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Bankruptcy 101
Bankruptcy is a legal proceeding in which a person who can not pay his or her bills can get a fresh financial start. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law.
What Can Bankruptcy Do for Me?
Bankruptcy may make it possible for you to:
(1) Eliminate the legal obligation to pay most or all of your debts. This is called a “discharge” of debts. It is designed to give you a fresh financial start.
(2) Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. (Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment.)
(3) Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
(4) Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt.
(5) Restore or prevent termination of utility service.
(6) Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.
What Bankruptcy Can Not Do
Bankruptcy can not, however, cure every financial problem. Nor is it the right step for every individual.
In bankruptcy, it is usually not possible to:
(1) Eliminate certain rights of “secured” creditors. A creditor is “secured” if it has taken a mortgage or other lien on property as collateral for a loan. Common examples are car loans and home mortgages. You can force secured creditors to take payments over time in the bankruptcy process and bankruptcy can eliminate your obligation to pay any additional money on the debt if you decide to give back the property. But you generally can not keep secured property unless you continue to pay the debt.
(2) Discharge types of debts singled out by the bankruptcy law for special treatment, such as child support, alimony, most student loans, court restitution orders, criminal fines, and most taxes.
(3) Protect cosigners on your debts. When a relative or friend has co-signed a loan, and the consumer discharges the loan in bankruptcy, the cosigner may still have to repay all or part of the loan.
(4) Discharge debts that arise after bankruptcy has been filed.
What Different Types of Bankruptcy Cases Should I Consider?
There are four types of bankruptcy cases provided under the law:
(1) Chapter 7 is known as “straight” bankruptcy or “liquidation.” It requires an individual to give up property which is not “exempt” under the law, so the property can be sold to pay creditors.
Generally, those who file chapter 7 keep all of their property except property which is very valuable or which is subject to a lien which they can not avoid or afford to pay.
(2) Chapter 11, known as “reorganization,” is used by businesses and a few individuals whose debts are very large.
(3) Chapter 12 is reserved for family farmers and fishermen.
(4) Chapter 13 is a type of “reorganization” used by individuals to pay all or a portion of their debts over a period of years using their current income.
Most people filing bankruptcy will want to file under either chapter 7 or chapter 13. Either type of case may be filed individually or by a married couple filing jointly.
Chapter 7 (Straight Bankruptcy)
In a bankruptcy case under chapter 7, you file a petition asking the court to discharge your debts. The basic idea in a chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property, except for “exempt” property which the law allows you to keep. In most cases, all of your property will be exempt. But property which is not exempt is sold, with the money distributed to creditors.
If you want to keep property like a home or a car and are behind on the mortgage or car loan payments, a chapter 7 case probably will not be the right choice for you. That is because chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt.
If your income is above the median family income in your state, you may have to file a chapter 13 case (the New Jersey median family income for a family of four in 2011 is $103,261 -- your state’s figures may be higher or lower). Higher-income consumers must fill out “means test” forms requiring detailed information about their income and expenses. If the forms show, based on standards in the law, that they have a certain amount left over that could be paid to unsecured creditors, the bankruptcy court may decide that they can not file a chapter 7 case, unless there are special extenuating circumstances.
Chapter 13 (Reorganization)
In a chapter 13 case you file a “plan” showing how you will pay off some of your past-due and current debts over three to five years. The most important thing about a chapter 13 case is that it will allow you to keep valuable property--especially your home and car--which might otherwise be lost, if you can make the payments which the bankruptcy law requires to be made to your creditors. In most cases, these payments will be at least as much as your regular monthly payments on your mortgage or car loan, with some extra payment to get caught up on the amount you have fallen behind.
You should consider filing a chapter 13 plan if you:
- Own your home and are in danger of losing it because of money problems;
- Are behind on debt payments, but can catch up if given some time;
- Have valuable property which is not exempt, but you can afford to pay creditors from your income over time.
You will need to have enough income during your chapter 13 case to pay for your necessities and to keep up with the required payments as they come due.
What Does It Cost to File for Bankruptcy?
It now costs $306 to file for bankruptcy under chapter 7 and $281 to file for bankruptcy under chapter 13, whether for one person or a married couple. The court may allow you to pay this filing fee in installments if you can not pay it all at once. If you hire an attorney you will also have to pay the attorney fees you agree to.
If you are unable to pay the filing fee in installments in a chapter 7 case, and your household income is less than 150 percent of the official poverty guidelines, you may request that the court waive the chapter 7 filing fee. The filing fee can not be waived in a chapter 13 case, but it can be paid in installments.
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Next Step
With so many alternatives to managing debt, it is important to discuss all of your options with an experienced and knowledgeable professional.
Call us at 201-478-7412, or fill out the form below, to schedule an initial FREE phone consultation.
Our first conversation will simply be to talk about your financial situation and identify the best solution to fit your circumstances.
Whether you qualify for bankruptcy, need to respond to a foreclosure or other lawsuit from a creditor, we will provide you with valuable information for you to make an informed and educated decision that is most appropriate for your situation.
With so many alternatives to managing debt, it is important to discuss all of your options with an experienced and knowledgeable professional.
Call us at 201-478-7412, or fill out the form below, to schedule an initial FREE phone consultation.
Our first conversation will simply be to talk about your financial situation and identify the best solution to fit your circumstances.
Whether you qualify for bankruptcy, need to respond to a foreclosure or other lawsuit from a creditor, we will provide you with valuable information for you to make an informed and educated decision that is most appropriate for your situation.