Bankruptcy can be filed for debts which are incurred for both personal and business reasons. Consumer bankruptcy is when someone files bankruptcy for debts which were incurred for personal needs rather than business needs. A consumer can file under chapter 7 or chapter 13 of the Bankruptcy Code.
What is Chapter 7 Bankruptcy?
Chapter 7 is the most popular type of bankruptcy for consumers. It applies to both individuals and business entities; in order to be eligible for this, the disposable income must be low. Whether it is low will be determined by a Chapter 7 means test.
The means test will consider your income and expenses and it will make you ineligible if the numbers do not meet certain guidelines. Under Chapter 7 bankruptcy, most of your general unsecured debts such as credit cards and medical bills are wiped out and an individual is not required to pay back balances through a repayment plan.
Chapter 7 has certain major features such as:
- An automatic stay which prevents most creditors from pursuing collection efforts;
- The appointment of a bankruptcy trustee to administer a particular case as well as to review your bankruptcy papers and supporting documents;
- Permitting the trustee to sell your nonexempt property to pay back the creditors. However, if you do not have any nonexempt assets, then your creditors do not receive anything; and
- Letting debtors quickly discharge qualifying debts and get a fresh start.
What is Chapter 13 bankruptcy?
Unlike Chapter 7 which is a liquidation bankruptcy, chapter 13 bankruptcy involves reorganization. Chapter 13 bankruptcy is designed for debtors who have a regular income, with enough left over each month so that they can pay back at least a portion of their debts through a repayment plan. This type of bankruptcy has certain major features such as:
- Applies to debtors who are more affluent;
- Applies to individuals who need debt relief to lower their credit card payments, stop litigation or prevent garnishment of their wages;
- Applies to individuals who have fallen behind on a house or car payment and who want to get caught up on their missed payments and keep the property;
- Allows individuals keep all of their property including nonexempt assets. However, it is necessary to pay your creditors an amount which is equal to the value of your nonexempt property.
What is Exempt and Non-Exempt Property?
Exempt property is anything you own that is protected in a bankruptcy, while nonexempt property is anything that you own that is not protected in a bankruptcy. You can tell whether a particular piece of property is exempt or non-exempt by looking at your state’s exemption statutes.
Nonexempt property will not appear in these exemption statutes.What will happen to your nonexempt property will be based on the type of bankruptcy chapter that you file. Anything that you need to work and maintain a home can be exempt such as the tools that you need for your profession, certain household items, some equity in your car as well as your retirement account.
Under chapter 7 bankruptcy, the bankruptcy trustee who was appointed to manage your case will sell your nonexempt property to pay your creditors. You may have different types of debts like tax or credit card debts. As required by bankruptcy law, the trustee will use the sales proceeds to pay your bills in a particular order.
Priority debt such as domestic support obligations or tax debt will be paid first. If you do not have priority debt or if you have funds remaining after paying them fully, then the trustee will pay your other unsecured debts such as credit card balances, personal loans and utility bills. However, under Chapter 13 bankruptcy, the trustee will not sell your nonexempt property. Instead of this, you will pay your creditors the value of the nonexempt property. This applies to unsecured creditors whose debt is not guaranteed by collateral.
The differences between exempt and nonexempt property are important and can have significant impact on your bankruptcy filings and your overall financial status. You may wish to consult with an attorney if you need assistance in dealing with the impacts of exempt and nonexempt property on your financial situation.
Should I Contact a Lawyer if I Need Help with Consumer Bankruptcy Issues?
Bankruptcy laws are complex and it is important to determine what type of bankruptcy is most applicable to you. You will have to consider different factors like your income, expenses as well as the assets that you own and what you have to pay your creditors can be based on these as well as other factors.
In this context, it is important to consult with an experienced bankruptcy attorney before proceeding. A bankruptcy attorney can inform about the relevant laws regarding bankruptcy in your state including what property exemptions you can claim.