Bankruptcy allows individuals or businesses in financial trouble to have debts forgiven or in some cases make payment arrangements. Often “liquidation” or “reorganization” are the words used to sum up the process when you file for bankruptcy. There are several kinds of bankruptcy cases but Chapter 7 & Chapter 13 are the most common. Which option you should choose depends on several factors.
Chapter 7 – Is the most common type of bankruptcy. Chapter 7 completely forgives most debts such as credit cards, medical bills and in some circumstances taxes.
Chapter 13– Is a personal reorganization. Chapter 13 can to do many things such as eliminate a second mortgage or home equity line of credit (under some circumstances), stop a threatened foreclosure, reduce car payments (under some circumstances), stop vehicle repossession and reduce or eliminate credit cards and medical bills. In chapter 13 most people pay pennies on the dollar to credit cards.
Bankruptcy is complicated and there are many things to consider:
- Do I qualify?
- What will happen to my credit?
- Will I lose all of my property?
Qualifying for bankruptcy requires proof you are unable to pay your debts as they come due. The law requires a comparison of your income on a 6 month average to IRS guidelines.
Credit – A bankruptcy is reported on a credit report for 10 years, but that does not mean you cannot rebuild good credit during that time. The law allows a lender to loan money whenever the lender wants to, and nothing in bankruptcy prohibits a lender from making a loan after bankruptcy. Good credit is a history of paying bills on time and that is your goal after bankruptcy.
Property– The bankruptcy laws allow a person to retain “necessities of life” which are referred to as exemptions in bankruptcy. The exemption laws are different in each state. California is very liberal in comparison to other states and the vast majority of people retain all assets when filing bankruptcy. Note: an attorney can provide detailed guidance about your assets and your case.
Filing bankruptcy can be a complicated matter. Your attorney is required to submit numerous documents to the court including:
- A list of your assets
- A list of your debts
- A monthly budget
- Your recent paystubs
- Your last tax return
- A description of your average income
In addition to the documents, you must be prepared to provide picture identification and some type of proof of your Social Security number. You are also required to attend a hearing before a bankruptcy trustee. This hearing is called a Meeting of Creditors, but creditors rarely attend these hearings. At the Meeting of Creditors the trustee will review your identification and ask a few brief questions. Your lawyer will discuss this meeting in detail prior to the case being filed and will represent you at the meeting.
Frequently Asked Bankruptcy Questions Video Series.
- What are my options in filing bankruptcy? (0:49)
- Do I qualify for Chapter 7 bankruptcy? (1:46)
- Do I qualify for Chapter 13 bankruptcy? (0:36)
- Do I need to be behind on bills to file bankruptcy? (0:29)
- What is a charge off? (0:54)
- Can a married person file bankruptcy without a spouse? (0:40)
- Can I file bankruptcy of I have been sued by a creditor? (0:30)
- What is a good credit score and how will bankruptcy affect my credit score? (0:41)
- How long is bankruptcy on my credit? (0:41)
- Can bankruptcy force my lender to modify my home loan? (0:20)
- Can bankruptcy stop foreclosure? (0:54)
- Are taxes forgiven in bankruptcy? (1:58)
- How much does Chapter 7 cost? (0:44)
- How much does Chapter 13 cost? (0:58)