What does it mean to file for bankruptcy?
So, you've heard the term "filing" for bankruptcy. But what does that really mean?
Filing for bankruptcy means that you have prepared a petition that lists all of your assets, debts, income and expenses and filed it with the United States Bankruptcy Court.
Upon filing for bankruptcy, the protection kicks in. This is called the automatic stay. “Stay” in this context means stop. When you file a petition for bankruptcy relief, the protection is automatic and most creditors must stop their attempts at collection (whether that be in the form of calls, letters, garnishments, repossession, foreclosures or lawsuits).
Whether to file for bankruptcy protection is a very personal decision that you should make with the guidance of an experienced bankruptcy attorney.
So, what is bankruptcy?
Bankruptcy is a federal law designed to provide debtors (the person or entity filing for bankruptcy) with relief from debts. For consumers, there are two main chapters of relief: Chapter 7 and Chapter 13.
What is Chapter 7 bankruptcy?
Chapter 7 is often referred to as a liquidation or straight bankruptcy because unlike Chapter 13 reorganization, there are no payments to creditors through the bankruptcy process. There is a mathematical means test formula that must be performed to determine eligibility for a chapter 7 filing versus chapter 13.
In both Chapter 7 and Chapter 13 proceedings, a trustee is appointed to review and oversee your case. The goal of a chapter 7 trustee is to determine if there are any assets that are not protected or exempt (exemption laws protect many of your assets such as retirement savings) so that he or she can take and sell them to create cash to pay to your creditors.
Most Chapter 7 proceedings that are filed are “no asset” cases because the assets you own are protected or too de minimis (minor) for a Chapter 7 trustee to administer.
What is Chapter 13 bankruptcy?
In Chapter 13, you make payments to the Chapter 13 trustee to be distributed to your creditors over a period of time (generally between 3 and 5 years). You can keep your assets even if they are not exempt and have value as long as you pay into your chapter plan the amount your creditors would have received if you had filed a chapter 7 case.
Chapter 13 can be a highly beneficial tool in your financial tool belt. Some of the benefits of a Chapter 13 are the ability to strip certain subordinate mortgage liens, catch up on past due debts such as mortgage payments and auto loans and even child support and back taxes.
The goal of a bankruptcy filing is to discharge debt. In a Chapter 7 proceeding, a discharge is generally granted within about 4 to 6 months from the date of the bankruptcy filing. You are still protected by the automatic stay while your Chapter 7 proceeding is pending. Once the Bankruptcy Court issues a discharge of debts, a permanent injunction kicks in banning collection of the debts that were discharged.
There are certain debts that are not dischargeable in bankruptcy and while there are certain debts that are not dischargeable under Chapter 7, the debt may be dischargeable in a Chapter 13 reorganization.
The type of debt that you have may determine which Chapter is better for you.
Remember that this is a basic overview of bankruptcy. Speak to an experienced bankruptcy lawyer about your situation to determine if bankruptcy is right for your financial circumstances.