For some, filing for bankruptcy can be a last resort to get out of financial trouble. But it's not an easy way out of debt.
As part of the Greater Rochester Area Financial Literacy Initiative (GRAFLI) U.S. Bankruptcy Court Judge John Ninfo answers the most common questions he's asked about consumer bankruptcy.

Q. After Congress changed the law in 2005 to make it “harder” to file bankruptcy, can I still file bankruptcy and not have to pay all of my debts in full?

A. When Congress amended the law in 2005, it made it more “complicated” to file bankruptcy. You have to have credit counseling and file copies of tax returns, pay stubs and other documents. This also made it more expensive to file.

B. Congress also created a Means Test which has required many more debtors nationwide who have an ability to pay some or all of their debts to do so. It has not made a difference in Rochester because we had already identified people who had an ability to pay and required them to do pay based on their ability.

Q. What is the difference between a Chapter 7 and a Chapter 13 case?

A. A Chapter 7 case is what we call a straight liquidation case. You surrender all of your non-exempt assets, if you have any, and we will discuss that, which are then liquidated by the Trustee and the proceeds paid to creditors in exchange for a discharge from your debts. However, there are some debts that are nondischargable, and we will also discuss that.

B. In a Chapter 13 case, debtors put together a plan to pay back all or some of their debts over three to five years. Debtors elect to go into Chapter 13 often because they do have non-exempt assets that they would lose in a Chapter 7, that they can pay the value of in their plan, or because they want to save their home. They also might have to file Chapter 13 because they have an ability to pay and this is how they repay.

Q. Will all of my debts be discharged in a bankruptcy?

A. No. Some debts have been determined by Congress to be nondischargeable. The principal ones are most taxes, child and spousal support, student loans (except in very rare instances), debts you have incurred by fraud (for example, if you lie about your income on a loan application), and injuries as a result of driving while intoxicated.

Q. Will I lose all of my property if I file bankruptcy?

A. As we said, in a Chapter 7 you must surrender any non-exempt assets that you have. But, the government has determined that certain things should be exempt. In New York State, for example, $50,000 in your residence above any liens, $2,400 in an automobile above any liens, $5,000 in your personal household furnishings and property like your clothing and IRA and retirement accounts. There are other exemptions that might apply to some debtors.

Q. How long will a bankruptcy be on my credit history?

A. Currently, it is generally eight to ten years, but many people have advised me that there is a shadow that goes out longer than that eight to ten year period, because somebody looking at your credit history after that time can see that during that eight to ten year period you are not able to get credit, or received credit at a very high rate. That tells them that there was something wrong during that period.

B. In addition, you should know that perspective employers can always ask you whether you have filed bankruptcy. They can’t fail to hire you because you filed bankruptcy, but they can ask you about it because your bankruptcy may have been the result of your embezzling money from an employer or some other reason that could justify not hiring you.

C. Another common question is when will I get credit again. I always say that’s the wrong question. The real question should be at what rate, otherwise you may find yourself in affordable debt all over again if you can get credit, but only at very high rates.

Q. Can I save my house from foreclosure by filing bankruptcy?

A. In a Chapter 13 case you may be able to save your house from foreclosure if when you prepare a budget and plan it shows that you can keep current on your mortgage going forward and pay all of your back missed payments and expenses with interest over a period of three to five years. If you can’t keep current and pay all the back payments over three to five years out of your income, because you’re not going to be able to borrow any more money, you may not be able to save your home from foreclosure.

Q. If I file bankruptcy, will it stop all of those collection calls, garnishments and other collection activities?

A. Yes. All of those things will be stopped, and if you receive your discharge, they will end permanently.

Q. Do I have to include everybody in my bankruptcy filing?

A. Yes. People often want to keep their family members or others they owe money to out of their bankruptcy. This is not permissible. You must list all of your creditors, or run the risk that you will lose your discharge because you lied to the Court. However, even though you may receive a discharge from those debts that you did not want to list, like your family members or doctor, there is nothing that stops you after your bankruptcy from voluntarily paying them.

Q. Before I file bankruptcy, can I pay some people, like family members, because I don’t want to include them in my bankruptcy?

A. No. The bankruptcy trustee may be able to recover payments that you make to creditors within ninety days of your filing. It’s called a preference. As to family members, if you pay them or transfer assets to them, the trustee may be able to recover those payments or transferred assets for up to a year.

Q. What happens to creditors who have liens on my property, like my mortgage holder or my car loan lender?

A. In a Chapter 7, you can receive a discharge from those underlying debts, like your mortgage or car loan, so that you will no longer be personally liable on them. However, those creditors continue to have their liens, and they can foreclose on your house or repossess your car, furniture or other property they have a lien on, if you don’t pay them.

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