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 often referred to as the debtor. For more complete information, rules, and forms, see the State Law Library's Bankruptcy Information, or Bankruptcy Basics from the U.S. Court.
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 file.
Can I Be Fired for Filing for Bankruptcy?
No. Bankruptcy law forbids employers to discriminate against employees or applicants because they have filed for bankruptcy.
Will All of My Debts Be Discharged if I File for Bankruptcy?
No. A debtor will still owe certain debts but not necessarily all, including students loans, taxes, alimony, child support, fines, and certain other non-dischargeable debts. You should ask your attorney whether or not 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.
- Chapter 7 Bankruptcy, most often called liquidations or "straight bankruptcy," this is the most common type of bankruptcy proceeding, and is most often the simplest. In this form, the debtor can retain exempt property (discussed below). All 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.
- Chapter 11 Bankruptcy, also known as Business Reorganization, allows for a business to have some "breathing room" while it reorganizes. 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.
- Chapter 12 Bankruptcy, also known as Family Farm Bankruptcy, addresses the special situations 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.
- Chapter 13 Bankruptcy, also known as Adjustment of Debt, is for individuals with "regular income." It is some-times called a "wage-earner plan," although it is available to people with other kinds of regular income, whether that be from self-employment, welfare, or some additional sources. 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 bankruptcy proceedings, and can be kept by the debtor. In Montana, there is an exemption of $250,000 worth of equity in a homestead. Pension benefits may also be exempt. In addition, exempt property can include household furnishings and personal effects to include automobiles, 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 by one spouse, it may be appropriate for that spouse to file alone. Jointly owned property, however, may be affected if only one spouse files for bankruptcy. In most cases, a husband and wife have the same debts or co-signed the same loan agreements. If only one spouse files in this situation, the creditors can continue to demand payment form 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 Effect 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 Effect Persons Who Have Co-Signed Loans with Me?
A person who co-signed a loan with you may still be held responsible for the debt if you file for straight bankruptcy. A Chapter 13 Bankruptcy may suspend legal and collection action(s) against your co-signer for a time. Your attorney will explain the effect your particular bankruptcy would have on anyone who co-signed any loans with you.
Can My Creditors Prevent a Discharge?
Under limited circumstances, a creditor may be able to block a bankruptcy discharge of their debt. If a creditor can prove that they gave a loan in reasonable reliance on a financial statement which contained false information with important details, and given with the intent to deceive the creditor, they may then 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 credits. If this happens, the court can take the property and order it sold, with the proceeds distributed to the creditors. These are just a few examples of problems that may occasionally arise in a bankruptcy proceeding. They are among the many matters that 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. A minimum of six years must expire from the date of a Chapter 7 bankruptcy before another Chapter 7 bankruptcy can be filed. Following certain Chapter 13 proceedings, there is no waiting period for the filing of a straight bankruptcy. There is also no waiting period for the filing of a Chapter 13 bankruptcy after any prior bankruptcy. (e.g., A person can file for Chapter 7 bankruptcy, then immediately file for Chapter 13 bankruptcy. However, they would need to wait for 6 years before trying to file for another Chapter 7 bankruptcy.)
How Can I Tell Whether or not I Should File For Bankruptcy?
If you only have 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. Please note, Credit Counseling is a pre-requisite to filing for Bankruptcy. If you feel bankruptcy may be necessary, you should consult with an attorney. If Bankruptcy is appropriate, you will need an attorney to handle the filing, explain all procedures involved with filing for bankruptcy, evaluate your exemptions and non-dischargeable debts, and attend to all other matters involved with the 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 and Information Service. They can be contacted Monday through Thursday, 9:00 a.m. to 3:00 p.m. at (406)449-6577, or on the web. If you have limited income and feel that you cannot afford a private attorney, you should contact the Montana Legal Services at 1(800)666-6899 to see if you might qualify for assistance.
This information reflects Montana Law and is intended to inform, not advise. It is not intended to apply to any specific situation, and any person who is a resident of, or who owns property in, another state should consult the laws of that state.