Bankruptcy

What Is Bankruptcy?

In the United States, our bankruptcy laws help people who can no longer pay their creditors to get a fresh start. The laws let you liquidate, or sell, your assets in order to pay your debts, or by letting you create a repayment plan.

Most cases are filed under the three main chapters of the Bankruptcy Code – Chapter 7, Chapter 11, and Chapter 13. Federal courts have exclusive jurisdiction over bankruptcy cases. This means that your bankruptcy case can’t be filed in a state court.

What’s the Difference Between Types of Bankruptcy?

In general, only two of the six types of bankruptcy cases apply to most people. Ventura Bankruptcy Attorney Eric Ridley can and will help you with either of these, and will help you to decide which is better in your situation:

Chapter 7, otherwise known as Liquidation, is the most-filed, and generally the bankruptcy most people are thinking of. Chapter 7 bankruptcy is an orderly, court-supervised procedure by which a trustee takes over the assets of your estate, reduces them to cash, and makes distributions to creditors, subject to your right to retain certain exempt property and the rights of secured creditors. Because there is usually little or no nonexempt property in most chapter 7 cases, over 90% of chapter 7 cases result in you keeping all of your property. These cases are called “no-asset cases.”

A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court. In most chapter 7 cases, if the debtor is an individual, he or she receives a discharge that releases him or her from personal liability for certain dischargeable debts. The debtor normally receives a discharge just a few months after the petition is filed.

Amendments to the Bankruptcy Code enacted in to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a “means test” to determine whether individual consumer debtors qualify for relief under chapter 7. If such a debtor’s income is in excess of certain thresholds, the debtor may not be eligible for chapter 7 relief.

Chapter 13,  is designed for an individual debtor who has a regular source of income. Chapter 13 is often preferable to chapter 7 because it lets you keep a valuable asset, such as a house, and because it allows you to propose a “plan” to repay creditors over time – usually three to five years. Chapter 13 is also used by consumer debtors who do not qualify for chapter 7 relief under the means test. At a confirmation hearing, the court either approves or disapproves your repayment plan, depending on whether the plan meets the Bankruptcy Code’s requirements.

Chapter 13 is very different from chapter 7 since the chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on your anticipated income over the life of the plan. Unlike chapter 7, you do not receive an immediate discharge of debts. You must complete the payments required under the plan before the discharge is received. You are protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. The discharge is also somewhat broader (i.e., more debts are eliminated) under chapter 13 than the discharge under chapter 7.

Will All My Debts Be Cancelled in Bankruptcy?

It depends on the type of debt you have. Bankruptcy will eliminate most credit card debt, medical debt, debt resulting from a foreclosure or vehicle repossession, and most other types of unsecured debt, like payday loans and personal loans.

In a Chapter 7 bankruptcy, this debt is discharged at the end of your bankruptcy. In Chapter 13 bankruptcy, you will generally have to pay off a part of your unsecured debt through your repayment plan.

It’s also important to remember that, if you have debts secured by property (like your home or car), the fact that the debt is cancelled by the bankruptcy doesn’t mean you get to keep the property.

Certain types of debt are never discharged  in bankruptcy: child support and spousal support debt, most student loans, court fines, and more recent tax debts. Older tax debt can often be eliminated.

What About My Home? Will I Lose it During Bankruptcy?

As long as you have the ability to pay the mortgage, a Chapter 13 bankruptcy will allow you to keep your home and make payments during the life of the Chapter 13 plan.  You are allowed to “catch up” by payments on which you are behind over the next 60 months.

Filing your bankruptcy under Chapter 7 characterizes it as a “liquidation” proceeding.  Your assets are sold unless the equity in the asset fits within an exemption.  You are only likely to lose your home if you have substantial equity in it.

Under Chapter 7, you must also bring the loan up to date by catching up on any payments on which you are behind.  If your home is worth less than the note, and you can bring the loan current, you will also be able to keep the home.