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Bankruptcy is a federal court process. Bankruptcy
eliminates debts or repays them under the protection of the
bankruptcy court. Bankruptcies can be termed as "liquidations"
or "reorganizations." One will be asked about what
kinds of debts are covered and what property will be kept.
Chapter 7 bankruptcy is the liquidation plan. Property
is sold (liquidated) to pay off as much of your debt as possible.
You are left with enough property to start over. Chapter
13 bankruptcy is the most common type of "reorganization"
bankruptcy for consumers. This form of bankruptcy allows
you to repay debts over three to five years.
Chapter 7 Bankruptcy
Liquidation bankruptcy is called Chapter 7 bankruptcy,
and it can be filed by individuals (a "consumer"
Chapter 7 bankruptcy) or businesses (a "business"
Chapter 7 bankruptcy). The whole Chapter 7 bankruptcy process
takes about four to six months. Filing and administrative
fees cost under $300.00. Usually only one trip to the courthouse
is required.
In a liquidation bankruptcy, some of the property
may be sold to pay down debt. In return, most or all of the
unsecured debt (that is, debt for which collateral has not
been pledged) will be erased. One can keep any property that
is classified as "exempt" under the state or federal
laws available (such as your clothes, car, and household furnishings).
By not owning much, property is exempt and there is what is
known as a "no asset" case.
If money is owed on a secured
debt (for example, a car loan, where the car is pledged
as a guarantee of payment), there is 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.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, sometimes called the wage earner's
plan, or reorganization bankruptcy, is quite different from
Chapter 7 bankruptcy (which wipes out most of your debts).
In a Chapter 13 bankruptcy, one uses income to pay some or
all of what is owed to creditors over time. The bankruptcy
repayment period is three to five years depending on the size
of debts and income.
Chapter 13 bankruptcy isn't for everyone. Chapter
13 bankruptcy requires income to repay some or all of the
debt. You'll have to prove to the court that you can afford
to meet all of the payment obligations. If income is irregular
or too low, the court might not allow filing for Chapter 13
bankruptcy.
If the total debt burden
is too high, you are also ineligible.
The secured debts cannot exceed $922,975. Unsecured debts
cannot be more than $307,675. A "secured debt" is
one that gives a creditor the right to take a specific item
of property (such as a house or car) if you don't pay the
debt. An "unsecured debt" (such as a credit card
or medical bill) doesn't give the creditor this right.
Before someone can file for bankruptcy, they must receive
credit counseling from an agency approved by the United States
Trustee's
office. (For a list of approved agencies, go to the Trustee's
website at www.usdoj.gov/ust/, and click "Credit Counseling
and Debtor Education.") These agencies are allowed to
charge a fee for their services. They must provide counseling
free or at reduced rates if you cannot afford to pay.
Once counseling has been completed, the credit counseling
agency will generate a certificate showing that you met the
requirement. To begin a bankruptcy case, one must file this
certificate with the bankruptcy court. Also needed is a federal
tax return for the previous year and proof that federal and
state tax returns for the previous four years were also filed.
In addition, one must file a Chapter 13 repayment plan showing
how payment of debt will be done. The filing party will have
to pay the filing fee.
The Chapter 13 bankruptcy plan must pay certain debts in
full. These debts, which include child support and alimony,
wages owed to employees, and certain tax obligations, are
called "priority debts". These debts are considered
sufficiently important to jump to the head of the bankruptcy
repayment line.
In addition, the plan must include regular payments on secured
debts, such as a car loan or mortgage. Repayment of any arreares
on the debts (the amount by which you've fallen behind in
your payments) must also be taken care of before claiming
bankruptcy.
The plan must show that any disposable income that is left
after making these required payments will go towards repaying
unsecured debts, such as credit card or medical bills. One
does not have to repay these debts in full (or at all, in
some cases), but just show that any remaining income is put
towards repayment.
Once the repayment plan is complete, all remaining debts
that are eligible for discharge will be wiped out. Before
receiving a discharge, you must show the court that you are
current on your child support and/or alimony obligations,
and that a budget counseling course with an agency approved
by the United States Trustee has been completed.
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