Bankruptcy FAQs

When an individual files for bankruptcy, they are allowed to keep a certain amount of property. The allowances (formally called exemptions) are very generous, and most people can keep everything they own.

In Pennsylvania, a person filing a Chapter 7 bankruptcy can choose between two lists of exemptions: federal and state.

The federal list is used in most cases. It allows a Chapter 7 filer to keep a certain amount of equity in a residence, a vehicle, household property, retirement accounts, work tools, life insurance, Social Security benefits, unemployment compensation, disability benefits, and several other categories. The most important category for most debtors is $13,900 of wild-card property, which can be anything else the person has (e.g. cash or bank accounts).

A workable shortcut for most people is this: If you cashed out all your financial accounts and sold everything you own, would you get more than $13,900? If not, Chapter 7 bankruptcy would probably allow you to keep everything you have. If you would get more than $13,900, we will need to look at whether the other exemptions can protect the remaining property. Those exemptions can be generous—for example, the cap on certain retirement funds is over $1,000,000.

These exemptions are for each filer. So, if a married couple files together, each person is allowed the full $13,900 wild card and every other exemption amount.

The state list of exemptions, on the other hand, is rarely used, as the federal list is much more generous. State exemptions would allow you to keep clothing, certain pensions and retirement accounts, and certain insurance proceeds. The list also has other rarely used allowances—for example, it exempts uniforms, schoolbooks, and sewing machines.

The most useful exemption on the state list is the “entireties” exemption which, in certain circumstances, can allow a married couple to keep an unlimited amount of equity in certain jointly owned property. The most common reason a bankruptcy filer chooses to use the state exemptions is if the filer is married and wishes to protect equity in a home owned jointly with their spouse.

Whether you choose state or federal exemptions, if you have a loan on your property (such as for a house or a car), you only have to exempt the value of a property that is NOT covered by the loan. For example, if you have a $75,000 house with a $55,000 mortgage, you have $20,000 of equity in the property. $20,000 is less than the amount that you are permitted to exempt, which means you would be able to keep the home.

Of course, you would have to continue to make payments on the property to prevent a foreclosure. If the case closes, the automatic stay will lift, and your lender could foreclose your home if you are behind on payments.

Chapter 7 bankruptcy, sometimes referred to as straight bankruptcy, is the most common form of bankruptcy used by individuals. In a Chapter 7 case, all the individual’s nonexempt assets may be sold by the bankruptcy trustee. Any assets that are sold will be distributed to the individual’s creditors. Most often, though, a Chapter 7 case will be a “no-asset case.” A no-asset case is one where the debtor can claim all their property as exempt, thereby protecting it from liquidation. In other words, no assets will be sold by the trustee or distributed to the debtor’s unsecured creditors.

Upon completion of a Chapter 7 bankruptcy, the individual will typically receive a bankruptcy discharge. A discharge frees the debtor from any personal obligation to repay the discharged debts. Certain debts, like secured debt, child support, and recent income taxes, are not dischargeable. In addition, a discharge typically will not terminate any liens on property. So, while the individual may not be personally liable for the mortgage on their house, they will have to continue making payments if they don’t want the bank to foreclose on it.

Chapter 13 bankruptcy gives an individual the opportunity to pay a portion of their debts over the course of 3-5 years. There is no set requirement that any specific amount of the debt must be repaid. Many people pay an extremely small percentage of the total amount of debt, and the court discharges the rest.

An individual who files a Chapter 13 bankruptcy will be allowed to keep and use all their property because Chapter 13 does not involve a liquidation process. However, a person with large amounts of nonexempt property may need to make higher monthly payments to reflect the value of those assets. Generally, your monthly payment will be determined by your disposable income—not what you owe.

In a typical Chapter 13 case, the individual’s attorney will create a plan, which must be approved by the court. The individual will make their monthly payments to the trustee, who will then distribute this money according to the plan. Once the plan is completed, the individual will receive a discharge of the unpaid portion of the dischargeable debts.

If, before the plan ends, you suffer a loss of income and can no longer afford the monthly payments, you can demonstrate these changes to the court. The court might allow you to reduce your monthly payment, or, in certain circumstances, issue a “hardship discharge.” A hardship discharge occurs as soon as it is issued, without any further payment to the creditors.

Not everyone qualifies for a Chapter 13 bankruptcy. A debtor must demonstrate a regular income that will allow them to make monthly payments to the bankruptcy trustee. Additionally, you cannot owe more than $419,275 in unsecured debt and $1,257,850 in secured debt.

Most Chapter 7 cases last 3-6 months. Most Chapter 13 cases last for 3-5 years.

When an individual files for bankruptcy, their property is protected by a provision of the bankruptcy code known as the automatic stay. The automatic stay is extremely helpful to individuals who file for bankruptcy, as it protects them from almost all types of adverse action taken by a creditor.

The automatic stay will prohibit a creditor from:

• foreclosing or repossessing your property;
• enforcing a judgment that was already obtained, filing or continuing to pursue a lawsuit against you;
• turning off your utilities;
• and performing ANY type of act to collect or recover your debt.

A creditor who performs any of these actions after they know you have filed a bankruptcy may be in violation of the automatic stay, and they may be held liable to the debtor for actual damages, attorney’s fees, and, in some circumstances, punitive damages.

Most importantly, the automatic stay goes into effect immediately upon filing a bankruptcy petition. This means that filing for bankruptcy can protect your property even if you waited until the last minute to get help. However, there are certain requirements that must be fulfilled before you can file a case. For example, most debtors are required to complete a credit counseling course and include a certificate of the completion of the course with the bankruptcy petition. Thus, you certainly should not wait until the last minute to seek help.

A bankruptcy discharge is intended to provide an individual with a clean slate. Typically, a bankruptcy discharge will wipe out an individual’s liability to pay almost all debts.

This means the individual usually will not have to:

This means the individual usually will not have to repay credit card debts, medical bills, and most other debts that are not secured by your property. Technically, the individual’s obligation to repay debts that are secured by property, such as a mortgage or car loan, is usually wiped out as well. However, the holder of the secured loan is still able to foreclose or repossess the property if the debt is not paid, so the individual usually continues to pay the debt so they can retain the property. If you intend to surrender the property to the lender, there is usually no reason to continue payments once you have filed bankruptcy.

Unfortunately, a bankruptcy discharge will not eliminate most recent taxes, debts accrued through fraud or false pretenses, child support or alimony, or, in most cases, student loans. These are just some of the debts that cannot be discharged in a bankruptcy. Get in touch with our firm for information about your specific financial circumstances.

Once you receive a bankruptcy discharge, you are no longer required to repay any of the debts that were discharged. After the discharge, you are free to repay any debts that you want to, and, if you choose to make a sporadic payment to a creditor, this will not make you responsible for the rest of the debt. Additionally, creditors are prohibited from trying to collect on any debts that were discharged in the bankruptcy. As with the automatic stay, any violation of this law can have serious consequences.

Unfortunately, there is no easy way to determine if bankruptcy is right for you. Each case is different, and these individual facts must all be closely analyzed to determine if filing a bankruptcy will be helpful for your situation. Generally, whether bankruptcy is right for you will depend on your goals, whether you would lose property through bankruptcy, the type and amount of debt you owe, and many other factors.

At Sabatini Freeman, LLC, we offer a free in-person or virtual analysis of your financial situation, during which we can answer all your questions and address your concerns.

To file for bankruptcy, you will need to provide the following:

• A list of all creditors, including the amount and nature of each claim
• The source, amount, and frequency of your income
• A list of all your property; and
• A detailed list of your monthly living expenses (e.g. food, clothing, shelter, utilities, taxes, transportation, medicine, etc.)

If you are married, you must include the above information about your spouse, even if they are not filing with you.

While all of this information is not mandatory for the initial interview with one of our attorneys, it is helpful to bring as much of it as possible so we can give you an accurate list of your legal options.

Most people who file for bankruptcy do not go to court. Instead, you will simply be required to go to a “meeting of the creditors.” Despite the name, creditors rarely attend these meetings. The only parties at these meetings are usually the individuals filing for bankruptcy, their attorneys, and the bankruptcy trustee. The bankruptcy judge is not allowed to attend this meeting. These meetings usually last between 3 and 7 minutes, with the trustee asking the individual a few questions. For most people who file bankruptcy, this meeting is the only in-person appearance that is required.

No. The law expressly prohibits both governmental units and private employers from discriminating against a person solely because they filed for bankruptcy.

Yes. An individual who wants to repay part of a discharged debt can pay as much or as little of the debt as they want.

Before filing, we recommend the following:

• Saving any papers related to your debt, including bills and letters from collection agencies;
• Saving all your paystubs; and
• Meeting with one of our attorneys for personalized recommendations during a free consultation.

We strongly advise against transferring assets out of your name before filing bankruptcy with the belief that, if it isn’t yours, the property will be safe in a bankruptcy case. In almost every case, this is a serious mistake. Usually, we see transfers where the transferred asset would have been safe if the bankruptcy filer had simply held on to it. Once the asset has been transferred out of your name, however, it may actually be easier for the bankruptcy trustee to seize it. To do that, the trustee would sue the person to whom you transferred the property. Of course, there are exceptions to this rule, and the analysis is a bit complicated. The safest course of action, however, is to not transfer any property without first getting professional advice.

We also caution against paying as much debt as possible before filing. Once you know you will be filing bankruptcy, paying down debt won’t necessarily help you. Instead, you may simply be throwing away money that you might have otherwise been able to keep.

For example, if you pay $5,000 towards a non-dischargeable student loan and then file bankruptcy a month later, the trustee might recover that money from the student loan company and use some of it to pay other debts. If they do this, then you would, once again, owe the student loan company what you previously paid. The same result could happen if you repay a loan to a friend or family member. For example, if your parents loaned you $3,000, and you repaid them with your tax return and filed bankruptcy six months later, the trustee could take the money back from your parents.

Generally, it’s a bad idea to try to guess which debts you should repay and which you should not, as every financial situation requires a customized strategy.