|
Bankruptcy Questions
What is
bankruptcy?
What are the different types of bankruptcy?
Why would I file Chapter 13 instead of Chapter
7?
Who is eligible for a bankruptcy?
How negatively will a bankruptcy affect me?
Will filing for bankruptcy stop harassing
phone calls from collectors?
What generally happens in consumer bankruptcy
cases?
What debts are not dischargeable?
What property could I lose if I file
bankruptcy?
Will I lose my house or apartment?
What is bankruptcy?
Bankruptcy is a federal court process that helps both businesses and consumers
eliminate their debts or repay them under the protection of a bankruptcy court.
In 2003, approximately 1.66 million personal bankruptcies were filed, an
all-time high. Many of those who file owe as little as $5,000. Harassing calls
from collectors, financial pressures, and so-called "non-profit"
credit counseling companies are of little help and represent some of the primary
reasons for the staggering number of bankruptcies.
If passed, recent bankruptcy law proposals will make filing bankruptcy even more
difficult. For the last 5 years, major banks and credit card companies have been
campaigning hard for these changes, changes that will leave you with fewer
alternatives to getting out of debt.
Back to top
What are the different types of bankruptcy?
Bankruptcy can be described as a "liquidation" or
"reorganization." Most consumers will file a Chapter
7 or Chapter 13.
"Liquidation" bankruptcy is called Chapter 7 and is the most common
filing. In a Chapter 7 bankruptcy, a consumer or business asks the bankruptcy
court to discharge all of the debts they owe. Some debts cannot be discharged.
(See Non-dischargeable Debts question.) In exchange for the discharge of debts,
the business' assets or consumer's nonexempt property are sold (or
"liquidated"). The proceeds are used to pay off the creditors.
Individuals filing for Chapter 7 usually have severe debt problems with large
credit card and other secured and unsecured debt. They typically do not own a
lot of assets, which can be liquidated and therefore do not have as much to
lose.
There are several types of "reorganization" bankruptcy: Chapter 11,
Chapter 12, and Chapter 13. Consumers with secured debts under $871,550 and
unsecured debts under $269,250 can file for Chapter 13. The main difference
between Chapter 13 and Chapter 7 is Chapter 13 enables a debtor to retain
certain assets that would otherwise be liquidated in Chapter 7. In most cases,
you can keep your home and car under either plan (provided your equity does not
exceed certain limits). Under Chapter 7, however, you won't be able to keep
rental properties, antique collections, etc. which you can retain under Chapter
13. A Chapter 12 is for family farmers.
Family farmers can file for Chapter 12. Consumers with debts in excess of the
Chapter 13 debt limits and businesses can file Chapter 11 -- a time-consuming
and expensive process. In any reorganization bankruptcy, you file a plan with
the bankruptcy court proposing how you plan to repay your creditors. Some debts
must be repaid in full, some are partially repaid, and others aren't paid at
all. Some debts must be paid with interest, some are paid at the beginning, and
some at the end.
Back to top
Why would I file Chapter 13 instead of
Chapter 7?
A chapter 13 bankruptcy is normally for people with too much income to file a
chapter 7 or for those who have a lot of non-dischargeable property. Chapter 13
bankruptcy is for consumers or small businesses who want to repay their
creditors while protecting their real estate and personal property and avoiding
harassing collections efforts. You cannot file a Chapter 7 if you have filed a 7
or 13 within the past 6 years (unless you paid off at least 70% of your
unsecured debts in a previous 13 filing). However, you can file for Chapter 13
at any time. A trustee would propose a 3-5 year plan to creditors where the
debtor would repay part of his debts out of future income. The trustee
calculates how much you can afford to pay each month after considering your
living expenses, income, and disposable income. At the end of the plan's period,
you would no longer be liable for your debts.
In a Chapter 13 you end up paying back at least 50% of your debts and in some
cases, the entire amount. If a payment is missed you could be forced to pay the
whole debt back. A Chapter 13 doesn't stay on your credit report as long as a
Chapter 7 and there are some debts that can be discharged in a 13 that can't be
discharged in a 7. The main problem with chapter 13 is that in some cases you
could end up paying back 50% or more of the debt, in some states the entire
amount of the debt, and forced by the courts to make the payments. If you then
miss a payment you could end up in breach of court and forced to pay the whole
debt. You can stop the collection efforts using chapter 13 but why would you
want to tie yourself into making payments by the courts?
Back to top
Who is eligible for a bankruptcy?
In order to be eligible to file a Chapter 7 you must not have been granted a
Chapter 7 bankruptcy within the last 6 years or have completed a Chapter 13. You
also must not have had a bankruptcy filing dismissed for cause within the last 6
months. If after paying all of your necessary monthly expenses there is not
enough money to pay your remaining monthly debts, then Chapter 7 may be an
option.
Back to top
How negatively will a bankruptcy affect me?
Bankruptcy should be considered only as a last resort. Why? Bankruptcy will stay
on your credit report for 10 years. However, it will actually remain on your
court records for 20 years. In other instances, it will follow you for the rest
of your life. For example, if you apply for a loan, job, insurance, or other
items, you may very well be asked "have you ever filed for
bankruptcy?" This can negatively impact your future employment and carries
with it a negative stigma.
Credit companies also do not look favorably on people that have used bankruptcy
as a means of solving their debt problem. The credit card offers you'll receive
will carry with them a "higher risk" interest rate than had you not
filed. While Bankruptcy may help you eliminate your debt, its negative affects
on your credit, emotions, court records, and self-esteem may last much longer
than 10 years.
Back to top
Will filing for bankruptcy stop harassing
phone calls from collectors?
When you file bankruptcy, something called an "automatic stay" goes
into effect. After you file, the court notifies all creditors listed in your
schedules. This stops virtually all creditors from taking action to collect the
debts you owe them unless the bankruptcy court lifts the stay and lets the
creditor proceed with collections.
Back to top
What generally happens in consumer bankruptcy
cases?
In a Chapter 7 bankruptcy filing, you file several forms with the bankruptcy
court that list income, expenses, assets, debts and property transactions for
the past two years. The cost to file is $200, which may be waived for people who
receive public assistance or live below the poverty level. A court-appointed
trustee is assigned to oversee the case. A month after filing, you must attend a
meeting of creditors where the trustee reviews your forms and asks questions. If
you have any nonexempt property, you must give it (or its value in cash) to the
trustee. Three to six months later, you will receive a notice from the court
that "all debts that qualified for discharge were discharged."
Chapter 13 differs slightly. You file the same forms along with a proposed
repayment plan. Here you describe how you plan on repaying your debts over the
next three to five years. The cost to file is $185 and a trustee is assigned to
oversee the case. You attend the meeting of creditors. Often one or two
creditors attend this meeting, especially if they don't like your plan. After
the meeting, you attend a hearing and the bankruptcy judge either approves or
denies your plan. If confirmed, and you make all the payments, you may receive a
discharge of any balance owed at the end of the case.
Back to top
What debts are not dischargeable?
There are many debts that are not dischargeable and that you will still be
responsible for after the bankruptcy. These include: taxes, spouse and child
support, debts arising from willful misconduct and or malicious misconduct by
the debtor, liability from driving while intoxicated, non-dischargeable debts
from a previous bankruptcy, student loans, and debts due to fraud or criminal
activities. Certain luxury purchases and cash advances over $1,000 are
non-dischargeable within 60 days of the bankruptcy filing.
Back to top
What property could I lose if I file
bankruptcy?
You won't lose property in Chapter 13. In Chapter 7, you select to keep from a
list of state exemptions or exemptions provided in the federal Bankruptcy Code.
Exemptions may include: Equity in your home, covered under the homestead
exemption; Insurance; some Pensions; personal property (up to $1,000 in jewelry
or vehicles with more than $2,400 in equity); public benefits like welfare,
Social Security, and unemployment insurance; tools used in your job; at least
75% of earned but unpaid wages.
Back to top
Will I lose my house or apartment?
While bankruptcy is not designed to take away your home, there are a few
situations where you can lose your home. If you are behind on your mortgage
payments, you will almost certainly lose your house if you file a Chapter 7. In
a Chapter 13 bankruptcy, you will not lose your house if you immediately resume
making the regular payments called for under your agreement and repay your
missed mortgage payments through your plan. In Chapter 7 bankruptcy, whether or
not you will lose your house depends on the amount of equity you have in the
property and the amount of any homestead exemption (which varies
state-to-state). If the total amount of debt against your house is less than the
market value, you may lose your house unless a homestead exemption protects you.
If you are current on your rent payments and file for bankruptcy, it's unlikely
your landlord will know. But if you are behind on your rent, it's likely your
landlord will attempt to evict you.
| |
|
