WHAT IS BANKRUPTCY?
Bankruptcy is a legal proceeding in which a person who cannot pay his or her bills can move towards a better financial future with a clean slate. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are overseen by the United States Trustee's office. In most cases, filing bankruptcy immediately stops your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law.
WHAT CAN FILING BANKRUPTCY DO?
Bankruptcy may make it possible for you to:
- Eliminate the legal duty to pay most or all of your debts. This is called a "discharge" of debts. It is designed to give you a fresh financial start.
- Stop foreclosures, repossessions, or seizures of the other property so you can catch up on missed payments. In most cases, you will still need to choose between continuing to make payments and surrendering the property. Bankruptcy won't eliminate a lease, mortgage or car loan and let you keep the property at the same time.
- Stop wage garnishments, debt collection harassment, and similar creditor actions to collect a debt.
- Restore or prevent termination of utility service. Be aware that a reinstatement deposit may be required upon the filing of your bankruptcy.
- Allow you to challenge creditors who have committed fraud or who are otherwise trying to collect more money than you really owe.
WHAT FILING BANKRUPTCY CAN'T DO
Bankruptcy can't cure every financial problem, nor is it the right step for everyone. In bankruptcy, it is usually not possible to:
- Eliminate certain obligations to "secured" creditors. A "secured" creditor is a creditor that can take something (called "collateral") if the debt is not paid as agreed, such as car loans and home mortgages. You can make payments over time in the bankruptcy process, and bankruptcy can eliminate your obligation to pay more money if your property has been taken, but you generally cannot keep the collateral unless you keep making payments on the debt. You typically cannot keep making payments without a signed agreement with the creditor.
- Discharge certain debts singled out by the bankruptcy law for special treatment, such as child support, alimony, certain other debts related to divorce, most student loans, court restitution orders, criminal fines, and some taxes.
- Protect co-signers on your debts. If a relative or friend has co-signed on a particular debt and you discharge the debt in bankruptcy, the co-signer may still have to repay all or part of the debt.
- Discharge debts that arise after bankruptcy has been filed.
WHAT KINDS OF BANKRUPTCY CASES ARE THERE?
There are four common types of bankruptcy cases provided under the law:
- Chapter 7 is know as "liquidation". It may require a debtor to give up certain property which exceeds certain limits called "exemptions," so the property can be sold to pay creditors.
- Chapter 11, known as "reorganization," is used by businesses and a few individual debtors whose debts are too large for a Chapter 13.
- Chapter 12 is reserved for family farmers or fishermen.
- Chapter 13 is called "debt adjustment". It requires a debtor to make monthly payments to the Bankruptcy Court to pay the bank at least a portion of their debt.
**Most people filing bankruptcy will file under either Chapter 7 or Chapter 13. Either type of case may be filed individually or by a married couple filing jointly. You are still able to file an individual bankruptcy even if you are married.
In a bankruptcy case under Chapter 7, 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 you giving up property, with the exception of "exempt" property which the law allows you to keep. In many cases, much of your personal property will be exempt. However, property which is not exempt is sold by the bankruptcy Trustee so the money can be distributed to creditors.
If you want to keep property like a home or a car and you are behind on the payments, a Chapter 7 case may not be the right choice for you. Chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan companies to take your property to cover your debt, unless you agree to continue making payments.
CLICK HERE for more detailed information on Chapter 7 bankruptcy.
In a Chapter 13 case, you will file what's called a "plan" to inform the Court and your creditors how you plan to handle each debt during the bankruptcy. Chapter 13 cases can last anywhere from 3 -5 years, depending on your income level. The most important thing about a Chapter 13 case is that it will allow you to keep valuable property, such as your home and vehicle, which might otherwise be lost. You must be able to keep current on the required payments to the Court. You must also stay current on any secured debt payments, including your mortgage and your vehicle, while you are in bankruptcy.
You should consider Chapter 13 if you:
- Have debt that is non-dischargeable in a Chapter 7 bankruptcy and would like to pay it off with little to no interest.
- Have a pending foreclosure sale that you need to beat to protect your home and bring current any arrearage on the mortgage.
- Are behind on debt payments, but can catch up if given some time;
- Have valuable property which cannot be exempt, but you can afford to pay creditors from your income over a period of time.
**When considering Chapter 13, it is important to remember that you must have enough income to pay for your regular monthly expenses plus the required Chapter 13 Plan payments.
CLICK HERE for more detailed information about Chapter 13 bankruptcy.