Bankruptcy is the name given to a legal court proceeding in which a person or business that is unable to pay outstanding debts asks the court to relieve them from the debts that they owe to creditors. Bankruptcy is handled in the federal court system and can help provide the opportunity to have a fresh financial start. Not only can it provide debt forgiveness, but bankruptcy also provides the opportunity for a creditor to be reimbursed through the liquidation of the debtor’s assets.
Bankruptcy is a federal matter that operates based on details and specifications laid out in the U.S. Bankruptcy Code. There are many different types of bankruptcy filings, which are referred to as Chapters. They have earned this term as each type of filing is based on the specific chapter of the Bankruptcy Code.
While there are many different Chapters of Bankruptcy, here we will take a deeper look at the most frequent/common filings for individuals: Chapter 7 and Chapter 13.
Chapter 7 bankruptcy is a filing in which the debtor (individual filing for bankruptcy) has very few assets and they are primarily delinquent in unsecured debt. Unsecured debt is debt in which the borrower does not initially put up any collateral in exchange for the credit. Some forms of unsecured debt include:
• Medical Bills
• Credit Card Debt
• Payday Loans
• Student Loans
• Past-Due Rent and Utilities
• Some Tax Debt
In filing for Chapter 7 bankruptcy, the debtor is required to put up certain types of assets for sale (liquidation) through the help of a court appointed trustee. The trustee will oversee the sale of these items to reimburse the creditors for their loss and to pay off the debt. The trustee may only liquidate nonexempt assets which can include second homes, stocks, high value heirlooms and cash. If an individual filing Chapter 7 has no valuable assets that are not nonexempt, they will be able to be relieved of their debt without the obligation to repay the creditors. Once a filing for Chapter 7 bankruptcy is completed, a creditor can no longer attempt to collect the debt and the debtor is able to move forward with a fresh financial start.
• Individuals or businesses that do not have an income or the ability to pay back all, or some, of their debt
• Household income is below your state’s median level
• If your household income is above the median level, you must qualify under the federal bankruptcy “means test” which weighs your income against your debt and the cost of living
Unlike Chapter 7 bankruptcy, a Chapter 13 filing is intended for individuals with a consistent income that wish to pay their debt off in a manageable way without further penalization from creditors. Because of this, Chapter 13 bankruptcy is often referred to as a “wage earner’s plan”. In Chapter 13 bankruptcy, an individual will work with an attorney to gather all of the information on their current income, total debt, living expenses, etc. to establish a 3 to 5 year monthly repayment plan to the creditors. The Bankruptcy Court will appoint a Chapter 13 Trustee to oversee the case and the trustee will handle all transactions and distributions of payments to the creditors. In a Chapter 13 filing, the debtor is able to maintain their property and assets while they work to pay off their debt over time.
• Only available to individuals, not businesses
• Consistent, regular income
• Chapter 13 has debt limitations that can change each year. The current Chapter 13 eligibility limits are:
o Unsecured Debt (medical bills, credit cards, student loans, etc) under $394,725
o Secured Debt (mortgages, auto loans, etc) under $1,184,200
While Chapter 7 and Chapter 13 are two types of filings that you may hear about more often, there are other types of filings as well. There are a total of six different types of bankruptcy and each Chapter is intended to help a specific type of organization and situation, each with a different set of requirements.
Chapter 7: Liquidation (individual or small business)
Chapter 9: For Cities and Municipalities
Chapter 11: Financial Reorganization of a Business
Chapter 12: Specifically for Family Farmers and Fishermen
Chapter 13: Individual Repayment Plan
Chapter 15: Specifically for Foreign Bankruptcy Cases
If you are considering filing for bankruptcy, it would be best to first consult a bankruptcy attorney. At that point, you will sit down and create a list of all of the sources of your income, your exempt and nonexempt assets, the totality of your debt and a complete list of your living expenses. Once you have compiled all of this information, you will discuss with your attorney which Chapter of bankruptcy will be right for you.
Once all of your information has been gathered together and you are ready to move forward, your attorney will file your case with the Bankruptcy Court. Depending on the Chapter that you file, you may be assigned a Bankruptcy Court Trustee. A Trustee is an independent contractor that is responsible for reviewing your case, communicating with the creditors, and overseeing any liquidation of assets and/or repayment to creditors. If you have filed Chapter 7, this process will typically take 3-5 months. If you have filed Chapter 13, this will take between 3 and 5 years.
After your case has been thoroughly reviewed by the trustee and you have completed the terms of your bankruptcy (repayment, liquidation, etc.), the trustee will advise the court to grant you bankruptcy discharge. Bankruptcy Discharge is a court ordered mandate to end your bankruptcy case. Once you have been granted a discharge, creditors can no longer attempt to collect the debt and you have officially started on your path to a fresh start with your finances.
Each type of bankruptcy has different requirements for how the debt will be handled. If you are filing Chapter 7 bankruptcy, you may have to liquidate, or sell, some of your nonexempt assets to repay your debt to the creditors. While the exact list of what is considered nonexempt varies from state to state, some examples of non-exempt assets include:
o A second home or vacation house
o A vehicle with equity
o Family Heirlooms such as jewelry, expensive artwork or fine china
o Valuable Collections such as stamps, coins or rare books
o Musical Instruments that are not used in your employment
o Expensive Clothing
It is not guaranteed that you will have to liquidate these items. Before you file your bankruptcy claim, your attorney can review your exempt and nonexempt assets to discuss your best options for moving forward before the trustee reviews your case.
When you find yourself in a situation where you are overwhelmed in debt, filing for bankruptcy may be your only option. While bankruptcy will provide you financial relief from your debt, there can be some long-term consequences. One of these is that a bankruptcy filing will stay on your credit report anywhere from 7 to 10 years, depending on what type of bankruptcy that you file. When a bankruptcy case is discharged you will no longer owe the debt to the creditors, however, future lenders will be able to see that you have declared bankruptcy in the past, possibly making it more difficult to secure credit in the future or resulting in higher interest rates.
Deciding to file for bankruptcy is a big decision for any individual. While at the end of bankruptcy comes a fresh start, the process can be intimidating and overwhelming at times. You will need to know the required and important files that you will have to submit with your claim as well as what items you need to include in your assets. If you are drowning in debt and want to know your options, fill out our form below to be connected with a local bankruptcy attorney that can help review your case and get you on your first steps towards financial freedom.