- What is a bankruptcy?
- What is a Chapter 7 bankruptcy?
- What are the pros and cons of filing a chapter 7 bankruptcy?
- What is a Chapter 13 bankruptcy?
- What are the pros and cons of Chapter 13 bankruptcy?
- What does bankruptcy do to my credit?
- Will bankruptcy wipe out all my debt?
- Will I qualify for bankruptcy?
What is a bankruptcy?
Bankruptcy is a court procedure where people or businesses can 1) eliminate all or a portion of their debt; 2) reorganize their finances to repay a portion of the debt over time. The most common forms of bankruptcy for individuals are those found under Chapter 7 or Chapter 13 of the bankruptcy code.
What is a Chapter 7 bankruptcy?
Chapter 7, also known as a fresh start bankruptcy, is a Court procedure where one’s debt is discharged (wiped out) and non-exempt assets are sold to pay off debt owed to creditors. Each state has its own set of exempt property (things that can be kept). In California most people keep their cars (as long as they are not valued too high), their clothes, furniture, appliances and basic jewelry. Chapter 7 bankruptcies are frequently filed by people with a lot of debt and not a lot of assets. The entire process usually takes a few months and involves one meeting before a case trustee appointed by the Court.
What are the pros and cons of filing a chapter 7 bankruptcy?
Generally a Chapter 7 bankruptcy is fast and relatively inexpensive. Disadvantages include the inability to permanently save a home from foreclosure and the inability to strip a lien from property. Also, a trustee can sell your assets to pay creditors and once the Chapter 7 is filed, it is difficult to change your mind.
What is a Chapter 13 bankruptcy?
Chapter 13, also known as the reorganization bankruptcy, is a Court procedure where you use your best efforts to pay your creditors what you can afford over a period of three to five years. You keep everything you own, but your creditors must receive at least what they would have gotten had you filed a Chapter 7 bankruptcy. At the end of the time period, your remaining unsecured debt is discharged (wiped out). Only individuals can file a Chapter 13 bankruptcy. There are strict debt limits for chapter 13 so people who owe too much money cannot qualify and must file a Chapter 11 bankruptcy to achieve the same results. The vast majority of people who file Chapter 13 bankruptcies do so to catch up on missed mortgage payments. Others don’t qualify for a Chapter 7 bankruptcy. Many do so to strip off junior liens from property. You can also cram down (reduce to current value) car loans under certain circumstances. A plan is submitted to the Court for approval and regular plan payments must be made. The entire process takes about three months from filing to confirmation of the plan, and three to five years before discharge.
What are the pros and cons of Chapter 13 bankruptcy?
Advantages include paying back mortgage arrearages over time, stripping liens, cramming down loans and keeping all your property. Disadvantages include a 3 to 5 year time commitment and about double to triple the costs of a Chapter 7 bankruptcy. In addition, tax planning is usually required.
What does bankruptcy do to my credit?
The bankruptcy stays on your credit report for ten years. Old debt is wiped out and your credit improves over time. New credit can be established once the old debt is wiped out and if you pay on time, your credit score goes up. A new credit card can be established immediately during the bankruptcy process. Ask us how. A generation or two ago, bankruptcy had quite a negative stigma; however in the recent recession, since so many people have filed, the stigma has been reduced dramatically.
Will bankruptcy wipe out all my debt?
Some types of debt just can’t be eliminated in bankruptcy. Here is a short list of the most common:
Spousal support ( alimony), child support, fines (like parking tickets), most taxes (however income taxes over three years old may be wiped out), loans you received by making false statements, drunk driving debts and student loans (unless you can prove that they are a great hardship).
Will I qualify for bankruptcy?
A means test is used to determine if you have the “means” to pay back some or all of your debt. It is used for Chapter 7 filings, but not for Chapter 13 filings. A similar test is used in Chapter 13 cases to determine if the plan will be three or five years long. The means test is by and large, a mathematical exercise, however even if you qualify, the Court can still object based on “the totality of the circumstances.” The means test is only used for consumer debt (personal) so if your debt is mostly (more than 50%) business related there is no means test applied. The means test is complicated but there are some general rules-of-thumb you can use without getting into detailed calculations. For the most part, if you haven’t made a lot of money in the past six months and you have considerable debt, you probably qualify. A practicing bankruptcy attorney will apply the means test early in the process to make sure there are no problems. I usually do some informal calculations in my head upon the first inquiry by a client. A detailed financial analysis is later performed once I have been retained and gathered all the information needed.
