Introduction
I am providing this guide for informational purposes only. Nothing contained on this page should be construed as legal advice, or as a recommendation to file bankruptcy as this is strictly a personal decision.
What is Bankruptcy?
Bankruptcy is a legal proceeding in which a person who cannot pay his or her bills can get a fresh financial start. The right to file for bankruptcy protection is provided by federal law, and all bankruptcy cases are handled in federal court. Filing Bankruptcy immediately stops all of your creditors from seeking to collect debts from you. A successful Chapter 7 bankruptcy removes most or all of your debt.
What can filing bankruptcy accomplish?
Bankruptcy may make it possible for you to:
- Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments.
- Stop some legal actions (if you are being sued.)
- Prevent repossession of a car or other property.
- Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt.
- Wipe out or "discharge" your unsecured debts (credit cards, etc.) It is designed to give you a fresh financial start.
Things Bankruptcy cannot do:
- Eliminate certain rights of "secured" creditors (a car loan, mortgage, etc.) A secured creditor has taken a mortgage or other lien on property as collateral for the loan. You can force secured creditors to take payments over time in the bankruptcy process and bankruptcy can eliminate your obligation to pay any additional money if your property is taken. Nevertheless, you generally cannot keep the collateral unless you continue to pay the debt (this amount can usually be reduced through negotiation with your attorney and the loan agency.)
- Discharge types of debts singled out for special treatment. Child support, alimony, certain divorce debts, some student loans, court restitution orders, criminal fines, and some taxes are included.
- Discharge debts that arise after bankruptcy has been filed.
What different types of bankruptcy should I consider?
Almost everyone filing bankruptcy will want to file under Chapter 7 or Chapter 13. Either type of case may be filed individually or by a married couple filing jointly. Below are short explanations of each.
- Chapter 7 (liquidation or straight bankruptcy). In a chapter 7 case, you file a petition asking the court to discharge your debts. The basic idea in a chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for giving up non-exempt property. In most cases, unless you have an extraordinary asset, all of your property will be exempt!! In the event you have non-exempt property, that property will be sold and the money distributed to your creditors.
- Chapter 13 (Reorganization). In a Chapter 13 case, you file a plan showing how you will pay off some of your past due and current debts over three to five years. The most important thing about a chapter 13 case is that it will allow you to keep valuable property (often your home and your car) which might otherwise be lost. Under the Chapter 13 plan, you make your monthly payment to the Trustee who in turn pays your creditors.
How do I know which chapter to file under?
Approximately 80% of all bankruptcies filed are Chapter 7. You should consider filing a chapter 13 if one or more of the following apply to you. (NOTE: a Chapter 13 bankruptcy is generally considered to be kinder on your credit record then a Chapter 7.)
- You own your home and are in danger of losing it because of money problems.
- You are behind on debt payments but can catch up if given some time.
- You have valuable property which is not exempt, but you can afford to pay creditors from your income over time.
- You owe debts to the government (federal and state income taxes apply) which you would like to pay over three to five years.
You will need to have enough income in chapter 13 to pay for your necessities and to keep up with the required payments as they come due.
What property can I keep?
In a Chapter 7 case, you can keep all property which the law says is "exempt" from the claims of creditors. In general, most property including the equity in your home, household goods, clothes, and your car can be retained. There are limits on how much you can exempt from each type of property however, and these can be discussed during your consultation.
Will bankruptcy affect my credit?
The fact you have filed a bankruptcy can appear on your credit record for up to ten years. However, if you are behind on your bills, your credit may already be bad. In this case, bankruptcy will not make things much worse. A bankruptcy on your credit report may impact your ability to borrow money, may increase the interest you have to pay on a loan, or make it more difficult to rent an apartment or a house. These effects are generally the most severe for the first year after a bankruptcy is filed, and tend to lessen as time goes on.
