The Basics of Bankruptcy

Every year, more and more individuals file for debtor protection under the terms of a bankruptcy. Everyone deserves a second chance, and the laws governing bankruptcies in the United States agree with this by allowing individual and business debts to be pardoned.

If you're considering bankruptcy as an option, there are a number of factors to be considered. Of course, the role of a bankruptcy lawyer or attorney is crucial to the successful outcome of any bankruptcy filing. For this reason, secure a legal professional prior to moving forward. It is you against your creditors, and your attorney can escort you through this process and help you to make a fresh start.

Having a familiarity with the different types and terms of bankruptcy filings will help you to have a good overview of what the law allows when you meet with your attorney. Questions regarding the different chapters, how and which creditors are paid, and how your personal credit is affected are a few fundamentals that are helpful to know. You may also wonder about your privacy, how your spouse may be affected, what assets you may or may not be able to keep, and the cost to file bankruptcy. All good concerns.

For starters, you should know that there are six different bankruptcy chapters available for filing. However, individuals mainly file either a Chapter 7 or a Chapter 13. Chapter 7 is a basic liquidation, and is the most common type of filing. Over 60% of filings fall under Chapter 7. A Chapter 13 bankruptcy is a reorganization of an individual's debts. More on that later.

Other chapters under the bankruptcy code are: Chapter 9, used by municipalities, Chapter 11, a reorganization of a business, Chapter 12, a reorganization for family farmers and fishermen, and Chapter 15, which is reserved for international cases.

Chapter 7

Under Chapter 7, the debtor turns over his or her assets (should they have any) to a bankruptcy trustee, who then converts them to cash. Creditors are paid out of this amount and debts are then discharged, or considered paid off. A Chapter 7 filing can be considered either an "asset" or "no asset" petition. If the debtor has no significant assets, like a home, vehicles, investments or valuable collections, the trustee will file the bankruptcy as a "no asset" petition. Most Chapter 7 filings are no asset cases. Unsecured creditors (creditors that have granted lines of credit that are not secured by any collateral, like a credit card company) receive little to no reimbursement under this provision.

If an "asset" Chapter 7 filing is made, then unsecured creditors must file what's called a "proof of claim". Secured creditors, like your mortgage lender or auto financer, don't need to file this claim because their interest in the debt has already been secured by their lien. The lien is a tool that gives them a security interest on your asset. Simply put, if you don't pay the lien, they get the asset. Unsecured creditors have to file this claim so that they can get their hand in the pot too. This claim has to be filed within a certain timeframe, and the debtor (or the attorney for the debtor) must be present. Your attorney will no doubt explain this further to you.

In Chapter 7, money is paid out to the creditors according to their claim priority. Secured claims get paid first (like the mortgage holder), then unsecured priority claims, and finally the unsecured or general claims (credit card lenders). An example of an unsecured priority claim is a domestic support order or a child support order.

Chapter 13

Chapter 13 is similar to a Chapter 7, but differs in the way payments are made to the creditors. A Chapter13 bankruptcy requires that a repayment plan be submitted, which outlines the amounts and priority that creditors will be paid off, usually within a period of three to five years. This type of bankruptcy appeals to individuals who have property that they may wish to keep. Individuals who have a foreseeable income source that allows them to pay their necessary living expenses, with some amount left over to pay off their debts, primarily file Chapter 13. You pay the trustee, and the trustee oversees the disbursements to your creditors. Once the plan is complete, the bankruptcy is discharged.

A bankruptcy filing remains on your credit report for 10 years after discharge. It is a public record, but it's not advertised. Because of the fact bankruptcy filings have increased significantly, many potential creditors are a little more forgiving. Some banks offer credit cards with a minimal credit line equal to an amount initially paid in. As you prove you can repay these small amounts, the bank will begin to float you a line of credit. Two years after a bankruptcy discharge, debtors are once again eligible for mortgage loans. Although the bankruptcy remains on your credit for a while, it becomes less significant the further in the past the bankruptcy becomes.

Your spouse will not be affected by your bankruptcy if they are not liable for any of the debt. There are a few exceptions to that, such as if a home is jointly titled, or for those living in community property states. Belongings that can be retained in the bankruptcy vary according to the state you're in, but generally don't include secondary properties, vehicles or other non-exempt assets. It costs about $300 to file the bankruptcy, in addition to the fees charged by the lawyer. A bankruptcy lawyer's fees vary but are likely in the range of $1,000 to $2,000. Many bankruptcy lawyers offer a free initial consultation. Being organized and well prepared will assist your lawyer, who will then be in a better position to litigate on your behalf.