Tough Lawyers - What you need to know about Chapter 7 and Chapter 13 Bankruptcy

Bankruptcy is a legal action 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 for by federal law, and all bankruptcy cases are handled in federal court.
A person who files for bankruptcy is called a DEBTOR. By filing for bankruptcy, they may:

Get certain types of bills wiped out (DISCHARGED)
Get to keep most or all of their property which otherwise might be lost to CREDITORS (people to whom money is owed)
Get extra time to pay or catch up on bills, if they have regular income

There are two kinds of bankruptcies for individuals: CHAPTER 7 (also referred to as straight bankruptcy) and CHAPTER 13.

2) WILL BANKRUPTCY AFFECT MY CREDIT?

The fact that someone has filed a bankruptcy can appear on their credit record for ten (10) years. But since bankruptcy wipes out old debts, the debtor should be in a better position to pay current bills, so he or she may be able to get credit. Ultimately, each creditor will look at different factors in deciding whether to extend credit after a bankruptcy.

3) DOES BANKRUPTCY WIPE OUT ALL OF MY DEBTS?

Money owed for child support or alimony, fines, most taxes, and limited other kinds of debts
Debts not listed on the bankruptcy petition
Debts incurred by knowingly giving false information to a creditor, who reasonably relied on it when extending credit
Debts resulting from "willful and malicious" harm
Student loans owed to a school or government body, except if it can be shown that payment would cause an undue hardship

A Chapter 7 bankruptcy does not wipe out these kinds of debts, but some of them can be wiped out or modified through a Chapter 13 bankruptcy.

4) WHAT DOES IT COST TO FILE FOR BANKRUPTCY?

The current filing fee charged by the bankruptcy court is $185.00 to file a Chapter 13 bankruptcy and $200.00 to file a Chapter 7 bankruptcy, whether for one person or a married couple. The court may allow a debtor to pay the filing fee in installments if they cannot pay all at once

5) WHAT IS A SECURED CREDITOR?

Some creditors may have a SECURITY INTEREST in some of your property. A creditor is a secured creditor if you gave the creditor an interest in your property in exchange for a loan. Examples of this is a lien against your home or your car. If payments are not made on the loan, the creditor can seek to get payment by forcing sale of your property in which you granted them an interest.

Debtors file bankruptcy if they get behind on their mortgage so that they can keep their property. A debtor can, of course, pay all back payments that are due and will be able to keep their home. However, if the company insists on full payment of the arrears and a debtor is unable to pay they can file a bankruptcy. In a bankruptcy you can consolidate all of the back payments that are owed to the mortgage company and spread those payments out of 3 or 5 years.

Creditors that don’t have a security interest in the debtor’s property are called UNSECURED or general creditors. Unsecured creditors have significantly less rights to property than secured creditors.

6) WHAT IS CHAPTER 7 BANKRUPTCY?

To seek relief under Chapter 7, a debtor files a petition asking the court to discharge his or her debts. The basic idea in a Chapter 7 bankruptcy is to wipe out (discharge) debts and in exchange the debtor gives up certain property, except for EXEMPT property, which the law allows the debtor to keep. In many cases, much or all of the debtor’s property will be exempt. Property which is not exempt is sold and the money distributed to creditors. Under certain circumstances, even if there is no property to sell, the debtor still receives a discharge of his or her debts. Keep in mind that if the debtor has adequate assets or income to repay some or all of the debts, the court will require the debtor to file a Chapter 13.

7) WHAT IS CHAPTER 13 BANKRUPTCY?

In a Chapter 13 case, the debtor files a PLAN showing how he or she will repay some of his or her past-due and current debts over an extended period; normally either 3 or 5 years. This is different from Chapter 7 bankruptcy, where a debtor asks the court to wipe out (discharge) all of their debts.

The most important thing about a Chapter 13 case is that it allows the debtor to keep valuable property - especially their home and car - which might otherwise be lost.

They own their home and are in danger of losing it because of money problems
They are behind on debt payments, but can catch up if given some time, and

They have regular income (including government benefits such as social security or public assistance)

8) CAN A DEBTOR OWN ANYTHING AFTER BANKRUPTCY?

Yes! Many people believe they cannot own anything for a period of time after filing for bankruptcy. This is not true! However, if prior to being discharged from bankruptcy a debtor receives an inheritance, a property settlement, or life insurance benefits, that money or property may have to be paid to creditors if:

9) WHAT PROPERTY CAN THE DEBTOR KEEP?

A debtor can keep all property, which the law says is EXEMPT from the claims of creditors. A debtor can choose between a list of exemptions under state law or federal law. With a few exceptions, the federal exemptions are more comprehensive, and may allow the debtor to keep more property than under state laws.
The current federal exemptions include:

$16,150 in EQUITY in a home (equity is the value of the property minus the amount still owed on mortgages.)
$2,575 in equity in a car
$425 per item in any household goods ($8,625 in aggregate)
$1,075 in jewelry
$1,625 in property needed for work (tools, books, etc.)
$825 in any kind of property, plus up to $8,075 of the exemption for a home that was not already used
the full amount of unmatured life insurance other than credit life insurance
the right to receive certain future benefits such as social security, unemployment compensation, veterans benefits, public assistance, alimony and pensions - regardless of the amount

The amounts of the exemptions are doubled when a married couple files together. There are other exemptions and the exemptions listed above periodically change; therefore please consult with an attorney to determine the current exemptions.

10) WHAT OTHER INFORMATION SHOULD I KNOW?

Utility service- public utilities, such as an electric company, cannot cut off service or refuse to turn it back on because someone has filed for a bankruptcy. However, the utility can require a deposit for further service.
Discrimination- a government agency cannot discriminate against someone because they have filed for a bankruptcy.
Driver’s license- if a license was lost solely because someone could not pay "court ordered" damages caused in an accident, bankruptcy will allow the license to be restored.
Co-signers- if someone has co-signed a loan with a person who files for bankruptcy, the co-signer may have to pay the debt if the debtor does not make arrangements to pay it in full through the bankruptcy.

11) WHAT IS DISCHARGE?

If everything goes normally in a bankruptcy case, the final thing the court does is to grant a DISCHARGE, which excuses the debtor from paying their debts (except possibly for the few mentioned above). The discharge order also forbids creditors from doing anything to collect a debt that has been discharged.

The court can refuse to grant a discharge, but only in very limited cases if the debtor has done something improper, such as: trying to cheat a creditor by hiding property; giving false information to the court; refusing to obey a court order, etc.

WHAT YOU NEED TO KNOW ABOUT CHAPTER 13 AND CHAPTER 7 BANKRUPTCY

1) WHAT IS BANKRUPTCY?

2) WILL BANKRUPTCY AFFECT MY CREDIT?

3) DOES BANKRUPTCY WIPE OUT ALL OF MY DEBTS?

4) WHAT DOES IT COST TO FILE FOR BANKRUPTCY?

5) WHAT IS A SECURED CREDITOR?

6) WHAT IS CHAPTER 7 BANKRUPTCY?

7) WHAT IS CHAPTER 13 BANKRUPTCY?

8) CAN A DEBTOR OWN ANYTHING AFTER BANKRUPTCY?

9) WHAT PROPERTY CAN THE DEBTOR KEEP?

10) WHAT OTHER INFORMATION SHOULD I KNOW?

11) WHAT IS DISCHARGE?