What Bankruptcy Can and Cannot Do For You
Let’s start with the basics: there are multiple forms of bankruptcy that an individual or business can file for in the United States. We’ll go over some of the generalizations about all forms in this article, as well as break down two of the most common forms of bankruptcy that individuals can file for in the U.S.
Generally speaking, any formal form of bankruptcy is a legal process overseen by the federal bankruptcy courts. The process is designed to help individuals and businesses eliminate all or a large portion of their debt, or to help them devise a plan to help repay a portion of what they owe to creditors. Bottom line: all forms of bankruptcy are seen as legal processes to help individuals or businesses that are drastically “underwater” come up for air!
However, filing for bankruptcy should not be taken lightly. Filing for any form of bankruptcy may have a very serious and long-term effect on your credit. This, of course, can influence multiple areas of your life such as your ability to purchase a car or home, your ability to rent an apartment, credit checks by employers, your ability to open new credit cards, and more.
So, you should never turn to bankruptcy as a casual solution to financial troubles; it’s best to discuss your options with an experienced bankruptcy attorney before coming to a decision about what’s best for you.
Does anyone qualify for bankruptcy?
There are, indeed, requirements to meet before you can file for bankruptcy. Simply stated: you will first need to demonstrate proof that you can NOT repay your debts. As well, you will need to complete credit counseling with a specific, government-approved credit counselor who will help you assess your financial situation and discuss alternatives to bankruptcy.
After you meet those requirements, if you decide to move forward with filing for bankruptcy, you will need to decide which form of bankruptcy is best for you.
What are the common forms of bankruptcy I can file for?
Typically, individuals choose between Chapter 7 Bankruptcy or Chapter 13 Bankruptcy.
Both forms of these bankruptcies help you eliminate unsecured debt, halt foreclosures and repossessions, and put a stop to wage garnishments, utility turn-offs, and debt collectors. However, there are major differences between Chapter 7 and Chapter 13 filings.
What cannot be discharged in bankruptcy?
Before we dive into those differences, let’s take a look at the common categories of debts that cannot be discharged in either Chapter 7 or Chapter 13. Though the details vary among the different chapters, the general, most common examples of non-dischargeable debts are the following:
- Alimony and child support
- Certain taxes that have gone unpaid (i.e. tax liens.) Other federal taxes cannot easily be discharged without a special exemption (speak with your attorney about this); though some federal, state, and local taxes may be eligible for discharge if they date back a certain amount of years.
- Debts relating to death or personal injury caused by your operation of a motor vehicle while intoxicated or on drugs (i.e. a DUI)
- Debts for willful and/or malicious injury to another individual or property
- Debts you failed to include in your list during your bankruptcy filing
- Student loans typically cannot be discharged. However, if you can demonstrate undue hardship to yourself or your dependents (such as not being able to maintain a minimal standard of living) you may be able to discharge these.
- Debts from fraud, embezzlement, or larceny
- Debts from government fines and penalties
Chapter 7 Bankruptcy
This is often called the “liquidation chapter” or is known as “straight bankruptcy” and is used by individuals or businesses who see no chance of repairing their financial situation (i.e. this is an extreme form of bankruptcy.) When you file for Chapter 7 Bankruptcy, your estate (i.e. assets) are liquidated under the rules of the bankruptcy code.
This may sound traumatic, but don’t panic; there are certain assets that are exempt from being liquidated, so you may not need to give up your home, car, or work-related assets, depending on your particular situation. There are many factors involved in this decision, such as how current you are with mortgage payments and how much equity you have in your home. Speak with an attorney for details.
What happens to my non-exempt assets?
Your non-exempt property/assets will be sold for cash by a trustee. The cash is then distributed to your creditors. Typical non-exempt assets included, but are not limited to: property that is not your primary residence, second car/truck, recreational vehicles, boats, collections, valuable items, bank and investment accounts.
After non-exempt property is liquidated and paid to creditors, the balance of what you owe to your creditors is discharged (i.e. it goes away, and creditors no longer have the right to pursue you to pay it.)
For how long does a Chapter 7 Bankruptcy stay on my credit?
Bankruptcy information will remain on your credit report for 10 years after the filing date.
Can I file for bankruptcy again?
If you find yourself in financial trouble again and are seeking bankruptcy, you will not be able to file again under this chapter for 8 years after your previous filing.
Chapter 13 Bankruptcy
If you are overcome by debts but believe that those debts CAN be paid over a reasonable period of time, this may be the better chapter under which you file for bankruptcy. In a Chapter 13 Bankruptcy, an individual is allowed to devise a plan in which they agree to pay a certain percentage of their future income to the Bankruptcy Court; those funds are then dispersed to creditors.
If the court agrees to the plan, the individual will be under the Court’s protection while repaying the debts. This means, the creditors no longer have the right to harass you to pay on the previous time-line, or for the previous amounts owed. They now must collect the new amount specified by the Chapter 13 plan, and it will be collected from the Bankruptcy Court on the new time-line, devised by the Chapter 13 plan.
What is the biggest advantage of Chapter 13 Bankruptcy compared to Chapter 7?
To be clear, there is no one form of bankruptcy that is best for everyone.
It’s beneficial to speak with an experienced bankruptcy attorney to go over which form of bankruptcy is best for you and your particular situation.
Having said that, what many people may see as advantageous to a Chapter 13 filings is that you are allowed to keep your property and assets (whereas; you must liquidate all of your non-exempt assets in a Chapter 7 filing.) In a Chapter 13 filing, you get to keep your property and assets in exchange for partially or completely repaying your debt over time.
Another perceived advantage of this form of bankruptcy versus Chapter 7 is that, under Chapter 13, your credit is potentially less affected (because you are re-paying some or all of your debt.) A Chapter 13 also cycles out of your credit history after 7 years, and you can file again under this chapter in two years.
How long do I have to re-pay my debts under a Chapter 13 Bankruptcy?
This is different in each case, but typically, the bankruptcy court and your attorney (if you have one) will negotiate a plan that is between 3-5 years. Depending on your situation, you will have to pay part or all of your debt during that time. Once you’ve completed your play, your debt is totally discharged.