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Money Wise

Bankruptcy 101

There are several Chapters of Bankruptcy available however for individuals the two most common are Chapter 7 and Chapter 13. Before you begin the process be sure this is the right option for you. Here are some basics to start you on your path.

What exactly is bankruptcy?

Bankruptcy is a process that allows consumers and businesses to repay some or all of their debts under the protection of the federal bankruptcy court. The two types of bankruptcy available to individuals are Chapter 7 and Chapter 13.

Chapter 7 is designed for debtors suffering difficulty that do not have the ability to pay their existing debts. The purpose is to obtain elimination of their existing debts, not repayment. 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 will be erased. You get to keep any property that is classified as exempt under the state or federal laws available to you. You should also be aware that out-of-court agreements with creditors or debt counseling services may provide an alternative to a bankruptcy filing.

One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual debtor a "fresh start." The debtor has no liability for discharged debts. In a chapter 7 case, however, a discharge is only available to individual debtors, not to partnerships or corporations. 11 U.S.C. § 727(a)(1). Although an individual chapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute, and some types of debts are not discharged.

There are eligibility terms and restrictions so make sure you review them with a bankruptcy attorney and/or a financial counselor. More information about Chapter 7 Basics is available here.

Chapter 13, also called the wage earner’s plan, is designed for consumers with regular income who are temporarily unable to pay their debts but would like to pay them in installments over a period of time. The bankruptcy courts will approve a repayment plan that will repay the debts in no more than five years. When you file for Chapter 13 bankruptcy, you must have 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.

Also with Chapter 13, there are eligibility terms and restrictions so make sure you review them with a bankruptcy attorney and/or a financial counselor. More information about Chapter 13 can be found here.

Who should I talk to about filing bankruptcy?

You should first do some of your own research online to get an idea of what your options are. Once you have a good handle on what to expect, contact a financial counselor or bankruptcy attorney to begin discussing what steps you need to take next.

Here are some links that will help you begin your online research:

www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics

www.justice.gov/ust/list-credit-counseling-agencies-approved-pursuant-11-usc-111

www.americanbar.org/groups/legal_services/flh-home.html

www.nmcaa.net

What are the benefits of filing bankruptcy?

Declaring bankruptcy allows individuals or businesses that are unable to pay their debts resolve their financial difficulties and start rebuilding their credit. Filing for bankruptcy will trigger the “automatic stay”, preventing creditors from taking action to collect their debts. While a bankruptcy filing will remain on your record for 7-10 years, because many debts can be discharged in bankruptcy with exemptions, many debtors begin improving their credit rating after filing for bankruptcy.

What are the downfalls of filing?

Because filing for bankruptcy may affect your finances for many years, you should carefully weigh all of your options before filing. If you are unable to exempt all of your personal property or real estate under the bankruptcy exemptions, some of your property may be seized by the bankruptcy court and sold to pay your creditors. A recent bankruptcy filing may hinder your ability to obtain a mortgage or loan for many years and many credit card companies will automatically cancel your credit cards when you file for bankruptcy. Also, if you are looking for a job or housing, some employers or landlords may look unfavorably on a recent bankruptcy filing.