Every lawyer in town gets a lot of calls about bankruptcy. Just a few weeks ago, Congress passed legislation that significantly curbs a consumer’s rights in bankruptcy (If you have a business, nothing to fear as the bill does not affect your rights in the business). These new changes will greatly affect your ability to get a discharge in bankruptcy – more on what a discharge is later. This month’s column focuses on some of the common questions regarding bankruptcy?

Q. Why do people file for bankruptcy?

A. People file for bankruptcy when they can no longer make their financial obligations and all efforts of restructuring and/or negotiating their debts have failed.

Q. What do I get out of bankruptcy?

A. Simply put, a discharge. A discharge is an order from a federal court judge that says you are no longer obligated to pay any of your debts. The order also prevents your creditors from trying to collect debts you owe.

Q. How do I get a discharge from all my debts if I have not paid them?

A. Long ago, Congress provided the bankruptcy procedure to give people a new start after catastrophic events like layoffs, medical emergencies and natural disasters. Depending upon your situation, you may have to pay off some or none of your debt before the judge will give you a discharge.

Q. I have heard about chapter 7, 11 and 13. What does that mean?

A. The chapter refers to the chapter of the law in the bankruptcy code. A Chapter 7 is a liquidation. In a 7, everything you own is sold and the proceeds of the sale go to your creditors. Even if the sale leaves millions of dollars of debt unpaid, you are relieved of paying those debts. You can elect to keep your house, a car, and some personal effects but you will have to continue paying notes on those items, if you borrowed to purchase them.

Q. What is a chapter 11?

A. A chapter 11 is designed for businesses and is not usually an option for a consumer unless there are partnerships or business entities involved.

Q. What is a chapter 13?

A. A chapter 13 is a payment program. The judge will look at an itemization of your debt and will determine a payment program you can afford to make. The period of payments is no longer than a few years. After you have made all of the payments, on time, the court grants you a discharge of the remaining portion of your debt. You may also keep your house and car in a chapter 13 but you will have to continue paying on those notes as usual.

Q. What will this do to my credit?

A. Bankruptcy will make a horrible mark on your credit and it will stay on there for seven years, sometimes 10. Depending upon the state of the economy, you will probably be able to get credit cards, a home loan, and/or a car loan within months after your discharge is granted but the interest rate will be high. Lenders are willing to do this because you are prohibited from taking a bankruptcy in the next several years and because you have very little debt as compared to your income after the discharge.

Q. What about credit counseling?

A. You should try credit counseling before bankruptcy. In credit counseling, a third party negotiates your debts and stops the interest and fees. You then make payments until the debt is paid – you have to stop using your credit cards. Be careful selecting a service because there are plenty of scams out there with lots of hidden fees.

Q. Does credit counseling hurt my credit score?

A. Yes, you will be reported as being on a payment program and that will make it difficult for you to get additional credit.

Q. I have been sued for personal injuries and my insurance does not cover the damages. Can I discharge this debt in bankruptcy?

A. In most cases, a judgment from a lawsuit can be discharged in bankruptcy.

Q. What kind judgments can not be discharged in bankruptcy?

A. You can not discharge judgments based upon a claim of fraud or theft, for example.

Q. How does the new bill passed by the U.S. Senate change bankruptcy rights?

A. It forces most consumers into chapter 13 bankruptcy thereby forcing you to pay at least some of your debt. It also reduces the number of times a person can take bankruptcy and makes it easier for the court to not grant you a discharge. Furthermore, it does nothing to protect consumers from predatory lending or the enormous fees charged by credit cards that, in many bankruptcies, amounts to more than the original debt. The law also does not require business to pay off debts like consumers so companies like Enron will not fall under the new law.

Q. I am having financial trouble, what should I do?

A. See a bankruptcy lawyer immediately. If you should file bankruptcy, you will want to do it under current law.