Bankruptcy is a legal proceeding that is initiated when an individual or business cannot meet their financial obligations. There are different types of bankruptcy, all of which are under federal law. Consumer bankruptcy is filed when an individual cannot pay back the debts they incurred for personal needs.
Once the bankruptcy proceeding is completed, the individual is no longer liable for the debts they incurred. The bankruptcy court will enter a discharge order releasing the individual from the debts. The individual then has a clean financial slate but the bankruptcy will remain on their credit report for up to ten years.
Bankruptcy can have lasting consequences. It should only be used as a last resort during times of extreme financial hardship. There are many considerations an individual should review prior to filing for bankruptcy.
What is Chapter 7 Bankruptcy?
Chapter 7 Bankruptcy, also known as “liquidation bankruptcy”, allows an individual to discharge all debts that can be legally discharged. There are certain rules regarding who qualifies, how to file for Chapter 7 bankruptcy, and what type of debts can be discharged.
To be eligible for a Chapter 7 bankruptcy filing, the individual’s income must be equal to or below the median income in their state. Each state has different income requirements. If the individual’s income is above the requirement, the court will apply a “means test” based on the previous six months of income. If the individual has the means to repay debts, they are not eligible to file for Chapter 7 bankruptcy.
Once an individual files for Chapter 7 bankruptcy, the court will issue an automatic stay. This action prevents creditors from attempting to collect debts. It also prevents any pending lawsuits, wage garnishments, filing of liens, or seizure of property.
Chapter 7 bankruptcy involves taking the majority of the borrower’s property. The court appoints a trustee to oversee each case. The trustee will determine if selling property will produce enough money to pay off creditors. After the borrower has completed and filed all necessary paperwork, the trustee will schedule a creditors meeting, which is usually the only time the borrower has to go to the courthouse. If the borrower does not attend or provide the required information, the case may be dismissed.
After the creditors meeting, the bankruptcy court will hold a discharge meeting. At this meeting, the borrower’s unsecured debt is discharged. Some debts, such as a car loan or a mortgage may receive different treatment. At the beginning of the bankruptcy, the debtor may one of the following options to handle the debt:
- Pay the creditor the replacement value of the property or item;
- Return the property, or;
- Reaffirm old payment terms or agree to new payment terms with the creditor.
There are some types of debt that remain after a bankruptcy discharge:
- Child support;
- Tax debt (some federal tax debt can be discharged if criteria are met);
- Debt created through fraud; and
- Student loans, unless a court determines there is undue hardship.
Once the bankruptcy process is complete, creditors are no longer allowed to collect or attempt to collect on debts that were discharged.
What is Chapter 13 Bankruptcy?
Chapter 13 Bankruptcy, known as wage earner’s bankruptcy, is a way for a borrower to restructure their debt and be able to afford payments. This option is usually for those who have higher incomes and wish to keep their property.
Some debts may be eligible for discharge but others may require payment in full through a payment plan, usually set for between three and five years.
An individual is eligible for a Chapter 13 bankruptcy filing if they meet the following requirements:
- They are an individual or married couple, including if they own an unincorporated business or are self-employed;
- Their total secured debts are equal to or less than $1,184,200.00;
- Their total secured debts are equal to or below $ 394,725;
- They have not had a bankruptcy petition dismissed within the last 180 days due to failure to appear or comply with the court; and
- They receive credit counseling through an approved counselor within 180 days of filing their petition.
These requirements may change, so it is always good to consult with an experienced bankruptcy attorney.
Chapter 13 bankruptcy differs from Chapter 7 bankruptcy in that the borrower keeps or attempts to keep most property and is still required to make payments. It is important to consider the pros and cons of filing bankruptcy. Like Chapter 7, Chapter 13 bankruptcy can affect your credit for up to ten years after filing. During the Chapter 13 bankruptcy payment plan process, the borrower must stick to a strict budget without lines of credit. Many borrowers drop out of the payment plan.
What is Exempt and Non-Exempt Property?
There are two types of property in bankruptcy cases, exempt and non-exempt. Exempt property is any property that cannot be claimed by creditors to satisfy an individual’s debt. Any other property that can be used by creditors to satisfy a debt is called non-exempt property. The definitions of these properties may vary from state to state.
A common example of these types of property is a Chapter 7 bankruptcy case. Since it is a liquidation bankruptcy, the individual may be required to give up some of their property to be sold in order to satisfy their creditors.
Examples of exempt property may include:
- Some vehicles up to a certain value;
- Some jewelry, up to a certain value;
- Necessary items such as clothing, furniture, household appliances;
- Tools of the individual’s trade, up to a certain value;
- Some unpaid earned wages;
- Pensions; and
- Benefits including welfare, unemployment and social security, if held in a bank account.
Examples of non-exempt property may include:
- Second vehicles and other motor vehicles;
- Second homes or vacation properties;
- Valuables like antiques or coin collections;
- Funds in bank accounts;
- Cash; and
- Securities like stocks or bonds.
Bankruptcy attorneys in each state will be able to specifically explain what property is exempt and what property is non-exempt in a bankruptcy proceeding.
What Do I Need to Bring to My Bankruptcy Attorney?
Of all legal actions, bankruptcy is one of the most document-intensive. A bankruptcy attorney has to thoroughly review a client’s financial background before determining whether filing for bankruptcy is an option. If bankruptcy is an option, more documents may be required in order to determine what type of bankruptcy is proper.
The following a checklist of documents to bring during the first meetings with a bankruptcy lawyer:
- A list of all creditors, such as credit cards;
- Include account numbers, contact information, and amounts owed;
- Financial documents regarding bank accounts;
- Financial documents regarding employment;
- Receipts for major purchases;
- Tax returns;
- Documents relating to any outstanding loans, including mortgages, car loans, and other major loans;
- Include account numbers, contact information, and amounts owed;
- A list of major personal property items that might be subject to repossession, including boats and automobiles;
- Information related to real property that you own or rent;
- Any other documentation your attorney requests; and
- A list of any questions that you may have for your attorney.
The last bullet may be one of the most important. Bankruptcy can be a complicated and confusing process, so make sure you ask your attorney any questions you may have.
What if I Forget a Document or Cannot Find It?
First and foremost, don’t panic! Inform your attorney of the issue and they will work to either get you more time to find the information or find a suitable replacement. It is understandable that in years of financial documents, one or two may be difficult to find or even missing.
It is important to be up front and honest with your attorney and with the court. If an individual does not produce documents and fails to provide a reason, it may appear to the court that the borrower is trying to hide something.
Should I Contact a Lawyer if I Need Help with Consumer Bankruptcy Issues?
As mentioned previously, bankruptcy is a very complicated process and can be confusing to those without expertise. It is important to have a consumer bankruptcy attorney helping you along the way. There is a chance that some of your debts may be discharged or forgiven and a financial attorney can help you obtain the best outcome for your case.