Bankruptcy Overview Frequently Asked Questions

Here are some of the questions we get asked the most about bankruptcy.

• What is bankruptcy and will I be debt free if I go through a bankruptcy proceeding?
• Is there a difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy? I have property that I want to keep, which bankruptcy option will allow me to do so?
• Can I choose either Chapter 7 bankruptcy or Chapter 13 bankruptcy? Which one is best for me?

What is bankruptcy and will I be debt free if I go through a bankruptcy proceeding?

Perhaps a bankruptcy overview will answer the first part of the question. Bankruptcy is a generalized term for a federal court procedure that helps consumers and businesses get rid of their debts and repay their creditors. If you can prove that you are entitled to it, the bankruptcy court will protect you during your bankruptcy proceeding. In general, bankruptcies can be categorized into two types: "liquidations" and "reorganizations."

Among the different types of bankruptcies, Chapter 7 and Chapter 13 proceedings are the most common. Chapter 7 bankruptcies normally fall in the liquidation category. This means that if you own property, it could be taken and sold in the process of liquidation in order to pay back your debts. Conversely, Chapter 13 bankruptcies generally fall under the reorganization category, meaning that you will probably be able to keep your property, but you must submit and stick to a plan that will allow you to repay some or all of your debts within three to give years.

When you file for bankruptcy, the bankruptcy court will issue a protective order, called an "automatic stay," that will prohibit most creditors from seeking payment from you for your debts. This protective order binds the creditors that are covered by it, and only the court can lift the automatic stay and allow a creditor to collect from you.

There are certain types of debts that cannot be wiped out through a bankruptcy proceeding. For example, while credit card debt, unsecured loans and other debts can be forgiven, things like child support, taxes that are due and alimony payments cannot be wiped out. As well, student loans are not dischargeable through bankruptcy unless it can be shown that paying off the loan would place an undue burden on the debtor (this is very hard to show and is why student loans are rarely discharged through bankruptcy). In addition, if a creditor can show a court why a debt should not be discharged, that debt will also survive a bankruptcy proceeding.

Is there a difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy? I have property that I want to keep, which bankruptcy option will allow me to do so?

Yes, there is a difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy. As mentioned above, a Chapter 7 bankruptcy is classified as a liquidation bankruptcy. You may have guessed that, like a sale at a department store going out of business, your property (except property that is exempt) may be sold by the bankruptcy trustee. In exchange for discharging many of your debts, the proceeds from these sales will be disbursed to some, or all, of your creditors by the trustee.

Unlike a Chapter 7 bankruptcy, a Chapter 13 bankruptcy is classified as reorganization bankruptcy. If you choose to file a Chapter 13 bankruptcy, you will also have to file a repayment plan that shows how you will repay your debts based off of your income. You will have to work with the court to determine how much you will repay. This is based off of your income, your assets, the amount of your debt, and the value of the property you own.

If you choose (and are eligible) to file for Chapter 13 bankruptcy, you will not have to sell off any property in order to satisfy your debts because your repayment plan is based from your income. However, under a Chapter 7 bankruptcy, you will have to choose the property that will be sold. There are certain types of property that are eligible to be sold, and other properties that are considered safe (not eligible to be sold) under state laws. Here is a general breakdown of the types of property that are eligible and not eligible to be sold (check your state's laws for more detailed guidance).