Filing a bankruptcy petition causes creditors to immediately stop their actions to collect a debt, to repossess property, and to foreclose on a mortgage without court permission. For individuals and married couples, the two most common types of bankruptcy filings are the Chapter 7 Bankruptcy and the Chapter 13 Bankruptcy, each of which are discussed below.
A Chapter 7 Bankruptcy is commonly referred to as a "liquidation" bankruptcy or "straight" bankruptcy. Under a Chapter 7 Bankruptcy, all of the Debtor's non-exempt assets are sold or otherwise liquidated to create a fund to pay creditor's claims. In exchange, a Debtor's debts are discharged. That is, the legal duty to pay those debts is extinguished. However, a
Chapter 7 Debtor may (if he or she feels a moral obligation)
voluntarily pay a discharged debt at any time in the future. Although a Chapter 7 Bankruptcy discharges debts, it generally does not discharge liens. Thus, while the obligation to pay a mortgage note may be discharged - the mortgage lien is not. Therefore, to keep a mortgage company from foreclosing on its lien, a Chapter 7 Debtor may agree to pay or reaffirm the mortgage note. If the Debtor has no equity in his home over and above his exemptions, the Debtor may "keep" the home even though he has filed Chapter 7 Bankruptcy petition and successfully discharged his debts.
"Exempt" property is property which under state or federal law may be retained by the Debtor because the law deems the property to be necessary for the functioning of your household. In other words, exempt property will not be seized and sold to satisfy or pay the Debtor's debts. The dollar limits and kinds of "exempt" property vary from state to state.
Some common examples of "exempt" property in California include: retirement benefits, some insurance proceeds, tools for your trade, under $50,000 equity in real estate if single, $75,000 if married and $125,000 if over age 55; $1,900 equity in an automobile; and $5,000 in jewelry, heirlooms, and art. A lien, however, can impair an exemption. Thus, if a Bankruptcy Debtor has given a lien on his household goods (e.g. a refringerator, washer and drying, etc...) to secure a loan or credit financing, the Debtor must reaffirm the loan or redeem (pay for) the value of the appliance or furniture to keep it.
In contrast to the Chapter 13 Bankruptcy (discussed below), certain debts are typically "non-dischargeable." This means that a creditor can object to their discharge. Some common non-dischargeable debts include: (1) child support; (2) alimony; (3) back taxes; (4) student loans less than 7 years old; (5) government fines and penalties; (6) debts that the debtor failed to list in the bankruptcy petition; and (7) debts for fraud, embezzlement, larceny, malicious (intentional) injury to another person or their property, and debts for credit obtained with a false financial statement (where you intentionally omitted debts from your credit application in order to obtain credit).
While a Chapter 7 Bankruptcy just wipes the slate clean, a Chapter 13 Bankruptcy involves the creation of a court approved repayment plan to pay off all, or some, of the Debtor's debt over a 3 to 5 year period. The Chapter 13 Bankruptcy is therefore designed for people who have some regular income over and above their current living expenses (for food, rent, clothing, utilities, etc.), and want to retain some of their assets. After making your payments for the required time period, if debt
remains it will bedischarged, except alimony, child support, and some taxes. Usually, under a Chapter 13 Bankruptcy, no property is lost. A default on a home mortgage can be cured by paying the arrearages owed to the lender to the Chapter 13 Bankruptcy trustee. Property given as security can be redeemed at its resale value or through payments to the Trustee.
For a Chapter 13 Bankruptcy Plan to be Court-approved (or
confirmed), the Plan must, amongst other things:
- Be proposed in good faith;
- Offer to pay more to the creditor's than would be received if the Debtor's assets were liquidated under a Chapter 7 Bankruptcy filing;
- Show the Debtor is applying all of his "disposable income" to the Plan;
- Show the Debtor can afford to make the required payments offered under the Plan; and
- Provide for the full payment of priority claims (e.g. child support claims and taxes).
Before proceeding to file either a Chapter 7 or Chapter 13
Bankruptcy petition, consider consulting with a bankruptcy attorney. The laws vary from state to state. In addition, while many paralegal services offer to prepare the paperwork for a very small fee, they cannot offer legal advice and often disclaim any responsibility or liability for errors, mistakes, and omissions. The risk of failing to properly include and categorize a debt may outweigh the benefit of eliminating what generally are very reasonable attorney's fees.