BANKRUPTCY--SOME QUESTIONS AND ANSWERS

1. WHAT BANKRUPTCY OPTIONS ARE AVAILABLE TO ME?

Individuals and families may file under one of four Chapters of the Bankruptcy Code. Two of themare rarely used:

1. Chapter 11 (Reorganization)--This is generally used by individuals who own ongoing businesses as sole proprietorships. Under this chapter, the debtor continues to operate the business and restructure its debts, if possible, under the eye of a committee made up of the major creditors.
2. Chapter 12 (Adjustment of Debts--Family Farms)--similar to Chapter 13 (see below), available only to small farmers.

Most individuals and families choose one of the following:

1. Chapter 7 (Liquidation)--Under this chapter, debtors turn over "non-exempt" property to a "Trustee", and "discharge" all other debts (see questions 2, 3, and 4, below).
2. Chapter 13 (Adjustment of Debts)--Under this chapter, debtors set up a plan to pay off their creditors over a three to five year period. It is sometimes possible to discharge certain debts and pay others under such a plan.

THE REMAINING QUESTIONS REFER TO CHAPTER 7 FILINGS

2. IF I CHOOSE TO FILE UNDER CHAPTER 7, WHAT PROPERTY AM I ENTITLED TO KEEP?

Most individuals are entitled to claim all of their property as exempt. In Texas, you may choose to usethe Federal or State scheme of exemptions. Usually, the choice will be dictated by the amount of equity in yourhome, if you own one. Texas law provides for an unlimited exemption for a homestead, with limits only onthe amount of acreage. Otherwise, the amount of property you may claim as exempt is about the same, butthere are differences in the type of property you can claim. The Federal scheme allows for what is commonlyreferred to as a "wild card" category, under which property not exempt under the State scheme (such as cash,stocks, non-homestead real property), may be claimed as exempt.

All property which may not be claimed as exempt is "non-exempt", and the trustee may require youto surrender it. However, the trustee only receives a small percentage from the sale of non-exempt property,and thus will often choose not to take certain property, such as property of low value, property which willrequire substantial maintenance or storage, or property which is not readily saleable.

3. WHY IS A TRUSTEE APPOINTED, AND WHAT DOES (S)HE DO?

A trustee is appointed to ensure fair treatment of all creditors. (S)he collects all non-exempt property,sells it, and distributes the proceeds to all unsecured creditors who timely make claims. (S)he presides at the"Meeting of Creditors", reviews the file thoroughly, and may make inquiry about whether or not certainproperty is indeed exempt.

4. WHAT IS THE EFFECT OF A BANKRUPTCY DISCHARGE?

Once a discharge is granted, all creditors who were properly listed on the schedules, and whose claimsare dischargeable, are permanently enjoined from attempting to collect their debt. Secured creditors may stillforeclose on their collateral.

5. ARE ALL DEBTS DISCHARGEABLE?
No. Among those debts which may not be discharged are:

1. Child Support and Alimony payments
2. Damages caused when driving while intoxicated
3. Tax Debts (with some rare exceptions)
4. Guaranteed Student Loans (except very old ones)

However, the act of filing will give you some "breathing room", since it stays all creditors from takingaction against you until discharge is granted or until they take some independent action.

Some creditors may choose to object to discharge if you borrowed money from them at a time whenyou knew you could not repay it or knew that a bankruptcy filing was imminent

6. MAY I CHOOSE TO PAY SOME CREDITORS AND NOT OTHERS?

It depends. After filing, you are free to pay anyone you choose. For example, if you owe your family doctor money and want to continue to use his or her services, it may be necessary to pay this debt. Before filing, however, there are restrictions on your ability to give preferential treatment to some creditors, especiallyto family members and business associates. If you simply fail to list a creditor when filing, that debt will not be discharged.

My advice is to list all creditors, even if you are not sure. I also suggest that you list recent business associates, recent ex-spouses, and any contingent creditors, in the event they may have claims. You are then free to discuss repayment with any creditor(s) you choose. Remember, however, that no one is ever obliged to extend you credit unless you have a firm agreement with them, preferably in writing. Thus, a creditor may accept your repayment, and then decline to extend further credit to you.

7. WHAT DO I DO ABOUT SECURED DEBTS, SUCH AS THE LOANS FOR MY HOUSE AND CAR?
Some creditors, including your mortgage holder and the lienholder on your car, are "secured creditors",who hold a "lien" on the property purchased through them (the �collateral� for the loan). While they may notattempt to collect any money from you, they may still foreclose on the collateral. Therefore, you must either:

1. Return the collateral;
2. Continue to pay the debt; or
3. "Redeem" the collateral (pay the creditor its fair market value)

Department Stores are secured creditors, but seldom want the return of any collateral. They will oftenrequest that you return or redeem large items which may be resold (such as appliances, riding mowers, jewelry,and electronic equipment). If you have pledged items you already owned to a finance company, you may beable to avoid their lien, if the items you pledged were things such as household goods and furnishings.

8. HOW WILL THIS AFFECT MY CREDIT?

A Chapter 7 filing may remain on your credit record for as long as ten years, and will obviously havea detrimental impact on your credit. However, if you already have late pays, foreclosures, etc., on your record,your credit is already damaged. Most people are able to begin rebuilding credit through continuing to pay ontheir house, car, etc

You may also rebuild credit by obtaining a secured MasterCard or Visa. Many banks advertise thisservice. You may be able to purchase a house or car by paying a larger down payment or accepting a largerinterest rate. You may also lease a car rather than purchase it, and rebuild credit by making the lease paymentsin a timely manner.