Virginia Bankruptcy FAQs
Frequently asked questions
HOW LONG DOES THE PROCESS TAKE?
A bankruptcy proceeding, like any matter before a court in the United States, has no hard and fast deadline for completion. Rather, the timeline for each case is uniquely based upon the complexity of facts of that case. In the bankruptcy field, the process truly begins on the date you file with the bankruptcy court and ends on the day you receive the final notice of discharge from that court. Moving quickly, the standard Chapter 7 bankruptcy could last as little as four months, which is the case in the majority of Chapter 7 cases where the debtor has little to no nonexempt assets for the bankruptcy trustee to pursue. If there are substantial non-exempt assets, the process could take much longer. In contrast, a Chapter 13 case lasts for the life of the Chapter 13 plan, which is generally either three years or five years.
THE IMPACT BANKRUPTCY HAS ON MY CREDIT
There is no sugar-coating the fact that filing for bankruptcy typically adversely affects the filer's credit rating. However, most individuals that are considering bankruptcy already have a subpar credit score. And rather than increasing the amount of negative credit reporting with month after month of missed payment on credit accounts, the bankruptcy can put a stop to additional negative credit reporting and starts the debtor on the path to rebuilding that credit score. For this reason, individuals who file for Chapter 7 bankruptcy often see a large increase in their credit score within the first year following the close of their Chapter 7 bankruptcy and discharge of their debts.
The stigma surrounding bankruptcies may lead many people to believe that the challenge to regain good credit is insurmountable, but this is far from the truth. In reality, you can begin rebuilding your credit immediately after concluding the bankruptcy, and it is advisable to do so. After bankruptcy, regardless of how you begin the process and who you get credit from, the important thing to do is consistently make your required payments and reestablish a pattern of good credit behavior. This will then place you in the best position to regain your positive credit rating, and usually quicker than you may think.
THE IMPACT BANKRUPTCY HAS ON MY SPOUSE OR ON JOINTLY OWNED PROPERTY
If you are married and considering filing for bankruptcy, you must consider whether it is prudent to file individually, or jointly with your spouse. Depending on how you and your spouse hold the debt, they could be left solely responsible for paying it off once you've been discharged in bankruptcy. For example, if one spouse had opened a credit card account in his name only, that spouse can file for bankruptcy individually and, if the debt is only in his name, it will be discharged with no liability to the other spouse. In contrast, if the same credit card account was opened jointly in both spouses' names, then filing individually will likely leave the non-filing spouse responsible for the outstanding debt. This is because the bankruptcy, and therefore the discharge of debt, only applies to the debtor who actually files for bankruptcy with the court.
Importantly, due to Virginia laws on homeownership, this likely doesn't affect debts related to your home if the home is held in a “tenancy by the entirety.” A tenancy by the entirety is a technical, legal phrase which essentially means you own a piece of real estate together, jointly and should either of you die, the property immediately passes to the other spouse—bypassing probate, or any issue with wills. Many couples in Virginia own their homes in a tenancy by the entirety and as such, the home is more accurately described as owned by the marriage rather than either of the spouses. As such, should one spouse file for bankruptcy, the house will not even be listed as a part of the bankruptcy estate (property owned by the filing party). However, if both spouses file jointly, the home is counted as part of the bankruptcy estate.
WHAT IS THE 341 HEARING?
When a debtor first files for bankruptcy, the bankruptcy court sends a notice to every creditor listed in his filing paperwork. The notice alerts the creditors that the debtor has filed for bankruptcy and instructs them on the date, time, and location of the upcoming 341 Hearing, which is also known as a “Meeting of Creditors.” However, this is somewhat misleading because, in the vast majority of cases, no creditors show up at the meeting. Typically, this is the only event in the entire bankruptcy proceeding that the debtor must actually attend. In most cases, the debtor never needs to set foot inside a courthouse.
At the meeting, the bankruptcy trustee confirms your identity, reviews your paperwork for accuracy—including your listed assets and income—and asks you questions about your income, assets, and debts. Any creditors in attendance (usually there are none) may ask similar questions and typically focus on any discrepancies between stated income on your credit application versus the bankruptcy paperwork. It is therefore important that all the information on your bankruptcy be as accurate as possible.
WILL I HAVE TO GO TO COURT?
In most cases, no. You will have to attend a “341 Hearing” otherwise known as a meeting of creditors, which typically occurs 30-45 days after filing. However, that meeting is held in an office building, not in the courthouse. At that meeting, the court appointed bankruptcy trustee will ask you questions concerning the content of paperwork you filed with the bankruptcy court. These questions will focus on the property you listed in the paperwork and your current financial outlook—such as your income and expenses. While creditors rarely appear at these meetings, they do show up occasionally and are allowed to ask questions as well. Both the bankruptcy trustee and any attending creditors will seek to uncover any non-disclosed property, so it is important that all assets and property be properly disclosed in your bankruptcy petition.
EXEMPT V. NONEXEMPT PROPERTY
In Chapter 7 bankruptcy proceedings, the bankruptcy trustee and your creditors want you to pay off as much debt as possible with whatever assets you have before discharging any debt. However, the law does not give them unbridled discretion to sell whatever property you own; some of your property is protected, or “exempt,” from the bankruptcy process. The remaining “nonexempt” property is available for sale by the bankruptcy trustee, however, in the vast majority of cases, all property is exempt.
Each state has its own definition on what “exempt” property covers. In Virginia, some of the most commonly listed exempt property is as follows:
- Cemeteries and burial funds: the entire value of the burial lot and up to $5,000 of a funeral contract is exempt;
- Claims and proceeds from personal injury and wrongful death actions;
- Funds in a health savings account;
- Homestead exemption: up to $5,000 of equity in a home or really any other property (cash etc.), plus an additional $500 per dependent. If you are aged 65 or above you can exempt up to $10,000 and surviving spouses or minors can increase this exemption to $20,000;
- Certain insurance benefits;
- Up to $6,000 in equity for a motor vehicle;
- Personal property: up to $5,000 in home furnishings; $5,000 for family portraits and heirlooms; $3,000 for firearms $1,000 for clothing; pets so long as not raised for sale or profit, family bible; and wedding and engagement rings;
- Spousal and child support;
- Up to $10,000 worth of “tools of the trade” which you use to make money;
- Unemployment benefits;
- Up to 75% of weekly wages, or 40 times the federal minimum hourly wage per week (whichever is greater);
- Workers compensation benefits
After reviewing these distinctions, it is important to consider the risk you take opting for a Chapter 7 bankruptcy rather than a Chapter 13. If you believe you have a substantial amount of nonexempt assets, and don't wish to part with them, a Chapter 7 bankruptcy may not be the best path for you. If, however, you do not have a large amount of nonexempt assets for the bankruptcy trustee to seize and sell, Chapter 7 may be better as it discharges the debt, rather than puts you on a payment plan.
WHAT PROPERTY WILL I HAVE TO GIVE UP TO MY CREDITORS?
Chapter 7 bankruptcy is sometimes referred to as “liquidation” bankruptcy because a court appointed bankruptcy trustee is entitled to seize and sell your nonexempt property. The trustee then uses the proceeds from these sales to pay off as much of your debt as possible before discharging the rest. While you won't have to necessarily give up any property to the creditors directly, the bankruptcy trustee will order you to turn over any nonexempt property you own to him. However, in the vast majority of cases, no assets must be turned over at all. This is because Virginia has an extensive list of property which is deemed “exempt” and therefore beyond the reach of the bankruptcy trustee, including a broad catch-all exemption that protects cash and a certain amount of other non-exempt assets.
Even in the case of nonexempt property that could be taken, it is not in the bankruptcy trustee's best interest to do so. This is because the value the nonexempt property has is only as much as someone is willing to purchase it for, minus the costs to actually sell the item. Thus, if the property isn't too valuable, the trustee will probably just “abandon” it back to you and let you keep it, or perhaps will offer to “sell” it back to you at a low price.
Understanding the amount of nonexempt property you own, in addition to its value, is crucial in determining whether it is more cost effective for you to file a Chapter 7 bankruptcy or a Chapter 13.
WHAT SHOULD I DO BEFORE FILING?
Before filing for Chapter 7 bankruptcy, it is required that within 180 days prior to filing, you complete a credit counseling session or briefing with an approved nonprofit credit counseling agency. This counseling session is to ensure that you understand the current opportunities you have to budget and avoid bankruptcy, if possible. Once you have completed the session—either online or via telephone—you will receive a certificate confirming that you completed this counseling session.
Furthermore, you'll need a substantial amount of information to include in the initial bankruptcy filing. Therefore, you will also have to gather all necessary financial documents to assist in filing the initial paperwork, such as: pay stubs for the last six months, income tax returns for the last several years (both federal and state), any bills and debts you owe, and a breakdown of all of your assets with corresponding valuations.
MAY I KEEP MY HOME IF I FILE FOR BANKRUPTCY?
Very often yes, you will be able to retain your home during bankruptcy. While this is not guaranteed, we can determine whether your home is at risk before filing your case. The most important question is whether the amount of debt secured by the home is in excess of the home itself, meaning you do not have substantial equity in the home. If you do not have substantial equity in the home, you'll likely be able to keep it through a chapter 7 bankruptcy.
Additionally, if you are married, you have an even higher chance of keeping your home in Virginia. Virginia is one of a number of states which utilizes the “tenancy by the entirety” method of homeownership. If you and your spouse purchased your home together after your marriage, in the eyes of the law, the home is technically owned by your marriage, than you or your spouse individually. Thus, the home is beyond the reach of the bankruptcy trustee or any creditor because the home is held jointly. However, if you and your spouse file for bankruptcy jointly, the home may still be at risk, depending on the amount of equity you have in it.
WILL EMPLOYERS NOT HIRE ME AFTER FILING FOR BANKRUPTCY?
No, you cannot be discriminated against by any employer, whether they are public or private, for filing for Chapter 7 bankruptcy. Moreover, no municipality, state, or federal agency may discriminate against you for that reason when you are applying for a license, permit, student loan, or grant.
WILL MY NAME BE PUBLIC AFTER I FILE FOR BANKRUPTCY?
Yes, because you are filing a case before a United States Bankruptcy Court, it does become a public record. This means that someone could review the court records and see your name.
WILL FILING FOR BANKRUPTCY STOP CREDITORS AND COLLECTION AGENCIES FROM CALLING ME?
Yes. Once you retain our firm you only need to tell the representative(s) from the collection agency or creditor that you have hired a bankruptcy attorney. That will stop the phone calls, but they can still file a lawsuit. Additionally, once you actually file for bankruptcy you receive a the legal protection of the “automatic stay.” This automatic stay requires all of the creditors you list in your bankruptcy filing to cease collection efforts until the bankruptcy proceedings end or the automatic stay is lifted (which is rare). This stops all calls, letters, and further legal action such as garnishing wages. However, the creditors won't know about your filing until they receive the court's notice of the filing, which may take a week or more.
HOW LONG DOES A BANKRUPTCY STAY ON MY CREDIT REPORT?
Bankruptcies show up on your formal credit report and will appear for any lender who is considering extending you credit. However, the bankruptcy doesn't stay there forever. For Chapter 7 bankruptcy filings, the bankruptcy will remain on your credit report for 10 years from the filing date. For Chapter 13 bankruptcies, it will remain on your credit report for 7 years from the filing date. However, in many cases, this is less harmful to your credit than the alternative because bankruptcy is one negative notation, where you would otherwise receive a negative notation for every missed or late payment, and every lawsuit and garnishment.
WHAT HAPPENS TO COSIGNERS ON MY DEBT WHEN I FILE FOR BANKRUPTCY?
One important consideration when filing for bankruptcy is how it will affect your friends and family who have ever signed on to a loan as a cosigner for you. At the close of a Chapter 7 bankruptcy, you may personally be discharged from that debt, but this only affects you individually. Once you receive your discharge, the cosigner may be placed in the primary position on the debt and the cosigner will become liable to pay off the remaining outstanding debt. This is also an important consideration when you are deciding whether to sign on as a cosigner because the reverse may occur if your friend or family member goes bankrupt. If they do you may be left to foot the bill for any loan you have cosigned.
SINCE I KNOW I'M GOING TO FILE FOR BANKRUPTCY, CAN I MAX-OUT THE REST OF MY OPEN LINES OF CREDIT?
No, do not take this course of action. If you still have one or more credit cards with available credit and you plan to file for bankruptcy, do not make any further purchases on those cards. Unless the credit card has a zero balance when you file for bankruptcy, the credit card company will immediately become a creditor when you file. As such, the credit card company may likely file an objection to your bankruptcy and the court will likely hold you liable for those charges you made immediately just before the filing date.
CAN I DISCHARGE MY STUDENT LOANS IN BANKRUPTCY?
Although student loans can theoretically be discharged in bankruptcy, it is highly unlikely that you can. Student loans are a peculiar type of debt which is incredibly difficult to discharge in a Chapter 7 bankruptcy. The only way that the bankruptcy court will allow your student loans to be discharged is if you can show “undue hardship.” While the words themselves do not sound particularly harsh, this is an incredibly stringent legal standard that few courts ever recognize as being met. Undue hardship does not simply mean that you are struggling to get by, or that the payments are a difficult to meet each month. Instead, bankruptcy courts have interpreted the standard to mean that you cannot discharge the debt unless you cannot maintain even a minimal standard of living for yourself. Additionally, you must show that there are further complicated circumstances which prove that your current sub-minimal standard of living will persist throughout much of the loan's repayment period.
While it's widely known that student loans are notoriously difficult to get discharged—and therefore many attorneys don't suggest trying—the numbers are still quite staggering. According to a 2011 study published in the Villanova University School of Law Bankruptcy Law Journal, only .04% of bankruptcies by student loan borrowers resulted in a partial or full discharge of the loan. So, while the answer to the question is technically “yes,” the practical answer is no.
WHERE SHOULD I FILE MY BANKRUPTCY CASE?
Typically, you will file in the United States Bankruptcy Court closest to where you have lived for the last six months prior to filing. If you haven't lived in one place over the last six months the court closest to the place where you've lived for the greater portion of the prior six months is the correct jurisdiction. There are four division of the Eastern District of Virginia Bankruptcy Court: Alexandria, Richmond, Newport News, and Norfolk.
DO I HAVE TO LIST ALL OF MY PROPERTY IN MY BANKRUPTCY FILING?
Yes, you must list all of your property and all of your creditors in your bankruptcy filing; there are no exceptions to this rule. In fact, failing to report all of your property and creditors could potentially be deemed an attempt to defraud the bankruptcy court. While mistakes can occur, and you can amend your filings, any intentional effort to withhold information or destroy your financial records prior to, or during, the bankruptcy proceedings is one of the worst decisions you can make during this process.
DIFFERENCES BETWEEN CH. 7 AND CH. 13 BANKRUPTCY
You may be wondering, what is the difference between a Chapter 7 and Chapter 13 bankruptcy? While they both have the name “bankruptcy,” they are very different. Chapter 7 bankruptcies are generally reserved for persons with lower annual income. The end goal of a Chapter 7 bankruptcy is to liquidate as much of the debtor's non-exempt property as possible, pay off the outstanding debt, and then discharge whatever debt remains, unpaid. However, as a practical matter, most property is exempt from the liquidation, and most Chapter 7 cases do not involve the sale of any assets. There are some debts that cannot be discharged, such as child support, most tax debts, student loans, or debts incurred through fraud. Once the court-appointed bankruptcy trustee determines if there is any non-exempt property to sell, and sells it to pay some debts, any remaining dischargeable debt will be legally discharged by the court.
In contrast, a Chapter 13 bankruptcy is reserved for higher income individuals where the debt is re-organized, and the debtor must pay back their debts (or a portion of them) over time. Typically, when one files for bankruptcy under Chapter 13, the filing debtor proposes a payment plan to pay off some or all of the outstanding debts over a term of 3-5 years. If approved, the debtor begins making payments to the bankruptcy trustee who then distributes the payments to the various creditors for the life of the payment plan. After that period, if the debtor sticks to the terms of the monthly payment plan, any the remaining dischargeable debt will be released. This is the preferred method if you have a large amount of nonexempt property you don't want to lose to a bankruptcy trustee in a Chapter 7 bankruptcy, or if you have more equity in a piece of property than you can protect with certain bankruptcy exemptions under Chapter 7.
It's important to know both types of bankruptcy because sometimes you may seek to file under Chapter 7, only for the trustee to have it converted into a Chapter 13, thus requiring you to continue to repay many of your outstanding debts. For example, if you file for Chapter 7 bankruptcy but are deemed to have too high an income or fail to meet the “means test” your bankruptcy may be unilaterally converted to a Chapter 13 by the bankruptcy court. Furthermore, you may first think it best to file for Chapter 7 bankruptcy only to realize that you have substantially more nonexempt assets than you first anticipated. Not wanting to lose these items you may yourself choose to convert to a Chapter 13 to save your belongings.