What is Bankruptcy? Bankruptcy is a legal way to avoid paying your debts. One client once referred to her bankruptcy filing as her "Jubilee Year", referring to the forgiveness of debt in Leviticus 25. We have no Jubilee Year today, so bankruptcy is the only method for some people to keep their home from foreclosure, their car from repossession and to keeping creditors from harassing them.
When a person is discharged in bankruptcy, he or she is relieved from liability for most debts incurred before the bankruptcy was filed and protected from future collection of those debts. The purpose of bankruptcy is to give you a "fresh start," and the bankruptcy code is interpreted by the Courts to give effect to these words.
What Kinds of Bankruptcy Are There? There are two main types of consumer bankruptcy: Chapter 7 and Chapter 13. (The other two chapters, Chapter 11 and Chapter 12, apply to corporations and people who don't qualify for a Chapter 13, and to family farmers.) Chapter 7 is what most people think of when they think of bankruptcy. All of the debtor's assets with the exception of exempt items or assets with no equity can be sold and the proceeds are distributed among the creditors. A typical Chapter 7 bankruptcy will last about four or five months from filing to discharge. Chapter 13 provides a way for you to pay back your creditors, in whole or in part, over a period of three to five years. You must have less than $269,250 in unsecured debt (such as credit cards and doctor's bills) and less than $807,750 in secured debt (such as mortgages and car loans) to qualify for Chapter 13. Due to the Court-approved payment plan, a Chapter 13 bankruptcy will last between three and five years, although attorney involvement usually ends after about three months. In many cases, no interest will be paid on the amounts being repaid through the Chapter 13 Plan, you pay your unsecured creditors only pennies on the dollar, and you keep all of your assets.
What's Involved in Filing for Bankruptcy? A bankruptcy is started by filing a Petition with the U.S. Bankruptcy Court. The requirements for the petitions vary depending on the Chapter under which the bankruptcy is filed, but involve detailed forms and schedules. Filing fees are $200 for a Chapter 7 and $185 for a Chapter 13. Attorneys fees generally range from $500-$750 for a Chapter 7 and $1500-$1700 for a Chapter 13. Bankruptcy is very complicated and it is extremely difficult for a debtor to file for bankruptcy without the help of an attorney.
Will I Lose Everything If I File? A person who files for bankruptcy may exempt certain items from the bankruptcy. In most cases, this lets you keep your home, your car, your furniture, your household items and your retirement. Different states have different allowances for exemptions. You also can keep assets that have no equity, such as a car that's worth less than is owed on it, or a house where the mortgage is higher than the property value. Even if there is a small amount of equity, you can normally keep the asset.
Can All My Debts Be Wiped Out? There are certain debts which cannot be discharged. Federal and state taxes incurred less than three years before the date of filing (although you may get more time to pay them back), student loans (except where you can show "undue hardship"), child support and alimony are the big ones.
What Happens Once I File? Once the Petition is filed, the Court issues an Automatic Stay. This stops all legal proceedings against you. Foreclosures, repossessions and garnishments are halted, creditors cannot call or write you, and lawsuits against you can not be filed or pursued if they are pending.
Are Different Creditors Treated Differently? Creditors are broken down into three main classes: priority, secured and unsecured. Priority creditors are those creditors which are given special (and priority) treatment under the law for collection of the money owed them. They are paid first. Some examples of priority creditors are the IRS and people owed child support or alimony. Secured Creditors have next call. These are creditors who have a security interest or lien in or on your property, such as a bank holding a mortgage on your home or a finance company holding a lien on your car. Most of the time, secured creditors will be paid. Everyone else is an Unsecured Creditor. Credit cards, loans from banks and individuals, doctor's bills, some taxes that are old enough, and general claims for money are all unsecured debt. In most cases, unsecured creditors get nothing or only a portion of what they are owed. You may also terminate Executory Contracts, such as leases for an apartment, car or equipment, in a bankruptcy.
How Do I Keep My House and Car? If your payments are current, you have to keep making them. If you're behind, you can pay the arrearage through a Chapter 13 Plan and re-start the payments after you file.
Where Can I Get More Information? The California State Bar puts out a rather detailed brochure that is available on-line by clicking here. It is in Adobe PDF format, and you will need to download the reader, if you don't already have it installed, by clicking here.
Bankruptcy is a complex and confusing area of the law. You need legal advice you can count on to guide you through the process. We are experienced in helping you through your financial difficulties. If you have any questions, please call us at (619) 448-2129 or e-mail us to set up an appointment. We are a bankruptcy and debt relief agency. We help people file for bankruptcy.
About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.