Bankruptcy - Chapters 7 and 13

Bankruptcy is a federal law that establishes an orderly process to provide protection to debtors and fair treatment to creditors. Bankruptcy is an option to deal with a financial crisis, but all consumers are urged to fully understand the process and potential ramifications.

Chapter 7 and Chapter 13

The two most common types of consumer bankruptcy are referred to as Chapter 7 and Chapter 13 bankruptcies.

A Chapter 7 is a roughly 90-day process that gives you the opportunity to wipe the slate clean, eliminating many or all of your debts without having to make any future payments. "Discharge" is the legal term that means you no longer have a legal obligation to repay a debt. In a Chapter 7 bankruptcy, your assets can be at risk and some debts will not be discharged.

A Chapter 13 bankruptcy is a three- to five-year repayment proceeding. In Chapter 13, you gain protection for your assets, and you are able to repay certain debts such as child support arrearages, taxes, car payments and home mortgage arrearages over a three- to five-year timeperiod rather than having your wages garnished or your assets seized. In exchange for this added benefit, you must agree to make a monthly payment of your disposable income to repay a portion of your debts.

 

Will bankruptcy help my situation?
Bankruptcy can give you a fresh financial start on life and can seem very attractive to people who cannot afford to pay their bills as they become due. However, the process is not for everyone. Filing for bankruptcy comes with attorney fees and court costs, filing will have a negative impact on your credit report, and it may be difficult to obtain credit for 2-3 years following a bankruptcy. You should always talk to a licensed bankruptcy lawyer to assess the pros and cons of filing in your particular situation. Many attorneys will give a free consultation to discuss a bankruptcy and what alternatives may be available.

Will bankruptcy eliminate my debt?
Bankruptcy will not necessarily allow you to avoid paying back all of your debts. A Chapter 13 bankruptcy requires you to pay back a specific portion of your debts. Even in a Chapter 7, some debts such as child support obligations, spousal support, criminal restitution and fines cannot be discharged. Some other types of debts are dischargeable in some circumstances, but not others. For example, debts from taxes, bad checks and the fraudulent use of a credit card may not be erased (depending on the circumstances). Student loans are rarely discharged.

Will I have to give up all my property?
Although Chapter 7 is a "liquidation proceeding," you will be allowed to keep certain property, as long as the fair market value of each item does not exceed certain amounts. (Fair market value is not your original purchase price. It is sometimes described as "garage sale value," or how much actual cash you would receive by selling the item
to an unrelated party.) Certain property such as your working tools, household furnishings, your car and your home may be entirely protected, or "exempt," through bankruptcy. Unlike a Chapter 7 bankruptcy, a Chapter 13 case usually allows you to retain all of your "non-exempt" assets, but you will be required to make monthly payments to a bankruptcy trustee.

What will happen to my credit rating?
A Chapter 7 bankruptcy case will be reported by credit reporting agencies for 10 years. A Chapter 13 bankruptcy case will be reported by credit reporting agencies for seven years. Keep in mind that credit is a privilege, not a right, and some creditors will require an extended period of time after bankruptcy before extending further credit. This is certainly one reason to be cautious about filing bankruptcy.

NOTE: The information contained herein is for educational purposes only and is not legal advice.  You should seek advice from a legal professional regarding your particular situation.