It's an unfortunate fact that difficulties with debt repayment have become a growing problem for many people. There are many life circumstances that can bring about financial strain. Some are dramatic such as a job loss, medical complications or the death of a loved one unable to carry life insurance. Others issues may be due to student loans or too much credit card debt. The constant stress, sleepless nights and credit collections activity are all enough to make a person consider bankruptcy, but there are many things to consider before going down that road. Here are a few of the basics:
Types of Bankruptcy
The two most common forms of bankruptcy are Chapter 7 and Chapter 13. There are details that will vary from state in terms of how filing works and who is eligible, but in general, chapter 7 will wipe out most of a person's debt, while chapter 13 is a repayment option.
Certain exclusions that apply to a Chapter 7 bankruptcy include student loans, alimony, and taxes to name just a few. Once a discharge is received on the debt from a Chapter 7, the debtor is no longer obligated to pay, and creditors are no longer legally allowed to contact the debtor in attempts to collect. If a decision is made to include a house or car in a Chapter 7, these items will return to the bank that provided the loan and the debtor loses all equity that was gained. The debtor is not legally allowed to keep these items any longer. The bank is then legally permitted to resell those items for the amount that was still owed to another buyer.
A Chapter 13 bankruptcy allows the debtor to repay debt over the course of three to five years via a restructured payment plan. If the debtor has a job, this can be a better option than a Chapter 7 because it can allow the debtor to keep their house and car while getting caught up on their debt if timely payments are made as outlined by the plan. Basically, it suspends collections efforts and puts a stop to their phone calls, mail and other possible modes of communication. Because Chapter 13 is a repayment plan, the debtor can often include student loans, alimony, many tax debts, and other debts that may otherwise be excluded from a Chapter 7. Chapter 13 also protects co-signers from collections efforts.
A debtor is only eligible for a Chapter 7 when all other types of bankruptcy are exhausted and an attempt has been made to go through credit counseling, but the debtor could not keep up with the credit counseling plan. A Chapter 7 can be filed by an individual or a business.
An individual, self-employed worker or a business may be eligible for Chapter 13 provided attempts at credit counseling have been made prior to filing. Corporations and partnerships are not eligible for a Chapter 13.
How Filing Works
While it is possible to file for a Chapter 7 or Chapter 13 bankruptcy without an attorney, filing involves a great deal of paperwork. So unless the debtor has the time to research the specifics for what is needed in their particular state and the patience for all the paperwork, it is certainly more convenient to get a bankruptcy attorney.
For a Chapter 7 or Chapter 13, the debtor will need to file their petition with the local bankruptcy court in the area in which they live. Additional paperwork that will be needed includes:
- List of assets and debts
- Income and living expenses
- Statement of financial matters
- Schedule of outstanding contract services and leases
- Most recent year tax return
- Credit counseling certificate and debt repayment plan
- Two months worth of paycheck stubs and any additional net income or potential income increases or decreases
- A statement of any interest accrued in state or federal education or tuition accounts
- Legal identification
There will be a case filing and administrative fees charged with both chapters, and Chapter 7 may also include a trustee surcharge. It is possible to request a repayment plan for the fees. Under a Chapter 7, there are some states that have property exemptions. In cases such as these, the collections actions must legally stop against those properties.
Both chapters include a Trustee as a part of the bankruptcy process. In a Chapter 7, the Trustee's main focus is to get the best possible selling price for all of the debtor's applicable assets so that the creditors will get the best possible financial gain for those assets.
In a Chapter 13, the Trustee acts more as a mediator between the debtor and creditors. This includes the debtor being placed under oath and asked questions by both the trustee and their creditors about their financial situation for the purpose of creating the repayment plan. They then all attend a court hearing in connection to the repayment plan.
Once the court approves the repayment plan, it is usually set up to be a bi-weekly or monthly plan with a payment going to the Trustee. This payment can be done via wage garnishment. From that lump sum, the Trustee then distributes the specific payments that have been designated for each creditor. Within that plan are priority claims, secured, and unsecured. Priority includes items such as court costs and taxes. Secured includes items with collateral attached to them such as a car or house. Unsecured usually applies to an item such as credit card debt.
Discharge of Debts
The typical items included in either a Chapter 7 or Chapter 13 are, in general, items for which collections efforts can be made on the debtor. A few exceptions to this are that the debtor must keep up with any payments for a home mortgage or car loan in a Chapter 13. It is possible to convert a Chapter 13 to a Chapter 7 in the event of a hardship, or vice verse for those who come into the necessary income for a Chapter 13 repayment plan.
These are just a few of many things to keep in mind when considering filing for bankruptcy. It's also a good idea to seek the advice of an attorney or an accountant.