(BA, MBA, JD)
Attorney at Law
Lieutenant Robinson, U.S. Navy Flight Instructor, 1992
All Rights Reserved. Copyright 1999 by Ronald Robinson.
The Bankruptcy Process
by the Virginia State Bar
The Bankruptcy Law Section of the Virginia State Bar has prepared
this pamphlet as a public service to answer certain basic questions
about the bankruptcy process. A pamphlet of this type cannot address or
anticipate every issue that may arise when considering a bankruptcy
filing; however, this information will provide an introduction to
fundamental concepts that can be discussed more extensively with an
1. What Is It—And How Does It Work?
Bankruptcy is a legal process governed by federal rules and
procedures contained in the Bankruptcy Code and the Bankruptcy Rules.
The primary purpose of bankruptcy law is to provide a debtor with a
“fresh start" through which some debts can be paid, restructured or
discharged. Bankruptcy also provides a way for creditors to be treated
fairly and equitably. The debtor is the person who owes money, goods or
services, and the creditor is the person to whom the money, goods or
services is owed.
2. Who May File for Bankruptcy?
Almost any person who has a residence, business or property in the
United States is eligible to be a debtor under the Bankruptcy Code.
Individuals, solo proprietorships, partnerships, corporations and family
farmers are eligible for bankruptcy relief. In rare cases, creditors may
force someone into bankruptcy by filing an “involuntary petition"
against a debtor.
3. Do I Have to Go to Court?
In the early stage of a bankruptcy case, you must attend a meeting of
creditors (also called a Section 341 meeting) at which you must provide
information and answer questions under oath from the bankruptcy trustee,
the United States Trustee or your creditors. The bankruptcy judge does
not participate in such meetings. Although the meetings are not formal
court hearings, testimony is taken under oath and you are subject to
criminal penalties for perjury.
4. How Long Will It Take?
In a Chapter 7 case, you will typically receive an order discharging
most of your debts within 3-4 months. Chapter 13 usually requires
payments over a 3-year to 5-year period before you will receive an order
discharging your debts.
5. What Are the Different Kinds of Bankruptcy Cases?
There are several different types of bankruptcy cases:
In a Chapter 7 liquidation case, sometimes referred to as “straight
bankruptcy,��? a trustee is appointed to collect and liquidate the
debtor’s nonexempt assets (see below for an explanation of “nonexempt
assets") and to pay the proceeds to creditors in the order set forth in
the Bankruptcy Code. Most Chapter 7 cases are “no asset" cases. This
means that the debtor does not have sufficient nonexempt assets or
sufficient income to make any distribution to unsecured creditors.
Unsecured creditors are those who do not have a valid lien on
6. How Does Bankruptcy Help?
Bankruptcy can help a debtor in a number of ways. The filing of a
bankruptcy case automatically stops most collection actions against you,
such as garnishments, foreclosures and lawsuits, at least temporarily.
This allows you to have a “breathing spell" during which you have the
opportunity to put your finances in order and chart your financial
future. While the bankruptcy case is pending, creditors cannot pursue
most actions against debtors without bankruptcy court approval.
7. What Property Can a Debtor Keep?
The Bankruptcy Code allows the individual debtor to retain certain property as “exempt". Exempt property is free of the claims of creditors and cannot be taken by the trustee to be liquidated. Virginia law determines the types and amount of exempt property. The debtor is entitled to a “homestead exemption" which allows each debtor to claim a one-time exemption of up to $5,000 (plus $500 for each dependent) in any kind of property. The debtor is also entitled to a specific exemption, sometimes referred to as the “poor debtor’s exemption", in different types of property (for example, clothes up to $1,000; household furnishings up to $5,000; tools of a person’s trade or business up to $10,000). Other types of property (such as proceeds from a personal injury settlement or award and certain contributions to qualified pension plans or IRAs) may also be exempt under Virginia law. You must claim the property as exempt in your bankruptcy schedules and to claim the homestead exemption, you or your lawyer must also properly prepare and file a “homestead deed" within a certain time limit. Creditors or the bankruptcy trustee can challenge the type or amount of the exemptions claimed by the debtor.
A debtor may “reaffirm" his or her obligations to a secured creditor
who holds a lien on a house, car or other significant item. A
reaffirmation agreement must be in writing, signed by both the debtor
and the debtor’s attorney, and must be filed with the bankruptcy court.
A debtor may rescind a reaffirmation agreement within 60 days after
signing the agreement. A debtor may also free or “redeem" property from
a lien by paying the secured creditor the fair market value of the
property in a lump sum. The bankruptcy judge can set the value if the
parties do not agree.
8. What Kinds of Claims Survive Bankruptcy?
The liens of secured creditors survive bankruptcy unless the
underlying debt is paid off or the lien is removed during the bankruptcy
case. This means the creditor can pursue the collateral (i.e., repossess
the vehicle) but the creditor cannot collect against the debtor unless
the debt has been reaffirmed. Debts that are reaffirmed during the
bankruptcy case will survive.
9. What Effect Does Bankruptcy Have on Credit Ratings or Employment?
A bankruptcy filing can be reflected on your credit record for up to
ten years, regardless of the type or outcome of the bankruptcy case. A
bankruptcy filing may also affect your ability to borrow money, although
the effects of such a filing vary significantly depending on the
creditor and the nature of the debt. For example, a person’s ability to
obtain refinancing on a home mortgage may not be adversely affected by a
prior bankruptcy filing as long as payments on similar obligations have
remained current. The ability to obtain postbankruptcy credit or to
incur additional debt after a bankruptcy filing may be limited in a
Chapter 12 or 13 case because all of the debtor’s disposable income must
already be committed to repayment of prior creditors’ claims under a
plan. Otherwise, there are no legal prohibitions or restrictions against
borrowing money, owning property or transacting business after a
bankruptcy filing other than the restrictions set forth in the
Bankruptcy Code or by local bankruptcy courts.
10. How Much Does a Bankruptcy Case Cost?
Each bankruptcy case requires a filing fee. Typically, the filing fee
is paid in full with the filing, although an individual debtor may apply
to pay the filing fee in installments. There may be other costs and
administrative fees associated with a bankruptcy filing. The legal fees
and costs charged by attorneys to handle a bankruptcy case vary
significantly depending on the type and complexity of the case. The
bankruptcy court has authority to approve or disapprove fees paid to a
11. What Are the Alternatives to Bankruptcy?
Bankruptcy is typically thought of as a “last resort��? for
individuals and entities that have serious financial problems. Prior to
a bankruptcy filing, it is common for financially troubled individuals
or entities to consider alternatives such as consumer credit counseling
or an out-of-court workout or debt restructuring in which obligations to
some or all creditors are modified to provide the individual or entity
with some financial relief. Virginia law also provides for an
“assignment for the benefit of creditors��? under which another
individual handles the disposition of assets and proceeds for the
benefit of creditors.
Updated & revised May 2007
Prepared by the
Click to see the Website Use Terms. Virginia Divorce & Family Law, including Virginia Marital Settlement Agreement, Virginia Divorce Mediation, Virginia Separation Agreement, Virginia Property Settlement Agreement, Virginia Child Custody, Virginia Child Visitation, Virginia Child Support, Virginia Spousal Support (Virginia Alimony), and Virginia Equitable Distribution of Assets and Debts. Manassas Divorce Mediation. Virginia Military Divorce. Manassas Divorce Lawyer. Prince William Divorce Lawyer. Stafford Divorce Lawyer. Fredericksburg Divorce Lawyer. Fairfax Divorce Lawyer. Manassas Divorce. Leesburg Divorce Lawyer. Loudoun Divorce Lawyer.