What Is Bankruptcy? Will I Be Relieved Of All Of My Debt?
Bankruptcy is a federal court process to help consumers and businesses eliminate their debt, or repay them under the protection of bankruptcy court. Bankruptcy is split between “liquidation” (Chapter 7 Bankruptcy) or “reorganization” (Chapter 13). When you file either type of bankruptcy, the bankruptcy court orders an “automatic stay,” which prevents creditors from taking any actions to collect the debts that you owe them. Certain debts cannot be discharged through bankruptcy including: back child support, alimony, and certain types of tax debts. Student loans also cannot be discharged unless you can show that repaying the debt would be an undue burden (which is very difficult with student loans). Other types of debts can also not be discharged if a creditor can convince the court that the debt should survive your bankruptcy.
What Is The Difference Between Chapter 7 And Chapter 13 Bankruptcy?
Under Chapter 7 bankruptcy, you request that the bankruptcy court discharges (or wipes out completely) the debts you owe. In exchange for this discharge, the bankruptcy trustee can take any property that you own which is not exempt from collection, sell that property, and distribute the proceeds to your creditors. Typically, you are able to retain equity in your home, insurance, retirement, personal property, public benefits, and tools used on your job, as those properties generally fall under state exemption laws. Under Chapter 13 bankruptcy, you file an actionable plan with the bankruptcy court proposing how you plan to repay your creditors. In Chapter 13 bankruptcy, you will have to pay some debts in full, while others can be repaid only partially or not at all depending on what you can afford. You don’t lose any property in Chapter 13 bankruptcy due to the fact that you will fund your repayment plan through your personal income.
So Which Bankruptcy Should I Use? Chapter 7 Or Chapter 13?
Under new bankruptcy law, a person who files for bankruptcy with incomes higher than the median income for a family of their size may not be allowed to file for Chapter 7 bankruptcy if their disposable income allows them to pay back some portion of the debt over a five-year payment period. Most people who file for bankruptcy choose to use Chapter 7, if they meet the requirements. This is the popular choice due to there not being a requirement to pay back a portion of the debt as there is in Chapter 13 bankruptcy. That being said, Chapter 13 may be a better chance, depending on your situation. For example, if you are behind on your mortgage and would like to keep your house, you can include your missed payments in your Chapter 13 payment plan and repay the debt over time. In Chapter 7 though, you run the risk of losing your house if your equity exceeds the exemption amount available to you. For this decision, it’s always a good idea to talk with an attorney first.