Will Bankruptcy Ruin My Credit?

When your bankruptcy case is filed, your credit score almost always declines. However, your credit score usually begins to rebound soon after your bankruptcy. When you work with Eastbridge Law Group, we provide you with a Bankruptcy Credit Report that shows your current credit score and a prediction of what your credit score will be 12 months after bankruptcy. Your credit score is affected by more than whether or not your filed bankruptcy. Payment history, amounts owed, length of credit history, types of credit used, and new credit all affect your credit score. It’s also important to remember that whether or not a lender extends credit to you depends on more than just your credit score. Your income, employment history, housing history, and debt-to-income ratio all affect your creditworthiness. Many people find that bankruptcy does not affect their credit for as long as they expect it to. For example, under Federal Housing Authority (FHA) rules, you only have to wait two years after a Chapter 7 discharge before you can apply for an FHA-insured mortgage. Your attorney will discuss the pros and cons of filing bankruptcy with you, including the effect on your credit.

Can I Keep My Home and Car in Bankruptcy?

Most people are able to keep their home and automobiles when they file bankruptcy, provided that they have sufficient income to pay their mortgage and vehicle loans. In a Chapter 7 you have three choices for how to deal with mortgage and vehicle loan debt: 1) You can keep your home and/or automobile and reaffirm the loan, which means you continue making your loan payments under the original payment terms. In order to reaffirm, your payments usually have to be current. 2) You can surrender your home and/or car in exchange for having the loan discharged. 3) You can keep your home and/or vehicle by “redeeming” it, which is rarely done because it involves making one lump sum payment to the lender.

In Chapter 13, if your mortgage payments are current, you can keep your home and continue making your mortgage payments directly to your lender “outside of the plan.”If your mortgage payments are in default, you can still keep your home by putting the late mortgage payments in your three to five year Chapter 13 plan while simultaneously paying your post-Chapter 13 filing date mortgage payments directly to your lender outside of the plan. The ability to do this is one of the main reasons some people file a Chapter 13. If you cannot afford to pay your mortgage, you can surrender your home in exchange for having the loan discharged. In Wisconsin, both the Eastern and Western District Bankruptcy Courts also have a special Mortgage Modification Mediation program for Chapter 13 homeowners.

For auto loans in Chapter 13, regardless of whether your payments are current or not, if you want to keep your vehicle, you must discontinue making payments directly to your lender. Instead, you must put the entire balance of your auto loan on the date that your Chapter 13 is filed into your three to five year Chapter 13 plan. Under some circumstances, you may be able to pay less than the full balance of your auto loan. This is called a “cram-down.” If you cannot afford to pay your auto loan, you can surrender your vehicle in exchange for having the loan discharged.

The above explanation assumes that your home and/or auto is exempt. Your bankruptcy attorney will help you determine this. At Eastbridge Law Group, it is rare that we encounter a client whose home or auto is not exempt, but it does happen.

Will the Bankruptcy Court Take My Property?

Most bankruptcy cases are “no-asset” which means none of your property will be taken. When you file bankruptcy, you must provide the court with a list of all of your assets. A certain amount of property is exempt from being taken by the bankruptcy court. If your assets are less than that amount, none of your property will be taken. However, if you do have property that exceeds your exemption amounts, your bankruptcy trustee can take that property and liquidate it to pay your creditors. If you want to keep non-exempt property in a Chapter 7, you will have to pay the bankruptcy court the value of the property. Under Chapter 13, there is a good chance you will be able to keep most, if not all, of your property, but you may have to increase your Chapter 13 plan payments to cover the non-exempt portion of your assets.

Can Bankruptcy Stop a Garnishment?

Filing for bankruptcy will stop most garnishments. When you file for bankruptcy, something called the “automatic stay” is imposed. The automatic stay prevents creditors from continuing with debt collection activities, including garnishments, during the course of your bankruptcy. Be aware that there are still some types of wage garnishment, such as for child support or alimony, that are not affected by the automatic stay.

Can Bankruptcy Stop Foreclosure of My Home?

Yes—but how long the foreclosure is halted depends on what type of bankruptcy you file. Chapter 7 will delay foreclosure for two weeks to several months, but it will not stop foreclosure. Chapter 13 will usually provide you with an opportunity to stop foreclosure, because your back mortgage payments are a part of your bankruptcy repayment plan. As long as you are current with your plan payments during the three to five years of the plan, and you are current with your post-Chapter 13 filing date mortgage payments, which you must pay directly to your mortgage lender, your home will not be foreclosed.

Can I Get Rid of Junior Mortgages in Bankruptcy?

If you meet certain requirements, you might be able to eliminate a junior, or second, mortgage in bankruptcy through something called “lien stripping.” One caveat: lien stripping is not allowed in Chapter 7 bankruptcy cases. If you have a second mortgage, a home equity line of credit, or other junior lien you would like to get rid of, talk to your bankruptcy attorney about Chapter 13.

Will My Bankruptcy Discharge My Judgments?

Both Chapter 7 and Chapter 13 discharge your personal liability for judgments in most cases. However, certain judgments are nondischargeable, like judgments for student loan debt, child support, alimony, most debts you owe to the government (like certain taxes or restitution in criminal cases), and awards for death or injury caused while driving under the influence of alcohol or drugs.

Most other judgment debt is dischargeable, but a creditor may file an objection to discharge in some cases, such as for injury caused by a malicious act like assault, fraud, or embezzlement. In Chapter 7, nondischargeable judgments “ride out” the bankruptcy, and you still owe them when your bankruptcy is finished. In Chapter 13, nondischargeable judgments may need to be paid through your bankruptcy plan. However, there are a few types of judgments that can be discharged in a Chapter 13 that cannot be discharged in a Chapter 7, so sometimes filing a Chapter 13 can be more advantageous than filing a Chapter 7. If you are concerned about whether your judgment debt is dischargeable in bankruptcy, talk to your bankruptcy attorney.

Will My Bankruptcy Satisfy My Judgment Liens?

No. A judgment has two components. The first component is your personal liability for the debt. The second component is a lien against any real estate that you own or acquire. In order to have the second component, a judgment has to be docketed by the creditor. If it is not docketed, there is no lien. Both Chapter 7 and Chapter 13 discharge your personal liability in most cases. However, in order to remove the lien, a judgment must be satisfied, which is a procedure in state court that is separate from your federal bankruptcy court case. When your bankruptcy case is finished, you can request that Ash Street Law satisfy your state court judgment liens. Because judgment satisfaction is a separate legal procedure, we do charge an additional fee and the state court charges a small fee. Please note that liens of judgments that were not discharged cannot be satisfied in this manner. For more information about the dischargeability of the personal liability component of judgments in bankruptcy, please see “Will my Bankruptcy Discharge my Judgments”?

How is a Chapter 13 Beneficial if I Owe Income Taxes?

Both Chapter 7 and Chapter 13 can discharge certain income taxes. However, many income taxes cannot be discharged. When you owe nondischargeable income taxes, filing a Chapter 13 stops collection actions by the government, such as garnishments, or levies, against your wages and bank accounts. You can pay off your nondischargeable income tax debt over the three to five years of your Chapter 13 plan. Any unpaid penalties as of the Chapter 13 filing date are usually dischargeable, as is any interest that accrues from the filing date forward. Not having to pay all of your penalties and interest can result in significant savings, and can be a good reason to file a Chapter 13.

How Does Bankruptcy Affect Personal Guarantees I Made for Business Loans?

If the business files bankruptcy, that has no effect on your personal guarantee of the debt. The business may be off the hook, but you are still liable. If you file personal bankruptcy, your personal guarantee of the loan will be wiped out, unless the debt itself was nondischargeable for some reason.

Will I Have to Go to Court?

No matter whether you file Chapter 7 or Chapter 13, you will have to attend what’s called a meeting of creditors, or a 341 hearing (after the section of the Bankruptcy Code that describes it). In this meeting, the bankruptcy trustee will ask you a brief series of questions with your attorney by your side. Your attorney will have prepared you for this questioning. While your creditors are also allowed to appear and ask questions at this meeting, in practice this rarely happens. The meeting usually takes no more than ten minutes, and often as little as five. It is only the rare case that requires appearing at the courthouse before the bankruptcy judge. Most people who file Chapter 7 or Chapter 13 never see the bankruptcy judge.

If you have more questions about bankruptcy, or about your specific situation, we invite you to contact our law office.