Bankruptcy Basics

  1. What is Bankruptcy?
  2. What can bankruptcy do for you:
  3. What bankruptcy cannot do:
  4. Different types of bankruptcy cases:
  5. Chapter 7 (straight bankruptcy)
  6. Chapter 13 (Reorganization)

What is Bankruptcy?

Bankruptcy is a legal proceeding in which a person who cannot pay his or her bills can get a fresh financial start. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court. Filing bankruptcy immediately stops all collection actions, at least until your debts are sorted out according to the law. Long term debt, secured by an asset or piece of property, requires ongoing payments in most circumstances.

What can bankruptcy do for you:

Bankruptcy may make it possible for you to:

  1. Eliminate the legal obligation to pay most or all of your debts. This is called a "discharge" of debts. It is designed to give you a fresh start.
  2. Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. (Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment. Unless you qualify for a lien avoidance proceeding.)
  3. Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
  4. Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt.
  5. Restore or prevent termination of utility service.
  6. Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.

What bankruptcy cannot do:

Bankruptcy cannot, however, cure every financial problem. Nor is it the right step for every individual. In bankruptcy it is not possible to:

  1. Eliminate certain rights of "secured" creditors. A creditor is "secured" if it has taken a mortgage or other lien on property as collateral for a loan. Common examples are car loans and home mortgages. You can force secured creditors to take payments overtime in the bankruptcy process and bankruptcy can eliminate your obligation to pay any additional money on the debt if you decide to give back the property. But you generally cannot keep secured property unless you continue to pay the debt.
  2. Discharge types of debts singled out by the bankruptcy law for special treatment, such as child support, alimony, most student loans, court restitution orders, criminal fines, and most taxes. (Although in rare circumstances student loans may be dischargeable. Also, special rules apply to taxes making some taxes dischargeable.)
  3. Protect cosigners on your debts. When a relative or friend has co-signed a loan, and the consumer discharges the loan in bankruptcy, the cosigner may still have to repay all or part of the loan.
  4. Discharge debts that arise after bankruptcy has been filed

Different types of bankruptcy cases:

There are four types of consumer bankruptcy cases provided under the law:

Chapter 7 is known as "straight" bankruptcy or "liquidation." It requires an individual to give up property which is not "exempt" under the law, so the property can be sold to pay creditors. Generally, those who file Chapter 7 keep all of their property except property which is very valuable or which is subject to a lien which they cannot afford to pay.

Chapter 11, known as "reorganization," is used by businesses and a few individuals whose debts are very large.

Chapter 12 is reserved for family farmers and fishermen.

Chapter 13 is a type of reorganization used by individuals to pay all or a portion of their debts over a period of years using their current income.

Most people filing bankruptcy will want to file under either a Chapter 7 or Chapter 13. Either type of case may be filed individually or by a married couple filing jointly. Corporations and other business entities filing bankruptcy must file either a Chapter 7 or chapter 11.

Chapter 7 (straight bankruptcy)

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 your giving up property, except for "exempt" property which the law allows you to keep. In most cases, all of your property will be exempt. But property which is not exempt is sold, with the money distributed to creditors. If you have un-exempt property, you will not be placed in a Chapter 7.

If you want to keep property like a home or a car and are behind on the mortgage or car loan payments, a Chapter 7 case probably will not be the right choice for you. Chapter 7 is a 90 day proceeding. The simplest explanation of the purpose of a Chapter 7 is to discharge unsecured debt. Unsecured debt is debt like credit card debt in which there is no underlying asset or property that the debt is secured against. The Chapter 7 analysis includes examining the property, character of debt in working through a historical budget analysis called the means test, and examining the debtor's future looking budget as well. It is true that each area of the analysis helps to determine which chapter the debtor should be placed in. Our goal in selecting a chapter is to assist the debtor in having a low stress, smooth case and to keep costs down at the same time.

If your income is above the median family income in your state, you may have to file a Chapter 13 case. Gross median income is the total sum received without deductions. Evans Law Offices does work hard to qualify people who are over the median family income for the family size to still allow a Chapter 7 discharge to be received. We frequently file Chapter 7 cases for people over the median income for their family size with positive results.) Higher-income consumers must satisfy a "means test"  requiring detailed information about their income and expenses. If the means test demonstrates, based on standards in the law, that they have a certain amount left over that could be paid to unsecured creditors, then a Chapter 7 cannot be filed, unless there are special extenuating circumstances.

Chapter 13 (Reorganization)

Chapter 13 is utilized as the financial tool when Chapter 7 is not advisable or available to an individual or business. Chapter 13 includes a plan of reorganization. The plan has a monthly payment tailored to each person's or families budget. The plan payment ranges from $30.00 per month to $1,000 or more, depending on the goal of the individual, family or business. Some cases may pay unsecured debt (credit card debt, or other debt unsupported by collateral) back, either a portion, or not at all. Whether or not a plan pays back debt depends on the facts of each individual's case.

You should consider filing a Chapter 13 if you:

  1. Own your home and are in danger of losing it because of money problems;
  2. Earn too much to qualify for Chapter 7
  3. Have valuable property which is not exempt, but you can afford to pay creditors from your income over time.
  4. You are running a business burdened with too much debt
  5. Have tax problems that you can't afford to pay

You will need to have enough income during your Chapter 13 case to pay for your necessities and to keep up with the required payments as they come due.