Many people may want to get out from under overwhelming debt, but they may wonder how does bankruptcy work?
The first thing they should realize is that bankruptcy may not be able to eliminate all their debt. In some cases, it can wipe out all your liabilities, but certain types of debts like student loans, secured loans, child support, alimony and tax debts may persist even if you win your bankruptcy case.
Types of bankruptcy
There are three main types of bankruptcy filings in the United States:
• Chapter 7 – A debtor with minimal or no assets available for liquidation can file Chapter 7 as a “no-asset” case. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 set income thresholds for debtors to file Chapter 7 claims. Individuals and businesses may file for this type of claim. In some cases, you may be able to avoid liens on your property with a Chapter 7 filing.
• Chapter 13 – A Chapter 13 bankruptcy is an “Adjustment of Debts” in which the debtor repays the loan using a repayment plan set by the courts. The debtor is able to keep their assets and property using the Chapter 13 claim. This filing is a good alternative for debtors whose income level is too high for a Chapter 7 filing. The repayment period is from three to five years.
• Chapter 11 – A Chapter 11 filing is available to business owners and involves a reorganization of the business to include a repayment plan for at least part of the existing debt. The court, however, may discharge some of the debt to relieve the burden on the business.
Other types of filings are Chapter 12 for farmers and fishing professionals, Chapter 9 for municipalities that are in debt, and Chapter 15 for debtors that have assets in at least one foreign country.
The courts can eliminate some types of debt that you may own and are having difficulty paying.
• Credit card debt – Bankruptcy is a great alternative for wiping out credit card debt unless that debt is of the “secured” type. A secured credit card is one in which the creditor has a lien on some or all of your property. If you default on the debt, the creditor has the right to repossess the security on the loan.
• Unsecured debts – A bankruptcy court can discharge all or some of your unsecured debts. These debts can include bank loans and other types of loans. Home and car loans are typically secured debts in which the creditor can repossess the property if you fail to make your loan payments.
Bankruptcy generally cannot relieve you of the following types of obligations:
• Secured debts – If a creditor has a lien on your property for a secured debt, then the bankruptcy will not prevent the creditor from repossessing that property. A Chapter 7 filing, however, may offer the debtor ways of avoiding liens. For example, the debtor may be able to redeem their property by paying the creditor the current replacement value. Property pledged as collateral, other than homes or personal cars, can also avoid liens in some cases.
• Student loans – At one time, bankruptcy was a popular way of finding relief from burdensome student loans. However, current law only allows bankruptcy for student loans in cases that involve “undue hardship.” According to this standard, the debtor must not only be unable to pay their loans at the time of filing, but they must also show a low likelihood of being able to meet their obligations in the future.
• Alimony and child support obligations – Bankruptcy will not protect debtors from having to pay their child support and alimony payments. A Chapter 13 filing will require that you fully pay these obligations at the same rate as before the bankruptcy.
• Tax debts – In most cases, the court will not discharge tax debts although there are some exceptions. For example, some old income tax debts may be eligible for discharge. However, you must meet strict requirements in order to receive this type of relief.
• Non-dischargeable debts – Certain types of debts do not qualify for relief through bankruptcy. These include debts that you fail to list in your filing, debts resulting from legal fines or penalties, and debts caused by drunken driving. Debts involving fraud on the part of the debtor may also be non-dischargeable.
Some other benefits of bankruptcy
In addition to the benefits listed above, bankruptcy can stop collection activities and harassment by creditors. A Chapter 13 bankruptcy can stop a foreclosure on your home. The court can force the lender to accept a repayment plan that you can afford instead.
A Chapter 13 will also allow you to keep all your non-exempt property so long as you make your repayments.
In certain instances, you may be able to have the court reduce a secured debt to the security’s replacement value. For example, if you still owe $12,000 for your car that is now worth only $10,000, the court could reduce the debt to $10,000 discharging the remaining $2,000.
Certain property is exempt, and creditors have no access to taking possession of that property. The definition of exempt property differs from state to state. In some states, for example, the home where you live is exempt up to a certain dollar amount.
Filing for a Chapter 7 will require meeting the income threshold through a “means test.” Even when the debtor exceeds the threshold, they will still have the option of filing a Chapter 13 claim.
In all cases, it is best to seek the advice and representation of bankruptcy lawyers to help you with your filing. They will have the experience and expertise that you need to have maximum chances of success. They can quickly analyze your case to see what type of claim is right for you.
While it is possible to file a claim on your own, there are many possibilities of error that you can easily avoid by utilizing the services of a professional attorney.