Filing for Consumer Bankruptcy
Filing for bankruptcy allows individuals and businesses to eliminate or repay a portion of their debts. To help determine if bankruptcy is the best remedy for you, here are some basics about Chapter 7 and Chapter 13 bankruptcy.
Under Chapter 7, certain property is sold to pay off as many debts as possible. Any debts that are not paid from the proceeds of the sale of that property will be discharged, or eliminated. A Chapter 7 bankruptcy will remain on your credit report for 10 years.
When determining what property can be sold for the purpose of paying creditors, state bankruptcy laws categorize property as either exempt or non-exempt. Non-exempt property is the only property that can be sold to pay debts, whereas exempt property cannot be sold. Although the laws differ from state to state, exempt property generally includes the equity in your home, the cash value of insurance policies, retirement plans, furniture, clothing, appliances, vehicles, and public benefits like Social Security and unemployment. It is possible for all of your property to be considered exempt, leaving most of your debt to be discharged.
Chapter 7 bankruptcy can provide important benefits to consumers. For example, upon filing the bankruptcy petition with the court, an automatic stay is established, which prevents creditors from attempting to collect the debts you owe them. Chapter 7 is also very good at wiping out credit card and other unsecured debts. However, debt that is accumulated with secured credit – for instance, a car loan where the car guarantees payment of the loan and therefore can be repossessed if you don’t make the loan payments – may not be discharged under Chapter 7.
Child support and alimony obligations are also not affected by bankruptcy, and you must continue to make these payments. Additionally, student loans can only be discharged if you have evidence that repaying them would cause undue hardship. This is a very difficult legal standard which requires you to show that you cannot afford to pay the loans now and most likely will not be able to pay them in the future.
In order to file for Chapter 7, you must earn less than the median income in your state or pass what is known as the means test. This test is actually a complex income calculation that a qualified bankruptcy lawyer can help determine whether you qualify for relief under this chapter.
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Chapter 13 is often referred to as “wage-earner bankruptcy” because it permits individuals who have reliable income to repay their debts under the supervision of the bankruptcy court. A Chapter 13 bankruptcy will remain on your credit report for 7 years.
Unlike Chapter 7, where you pay debts from the sale of your property, Chapter 13 allows you to keep all of your property, but you must submit a payment plan proposal outlining the monthly payments you will make to creditors over the next three to five years to repay some of your debts. The amount of the monthly payments is generally based upon your monthly disposable income (your income minus living expenses), and any debt remaining at the completion of the plan is discharged. This often results in consumers paying less than what they owe.
As with Chapter 7, filing for Chapter 13 will initiate an automatic stay, which will stop harassing phone calls and letters from creditors attempting to collect payments. If you have secured debts, such as a house or a car, you can make-up missed payments by including them in your payment plan and repaying them over time. This will prevent foreclosure or repossession of your property by the creditor. Also, you may be able to reduce a debt to the replacement value of the property securing it. For example, if you have a car loan in the amount of $15,000 but the car is worth $8,000, you can include in your payment plan a proposal to pay the creditor $8,000 total and have the remaining $7,000 of the loan discharged. It is important to note, however, that when filing for bankruptcy, you cannot use this method for a car purchased within 30 months of filing for Chapter 13 or for other property purchased within one year of filing.
To be eligible for Chapter 13 bankruptcy, you must have a steady source of income. In addition, your debts must fall within certain limits – you cannot have more than $1,184,200 in secured debt and $394,725 in unsecured debt.