What exactly is bankruptcy?

Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts or repay them under the protection of the bankruptcy court.

Aren’t there different kinds of bankruptcy?

Yes. Bankruptcies can generally be described as “liquidation” (Chapter7) or “reorganization” (Chapter 13).

Liquidation bankruptcy is called Chapter 7. Under Chapter 7 bankruptcy, a consumer asks the bankruptcy court to wipe out (discharge) the debts owed. Certain debts cannot be discharged.

There are several types of reorganization bankruptcy (Chapter 13). Consumers with secured debts under $871,550 and unsecured debts under $269,250 can file for Chapter 13. Family farmers can file for Chapter 12. In any reorganization bankruptcy, a plan is filed with the bankruptcy court proposing how you will repay your creditors. Some debts must be repaid in full; others will be paid based on a percentage of the total debt owed; others may not be paid at all.

Will filing for bankruptcy stop harassing phone calls from bill collectors?

In either type of bankruptcy (Chapter 7 or Chapter 13), upon the filing of the case the court issues an “automatic stay”. The automatic stay prohibits virtually all creditors from taking any action to collect the debts you owe them unless the bankruptcy court lifts the stay and lets the creditor proceed with collections.

What generally happens in consumer bankruptcy cases?

In a Chapter 7 case, you file several forms with the bankruptcy court listing income and expenses, assets, debts and property transactions. There is a filing fee, which may be waived for people who receive public assistance or live below the poverty level. A court-appointed person, known as a trustee, is assigned to oversee the case.

Approximately one month after filing, you attend a “meeting of creditors” where the trustee reviews your forms and may ask questions of both you and your attorney. Three to six months later, you receive a notice from the court that “all debts that qualified for discharge were discharged.” This is what as known as a discharge.

Chapter 13 cases are a little different. You file similar forms in addition to a proposed repayment plan, in which you describe how you intend to repay your debts over the next three, or in some cases five years. As in a Chapter 7 a trustee is assigned to oversee the case. You attend the same type of meeting of creditors. If your plan is approved, and you make all the payments called for under your plan, you will usually receive a discharge at the end of your repayment term.

Non dis-chargeable Debts

The are certain debts that are non-dischargeable in both Chapter 7 and Chapter 13 bankruptcy plans. If you file for Chapter 7, these debts will remain owed by you when your case is over. If you file for Chapter 13, these debts may have to be paid during your plan.

Some types of non-dischargeable debts include:

– Debts you forget to list in your bankruptcy papers, unless the creditor learns of your bankruptcy case (It is very important in both Chapter 7 and Chapter 13 cases to make sure and list ALL of your debts.)
– Child support and alimony
– Debts for personal injury or death caused by intoxicated driving
– Most student loans, unless it would be an undue hardship for you to repay
– Fines and penalties imposed for violating the law, such as traffic tickets and criminal restitution, and
– Recent income tax debts and all other tax debts

In addition, the following debts may be declared non-dischargeable by a bankruptcy judge in Chapter 7 if the creditor challenges your request to discharge them.

These debts may be discharged in Chapter 13. You can include them in your plan, and at the end of your case, the balance is wiped out:

– Debts incurred on the basis of fraud, such as lying on a credit application
– Debts from willful or malicious injury to another person or another person’s property
– Debts from embezzlement, larceny or breach of trust, and

What property might I lose if I file for bankruptcy?

Generally, You lose no property in Chapter 13. In Chapter 7, you select property you are eligible to keep from either a list of state exemptions or exemptions provided in the federal Bankruptcy Code.

Will I lose my house or apartment?

One of the biggest worries people have when considering filing for bankruptcy is the possible loss of their home. Though there are a few situations where you may have to give up your home, keep in mind that bankruptcy is not designed to put you out of your home.

Why choose Chapter 13 over Chapter 7 bankruptcy?

Although the overwhelming number of people who have filed for bankruptcy in the past have chosen and can qualify for Chapter 7, there are several reasons why some may select to file Chapter 13:

– You cannot file for Chapter 7 bankruptcy if you received a Chapter 7 discharge within the previous eight years (unless you paid off at least 70% of your unsecured debts in a Chapter 13 bankruptcy. On the other hand, you can file for Chapter 13 bankruptcy at any time.)
– You have valuable nonexempt property.
– You’re behind on your mortgage or car loan. In Chapter 7, you may have to give up the property or pay for it in full during your bankruptcy case. In Chapter 13, you can repay the arrears through your plan, and keep the property by making the payments required under the contract.
– You have debts that cannot be discharged in Chapter 7.
– You have codebtors on personal (nonbusiness) loans. In Chapter 7, the creditors may pursue your codebtors for payment. In Chapter 13, the creditors may not seek payment from your codebtors for the duration of your case.
– You feel a moral obligation to repay your debts, you want to learn money management, or you hope new creditors might be more inclined to grant you credit after a Chapter 13 than they would after a Chapter 7.

Written by: Rebecca Kidd