What is Bankruptcy?
To be straightforward, bankruptcy is a legal way to avoid paying people what you owe them. Bankruptcy has biblical antecedents; however, look at the “Jubilee Year” and the forgiveness of debt in Leviticus 25. Since there is no Jubilee Year today, in many situations bankruptcy is the only way that you can keep your home from foreclosure, your car from repossession, your possessions from auction and creditors from making your life miserable.
You are required by law to list all of your obligations. You cannot pick and choose who to “file bankruptcy on.” The law does allow you to voluntarily payback a discharged debt AFTER you complete your bankruptcy. If you fail to list a creditor or they do not receive notice of your bankruptcy, their claim may survive your bankruptcy.
When a person is discharged in bankruptcy, he or she is relieved from liability for most debts incurred before the bankruptcy was filed and protected from future collection of those debts. The purpose of bankruptcy is to give you a “fresh start,” and the bankruptcy code is interpreted by the Courts to give effect to these words.
What are the different types of Bankruptcy?
There are two main types of consumer bankruptcy: Chapter 7 and Chapter 13. (The other two chapters, Chapter 11 and Chapter 12, apply to corporations and "form" reorganizations who don’t qualify for a Chapter 13, and to family farmers.)
Chapter 7 is what most people think of when they think of bankruptcy. All of the debtor’s assets – with the exception of “exempt” items or assets with no equity – can be sold and proceeds are distributed among the creditors. A typical Chapter 7 bankruptcy will last about four or five months from filing to entry of an order of discharge.
Chapter 13 provides a way for you to pay back your creditors, in whole or in part, over a period of three to five years. You must have less than $394,725 in unsecured debt (such as credit cards and doctor's bills), i.e, liquidated debt. As to secured claims, you may not have more than $1,184,200 in noncontingent, liquidated, secured debts (such as home loans and car loans) in order to qualify to file a Chapter 13 bankruptcy. Due to the Court-approved payment plan, a Chapter 13 bankruptcy will last between three and five years, although attorney involvement usually ends after about three months. In many cases, no interest will be paid on the amounts being repaid through the Chapter 13 Plan, you pay your unsecured creditors only pennies on the dollar, and you keep all of your assets. Whether or not your plan length would be required to last 60 months will depend on the Means Test Formula set forth in Form 22C in each Chapter 13 case. In order to determine whether or not your case is statutorily mandated to be a 60 month plan pivots on your income for the 6 months prior to you filing the chapter 13 bankruptcy.
What's Involved in Filing for Bankruptcy?
A bankruptcy is started by filing a Petition with the U.S. Bankruptcy Court. The requirements for the petitions vary depending on the Chapter under which the bankruptcy is filed, but involve detailed forms and schedules which are not available at the Bankruptcy Court. The filing package, including copies, averages about 50 pages for a typical Chapter 7 and 75 pages for a typical Chapter 13. Filing fees are $335 for a Chapter 7 and $310 for a Chapter 13 in addition to the reasonable legal fees you would be charged.
Will I Lose Everything If I File?
A person who files for bankruptcy may exempt certain items from the bankruptcy. In most cases, this lets you keep your home, your car, your furniture, your household items, your retirement and most, if not all, of what you have. Different states have different allowances for exemptions. You also can keep assets that have no equity, such as a car that's worth less than is owed on it, or a house where the mortgage is higher than the property value. Even if there is a small amount of equity, you can normally keep the asset.
Can All My Debts Be Wiped Out?
There are certain debts which cannot be discharged. Federal and state taxes incurred less than three years before the date of filing (although you may get more time to pay them back), student loans (except where you can show "undue hardship"), child support and alimony are the big ones.
What Happens Once I File?
Once the Petition is filed, the Court issues an Automatic Stay. This stops all legal proceedings (Civil/Collection) against you. Foreclosures, repossessions, and garnishments are halted, creditors cannot call or write you, and lawsuits against you can not be filed or pursued if they are pending.
Are Different Creditors Treated Differently?
Creditors are broken down into three main classes: priority, secured and unsecured. Priority creditors are those creditors which are given special (and priority) treatment under the law for collection of the money owed them. They are paid first. Some examples of priority creditors are the IRS and people owed child support or alimony. Secured Creditors have next call. These are creditors who have a security interest or lien in or on your property, such as a bank holding a mortgage on your home or a finance company holding a lien on your car. Most of the time, secured creditors will be paid. Everyone else is an Unsecured Creditor. Credit cards, loans from banks and individuals, doctor's bills, some taxes that are old enough, and general claims for money are all unsecured debt. In most cases, unsecured creditors get nothing or only a portion of what they are owed. You may also terminate Executory Contracts, such as leases for an apartment, car or equipment, in a bankruptcy.
How Do I Keep My House and Car?
If your payments are current, you have to keep making them or if you are upside down in your auto loan, then it may be possible to cram down the value to the fair market value (FMV) and pay the FMV with usually a lesser than contract interest rate on the loan. For example, 8% vs. 24% which your auto loan may be financed at. If you're behind on your auto loan and/or house loan and the creditor is seeking to foreclose on your house or repossess your car, you can pay the arrearage through a Chapter 13 Plan and re-start the payments after you file when it comes to your home loan and that may be the best option for you on your vehicle loan. Again, it is imperative for you to consult an attorney who practices in the bankruptcy law field and learn what your legal options are. If your vehicle was purchased less than 910 days BEFORE the date you file your Chapter 13 bankruptcy, then you will be required to honor the terms of your loan agreement…subject to possible negotiations with your creditor.