What is bankruptcy?

What are the different types of bankruptcy?

Why would I file Chapter 13 instead of Chapter 7?

Who is eligible for a bankruptcy?

How negatively will a bankruptcy affect me?

Will filing for bankruptcy stop harassing phone calls from collectors?

What generally happens in consumer bankruptcy cases?

What debts are not dischargeable?

What property could I lose if I file bankruptcy?

Will I lose my house or apartment?

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What is bankruptcy?

Bankruptcy is a federal court process that helps both businesses and consumers eliminate their debts or repay them under the protection of the court. In 2003, approximately 1.66 million personal bankruptcies were filed, an all-time high. Many of those who file owe as little as $5,000. Harassing calls from collectors, financial pressures, and so-called "non-profit" credit counseling companies are of little help and represent some of the primary reasons for the staggering number of filings.

If passed, recent law proposals will make filing even more difficult. For the last 5 years, major banks and credit card companies have been campaigning hard for these changes, changes that will leave you with fewer alternatives to getting out of debt.

Avoid bankruptcy by reducing your debt. Apply for a free debt counseling consultation from a Personal Debt Consultant.

What are the different types of bankruptcy?

Bankruptcy can be described as a "liquidation" or "reorganization." Most consumers will file a Chapter 7 or Chapter 13.

"Liquidation" bankruptcy is called Chapter 7 and is the most common filing. In a Chapter 7, a consumer or business asks the court to discharge all of the debts they owe. Some debts cannot be discharged. (See Non-dischargeable Debts question.) In exchange for the discharge of debts, the business' assets or consumer's nonexempt property are sold (or "liquidated"). The proceeds are used to pay off the creditors. Individuals filing for Chapter 7 usually have severe debt problems with large credit card and other secured and unsecured debt. They typically do not own a lot of assets, which can be liquidated and therefore do not have as much to lose.

There are several types of "reorganization" bankruptcy: Chapter 11, Chapter 12, and Chapter 13. Consumers with secured debts under $871,550 and unsecured debts under $269,250 can file for Chapter 13. The main difference between Chapter 13 and Chapter 7 is Chapter 13 enables a debtor to retain certain assets that would otherwise be liquidated in Chapter 7. In most cases, you can keep your home and car under either plan (provided your equity does not exceed certain limits). Under Chapter 7, however, you won't be able to keep rental properties, antique collections, etc. which you can retain under Chapter 13. A Chapter 12 is for family farmers.

Family farmers can file for Chapter 12. Consumers with debts in excess of the Chapter 13 debt limits and businesses can file Chapter 11 -- a time-consuming and expensive process. In any reorganization, you file a plan with the court proposing how you plan to repay your creditors. Some debts must be repaid in full, some are partially repaid, and others aren't paid at all. Some debts must be paid with interest, some are paid at the beginning, and some at the end.

Why would I file Chapter 13 instead of Chapter 7?

A chapter 13 is normally for people with too much income to file a chapter 7 or for those who have a lot of non-dischargeable property. Chapter 13 bankruptcy is for consumers or small businesses who want to repay their creditors while protecting their real estate and personal property and avoiding harassing collections efforts. You cannot file a Chapter 7 if you have filed a 7 or 13 within the past 6 years (unless you paid off at least 70% of your unsecured debts in a previous 13 filing). However, you can file for Chapter 13 at any time. A trustee would propose a 3-5 year plan to creditors where the debtor would repay part of his debts out of future income. The trustee calculates how much you can afford to pay each month after considering your living expenses, income, and disposable income. At the end of the plan's period, you would no longer be liable for your debts.

In a Chapter 13 you end up paying back at least 50% of your debts and in some cases, the entire amount. If a payment is missed you could be forced to pay the whole debt back. A Chapter 13 doesn't stay on your credit report as long as a Chapter 7 and there are some debts that can be discharged in a 13 that can't be discharged in a 7. The main problem with chapter 13 is that in some cases you could end up paying back 50% or more of the debt, in some states the entire amount of the debt, and forced by the courts to make the payments. If you then miss a payment you could end up in breach of court and forced to pay the whole debt. You can stop the collection efforts using chapter 13 but why would you want to tie yourself into making payments by the courts?

Who is eligible for a bankruptcy?

In order to be eligible to file a Chapter 7 you must not have been granted a Chapter 7 bankruptcy within the last 6 years or have completed a Chapter 13. You also must not have had a filing dismissed for cause within the last 6 months. If after paying all of your necessary monthly expenses there is not enough money to pay your remaining monthly debts, then Chapter 7 may be an option.

Avoid bankruptcy by reducing your debt. Apply for a free debt counseling consultation from a Personal Debt Consultant.

How negatively will a bankruptcy affect me?

Bankruptcy should be considered only as a last resort. Why? It will stay on your credit report for 10 years. However, it will actually remain on your court records for 20 years. In other instances, it will follow you for the rest of your life. For example, if you apply for a loan, job, insurance, or other items, you may very well be asked "have you ever filed for bankruptcy?" This can negatively impact your future employment and carries with it a negative stigma

Credit companies also do not look favorably on people that have used bankruptcy as a means of solving their debt problem. The credit card offers you'll receive will carry with them a "higher risk" interest rate than had you not filed. While filing BK may help you eliminate your debt, its negative affects on your credit, emotions, court records, and self-esteem may last much longer than 10 years.

Will filing for bankruptcy stop harassing phone calls from collectors?

When you file bankruptcy, something called an "automatic stay" goes into effect. After you file, the court notifies all creditors listed in your schedules. This stops virtually all creditors from taking action to collect the debts you owe them unless the court lifts the stay and lets the creditor proceed with collections.

What generally happens in consumer bankruptcy cases?

In a Chapter 7 filing, you file several forms with the bankruptcy court that list income, expenses, assets, debts and property transactions for the past two years. The cost to file is $200, which may be waived for people who receive public assistance or live below the poverty level. A court-appointed trustee is assigned to oversee the case. A month after filing, you must attend a meeting of creditors where the trustee reviews your forms and asks questions. If you have any nonexempt property, you must give it (or its value in cash) to the trustee. Three to six months later, you will receive a notice from the court that "all debts that qualified for discharge were discharged."

Chapter 13 differs slightly. You file the same forms along with a proposed repayment plan. Here you describe how you plan on repaying your debts over the next three to five years. The cost to file is $185 and a trustee is assigned to oversee the case. You attend the meeting of creditors. Often one or two creditors attend this meeting, especially if they don't like your plan. After the meeting, you attend a hearing and the bankruptcy judge either approves or denies your plan. If confirmed, and you make all the payments, you may receive a discharge of any balance owed at the end of the case.

Avoid bankruptcy by reducing your debt. Apply for a free debt counseling consultation from a Personal Debt Consultant.

What debts are not dischargeable?

There are many debts that are not dischargeable and that you will still be responsible for after filing. These include: taxes, spouse and child support, debts arising from willful misconduct and or malicious misconduct by the debtor, liability from driving while intoxicated, non-dischargeable debts from a previous bankruptcy, student loans, and debts due to fraud or criminal activities. Certain luxury purchases and cash advances over $1,000 are non-dischargeable within 60 days of the filing.

What property could I lose if I file bankruptcy?

You won't lose property in Chapter 13. In Chapter 7, you select to keep from a list of state exemptions or exemptions provided in the federal Bankruptcy Code. Exemptions may include: Equity in your home, covered under the homestead exemption; Insurance; some Pensions; personal property (up to $1,000 in jewelry or vehicles with more than $2,400 in equity); public benefits like welfare, Social Security, and unemployment insurance; tools used in your job; at least 75% of earned but unpaid wages.

Will I lose my house or apartment?

While bankruptcy is not designed to take away your home, there are a few situations where you can lose your home. If you are behind on your mortgage payments, you will almost certainly lose your house if you file a Chapter 7. In a Chapter 13 bankruptcy, you will not lose your house if you immediately resume making the regular payments called for under your agreement and repay your missed mortgage payments through your plan. In Chapter 7 bankruptcy, whether or not you will lose your house depends on the amount of equity you have in the property and the amount of any homestead exemption (which varies state-to-state). If the total amount of debt against your house is less than the market value, you may lose your house unless a homestead exemption protects you.

If you are current on your rent payments and file for bankruptcy, it's unlikely your landlord will know. But if you are behind on your rent, it's likely your landlord will attempt to evict you. Avoid bankruptcy by reducing your debt. Apply for a free debt counseling consultation from a Personal Debt Consultant.