What is Bankruptcy?
Bankruptcy is a form of legal relief for a person who has more debts than he or she can repay. An important purpose of the bankruptcy laws is to allow eligible debtors to either restructure their financial affairs or to get a fresh financial start. The person who files for bankruptcy is called the debtor. For more complete information, rules and forms: State Law Library's Bankruptcy Information or Bankruptcy Basics from the US Courts.
Who May File For Bankruptcy?
In general, any person, business, or entity can file for bankruptcy. There is no minimum amount of debt required; however, in most cases, a person who files does owe considerably more in debts than he or she can pay. Depending on the amount owed there may be restrictions as to what kinds of bankruptcies may be filed.
Can I Be Fired For Filing Bankruptcy?
No. Bankruptcy law forbids employers to discriminate against employees or applicants because they have filed for bankruptcy.
Will All My Debts Be Discharged if I File For Bankruptcy?
No. A debtor will still owe certain debts but not necessarily all, including student loans, taxes, alimony and child support, fines and certain other non-dischargeable debts. You should ask your attorney whether your debts are dischargeable.
Do I Have a Choice About Bankruptcy?
Generally, yes. Most bankruptcy filings are voluntary, meaning the debtor files a petition in Bankruptcy Court to protect themselves from creditors. Sometimes the creditors file an involuntary bankruptcy, forcing the debtor into Bankruptcy Court. This brochure discusses only voluntary bankruptcy for individuals.
Voluntary bankruptcy for an individual can be filed under four different chapters of the Bankruptcy Code: Liquidation or "Straight Bankruptcy." This is the most common type of bankruptcy proceeding, and is usually the simplest. It is also known as a Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, the debtor can retain exempt property, which is discussed further below. Non-exempt property is turned over for sale to pay creditors. Most debts are discharged in a Chapter 7 bankruptcy, meaning that the debtor is no longer legally obligated to pay the discharged debts.
Business Reorganization. Under Chapter 11 of the Bankruptcy Code, a business is allowed "breathing room" while it is reorganized. This provision is intended to allow a struggling business to remain in operation and work through its difficulties. An individual who is self-employed or operates a business as a proprietorship may be eligible for Chapter 11 reorganization.
Family Farm Bankruptcy. Chapter 12 addresses the special situation of agricultural debtors. Under Chapter 12 an agricultural debtor may reduce the principle, reduce the interest rate, and extend the time for repayment of debt.
Adjustment of Debt. An individual with "regular income" may be eligible for adjustment of debt under Chapter 13. It is sometimes called a "wage-earner plan," although it is available to people with other kinds of regular income, whether from self-employment, welfare, or another source. Under Chapter 13, a debtor has more flexibility in deciding which assets to keep, and may be able to extend time for repayment of debts.
Will I Be Able to Keep Any Property if I File For Bankruptcy?
Yes. Certain property is exempt from a bankruptcy proceeding and can be kept by the debtor. In Montana, there is an exemption of $250,000 equity in a homestead. Pension benefits may also be exempt. In addition, exempt property can include household furnishings and personal effects; an automobile; tools of the trade; and life insurance. These exemptions, if available, are subject to value limitations. Other exemptions may also be available in particular circumstances. The exemptions apply only to equity in real or personal property, which means that if property has been placed as security for a loan (such as a mortgage on a residence or a lien on the title of a car), the availability of the exemption may be limited.
Will I Be Able to Own Anything After Bankruptcy?
As a general rule, there is no limitation on the future ability of a debtor to own or acquire real or personal property. In most cases, creditors whose claims are discharged in bankruptcy will not be able to take property or earnings acquired after the filing of bankruptcy. However, some special types of interests, such as inheritances, property settlements, and life insurance proceeds, if acquired within a certain time after bankruptcy, may become available for payment to creditors.
Does My Spouse Have to File With Me?
No. There is no requirement that a husband and wife file bankruptcy together. In some instances, if most debts are owed only by one spouse, it may be appropriate for that spouse to file alone. But, jointly owned property may be affected if only one spouse files. In most cases, a husband and wife have the same debts or have co-signed the same loan agreements. If only one spouse files in this situation, the creditors can continue to demand payment from the spouse who did not file. Typically it costs the same whether one or both spouses file.
What if I Have No Assets?
Only property of the debtor which is not exempted is available to be sold and used toward payment of debts. Many persons, including those in low and middle income ranges, may only have property which falls under the exemptions and therefore have no assets available to be sold to pay creditors. The absence of such assets will not affect the bankruptcy. As in cases where there are assets available, creditors in a "no-asset" case will not be able to sue the debtor after the bankruptcy is filed.
How Will Bankruptcy Affect My Credit?
Bankruptcy may appear on a person's credit record for ten years and may hamper access to credit for a time. However, a person contemplating bankruptcy may already have a poor credit rating. In some cases, bankruptcy may actually improve the ability to obtain credit, since many of the debtor's former debts are discharged. Your local credit bureau may be able to provide information about the policy of lenders and creditors in your area with regard to the effect of bankruptcy on a person's ability to obtain credit.
How Will Bankruptcy Affect Persons Who Have Co-Signed Loans With Me?
A person who co-signed with you on a loan may still be held responsible for the debt if you file for straight bankruptcy. A Chapter 13 bankruptcy may suspend legal and collection actions against your co-signers for a time. Your attorney will explain the effect your bankruptcy will have on anyone who co-signed with you.
Can My Creditors Prevent a Discharge?
Under limited circumstances, a creditor may be able to block a bankruptcy discharge of his debt. If a creditor can prove that he gave a loan in reasonable reliance on a financial statement which was false in important details and given with the intent to deceive him, he may avoid having the debt discharged. If a creditor tries to avoid the discharge for this reason and fails, the bankruptcy judge may order the creditor to pay for the debtor's attorney fees and costs in defending the action. Your discharge may also be denied if you have incurred debts through fraud, drunken driving or intentional harm. It is also possible for the bankruptcy court to set aside any transfer of property made to conceal ownership or to avoid having it included in the bankruptcy, or made to defraud creditors. If this happens, the court can take the property and order it sold, with the proceeds distributed to the creditors. These are just examples of problems that may occasionally arise in a bankruptcy proceeding. They are among the many matters which you should discuss with your attorney.
Can I File For Bankruptcy More Than Once?
Yes, but there may be a limit on how soon you can file. Six years must expire from the date of a straight bankruptcy filing before straight bankruptcy can be filed again. Following certain Chapter 13 proceedings, there is no waiting period for the filing of a straight bankruptcy. And, there is no waiting period at all for the filing of a Chapter 13 bankruptcy after any prior bankruptcy.
How Can I Tell Whether I Should File For Bankruptcy?
If you have only a few debts, it is advisable to contact your creditors to try to work out a payment plan with them, rather than filing for bankruptcy. You can find assistance in avoiding bankruptcy by contacting a local consumer credit counseling agency, consumer credit bureau or legal services office. (Credit counseling is a pre-requisite to filing bankruptcy.) If you feel bankruptcy may be necessary, you should consult an attorney. If bankruptcy is appropriate, you will need an attorney to handle the filing, explain all procedures, evaluate your exemptions and non-dischargeable debts, and attend to all the other matters involved in a bankruptcy proceeding. The attorney will also assist you in determining whether a Chapter 13 plan may be appropriate for you.
How Can I Locate an Attorney to Assist Me?
The State Bar of Montana operates a Lawyer Referral & Information Service. By calling 406-449-6577, or clicking HERE, a lawyer can be referred to you. If you have limited income and feel that you cannot afford a private attorney, you should contact the Montana Legal Services at 800-666-6899to inquire whether you qualify for assistance.
The information in this pamphlet reflects Montana law. It is intended to inform and not to advise. It is not intended to apply to any specific situation. A person who is a resident of or who owns property in another state should consult the laws of that state.