Bankruptcy is not your first choice, but it might be your best–and wisest. Find out more here.
Important Notice: This discussion is intended only as a brief overview of the types of bankruptcy filings and of what a bankruptcy filing can and cannot do. No one should base a decision as to whether or not to file bankruptcy solely on this information. Bankruptcy law is complex, and there are many considerations that must be taken into account in deciding whether or not to file. Anyone considering bankruptcy is encouraged to NOT make a decision about bankruptcy without seeking the advice and assistance of an experienced attorney who practices nothing but bankruptcy law.
Disclaimer: The information contained in this FAQ is provided for general information purposes only and is not intended to be a legal opinion, legal advice or a complete discussion of the issues related to the area of consumer bankruptcy. Every individual’s factual situation is different and you should seek independent legal advice from an attorney familiar with the laws of your state or locality regarding specific information.
THERE IS NO SUBSTITUTE TO SPEAKING WITH AN EXPERIENCED BANKRUPTCY ATTORNEY
ENJOY THE INFORMATION AVAILABLE HERE BUT FOR THE BEST HELP, CONTACT US DIRECTLY FOR YOUR FREE INITIAL CONSULTATION (UP TO 60 MINUTES)
What is bankruptcy?
Why file a bankruptcy?
What types of bankruptcy are there?
What is the Automatic Stay Protection?
What is a Chapter 7 bankruptcy?
What is a Chapter 13 bankruptcy?
What is a Chapter 11 bankruptcy?
What can bankruptcy do?
What can bankrupty not do?
What are exemptions and how do they help?
What is bankruptcy’s effect on credit?
What will happen to my home and car if I file for bankruptcy?
What about Credit Counseling Agencies and debt consolidation plans?
Bankruptcy is a procedure provided by federal law and based on the United States Constitution. Bankruptcy permits a person (or business entity) who cannot pay bills as they become due some debt relief. This is called a fresh start. The law eliminates the legal responsibility to pay for some or all of the debt. All bankruptcy cases are handled in federal court. An important right of the debtor is his or her exemptions. This is property that is protected under bankruptcy laws from creditors. Even though bankruptcy is a Federal proceeding in Federal Court we use the Iowa exemptions to protect property. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law. For more details
Bankruptcy helps individual, families and businesses avoid the kind of permanent discouragement that can prevent them from ever reestablishing themselves as productive members of society. It can directly relieve the stress and strain associated with burdensome debt. Bankruptcy ultimately fosters creativity and the entrepreneurial spirit by clearing out the obstacles of past debt which block personal and business progress. In a sense, it is an incentive and tool to become financially healthy again. What most debtors don’t realize is that bankruptcy is a basic economic factor, right and reality accounted for in the business plans of competent creditors and is considered in provisions of the US tax structure that benefit creditors.
The U.S. Bankruptcy Code is divided into chapters. The chapters that usually apply to consumer debtors are chapter 7, known as a “straight or liquidation bankruptcy”, and chapter 13, which involves an affordable plan of repayment. There is also a chapter 11 reserved for reorganizing businesses and chapter 12 for family farmers and family fisherman.
An important feature in all types of bankruptcy filings is the automatic stay. The automatic stay stops most lawsuits, repossessions, foreclosures, evictions, garnishments, attachments, utility shut-offs and debt collection harassment. It offers debtors a breathing spell by giving the debtor and the trustee assigned to the case time to review the situation and develop an appropriate course of action. In most circumstances, creditors cannot take any further action against the debtor or the property without permission from the bankruptcy court.
A chapter 7 case applies to individual, married and business debtor(s). In a chapter 7 case the bankruptcy court appoints a trustee to examine the debtor’s assets to determine if there are any which are not protected by available “exemptions”. (See below for Iowa exemptions). Exemptions are laws that allow a debtor to keep certain types and amounts of money and property. For example, exemption laws allow a debtor to protect equity in the debtor’s residence, motor vehicle, household goods, life insurance, health aids, retirement plans, specified future earnings such as social security benefits, child support, and alimony, and certain other types of personal property.
If there is any non-exempt property, it is the trustee’s job to sell it and to distribute the proceeds among the unsecured creditors. Although a liquidation case can rarely help with secured debt (the secured creditor still has the right to repossess the collateral if the debtor falls behind in the monthly payments), the debtor will be discharged from the legal obligation to pay unsecured debts such as credit card debts, medical bills and utility arrearages and deficiencies on repossessed collateral. However, certain types of unsecured debt are allowed special treatment and cannot be discharged. These include alimony, child support, criminal fines, most student loans and new taxes.
It is common that most people filing for chapter 7 bankruptcy are largely protected by the exemption laws and lose none or little of their assets during bankruptcy. For more details
A chapter 13 case is for individuals and married couples. In it the debtor proposes a plan, following rules set forth in the bankruptcy laws, to repay certain creditors over an extended period of time. The money comes from future income over the next three to five years. The length of the plan depends upon how much money a person or a household makes and remains after reasonable and necessary expenses such as housing and food.
A chapter 13 filing is a good choice when a debtor needs to get caught up on mortgages or car loans in the face of foreclosure or repossession threats. The debtor is allowed to keep both exempt and some nonexempt property. The debtor’s plan is a document outlining to the bankruptcy court how the debtor proposes to dispose of the claims of the creditors. The debtor’s property is protected from seizure from creditors, including mortgage and other lien holders, as long as the proposed payments are made and necessary insurance coverages remain in place. The plan generally requires monthly payments to the bankruptcy trustee over a period of three to five years. Arrangements can be made to have these payments made automatically through payroll deductions. For more details
By and large, chapter 11 is a type of bankruptcy reserved for large corporate reorganizations. Chapter 11 shares many of the qualities of a chapter 13, but tends to involve much more complexity on a much larger scale. You can learn more about chapter 11 from the following resources: Click here or go to the “Bankruptcy Basics” brochure prepared by the Administrative Office of the United States Courts, dated June 2000, and which can be accessed over the internet by visiting the following website: www.uscourts.gov (Bankruptcy section)
Chapter 12 of the Bankruptcy Code was enacted by Congress in 1986, specifically to meet the needs of financially distressed family farmers and fishermen. The primary purpose of this legislation was to give family farmers and fishermen facing bankruptcy a chance to reorganize their debts and keep their farms. You can get more information about chapter 12 from the following resources: Click here or go to the “Bankruptcy Basics” brochure prepared by the Administrative Office of the United States Courts, dated June 2000, and which can be accessed over the internet by visiting the following website: www.uscourts.gov (Bankrupcty section)
1) Discharge liability for most or all of one’s debts. It provides a financial fresh start. When a debt is discharged, the debtor has no legal obligation to pay the debt.
2) Stop foreclosure actions on one’s home and provide an opportunity to catch up on missed payments. (Bankruptcy cannot change the terms of the first mortgage loan on your primary home, although in some limited cases it can change the terms of the secondary or subordinate loans).
3) Prevent repossession of a car or other property, or in some cases even force the creditor to return property after it has been repossessed.
4) Stop debt collection such as wage garnishment.
5) End debt collection harassment.
6) Restore or prevent termination of certain types of utility service.
7) In limited situations lower the monthly payments and interest rates on some secured debts, such as certain car loans.
8) Allow debtors an opportunity to challenge the claims of creditors who have committed fraud or who are otherwise seeking to collect more than an amount to which they are legally entitled or than you owe.
1) Eliminate certain rights of secured creditors. Although a debtor can force secured creditors to take payments over time in the bankruptcy process, a debtor generally cannot keep the collateral unless the debtor continues to pay the debt.
2) Discharge some types of debts such as child support, alimony, student loans, certain court ordered payments, criminal fines, and some taxes.
3) Protect all cosigners on their debts. If someone co-signed a loan which the debtor discharged in bankruptcy, the cosigner is still obligated to repay whatever part of the loan is not paid.
4) Discharge debts that are incurred after bankruptcy has been filed.
The law allows you to start over with some assets. It provides exemptions for basic assets. Even though bankruptcy is essentially a federal law, it allows you to use Iowa exemptions to protect your property. The good news is that Iowa exemptions are fairly generous. What is exempt is an allowable statutory amount in your “equity.” Exempt equity is generally free from the claims of your creditors. For example, Iowa is one of the three states that has an unlimited homestead equity exemption. This means that you could have a lot of equity in your home (e.g. $100,000) and this generally cannot be touched by your creditors (except of course your mortgage company and creditors with past due balances which existed before you had a homestead).
In determining whether property is exempt, you must keep a few things in mind. The value of the property is not the amount that you paid for it but what it is worth now. Remember that property generally depreciates over time and this is especially true for cars, furniture and other household items. These items may be worth substantially less than what you paid for them–fair market value but usually at a distress sale or auction. ANd you do not get money for its sentimental worth.
So you first find out the exemption amount and then figure out your equity in the property. You calculate your exemptions by taking the property’s full value minus any money that you owe on secured loans, mortgages or liens. For example, if your car is worth $7,800 with an outstanding loan balance of $5,000, you count your exemption against the $2,800.00, which is the equity (the money left over after paying the debt if you sold it). In Iowa you receive $7,000 of equity exemption in a car per debtor. So in this example you would be fully exempt. This principle applies to cars, furniture, tools of your trade, cash and any secured debt that you may wish to claim as exempt.
While your exemptions allow you to keep property even in a Chapter 7 case, your exemptions usually do not make any difference to the right of a mortgage holder or car loan creditor to take the property to cover the debt if you are behind. In a Chapter 13 case, you can keep all of your property if your plan meets the requirements of the United States Bankruptcy Code, which includes catching up over time on the arrearages you owe. In general, you will have to pay the mortgages, secured loans and certain kinds of liens as if you didn’t file bankruptcy.
In our district, we use the Iowa exemptions. Some of the more important ones are:
1. Unlimited exemption (generally) in real estate used as primary residence or homestead, not to exceed ½ acre in town or city and 40 acres in the country
2. $7,000 equity in one motor vehicle per person
3. $7,000 in household goods and wearing apparel per person
4. $1,000 in tax refunds and accrued wages per person
5. $10,000.00 in tools of the trade for non-farmer
6. Life insurance policies
7. Pension plans, IRAs, employer sponsored retirement plans
8. $1,000 cash on hand or wildcard per person
These exemptions generally cover the assets in a vast majority of consumer cases so that rarely is property sold by the trustee to make payments to creditors.
By federal law, a bankruptcy can remain part of a debtor’s credit history for 10 years. Whether or not the debtor will be granted credit in the future is unpredictable, and probably depends more on what good things the debtor does in the nature of keeping a job, saving money, making timely payments on secured debts, etc., than the fact that the debtor filed bankruptcy.
In some cases it may actually be easier to obtain future credit after bankruptcy, because new creditors may feel that since the old obligations have been discharged, they will be first in line. The also recognize that the debtor cannot again file bankruptcy for at least the next four years in the case of chapter 13 or eight years in the case of chapter 7. The truth is that if a debtor cannot pay his or her bills, and the debtor’s credit is already ruined or exhausted, filing bankruptcy can actually be an important first step in re-building credit.
In most cases, you will not lose your home or car during your bankruptcy case as long as your equity in the property is exempt, you are current on payments and you can continue to make payments in the future. Even if your property is not fully exempt, you will be able to keep it if you pay its non-exempt value to creditors in a Chapter 13 case.
However, some of your creditors may have a “security interest” in your home, automobile or other personal property. This means that you gave that creditor a mortgage on the home or put other property up as collateral for the loan. These creditors need to be paid if you want to keep the property–including any arrearages you have (which can be part of chapter 13 plan payments).
Reputable credit counselors can advise you on managing your money and your debts. They may also be able to develop a plan to repay your debts. This is useful if you have a small amount of debt compared to your income and you can get all your creditors on board. Most credit counselors though are not reputable and charge high fees and require contributions that will actually cause you to fall deeper into debt. Also, many misrepresent their non-profit status and/or their affiliations with religious or charitable organizations.
A repayment program is often as bad on your credit report as bankruptcy, as far as new lenders are concerned. The creditors continue to make negative reports to the credit reporting agencies. Also the creditors are just volunteering the change—it is not an enforceable legal change in your contract with them. As a result the change is at their whim. They are not required to continue accepting the repayment plan instead of suing or collecting directly from you, either. It is voluntary.
Bankruptcy is not voluntary for the creditors. A federal court steps in to protect you against them. Also most credit counseling programs do not address the entire debt problem, including homes and car loans. It is also important to shop carefully for credit counseling programs as they are not regulated in many states and some have turned out to be scams.
Finally, when debt is negotiated, settled and resolved out of court the debt “forgiven” is considered taxable income. The IRS usually is notified by law of the unpaid amount. The debtor needs to pay income tax on this amount unless there is proof of insolvency at the time the debt is settled. This is a surprise and financial shock for most people settling debt.
Liptak Law Offices recommends that if a person seeks the credit counseling services from a group it should be done with caution. Only use a company that has been approved by the United States Trustee Department or the Bankruptcy Administrator.