your payments to catch up with your past due balance on your mortgage, the bank can request to move forward with the foreclosure by asking to have the automatic stay lifted. However, the automatic stay cannot be lifted without giving you notice and an opportunity to object. Also, in a Chapter 13, if your spouse did not file bankruptcy with you but is a co-signer on any debts you are paying in your Chapter 13 Plan, he or she is also entitled to the Automatic Stay. This way, if you have, for example, filed Chapter 13 to catch up on your mortgage, but only you filed for bankruptcy, the mortgage company cannot harass your spouse while you are in a 13.
Does my spouse have to file bankruptcy with me?
What is a 341 Meeting of the Creditors and where is it held?
Can my wages be attached or garnished?
Also, the only way to have your wages attached is if a judgment is entered against you. So if your creditors are calling you and telling you they are going to attach your wages, if they have not even sued you yet, it can't happen. But again, in Pennsylvania, other than the limited exceptions stated above, there is no wage attachment.
However, your bank accounts CAN be garnished and if you have a bank account with a bank that you also have an overdue credit card or mortgage, chances are very high that the bank will remove your funds. Filing bankruptcy will prevent this from happening, and depending your exemptions, you may be able to recover the funds that were taken once you file bankruptcy.
Will I be able to keep my property?
Homestead - § 522(d)(1).............................................................................................. $31,575
Motor Vehicle - § 522(d)(2)............................................................................................ 5,025
Household Goods - § 522(d)(3)
Per Item Limit................................................................................................................ 800
Aggregate Limit....................................................................................................... 16,850
Jewelry - § 522(d)(4)......................................................................................................... 2,125
Wild Card - § 522(d)(5)
Any property.......................................................................................................... 1,675
Unused homestead under § 522(d)(1)................................................................ 15,800
Tools of the Trade - § 522(d)(6)................................................................................... 3,175
Unmatured Life Insurance - § 522(d)(8)..................................................................... 16,850
Personal Injury Claims - § 522(d)(11)(D)..................................................................... 31,575
Limitations on State Homestead Exemptions:
Pennsylvania does have its own exemptions but they are rarely helpful because they are so limited. The amount of property you can keep is ridiculously low ($300 in personal property for example). But there is one scenario where the PA exemptions are helpful: If you are married, and you own your property jointly with your spouse as tenants by the entirities, and you purchased that property after you were married (or had it put in joint name after you were married) and your debt is NOT joint, the PA exemptions might help you because under those exemptions 100% of all properly jointly owned by married people is considered "entireties property" and is fully exempt for debt that isn't joint. Here is an example to make that make sense: You and your spouse own your house and you purchased it together while you were married OR you put it in joint name after you were married. Your house is worth $200,000 and has no mortgage. Under the Federal exemptions the most you could exempt would be $27,900 each, plus the $1475 wildcard each. That isn't going to be enough to protect your house but under the PA exemptions the house is fully exempt. However, the debt you have with your spouse can't be joint. So if you and your spouse have $50,000 in debt and none of it is joint, you could protect your house under the PA exemptions. The PA exemptions are complicated and it is important to speak with an attorney about whether they are an option in your case. NOTE: Don't got changing the deed to your house without speaking with an attorney first. Transfers of property before you file bankruptcy can create big problems in your bankruptcy case.
Is there any way to get rid of my second mortgage or reduce the amount of my car loan, and still keep my house and my car?
If you think your house might be worth less than your first mortgage balance, we are going to need an appraisal. Reach out to us and we can give you some names of people who do bankruptcy appraisals.
Also, in a Chapter 13, you may be able to "cram down" the lien on your car down to the Blue Book value of your car. This assumes that your car is worth LESS than the loan. Your car loan must be Sometimes car lenders will object to this, but often they are willing to negotiate somewhere in the middle, and sometimes they don't object at all. The value of the car, if it is less than the loan, is then spread out of the term of the Chapter 13 plan (3 to 5 years) and you make that payment through the plan. You still have to pay interest on the loan, but we can usually reduce the interest rate to anywhere between 1% - 3%. The remaining balance of the loan, which is higher than the value of the car, gets discharged at the end of your plan. Note that if you purchased your car less than 910 days before filing bankruptcy, we can't do a cram down on the balance, but we can reduce the interest rate and spread the loan payments out over the three or five years of your bankruptcy.
Should I liquidate my IRA or 401(k) to pay my debts if I think it will prevent me from filing bankruptcy?
More importantly, however, is that you be honest with yourself about whether or not liquidating those funds will really make a difference and prevent bankruptcy. Consider if those funds offer just temporary relief, you could be causing problems for yourself in the future. If a bankruptcy is inevitable, you will have spent your retirement and still have to file bankruptcy. Why not save your retirement for when you retire? Your future you will be really glad you did! Also, remember you will have to pay taxes and a penalty on those funds. Depending on what your income was for the year (perhaps earlier in the year your income was better), you might have difficulty coming up with the taxes owed because the tax amount will be based on your income tax bracket for the entire year - not just what it was at the time you took out the funds. Of course, you can very often work out a payment plan with the IRS, but just make sure you think about the tax implications before you take the money out.
If I am being sued, and I know I will eventually file bankruptcy, does it matter if I have a judgment against me?
Property that is held by husband and wife as tenancy by the entireties may be protected if the judgment is against only one spouse. However, if you are contemplating divorce, and there are judgments against only one spouse, it is very important that the divorce not be finalized until you have spoken with a bankruptcy attorney. Once the divorce is entered, and the property is no longer held by spouses, the tenancy by the entireties is broken. Judgments against only one spouse can now attach to the property and must be paid off before the house can be sold, even if the underlying debt is later discharged in bankruptcy, unless we can remove the judgment as stated in the paragraph above.
It is possible in a bankruptcy to have a lien "avoided" so that it no longer attaches to your house. However, lien avoidance is not always possible and depends on how you hold title to the house, how much equity you have in the house, the kind of judgment, and what other assets you have. As a result, it is important to speak with a bankruptcy attorney prior to a judgment being entered against you.
What is a Sheriff Levy and Sheriff Sale?
If the sheriff deputies have a "break and enter" order, you MUST let them in, or they could technically force their way into your house. The Sheriff comes out to your house first without the break and entry order, and you can turn them away, but they can be back in a few days with the break and entry order (the creditor has to petition the court for this order; the Sheriff just follows the order once it has been entered). However, even with the break and entry order for the levy, the levy is not the actual sale.
The Levy tells you that in no less than SIX (6) days, the Sheriff will hold a sale and sell all of your personal property to satisfy the debt. In York County, the sale is generally no sooner than 30 days, but that is not always the case. There is no minimum bid or "reserve" and your neighbors can come and buy your property for a fraction of what it is worth. You can also buy your property back, if you are the highest bidder.
If the Sheriff has levied your property or attempted to levy your property and you turned them away, you should contact us immediately!
A sheriff sale can also be used to sell your home once a foreclosure judgment has been entered against you. A foreclosure in Pennsylvania takes anywhere from 4-6 months to complete. Also, even after the sale takes place, you don't have to leave the house until an action in ejectment is filed against you and a default judgment in that case is entered. However, it is not wise to wait that long; you should start making arrangements to move out of the house before the sheriff sale. NOTE: Please see the answer to the next question about whether or not you should file bankruptcy BEFORE your house is sold at a Sheriff Sale.
A bankruptcy can stop a sheriff sale of either your house or your personal belongings.
My house is in foreclosure, and I am trying to save it! What should I do first?
Before filing bankruptcy, you may want to consider a loan modification. You should contact your lender to see if you qualify for a loan modification program, such as the Save Our Home Program recently enacted by the Obama Administration. However, if you are in foreclosure, you should be careful about protecting yourself while negotiating with the bank, to make sure a judgment is not entered against you.
You can modify your loan, and still file bankruptcy to discharge other debts, such as credit cards. We used to tell people it was better to attempt a loan modification before you filed bankruptcy, but it seems that banks now are willing to consider loan modifications both before and during a bankruptcy. Sometimes filing while in bankruptcy streamlines the process because we are now dealing with the bankruptcy department, and the bank's lawyer is involved to some extend as well.
We can assist you with negotiating a loan modification with your lender, and our fees are more reasonable than many of the "modification" companies that have been preying on consumers. If you are interested in learning more about loan modifications, please contact us.
Note that bankruptcy can help you save your home if you are behind in your real estate taxes as well.
Understanding the Timeline for Foreclosure:
The law in Pennsylvania has recently changed - back. Banks are once again required to give borrowers an Act 91 notice, giving borrowers 33 days to seek assistance from the Pennsylvania Housing Finance Agency. You cannot be sued in foreclosure until you have received this notice, and the 33 days have elapsed. If you seek assistance from a PHFA counselor, the foreclosure cannot proceed until the application process is complete. PHFA may be able to provide an emergency loan to assist you in catching up with your mortgage. (www.phfa.org)
Understanding the time line for Tax Sale:
Generally speaking, tax sales happen only when a property owner is two years behind on his or her property taxes. If you are not escrowing your taxes, you are responsible for paying them yourself. However, very often, if there is a mortgage on the property, but you are paying the taxes directly, the mortgage company will step in and pay the taxes and just assess that cost on to the property owner. This is because a tax sale will wipe out the mortgage company's lien on the property, which is why mortgage companies hire companies that do nothing but check to make sure their borrowers are up to date on their property taxes.
What is the Median Test and the Means Test?
The Means Test is much more complicated than the Median Income Test. This requires the debtor to compare his or her expenses with the average expenses for the area in which the debtor lives. For example, debtors in York County, Pennsylvania are held to the average expenses that the IRS and the Census Bureau have determined are the average for Pennsylvania. There is a form that we use for the Means Test, but there are several unwritten rules about certain aspects of the Test. The bankruptcy law is always changing, so let us help you in determining whether or not you can pass the Median and Means Tests and whether your projected income test puts you in a Chapter 7 or Chapter 13. Sometimes we want to wait to file, or may need to file right away, depending on the income you have had in the last six months.
The Means Test does not use your projected income, but, like the Median Income Test, it uses the income you have made for the last six months and then doubles it. As a result, sometimes it is better to wait to file bankruptcy to let a three-paycheck month pass outside the six-month window; or in the case of people who work on commission, allow a higher than average commission payment to pass outside the six month window. We can advise you as to whether or not you should wait.
If you are under median, but fail the projected income test, you are in a Chapter 13 for three years. If you are over median you are in a Chapter 13 for five years. More is explained in the next paragraph.
If I pass the Median and Means Tests, can I definitely file a Chapter 7?
1. The debtor's actual projected income (that third income test mentioned in the paragraph above) is higher than the debtor's reasonable expenses. Instead of using the income you earned for the six months right before you filed bankruptcy, this tests looks at your actual, projected income. This test also examines your actual expenses, not the expenses that are the average for your region, as used in the Means Test. Depending on how high this number is, the monthly income that is over and above the debtor's monthly expenses must be paid into the Court every month for three years (but the payments can sometimes be spread out over five years). An experienced bankruptcy attorney can assist you in determining what your actual and reasonable expenses are and whether you want to spread out your payments over five years to lower the payment.
2. The debtor has a property that is valued higher than the allowed exemptions. In this case, the debtor can take up to 3 to 5 years to pay the trustee the amount the trustee would get if he or she sold the property if the debtor wishes to keep it. For example, if you have a car worth $10,000, and it has no loan, and you can exempt only $6000 (using the vehicle exemption and some of your wildcard exemption), then you have $4000 in equity that is not exempt. Therefore, you would pay the trustee the $4000 over the three or five year period, and you would get to keep the car. Please keep in mind that it is extremely rare for consumer debtors to lose property in bankruptcy because of this option to keep the asset by paying for it over time, or because sometimes the value is not enough for the trustee to be interested in the property. For example, let's say instead of $4000 non-exempt equity in that car, you had $500. If that was the only non-exempt asset the trustee isn't going to be interested in it.
3. The debtor is behind in the payments on a mortgage or car loan for a house or a car. The debtor will be given up to 5 years to pay the past due balance, provided that the debtor can also make the current payments as well. This works well for a debtor who fell behind in payments due to an extended illness or loss of a job, but who now is working to his or her full capacity and just needs to be able to catch up on past mortgage payments.
Regardless of the reason a person files a Chapter 13, all unsecured debts (credit cards, etc...) that would have been discharged in a Chapter 7 are still discharged in a Chapter 13. Any payments in the plan that are paid to those creditors do not change the fact that the balances still owed to them when the Chapter 13 is over will be discharged. Also, in a Chapter 13 some debts that are not dischargeable in a Chapter 7 ARE able to be discharged in a Chapter 13, including some requirements under a divorce settlement agreement.
Will I have to pay some or all of my creditors?
It is also possible under the guidelines set out in the new bankruptcy law that you may be required to make some payments to your creditors. However, these payments are often substantially less than the payments you are currently trying to make, or unable to make. If you are required to make payments, it means that you do not qualify for a Chapter 7 bankruptcy, but instead have to file a Chapter 13. The payments are made monthly, to the bankruptcy trustee, for three to five years, and except for secured debts and some priority debts, the payments do not include interest. Depending on your income, you can pay back as little as 1% (or even less) of your debt, or as much as 100%. However, even if your payment is so high that you are in what is called a "100% plan," you will actually pay off all of the debt at the end of your bankruptcy. If you were not in bankruptcy but were paying the same amount of money to your creditors that your plan called for, you would most likely not pay off all of your debt because of late fees and interest. As a result, sometimes bankruptcy is still the best option even if the plan payment is high. However, you should come and see us first to determine what your plan payment would be, if anything, before making the decision to file bankruptcy. We ALWAYS discuss non-bankruptcy options with our clients.
Can I discharge taxes or student loans?
Taxes are actually dischargeable to some extent in bankruptcy, even though there is this general belief that they are not.
The basics about discharging taxes in bankruptcy:
1. What Kind of Tax is it?
Only federal income tax can be discharged. Taxes that are "trust fund" taxes, (taxes that you, as an employer, were required to withhold from your income or the income of your employees), sales taxes, fuel taxes, estate taxes, gift taxes and taxes that are as a result of tax fraud are all not dischargeable.
2. Who owes the Tax?
Only individuals can discharges taxes; businesses cannot.
3. Is the Tax "Secured"?
If the IRS files a tax lien against you, then you cannot discharge that lien in bankruptcy, and it remains against your property. This is why it is very important to talk to us before a tax lien is filed against you.
4. Secured, Priority or Unsecured?
Ordinarily, taxes are considered priority unsecured debts. They are not dischargeable in a Chapter 7, and they must be paid in full in a Chapter 13. However, if certain conditions are met (see below), your taxes can be considered general (non-priority), unsecured debts - just like a credit card. They will be dischargeable in a Chapter 7 and considered unsecured non-priority debts in a Chapter 13. If you are making a payment in the Chapter 13 plan, a pro rata share of the payment you are making will be applied toward your taxes, just like that payment is applied toward all your other unsecured creditors. But any amount still due at the end of your Chapter 13 plan will be discharged like all your other unsecured debt.
5. Requirements to have taxes classified as General Unsecured Debts:
a. Taxes for which a tax return was supposed to be filed within three years (plus extensions) prior to the date of filing bankruptcy. For example, the tax return for 2005 income taxes was due to be filed on April 15, 2006 (plus any extensions), and therefore, these income taxes cannot be discharged by filing bankruptcy on or before April 15, 2009 (plus the time of extensions); OR
b. Taxes assessed by the IRS within 240 days before the filing of bankruptcy. The assessment date is the date that the IRS determines how much you owe, and then the IRS generally sends you a letter telling you the amount you owe. Think of this as your bill from the IRS after you file your tax return; OR
c. Taxes not yet assessed but could still be assessed; OR
d. Taxes for which a tax return was filed late and filed within two years prior to filing bankruptcy; OR
e. Taxes of a debtor who committed fraud related to a tax return or willfully attempted to evade or defeat taxes sought to be discharged.
If you file a Chapter 13, and you have only unsecured priority taxes, you must pay those in full during your Chapter 13 (60 months), but there is no interest. If you have a secured tax lien, that secured portion of the taxes you owe must be paid in full in a Chapter 13, with interest, but there are no penalties.
If you think you might be able to discharge taxes, you should order copies of your tax transcripts from the IRS. They are free but take a few weeks to get, so order them now so you can bring them to us to review with your other documents.
Student Loans: Learn more about student loan dischargeability here - the law changed a little bit and we have a whole article about it.