Bankruptcy and Credit Repair
Bankruptcy is a federal court process designed to help consumers and businesses eliminate
their debts or repay them under the protection of the bankruptcy court. Bankruptcies
can generally be described as “liquidations” or “reorganizations.”
Chapter 7 bankruptcy is the liquidation variety — property is sold (liquidated) to
pay off as much of your debt as possible, while leaving you ith enough property to
make a fresh start. Chapter 13 is the most common type of “reorganization” bankruptcy
for consumers — you repay your debts over three to five years.
Both kinds of bankruptcy have numerous rules — and exceptions to those rules — about
what kinds of debts are covered, who can file, and what property you can and cannot
keep. Bankruptcies, of any kind, stay on your credit report for 10 years.
All decisions regarding bankruptcy should be considered very carefully and not taken
lightly.
Liquidation (Chapter 7)
Liquidation bankruptcy is called Chapter 7, and it can be filed by individuals (a
“consumer” Chapter 7 bankruptcy) or businesses (a “business” Chapter 7 bankruptcy).
A Chapter 7 bankruptcy typically lasts three to six months.
In a liquidation bankruptcy, some of your property may be sold to pay down your debt.
In return, most or all of your unsecured debts (that is, debts for which collateral
has not been pledged) will be erased. You get to keep any property that is classified
as “exempt” under the state or federal laws available to you (such as your clothes,
car, and household furnishings). If you don’t own much, chances are that all of your
property is exempt and you have what is known as a “no asset” case.
If you owe money on a secured debt (for example, a car loan, where the car is pledged
as a guarantee of payment), you have 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.
Not everyone can file for Chapter 7 bankruptcy. For example, if your disposable income
is sufficient, after subtracting certain allowed expenses and monthly payments for
certain debts (including child support and debts that secure property), to fund a
Chapter 13 repayment plan, you won’t be allowed to use Chapter 7.
Bankruptcy doesn’t work on some kinds of debts. Though bankruptcy can eliminate many
kinds of debts, such as credit card debt, medical bills, and unsecured loans, there
are many types of debts, including child support and spousal support obligations and
most tax debts that cannot be wiped out in bankruptcy.
Reorganization (Chapter 13)
Chapter 13 bankruptcy is also known as “wage earner” bankruptcy because, in order
to file for Chapter 13, you must have a reliable source of income that you can use
to repay some portion of your debt. And to qualify for Chapter 13, your secured debts
must be less than $922,975 and your unsecured debts less than $307,675.
When you file for Chapter 13 bankruptcy you propose a repayment plan that details
how you are going to pay back your debts over the next three to five years. The minimum
amount you’ll have to repay depends on how much you earn, how much you owe, and how
much your unsecured creditors would have received if you’d filed for Chapter 7.
If you have secured debts, Chapter 13 gives you an option to make up missed payments
to avoid repossession or foreclosure. You can include these past due amounts in your
repayment plan and make them up over time.
This weblog is sponsored by Ovation Law.