| Summary: What is bankruptcy? Bankruptcy is when an individual legally declares an inability to repay their creditors. |
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Bankruptcy is when an individual legally declares an inability to repay their creditors. Depending on which plan they file under, debtors may have to sell property or use income to repay debts, or may instead have much of the debt cancelled. Filing for bankruptcy requires completion of several forms, which ask for details about property, income, living expenses, and debt. Bankruptcy cases are handled by the United States Bankruptcy Courts, which are part of the Federal District Courts of The United States.
Individuals usually file bankruptcy under Chapter 7 or Chapter 13 of the Federal bankruptcy code. A Chapter 7 bankruptcy is often called a liquidation bankruptcy, because debtors may have to sell some assets to repay part of the debt. Certain assets, called non-exempt assets, are used to repay part of the debt, while the debtor is allowed to keep exempt assets (such as clothing, household goods, and personal effects). However, most of the debt is cancelled, or “discharged”. Debts that are discharged, such as credit card debts, are usually relieved 90 days after filing the bankruptcy paperwork. Debts that cannot be cancelled include child support payments, student loans, some taxes, and secured debts such as car loans and home mortgages.
Chapter 13 bankruptcy is often called the wage earner’s plan or reorganization bankruptcy. Under this plan, debtors keep their property, and use their income to repay all or some of their debt. Repayments must begin within 30 days after filing. Some debts, called priority debts, must be paid in full, and include obligations such as child support, wages owed to employees, and some taxes. Individuals must also make regular payments to secured debts such as car loans and home mortgages. Other debts, however, may be cancelled. If there is disposable income left over after making the required payments, it will be applied to unsecured debts such as credit cards and medical bills. However, the debtor may not have to repay all of the debt, but must show use of remaining money to try to pay off some of the debt. Under Chapter 13, the individual must commit to a three- to five-year repayment plan, after which the remaining debt is discharged.
With both kinds of bankruptcy, when an individual files, an Order for Relief, also called an automatic stay, is issued. This prevents creditors from garnishing wages, or trying to have money from bank accounts or property used for repayment of debt. Also with both kinds, the court appoints a trustee to oversee the division of assets. The trustee examines financial papers, and searches for any non-exempt property that can be sold to repay creditors. The trustee also oversees creditors meetings, in which the debtor is asked questions, under oath, about the bankruptcy and the documents filed. The creditors meeting is held at the courthouse, usually only lasts a couple of minutes, and is seldom actually attended by the creditors.
While filing for bankruptcy should be a last resort, if you are in over your head in debt it may be worth consulting a bankruptcy attorney to see what your options are.
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