FAQs About Bankruptcy
This section will attempt to answer your general questions about bankruptcy. General answers might not apply to your specific situation. This website is not a substitute for an individual consultation with a Louisiana lawyer, nor is it intended to constitute individual legal advice regarding your specific situation. Although this website is written and produced by a Louisiana lawyer, you must remember that we are not your lawyer unless and until you formally retain us and until we accept the engagement in writing.
Bankruptcy Basics - Hard Times Require Hard Choices
Before you file a Chapter 7 bankruptcy or a Chapter 13 debt reorganization, you should carefully consider the benefits and consequences. You could actually wind up in a worse situation than you are already in now if you jump into bankruptcy court without proper planning.
Difference between Chapter 7 and Chapter 13. As a general rule, in Chapter 7 you don’t pay back your debts and you may lose some of your property. In Chapter 13 you generally keep your property and the court gives you up to five years to pay back your unsecured debts. Our general advice is that usually you shouldn't file a Chapter 7 if you can manage a Chapter 13, and usually you shouldn't file a Chapter 13 if you can qualify for non-profit Consumer Credit Counseling and/or can work out an out-of-court arrangement with your creditors.
Similarities between Chapter 7 and Chapter 13. Both Chapter 7 and Chapter 13 are bankruptcy. Remember that the purpose of the bankruptcy law is to allow the honest debtor to get out from under his or her old debts and get a fresh start. When you file for bankruptcy you must submit all of your property to the control of the federal court. A trustee is appointed to look after the best interests of your creditors, and one of the trustee's duties is to examine you under oath concerning your finances. An intentional mis-statement or omission of your property or debts is a federal crime, and even an accidental mis-statement or omission can cause you serious problems and extra expense.
All bankruptcy proceedings are a matter of public record. Your employer may learn that you have filed; some insurance companies might consider you to be a bad risk and might cancel your policy; your name might appear in the newspaper; and your credit rating will likely be further damaged or destroyed, if it isn't already. Bankruptcy should not be taken lightly, but it shouldn’t be feared, either.
WHAT DEBTS MUST YOU STILL PAY
IN A CHAPTER 7?
For starters, most taxes must still be paid. (The IRS is notified of your bankruptcy filing, as are the state and local departments of revenue and taxation.) So must back-due and current alimony and child support, court-ordered restitution and fines, most educational loans, and damages caused by you while operating a vehicle under the influence of alcohol or drugs. Chapter 7 does not relieve you from debts that were obtained by misrepresentation or by submitting a false loan application. Your creditors may sue your co-signers for the debts that you fail to pay, and you receive no protection from criminal prosecution for bad checks or debts obtained through fraud.
WHAT PROPERTY MIGHT YOU LOSE
IN A CHAPTER 7?
Chapter 7 bankruptcy does not guarantee that you will be allowed to keep any "non-exempt" property, or property which you have not paid for in full, or property which you have mortgaged or pledged as security for a loan. On the contrary:
1) Unless your property is considered "exempt" under applicable state or federal law, the trustee might sell property that you own outright and distribute the net proceeds of the sale to your creditors.
2) You must surrender property which you have not paid for in full and on which you still owe money to the seller or its assignee unless you make satisfactory arrangements with the creditor to pay for it.
3) If you have given a bank or finance company or credit union a mortgage or lien on your household goods or motor vehicles or personal effects, that mortgage or lien may still be valid and enforceable against the mortgaged property unless additional proceedings are filed in bankruptcy court to "avoid" the lien or to "redeem" the property. Unless such proceedings are timely filed, you must either surrender the collateral to the lienholder or "reaffirm" the debt.
4) And finally, all or a portion of any income tax refund to which you might be entitled may have to be given to the trustee, as might any property inherited by you within 180 days of filing bankruptcy, and anything you have in your checking or savings account on the date you file.
WHAT ARE THE SPECIAL PROBLEMS
INVOLVED IN A CHAPTER 7?
Post-petition debts: Chapter 7 bankruptcy relieves you from liability only for debts which you owe on the date of filing your petition, and you can only receive a Chapter 7 discharge once every eight years. It is therefore extremely important that you obtain and/or maintain adequate liability insurance to cover you for claims that might arise after the date of your bankruptcy filing.
Special problem for owners of real estate: If you own any real estate, you could have enormous potential legal liability under state law for events beyond your control that occur after the date of your bankruptcy filing, even in cases when you are not at fault, and even if the property has been repossessed or is involved in foreclosure.
Educational loans: An educational loan must generally be paid unless you can demonstrate extreme hardship. There are numerous programs outside of bankruptcy that are available through the federal government that might offer you some relief. Student loan assistance is currently not within the scope of our bankruptcy retainer, but we will be glad to provide you with recommendations for literature that might help you work out an arrangement with your lender on your own.
Income tax refunds: Your income tax refund for the tax year in which you file Chapter 7 may have to be given to the trustee, as must any income tax refund checks for previous years that have not been received and cashed. If your employer deducts unnecessarily large amounts from your paycheck because you like to get a large refund at the end of the year, you should understand that you probably won't ever see any of it.
Income tax liability: If you have assets that must be turned over to the bankruptcy court and owe income taxes for the current year, the amount of your income tax liability might be reduced if you file what is called a "short-year tax return." The election to do so must be made early in the bankruptcy proceeding and is irreversible. Ask your attorney for details.
Inheritances: Should you inherit anything within 180 days of filing bankruptcy, it belongs for all practical purposes to your trustee. If you have parents or other relatives or friends who have assets that they might want to leave to you, there could be a problem. Ask your attorney for more details.
Recent credit card charges: If you have charged certain items within the past ninety days or made any cash advances on a credit card within the past seventy days, you might have problems. Ask your attorney for details.
Domestic Support Obligations. You will not be able to get out of paying these debts by filing bankruptcy. Ask your attorney for details.
Gambling debts: Gambling debts may be nondischargeable. Ask your attorney for details.
Property of yours that is in someone else’s name, and property of someone else that is in your name: The bankruptcy court is suspicious of any transaction that is not what it appears to be. Let your attorney know in advance so that he may properly advise you.
Pending lawsuits: If you have a personal injury lawsuit or any other pending litigation, not only might your trustee be entitled to all or part of the proceeds, but he might also be able to take over control of the case, fire the attorney who has been handling the case from the beginning, and settle it without your permission. Have your other personal injury lawyer ask your bankruptcy attorney for more details.
WHAT DEBTS MUST YOU STILL PAY
IN A CHAPTER 13?
You must pay in full and on the terms and conditions of the original contract any debt that is secured solely by a mortgage on your principal residence and that is not avoided by the bankruptcy court. In other words, Chapter 13 is generally not the place to get a “loan modification” or reduction. However, the court will allow you time to catch up on payments that are in default, even if the property is in foreclosure, but there are limits and qualifications. Ask your attorney for details.
Under some conditions you can reduce the amount of your car note, but there are limitations and qualifications. Car/truck notes are sometimes paid "outside the plan." Ask your attorney for details.
You must pay your Chapter 13 Trustee an amount monthly that will allow him to distribute to each of your unsecured creditors at least as much as they would receive had you filed a Chapter 7 bankruptcy. Generally you pay all of your "disposable income" to the Trustee for at least three years. Although interest is often but not always either eliminated or reduced, the Trustee charges an administrative fee on what he pays out over the length of your plan.
You must make arrangements, either through the plan or outside the plan, for the payment of most taxes, all back-due and current alimony and child support, all court-ordered restitution and fines, most student loans, and damages caused by you while operating a vehicle under the influence or drugs or alcohol. Co-signed debts can sometimes receive special treatment. Your creditors may sue your co-signers for the amount of the debt that is not fully paid in your Plan. Ask your attorney for details.
WHAT PROPERTY MIGHT YOU LOSE
IN A CHAPTER 13
Generally, you keep all of your property in a Chapter 13 provided that:
1) Each secured creditor receives at least the present value of his collateral under your plan; and,
2) Your plan is confirmed by the court and you make all of the payments called for.
WHAT ARE THE SPECIAL PROBLEMS
INVOLVED IN A CHAPTER 13?
You cannot incur any new debts on credit while in a Chapter 13, except for a medical emergency, without prior court approval. This includes credit cards and charge accounts, and bank loans for tuition for your children.
If you send your child to a private or religious school, the court may require you to pay 100% of your unsecured debts within three years. Exceptions may be made if the school provides before- or after-care, if your child has special needs, or if there are other extenuating circumstances. Ask your attorney for details.
If you have non-dischargeable student loans, a Chapter 13 can provide a means for obtaining a payment deferment, but the entire amount of the loan plus all accumulated interest might become due upon the termination or completion of your Chapter 13 Plan. Ask your attorney for details.
If you don't pay at least seventy per cent (70%) of your allowed unsecured debts in your Chapter 13 Plan, the effect is for all practical purposes the same as if you had filed a Chapter 7 bankruptcy. In such a case, you might be better off filing a Chapter 7. Ask your attorney for details.
Finally, if you don't make all of the payments called for in your plan, your case can be either dismissed by the court or converted to a Chapter 7 bankruptcy. In the former situation, everything you owe your creditors on the date you filed your Chapter 13 becomes due and payable at once, and the payments you have made to the trustee are all for naught; in the latter case, you have all of the consequences listed above for a Chapter 7 filing.
Bankruptcy attorneys are required to provide prospective clients with certain mandatory written notices, which you may find here.
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