What
Is Bankruptcy? - By Tony Arnest
Chapter
7 and Chapter 13 bankruptcy basics.
Bankruptcy
is a federal court process designed to help consumers and businesses eliminate
their debts or repay them under the protection of the bankruptcy court.
Bankruptcies can generally be described as "liquidations" or
"reorganizations."
Chapter
7 bankruptcy is the liquidation variety: If you own property that isn't exempt
under your state's laws, it may be taken and sold ("liquidated") to pay back
some of your debt. Chapter 13 bankruptcy is the most common type of
"reorganization" bankruptcy for consumers: You get to keep all of your property,
but you must make monthly payments over three to five years to repay all or some
of your debt.
Both
kinds of bankruptcy have numerous rules -- and exceptions to those rules --
about what kinds of debts are covered, who can file, and what property you can
and cannot keep.
Chapter
7 Bankruptcy
Chapter
7 bankruptcy can be filed by individuals (called a "consumer" Chapter 7
bankruptcy) or businesses (called a "business" Chapter 7 bankruptcy). A Chapter
7 bankruptcy typically lasts three to six months.
Property
liquidation.
In Chapter 7 bankruptcy, some of your property may be sold to pay down your
debt. In return, most or all of your unsecured debts (that is, debts for which
collateral has not been pledged) will be erased. You get to keep any property
that is classified as exempt under the state or federal laws available to you
(such as your clothes, car, and household furnishings). Many debtors who file
for Chapter 7 bankruptcy are pleased to learn that all of their property is
exempt.
Secured
debt.
If you owe money on a secured debt (for example, a car loan for which the car is
pledged as a guarantee of payment), you have a choice of allowing the creditor
to repossess the property; continuing your payments on the property under the
contract (if the lender agrees); or paying the creditor a lump sum amount equal
to the current replacement value of the property. Some types of secured debts
can be eliminated in Chapter 7 bankruptcy.
Eligibility
for Chapter 7.
Not everyone can file for Chapter 7 bankruptcy. For example, if you’re
disposable income is sufficient to fund a Chapter 13 repayment plan -- after
subtracting certain allowed expenses and monthly payments for certain debts --
you won't be allowed to use Chapter 7 bankruptcy.
Bankruptcy
doesn't work on some kinds of debts.
Though bankruptcy can eliminate many kinds of debts, such as credit card debt,
medical bills, and unsecured loans, there are many types of debts, including
child support and spousal support obligations and most tax debts that cannot be
wiped out in bankruptcy.
Chapter
13 Bankruptcy
Chapter
13 bankruptcy is also known as "wage earner" bankruptcy because, in order to
file for Chapter 13, you must have a reliable source of income that you can use
to repay some portion of your debt.
Repayment.
When you file for Chapter 13 bankruptcy, you must propose a repayment plan that
details how you are going to pay back your debts over the next three to five
years. The minimum amount you'll have to repay depends on how much you earn, how
much you owe, and how much your unsecured creditors would have received if you'd
filed for Chapter 7 bankruptcy.
Debt
limits.
Your debts must be within limits set by the federal government: Currently, you
may not have more than $1,081,400.00 in secured debt and $360,475.00 in
unsecured debt.
Secured
debts.
If you have secured debts, Chapter 13 gives you an option to make up missed
payments to avoid repossession or foreclosure. You can include these past due
amounts in your repayment plan and make them up over
time.
Other
Types of Reorganization Bankruptcy
In
addition to Chapter 13 bankruptcy, there are two other types of reorganization
bankruptcy: Chapter 11 and Chapter 12.
Chapter
11 bankruptcy.
Chapter 11 is typically used by financially struggling businesses to reorganize
their affairs. It is also available to individuals, but because Chapter 11
bankruptcy is expensive and time-consuming, it is generally used only by those
whose debts exceed the Chapter 13 bankruptcy limits (rare) or who own
substantial nonexempt assets (such as several pieces of real estate). If you are
considering Chapter 11 bankruptcy, you'll need to talk to a
lawyer.
Chapter
12 bankruptcy.
Chapter 12 is almost identical to Chapter 13 bankruptcy. But to be eligible for
Chapter 12 bankruptcy, at least 80% of your debts must arise from the operation
of a family farm. A Chapter 12 bankruptcy has higher debt ceilings to
accommodate the large debts that may come with operating a farm, and it offers
the debtor more power to eliminate certain types of liens. Very few people use
Chapter 12 bankruptcy; if you want to join their ranks, you should consult with
a lawyer.
(The
presenter, Tony Arnest, is a licensed attorney in California. He is a debt
relief agency and helps people file for bankruptcy. This information is being provided solely for
educational purposes, and is not intended to offer legal advice or serve as a
solicitation for business in anyway.)
What is Bankruptcy?
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