Chapter 7 Bankruptcy

Chapter 7 Bankruptcy

chapter 7 bankruptcy attorneysAs one of our Sacramento Bankruptcy Attorneys will explain, Chapter 7 Bankruptcy is generally the cheapest, easiest, and for most people, the preferred bankruptcy to file when you have an option. In a Chapter 7, you get to keep all of your assets for which there is an “exemption.” As discussed below, for the vast majority of people, all of their assets are exempt. In a Chapter 7 Bankruptcy, eligible individuals also receive a “discharge” of all of their debts. There are, however, some exceptions to debts that are discharged (discussed below).

Chapter 7 is often referred to as a “Fresh Start” bankruptcy, and is different from the other bankruptcies that are commonly referred to as “reorganization bankruptcies.” Chapter 13, which is traditionally for individual consumers, and Chapter 11, which is traditionally for businesses or business owners, are the most common of the reorganization bankruptcies. There are also the lesser-known reorganization bankruptcies: Chapter 9 Bankruptcy for municipalities like the City of Stockton; and Chapter 12 Bankruptcy for the family farmer.

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Frequently Asked Questions about Chapter 7 Bankruptcy

What assets are exempt in a Chapter 7 Bankruptcy?

In a Chapter 7 Bankruptcy, a trustee is appointed to your case to determine if you have any assets with equity that he/she can liquidate to raise money to pay your creditors. The good news, however, is that individuals are allowed to “exempt” certain assets to protect them from the trustee. The applicable exemptions are based on state law, and thus vary from state to state. California is a relatively generous state when it comes to exempting assets.

The exemption statutes are complex, but in a general sense and subject to some limitations and exceptions, the following items are almost always exempt: general household goods and furnishings; clothing and personal effects; and retirement accounts. Although limited in amounts, there are also exemptions to protect equity in a vehicle or vehicles, protect family heirlooms and jewelry, as well as protect tools of the trade.

Besides miscellaneous other exemptions (with limitations for items ranging from life insurance to burial plots), there are significant exemptions available for your personal residence, and in some situations you may even qualify for the “wildcard” exemption that allows you to protect up to just over $20,000 in any asset or assets above and beyond the ones identified above. Exemption planning is a very important area when deciding to file a Chapter 7 Bankruptcy, and an area where consulting a Sacramento Bankruptcy Attorney typically proves to be valuable.

What debts are discharged in a Chapter 7 Bankruptcy?

Typically, the goal in filing a Chapter 7 Bankruptcy by a Sacramento Bankruptcy Attorney is to obtain a “discharge” for our client. A discharge is the legal jargon for saying that you no longer owe the debt. Assuming you are an eligible debtor for a discharge, and comply with the statutory requirements, all of your debts are discharged with certain “exceptions.” There are limited exceptions to discharge, and the exceptions are all set forth in specific code sections within the bankruptcy code.

The most common exceptions to discharge are: child support; spousal support; criminal fines and restitution orders; debts arising from drunk driving; and student loans. In addition to several other miscellaneous categories of debts that are not subject to discharge, debts based on fraud are usually not dischargeable. The most complicated of all of the exceptions to discharge is taxes. While many taxes can be discharged, unfortunately most taxes are not discharged. If your goal is to maximize the discharge of your debts, hiring a knowledgeable Sacramento Bankruptcy Attorney is crucial.

What happens to secured debts in a Chapter 7 Bankruptcy?

In a Chapter 7 Bankruptcy, eligible debtors typically receive a discharge of secured debts, such as home loans and car loans. However, there is often confusion of exactly what that means. A discharge means that the debtor no longer personally owes that debt. However, if property was pledged as collateral for that debt, the creditor usually still retains its state law rights to ultimately sell the collateral to pay the debt. Stated another way, the debtor may be discharged, but the asset is still subject to the debt. The net result is that if you want to keep an asset that was pledged as collateral, you generally will still need to pay debt.

In dealing with secured debts, there are several options that a Sacramento Bankruptcy Attorney can assist you with in a Chapter 7. You may have the option to reaffirm the debt, surrender the asset, redeem the asset by paying its fair value in cash, or in some cases just simply retain the debt and pay under the previous terms. Before deciding how to handle a secured debt in a bankruptcy, a significant amount of thought, planning, and financial analysis should be made by you and a Sacramento Bankruptcy Attorney. The goal of filing a Chapter 7 Bankruptcy is to get a fresh start, and far too many debtors do not get the true benefit of a fresh start by making uninformed decisions about debt reaffirmations.

Are there income limits as to who can receive a Chapter 7 Bankruptcy Discharge?

While there are some exceptions, there are some very strict income limits as to who can receive a Chapter 7 Bankruptcy discharge. The first place to start is to see if you earn less than the median income for your state as published by the Department of Justice. While not always true, generally speaking, eligible individuals whose household income is less than the median income for the state they live in will qualify for a discharge in a Chapter 7 Bankruptcy.

If you earn more than the median income, you may still qualify, but you must perform a much more complicated analysis (often referred to as the Means Test). Completing the means test (form 22a) is extremely complex, and is probably best compared to completing a complicated tax return. Failure to complete it accurately can result in significant consequences such as dismissal of your case, conversion to a Chapter 13, and even denial of a discharge. To make sure that you complete the means test accurately, it is highly recommended that you contact a Sacramento Bankruptcy Attorney.

How long does a Chapter 7 Bankruptcy case typically take?

While the Sacramento Bankruptcy Attorneys at Eason & Tambornini have filed an occasional Chapter 7 Bankruptcy the same day as we are retained, generally it take approximately one week to assemble and prepare the necessary documents to initiate a bankruptcy petition. After the petition is filed, the court will schedule a meeting of creditors, which our Sacramento Bankruptcy Attorneys will attend with our clients. That meeting is typically 30 days after filing. In the great majority of cases, a discharge order is entered 60-90 days after that meeting of creditors. While the case closing may take a little longer, the discharge is (for all practical purposes) the relevant final event, and thus it is usually less than four months from the beginning of the case until the end of a Chapter 7 Bankruptcy.

Will a Chapter 7 trustee come to my home? Will a Chapter 7 trustee come inside my house and take my things?

Trustees do not make enough money to go to every debtor’s home, and in fact, rarely ever go to a debtors home. However, if the trustee believes that there is potential equity in your home that is not covered by the homestead exemption, they may first look to online resources such as zillow.com or multiple listing services to assist in calculating a value. They may also use a Google Earth type tool to view the home and surrounding area. If they believe they can sell the home to generate proceeds for the estate, then they may come by and look at the home or send an agent. This rarely happens by surprise, as a good bankruptcy attorney will alert you to these potential issues in advance.

It is extremely unusual for a bankruptcy trustee to inspect the contents of a residence. California’s household items exemptions are very broad, and the cost of selling potential personal property inside the home that is not covered by an exemption is usually not economical. Consequently it is extremely rare that a trustee will inspect the contents of a home. However, the fact that the trustee almost never inspects the contents of a home is not a license to commit bankruptcy fraud by failing to disclose items. The risks and penalties of bankruptcy fraud is way too great to ever put yourself at risk. If you have an item in your home that may exceed the exemptions, it is always better to disclose it to your bankruptcy attorney so that they can apply a different exemption, or disclose it and likely negotiate a repurchase.

If my spouse (husband or wife) does not cooperate with my bankruptcy, will that impact my exemptions?

Your husband or wife does not have to file bankruptcy, and they do not have to consent to your bankruptcy. However, if your husband or wife does not cooperate with your bankruptcy it can make a difference as to which set of exemptions you can use. In California, we have two sets of exemptions commonly known as the wildcard set of exemptions and homestead set of exemptions. The homestead is typically the better set if you own a home with lots of equity. The wildcard set is typically better if you do not have a home with significant equity as it gives you a “wildcard” of over $20,000 to place on miscellaneous assets such as bank accounts, cash, and extra vehicles. Unfortunately, if you file bankruptcy without your husband or wife, and they will not sign a waiver, you are not eligible for the wildcard set and may only use the homestead set of exemptions.

Frequently Asked Questions about Property Exemptions in a Chapter 7 Bankruptcy

What assets do I get to keep in a bankruptcy?

We are regularly asked “what assets do I get to keep in a Chapter 7 bankruptcy. There are two different ways to answer the question as to what assets you get to keep in a Chapter 7 bankruptcy. On one the hand, you get to keep all of the assets that you appropriately claimed as “exempt.” You also get to keep all of the assets that the trustee “abandons.”

In California, we have two sets of exemptions that apply in bankruptcies. They are commonly known as the “wildcard” set, and the “homestead” set. When you file bankruptcy, a good bankruptcy attorney will assist you in choosing the set of exemptions that best meets your needs. Both sets allow for exempting most, if not all, household goods and items, clothing, and qualified retirement accounts. Both sets of exemptions have provisions for exempting limited amounts of equity in a vehicle, family jewelry and heirlooms, as well as personal injury claims.

Typically, the most common reason to choose between the homestead set of exemptions, and the wildcard set of exemptions is whether you have a personal residence with significant equity. The homestead set of exemptions allows the largest amount of equity to be exempt in a residence in a bankruptcy, and that amount ranges between $75,000 and $175,000. On the other hand, if you do not have a home with significant equity, the wildcard set can be the most favorable because it allows you to exempt over $20,000 in anything you want, including cash, cars, trucks, and bank accounts.

In addition to keeping exempt assets, you also get to keep those assets that the bankruptcy trustee abandons. In a Chapter 7 bankruptcy, the trustee is only interested in assets that will generate an income for the estate. Consequently, if an asset is over encumbered (you owe more on the asset than it is worth such as many newer cars and some homes), the trustee will not likely have any interest in the asset. Trustees work for a nominal per file fee, plus receive approximately 7-10% of any money that they can generate for an estate. If a car has no equity in it, the trustee cannot sell it for a profit and thus cannot generate any money for the estate. As such, they typically abandon such an asset back to the debtor.

Besides assets that have no equity in them, trustees will often abandon assets that have even a little equity because the amount of work required to sell the asset, along with costs to sell the assets, and/or costs to administer an estate are not economically practical. For example, if you had an investment rental house that had $20,000 in “equity,” but it would cost $30,000 in real estate fees to sell it, there is a good likelihood that the trustee would simply abandon the property. Likewise, if you had too many cars, and one of the non-exempt cars was a non-operable vehicle worth $1,000, the trustee would very likely abandon the car back to you. The administrative hassle of having the car towed, title transferred, hiring an attorney to handle a motion to sell, preparing a tax return for the estate, and administering the estate for a 10% fee of $100 is not practical. Of course, if this was one of many small assets, the trustee may have a different outlook.

How does the trustee or the court determine the value of my home or an asset in a Chapter 7 bankruptcy?

How my home or business is valued in a Chapter 7 bankruptcy is a common question asked of our bankruptcy attorneys. The answer depends on the purpose of the valuation.

If the trustee is valuing an asset to see whether he or she can sell it for a profit/benefit to the estate, the trustee is not particularly concerned with appraisals or internet value estimators such as zillow.com or Kelly Blue Book. The trustee is more concerned with real life factors. They will look to those resources to give them an idea, but if they think it the property has potential they will seek professional opinions from auctioneers, real estate agents, or comparable professionals. Trustees are not concerned with arguing over valuation, but rather the proof is in the results: can they sell the asset for enough money to clear the sales costs, liens, and exemptions. If they think they can, they may. If they don’t think they can, they will likely abandon the asset. While they are generally conservative in determining values, they are also professionals at their trade and know how to maximize values.

If the valuation of the asset is being determined for the purpose of stripping off a lien, redeeming and asset, or similar purpose, then the court may hold a mini-trial on the issue. The court will listen to testimony of the bankruptcy debtor as to valuation, possibly listen to experts such as appraisers, and make a determination.

The valuation of a business is much more complicated. It is important to discuss whether the business is a sole proprietorship or a separate legal entity. Likewise, many factors play into business valuation such as the value of the tangible and intangible assets, the value as a going-concern, whether it is a personal services business, and whether there are liens on the business assets. If you have questions about calculation of value, please contact one of our bankruptcy attorneys.

Can I buy my assets back in a Chapter 7 bankruptcy? What happens if a trustee wants to sell my assets in a Chapter 7 bankruptcy?

In a Chapter 7 bankruptcy, the trustee is not interested in taking away your assets. The trustee is most interested in maximizing the assets for the estate. Consequently, when the trustee identifies an asset that he or she thinks has a value to the estate, they will typically first offer the debtor an opportunity to purchase the asset. This is not only the best result for the debtor, but is often the best result for the trustee and the estate. When the trustee sells the asset back to the debtor, the estate does not incur sales costs and does not face potential challenges by the debtor to the sale. For example, suppose a debtor has a boat that was otherwise not exempt, and has a “value” of $5,000. If the debtor did not want that boat the trustee would be required to have the boat picked up and hauled to a storage facility; have it mechanically inspected; and pay storage costs, auctioneer costs, and title transfer costs. These costs could easily be more than $1,000 and take significant time and energy of the trustee. Consequently, many trustees will give the debtor to option to purchase the asset for $4,000 or less. Most trustees will also give the debtors a reasonable time to pay for the purchase. What is “reasonable” depends on the type of assets and amount at stake, but a six month payment program is fairly common, and longer for more significant or harder to sell assets.

Will a Chapter 7 trustee come to my home? Will a Chapter 7 trustee come inside my house and take my things?

Trustees do not make enough money to go to every debtor’s home, and in fact, rarely ever go to a debtors home. However, if the trustee believes that there is potential equity in your home that is not covered by the homestead exemption, they may first look to online resources such as zillow.com or multiple listing services to assist in calculating a value. They may also use a Google Earth type tool to view the home and surrounding area. If they believe they can sell the home to generate proceeds for the estate, then they may come by and look at the home or send an agent. This rarely happens by surprise, as a good bankruptcy attorney will alert you to these potential issues in advance.

It is extremely unusual for a bankruptcy trustee to inspect the contents of a residence. California’s household items exemptions are very broad, and the cost of selling potential personal property inside the home that is not covered by an exemption is usually not economical. Consequently it is extremely rare that a trustee will inspect the contents of a home. However, the fact that the trustee almost never inspects the contents of a home is not a license to commit bankruptcy fraud by failing to disclose items. The risks and penalties of bankruptcy fraud is way too great to ever put yourself at risk. If you have an item in your home that may exceed the exemptions, it is always better to disclose it to your bankruptcy attorney so that they can apply a different exemption, or disclose it and likely negotiate a repurchase.

If my spouse (husband or wife) does not cooperate with my bankruptcy, will that impact my exemptions?

Your husband or wife does not have to file bankruptcy, and they do not have to consent to your bankruptcy. However, if your husband or wife does not cooperate with your bankruptcy it can make a difference as to which set of exemptions you can use. In California, we have two sets of exemptions commonly known as the wildcard set of exemptions and homestead set of exemptions. The homestead is typically the better set if you own a home with lots of equity. The wildcard set is typically better if you do not have a home with significant equity as it gives you a “wildcard” of over $20,000 to place on miscellaneous assets such as bank accounts, cash, and extra vehicles. Unfortunately, if you file bankruptcy without your husband or wife, and they will not sign a waiver, you are not eligible for the wildcard set and may only use the homestead set of exemptions.

Why do we allow certain assets to be exempt in a Chapter 7 bankruptcy?

The legislature has created the available exemptions with sound policies in mind. There are certain essential items necessary for an economic fresh start such as clothing, household furnishings, and tools of the trade. As a result, the legislature has included these items in its list of exemptions.
The law also allows for the exemption of items such as retirement accounts for long-term reasons. If we were to force debtors to cash out their retirement accounts, then they would have to rely on the government in their retirement years for support. This would cause economic problems for our government, and for this reason we allow retirement accounts to be exempted. Similarly, workers compensation awards, disability awards, and personal injury awards necessary for the support of the debtor or the debtor’s dependents are also usually exempt in a bankruptcy.

Can you convert non-exempt assets into exempt assets prior to filing a bankruptcy?

We are often faced with a debtor that has certain assets that are not exempt, but has exemption categories that are not maximized. In those situations, the question often posed is can you convert non-exempt assets into exempt assets prior to filing bankruptcy. This practice is sometimes referred to as “exemption planning.”

There is no clear cut rule about exemption planning that applies in all cases. The Ninth Circuit has ruled that the mere fact of selling, or hypothecating (borrowing against) non-exempt assets, and then using the proceeds to acquire exempt assets is not fraudulent per se. Consequently, quite often this practice is appropriate, and should be discussed with a good bankruptcy attorney.

On the other hand, there is some authority that if the transfers were made to defraud, hinder, or delay creditors, then it may be illegal. This situation is common when a marital settlement agreement is negotiated right before a bankruptcy transferring all of the non-exempt assets to the non-filing debtor, and the debtor keeping all of the exempt assets. There are other possible situations which may be problematic, including paying down huge portions of a home loan just before filing bankruptcy, and thus if you have excess assets that may be subject to exemption issues, you should always consult with knowledgeable and skilled bankruptcy attorneys.

What happens if an asset goes up in value during a Chapter 7 bankruptcy?

The amount of the exemption applicable to a voluntary Chapter 7 bankruptcy is fixed as of the date of the filing of the petition. However, in an escalating market where the valuations are going up, it is often a good idea to move to abandon assets early in a case. If the asset goes up in value while the case is pending and it was not abandoned, then the trustee may be entitled to the increase in equity over the exemption amount

How do you claim exemptions in a Chapter 7 bankruptcy?

When filing a Chapter 7 bankruptcy, the debtor is required to file several documents including documents referred to as “schedules. ”To claim exemptions in a Chapter 7 bankruptcy, the debtor must file a Schedule C. Schedule C lists the specific or general asset classes in which the debtor seeks to exempt, along with the statute providing for the exemption. While this schedule looks very simple, it is often the most important schedule filed in a bankruptcy and one that should be carefully reviewed with a bankruptcy attorney as it significantly impacts what assets you get to keep and what assets the trustee can take from you.

What are common exemptions in a Chapter 7 bankruptcy?

In a Chapter 7 bankruptcy, the most common exemptions are household furnishings, clothing, family jewelry and heirlooms, equity in a vehicle, and retirement accounts. The amounts permitted to be exempt vary dramatically based on which exemption set was chosen and eligibility requirements. Other categories of bankruptcy exemptions that may be available and with certain limits include: tools of the trade; traceable earnings to a pre-petition levy; social security and public assistance; life insurance policies; private retirement plans; health aids; personal injury and wrongful death causes of action; building materials; cemetery plots; public employee vacation credits; unemployment an unemployment disability funds; and homesteads.

What is the difference between a declared homestead and an automatic homestead in a bankruptcy?

Many years ago, in order to have a homestead exempted, a debtor was required to record a homestead declaration with the county recorder. While there can still be some very good benefits to doing so, California now recognizes an automatic homestead without the recording of a declaration with the county recorder. In California, debtors are automatically entitled to claim a homestead exemption against the forced judicial sale of their home owned and occupied by them or their spouse. A sale by a Chapter 7 trustee is considered a “forced sale” for these purposes.

There is much debate about what counts as a “dwelling” for the purposes of the homestead exemption. Some of the more common dwellings include a house, condominium, and a mobile home. However, the definition may be more broad and may include an interest in a stock cooperative or a community apartment project, and even a boat or motor home. The residence does not have to be a single family dwelling. Duplexes and four-plexes have been determined in some cases to qualify for homestead exemptions as well.

In addition to the issues over the type of dwelling, there can be many disputes over the residency requirement. The two primary threshold questions are whether the debtor and/or the debtor’s spouse are physically occupying the property, and whether they intend to occupy the residence. Some of the issues along these lines include situations in which the debtor is in a long-term hospital stay, has been away on a military or job assignment, and when the debtor has multiple residences. Because the homestead is, for most debtors, their largest exemption, it should be addressed with a bankruptcy attorney.

How much is the homestead exemption in California?

If you choose the California homestead exemption set as opposed to the wildcard exemption set, as of 2014, the homestead in California varies from $75,000 for a single debtor with no dependents, up to $175,000 if the debtor or his/her spouse meet certain age, disability, or low-income qualifications. However, there is a bankruptcy cap on the amount of homestead you can take in California if you acquired the property less than 1,215 days before filing bankruptcy. As of 2014, that cap is $155,675. The exact amount of the homestead applicable, and whether there is a cap applicable is a subject matter that you should discuss with a bankruptcy attorney.

Are retirement accounts exempt in a Bankruptcy?

For good reason, most retirement accounts are exempt in a bankruptcy. If debtors were required to liquidate their retirement accounts so that the trustee could pay the credit card companies, the government would be required to support the debtors during the retirement years. Consequently, the general rule is that retirement accounts are exempt.

However, you should always schedule your retirement accounts in your bankruptcy and should carefully discuss with your bankruptcy attorney the specifics of the accounts. To be exempt the retirement accounts be qualified retirement accounts. Generally speaking, if the retirement funds are held in an account that has received a favorable IRS determination as a qualified retirement account, and that determination is in effect on the bankruptcy petition date, there is a presumed exemption under the law. Keep in mind that there are certain problems that arise from retirement accounts inherited, retirement accounts set up by the debtor direction rather than an employer, and retirement accounts not properly funded

What happens to my credit after Bankrutcy?

What will be my credit score after a bankruptcy?

It is near impossible to accurately predict what your credit score will be after you file a bankruptcy. However, we regularly see scores in the low to mid 500’s (530-540) just after a bankruptcy is filed, and often see scores around 630-650 15 months after the discharge is entered. Typically around the two year mark, people that aggressively work to restore their credit scores are seeing scores in the high 600’s, and we have even heard stories of people in the low 700’s at the 24 month mark.

When we talk about credit scores, we are generally referring to the FICO credit score. FICO formally known as Fair Isaac Company is the leading credit scoring company utilized in the United States. Although FICO goes to great lengths to keep the exact formula for calculating the credit score secret it has published that calculating your credit score is based predominantly on the following five components:

  • Payment history accounts for 35% of your score. Payment history includes not making late payments on bills such as a mortgage or credit cards. When you file bankruptcy, this aspect of your credit score is seriously impaired.
  • Credit utilization is worth 30% of your credit score. Credit utilization is the percentage of your revolving debt that has been used compared to what is available. Often people that file bankruptcy have very poor credit utilization ratios because their credit cards have been maxed out. Typically, the quicker you can obtain a new credit card and maintain a very low balance on that card, the quicker your credit utilization ratio will rebound.
  • Length of credit history accounts for 15%. It is unclear exactly how this is impacted when you file bankruptcy, but many suggest that the “fresh start” in a bankruptcy is somewhat akin to a fresh start on a credit report. Consequently, your length of credit history is negatively impacted when you file bankruptcy.
  • Types of credit used is worth 10% of your credit score. By mixing installment payments with revolving credit cards, and mortgages, you will find your scores in this category will likely increase the fastest.
  • Recent searches for credit are worth 10% of your credit score. If you are applying for credit too much, these searches can impact your credit score as well. Consequently, before applying for credit after a bankruptcy, you should research the likelihood of being approved prior to applying . You generally want to reduce the number of times you apply for credit so it does not appear that you are over shopping for credit.

In 2010, FICO did give us some additional clues about how bankruptcy can impact your credit score. They released two different credit scenarios showing people that had filed a bankruptcy. One of the individuals had a credit score of 780, and after filing their credit dropped to 540. Similarly, an individual who had a credit score of 680 had their credit drop to 530. Consequently, whether you have a high credit score or a low credit score before filing bankruptcy, it appears that most people will find themselves between 500 and 550. History and experience tells us that a score of 625-650 is realistic 18 months after filing, and a score of 700 is possible just after two years post filing of a Chapter 7 bankruptcy.

How do I improve my credit after a bankruptcy?

There are some basic easy steps to improve your credit score after filing of a Chapter 7 bankrutpcy. First, we recommend that you log into each of the three credit bureaus (Experian, Equifax, and Trans Union) 90 days after receiving your discharge, and make sure that each of your creditors are noted as having been discharged What you want to avoid is the creditors continuing to report you as delinquent after filing. If they are continuing to report you as delinquent, then you will need to dispute that item with each credit bureau that shows you as delinquent. Disputing the item directly with the creditor usually does little good. The dispute should be done with the bureaus instead. If the creditor continues to report you, you should contact your bankruptcy attorney.

In addition to cleaning up the old items, it is usually beneficial to establish new credit. Many debtors will begin receiving solicitations for new credit cards and car loans after they receive their bankruptcy discharge. We generally suggest opening one or two credit cards, charging them a single time, and then putting them away in a safe place. Doing so will cause these cards to report you as having opened an active account with typically positively impacts your credit score. Then by not carrying a balance you will have a very favorable credit utilization ratio. The length of time you have these credit cards is also important, so try to open an account with a low annual fee, or no annual fee. That way you will be less likely to cancel it. Try to avoid carrying any balance on these credit cards as that is often what caused the bankruptcy in the first place, and it will negatively impact your credit utilization ratio.

The more difficult item can be with respect to opening installment loans, such as a car or truck loan. There will be many car dealers anxious to lend you money to purchase a new or used car. The reason they are willing to do so is because the interest rates on these loans is typically very high, and thus profitable for the dealer. While a car loan will likely improve your credit score, it is usually a bad idea to get a car loan solely for that purpose. If you can wait until your credit score has recovered before buying a car on credit, you will likely save significant money.

Can I get a credit card after a bankruptcy?

After filing a chapter 7 bankruptcy, most of our clients find themselves inundated with marketers trying to sell credit cards. The credit industry recognizes that you are limited in the ability to file bankruptcy again, and that most debtors want to move on with a clean slate. Consequently, people post bankruptcy are often a very good credit risk. Unfortunately, these creditors are also marketing credit cards with high annual rates, high transaction fees, and exorbitant late charges. Be very careful in your selection of a credit card.

For those few that do not receive unsecured credit card offers, almost everyone can qualify for a secured credit card. A secured credit card in one in which you give the creditor a deposit towards your credit card to guaranty payment. A web search for secured credit card will reveal many such options.

A final option for those that are credit card adverse after a bankruptcy, are to purchase debit cards. You can buy debit cards in most chain grocery stores and pharmacies. Debit cards can be used much like credit cards, particularly for purchasing items on the internet.

Will a bankruptcy impact my son/daughter's ability to get student loans?

The Bankruptcy Reform Act of 1994 amended the US Bankruptcy Code to prohibit the denial of government student grants and loans based solely on the borrower’s past or present filing of a bankruptcy petition. There is, however, an exception, and that is the Federal PLUS loan.

A student is eligible for federal student loans (e.g. Stafford loan), even if their parents recently filed for bankruptcy, as the Stafford loan does not depend on the borrower’s credit history. Furthermore, a student’s parent’s bankruptcy does not negatively impact a student’s eligibility for Federal and State grants, or scholarships. Not surprisingly, a parents’ bankruptcy may actually help students qualify for needs based scholarship and grants, depending on the eligibility criteria.

One government program, however, that is impacted by a bankruptcy is the Federal PLUS loan program. If a parent was discharged in a bankruptcy within the prior five years, the will likely not be eligible for this loan. However, it is not just a bankruptcy that renders a parent ineligible, but also if they had various other credit problems such as a foreclosure, repossession, tax lien, or wage garnishment.

Fortunately, if a student’s parent is denied a PLUS loan because of an adverse credit history, the student may become eligible for increased unsubsidized Stafford loan limits.

Unfortunately, the protections against discrimination of government backed student loans do not apply to private party student loans. These lenders choose their own lending requirements, and if a bankruptcy is too recent it is possible that the parent could be denied.

Student loan eligibility and lending requirements are very technical in nature, and you should consult with both a bankruptcy attorney and the schools financial aid office, prior to making any final decisions about filing, or not filing, bankruptcy.

Can I buy a car after bankruptcy?

Once your bankruptcy is complete, you are free to move on with your life. This means you can buy and sell assets as you want, including cars. The better question may be: Can I borrow money to buy a car after a bankruptcy; or can I get car financing after a bankruptcy?

Fortunately, or unfortunately, car dealers are aggressively soliciting debtors after they receive their discharge to loan them money for the purchase of a car. There is no shortage of lenders for car loans after a bankruptcy. However, most of these car loans are at very high interest rates, and many of the dealers only sell overpriced cars. The combination of which can result in a horrible financial decision. If you must buy a car after a bankruptcy, you can do so without a co-signor, but the rates will be very high. If you can wait, or get a cosigner, the rates will likely be much more reasonable.

Can I buy a house after bankruptcy?

The timeframe for obtaining government sponsored conforming financing after a bankruptcy or a foreclosure continues to change, but as of 2014 it is generally 3 years post bankruptcy discharge or foreclosure, whichever is later. Private party lenders, or non-conventional financing is often available immediately after a bankruptcy but the required down payment can be significantly higher, and the interest rates not as favorable. Because these requirements continue to change regularly, it is wise to speak with a bankruptcy attorney and mortgage lender directly to determine the current lending requirements.

If you have questions about filing a Chapter 7 Bankruptcy, please call one of our Sacramento Bankruptcy Attorneys for a free consultation.

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