Bankruptcy: Frequently Asked Questions
If you're considering filing for bankruptcy, you're bound to have a lot of questions on your mind. You probably want to know about the benefits of bankruptcy, the downsides of filing, the differences between Chapter 7 and Chapter 13, and how the filing process works. If so, you've come to the right place. Below, you'll find answers to the most common bankruptcy-related questions.
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).
Property that may be non exempt in your state and eligible to be sold under Chapter 7 bankruptcy:
- Collections of coins, stamps or other valuable items.
- Bank accounts, certificates of deposit, cash, stocks, bonds and other investments.
- A second truck or car.
- Vacation or second homes, homes that are not your primary residence.
- Family heirlooms.
- Musical instruments that are high in value (pianos, expensive string or wind instruments), unless the instrument relates to your job as a professional musician.
Property that may be exempt in your state and not eligible to be sold under Chapter 7 bankruptcy:
- Part of the equity in your home.
- Automobiles that do not exceed a certain value.
- Certain household appliances and furnishings.
- Jewelry that is below a certain value
- Reasonably necessary clothing and household goods.
- Retirement money and pensions.
- Social security, welfare, food stamps, unemployment benefits.
- Tools or instruments used in your trade or profession, up to a certain value.
- Damages that have been awarded from a personal injury lawsuit or settlement.
- A portion of earned, but unpaid wages.
Can I choose either Chapter 7 bankruptcy or Chapter 13 bankruptcy? Which one is best for me?
The answer to the first questions is dependent on whether you meet the eligibility requirements for both types of bankruptcy. If you do meet the requirements for both Chapter 7 and Chapter 13 bankruptcy, then you can choose the one that is best for your particular situation. However, there are times when you may not have a choice in the matter.
As a bankruptcy overview for Chapter 7, if you have an income that is higher than the median income for a family of your size, then you may not be able to file for Chapter 7 bankruptcy if your disposable income (taking out certain, allowed expenses and required debt payments) would allow you to pay back a portion of your unsecured debt within a 5 year period.
Likewise, Chapter 13 bankruptcy is only available to debtors that have less than $1,010,650 in secured debts, and less than $336,900 in unsecured debts (debts that are not secured by property or other collateral). If you do not meet these requirements, you cannot file for Chapter 13 bankruptcy. Note, these amounts are currently accurate but they may change over time as the laws are amended. You may want to consult with attorney to verify these dollar amounts.
In most situations, people will opt to file for Chapter 7 bankruptcy. They do this because if they meet certain eligibility requirements, they may not have to pay back any portion of their debts (except with the proceeds from the liquidation). In addition, Chapter 7 can also be faster than Chapter 13, which normally runs between three and five years and is more complicated to set up.
On the other hand, Chapter 13 may be a better option for you if you are just behind on some of your debt payments. For example, if you have fallen behind on your automobile payments, but you do not want your car to be repossessed, you may consider Chapter 13 bankruptcy. This would allow you to include the missed payments in your repayment plan, which would allow you to pay them off over the course of three to five years. If you filed for Chapter 7, your creditor may want to repossess the car and sell if off to repay the debt.