What Happens In Bankruptcy?

Losing a job. Unexpected medical bills. Death of a breadwinner. There are many reasons why a person might be forced to file for bankruptcy. Before filing, it is important to understand some basics.

What Is Bankruptcy?
Bankruptcy is a process governed by federal law that grants relief to people in financial distress through the bankruptcy courts.

Who Can File for Bankruptcy?
All kinds of people and entities can file for bankruptcy, including individuals, corporations, and even cities. A husband and wife may file for bankruptcy together.

Are There Different Kinds of Bankruptcy?
Yes. Although individuals can file for bankruptcy under several different parts of the Bankruptcy Code, the two most common kinds are Chapter 7 and Chapter 13. Chapter 7 bankruptcy ("liquidation" bankruptcy) involves the liquidation of some of the debtor's assets to pay his debts. Chapter 13 bankruptcy ("debt adjustment" bankruptcy) allows a debtor to stretch out his payment obligations over time.

What Happens When I File for Bankruptcy?
The minute a debtor files his paperwork, the "automatic stay" comes into effect. The automatic stay is imposed by federal law and forces the debtor's creditors to come into bankruptcy court to make their claims. Unless lifted by the court, the automatic stay stops all efforts to collect debts, including foreclosures and lawsuits.

What Happens in Chapter 7?
In Chapter 7, the debtor asks the bankruptcy court to appoint a trustee to sell his nonexempt property to pay his creditors. If there are no objections after this property is sold, the court issues the debtor a "discharge." The discharge provides that the debtor does not have to repay most of the unsecured debts he owes, and the debtor receives a "fresh start." However, recent changes to the Bankruptcy Code make Chapter 7 more difficult to qualify for, and may mean that a debtor has to pursue a Chapter 13.

What About Secured Debts?
Most debtors also have secured debts--debts whose payment is secured by property. Common examples of secured debts are mortgages and car notes. Although a bankruptcy court can sometimes reduce a secured debt, if the debtor wants to keep the property securing the debt he must agree to pay the debt, and he must continue to pay the creditor.

What Property Is Exempt?
Under federal law, some property cannot be sold, no matter how much is owed. Exempt property includes the "stuff" of daily life, such as clothing, basic furniture, household items, pets, etc. Specific examples of exempt property include $20,200 of equity in a home, $3,225 of equity in a car, $2,025 of tools or equipment used for a job, and $1,075 of personal property of any kind, including cash and jewelry. There are also other exemptions.

Are Any Debts Not Affected by Bankruptcy?
Yes, there are several kinds of debts that are difficult or impossible to discharge through bankruptcy, including alimony, child support, taxes, criminal fines, student loans, debts obtained by fraud, and debts that the debtor fails to disclose. These debts will usually not be discharged by the bankruptcy court.

How Is Chapter 13 Different?
Instead of asking the trustee to liquidate property, the debtor in a Chapter 13 case proposes a "plan" to repay all or a portion of his debts over a period of three to five years. Because of this long-term commitment, Chapter 13 debtors must have a steady income. The advantage of Chapter 13 is that it allows a debtor to do things that Chapter 7 does not, such as protect the equity in the debtor's home. Also, some debts that cannot be discharged under Chapter 7 may be discharged on the successful completion of a Chapter 13 plan.

Every case is different and this article covers only the basics of bankruptcy law. If you have questions regarding bankruptcy, you should consult with a bankruptcy specialist to help you through the process and on to a new, debt-free start.

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