WHAT IS BANKRUPTCY?

             Bankruptcy is your right to be relieved from your debts when your debts exceed your ability to pay.  This right is guaranteed by federal law.  Bankruptcy will generally allow you to keep necessary property, home, furniture, car, etc., and ensure that your future income will not be subject to your past debts.  Bankruptcy will stop wage garnishment, repossession and foreclosure, and may allow you to catch-up on past-due mortgage payments.  People often feel some degree of guilt when they consider bankruptcy.  However, in most cases, the factors that lead to bankruptcy are beyond your ability to control and the consequences to you and your family of not filing bankruptcy can be devastating.

 WHAT ARE THE TYPES OF BANKRUPTCY?

             There are two types of bankruptcy available to individuals and owners of small businesses.  These are Chapter 7 and Chapter 13.  Chapter 7, referred to as a "liquidation" bankruptcy, is the most common.  Chapter 13 is a "reorganization" of debts for consumers and small businesses.  This is an extremely useful form of bankruptcy, especially when you are behind on secured debts (such as your mortgage), you have debts that cannot be discharged in a Chapter 7 (such as taxes), or when you have unprotected property that you wish to keep.  There is also Chapter 11, which is like Chapter 13, but designed for wealthy individuals and larger businesses.

 CHAPTER 7 

            In a Chapter 7 bankruptcy, your case will stay open for four or five months.  After this period, your case is closed and you are relieved from responsibility ("discharged") for most of your debts.  Some common debts that are not discharged are most taxes, alimony and child support, most student loans, and debts based on fraud.  YOU SHOULD NOT USE YOUR CREDIT CARDS if you are considering bankruptcy.  Such charges may be seen as fraud and may not be dischargeable in a Chapter 7 Bankruptcy.  You must continue to pay secured creditors, such as your mortgage or auto lenders, in order to keep the secured property.  You may elect to give up such property if you cannot or do not want to continue making payments.

 CHAPTER 13  

            In a Chapter 13 bankruptcy, you enter into a plan to repay a portion of your debts over a period of up to five years.  In order to qualify for Chapter 13, you must have "excess income."  Excess income is what is left over after paying your necessary expenses, such as rent, food, clothing, utilities, insurance, etc..  Your excess income is paid to the trustee, and then distributed to your creditors.  At the end of the plan, many debts that have not been paid in full are discharged.  Some debts that cannot be discharged in a Chapter 7 may be discharged at the end of a Chapter 13.  If you are behind on your mortgage or car payment, or other secured debts, you can use the period of the Chapter 13 Plan to catch-up on the back payments while you continue making the future monthly payments.  In some cases, debts with secured creditors (car loans, etc.) may be altered and reduced.  Most taxes can be paid without further penalties.  While you are current with payments under the plan, creditors are prevented from taking action against you or your property.

 HOW DOES BANKRUPTCY WORK?

             You start a bankruptcy by filing a set of papers with the Bankruptcy Court.  A bankruptcy trustee is appointed to look over your case.  Your creditors are given notice by the Bankruptcy Court that a bankruptcy has been filed and that during the bankruptcy they are forbidden from taking any action against you or your property.  This prohibition (called the "automatic stay") generally prevents foreclosures, repossessions, the continuation of lawsuits, or even telephone calls.  In the paperwork, you list all of your assets and all of your debts.  You are permitted to keep certain property in the bankruptcy by claiming it as "exempt."  There are exemptions available for your home, your car, household furnishings, clothing, jewelry, etc..  In the majority of cases, you will be able to exempt, and therefore keep, all of your assets.  You will have to make one appearance in court.  This appearance is before the bankruptcy trustee.  You will be placed under oath and required to answer questions regarding your financial situation.  This court appearance is usually over quickly and is generally far less traumatic than you would imagine.   

WHAT ARE THE ADVERSE EFFECTS OF A BANKRUPTCY?

             Your credit record will be damaged by a bankruptcy.  A Chapter 7 and a failed Chapter 13 will remain on your credit record for ten years.  A successful Chapter 13 will remain on your credit for seven years.  This does not mean that you cannot get new credit.  However, you will probably have higher interest rates and higher down payments.  Credit will be available, but use it judiciously.  Do not assume that your current income will last forever.  Your job may end, you may have health problems, or other matters may arise that will prevent you from paying the new debt.  Experience shows that very few people need more than one bankruptcy, and many people find they can buy a house or a car on credit and obtain other types of credit in the years that follow a bankruptcy.

 THE BANKRUPTCY REFORM ACT

             There are new laws being proposed in Congress which may dramatically change the way bankruptcy cases are administered.  The proposed changes will make bankruptcy more expensive and more difficult for most debtors.  Credit cards and certain other debts will be more difficult to discharge.  Many debtors who would previously have chosen to use a Chapter 7 "Liquidation" Bankruptcy will have to use a Chapter 13 partial repayment plan.  Because the proposed changes will require a great deal more attorney time and knowledge, the attorney's fee for cases filed after the changes will increase significantly.  If you are considering bankruptcy, you should consider filing your bankruptcy BEFORE the proposed changes become law.