What Is Bankruptcy?
When filing for bankruptcy, you surrender your property in exchange for forgiveness of your debts. Your property is sold and the proceeds are divided among your creditors. The court then issues you a full discharge which means you no longer owe those debts.
There are two major types of individual bankruptcy: Chapter 7 and Chapter 13
Chapter 7 bankruptcies are designed for people who have little to no assets and essentially no disposable income.
Bankruptcy under Chapter 7 is a straight liquidation of all unsecured debt. This type of case is commonly referred to as a no-asset Bankruptcy. Examples of unsecured debt are credit cards and gym memberships. Debts that are not secured by collateral. A Chapter 7 trustee is assigned to administer your case and is the one who will grant your final discharge. The trustee will also be the one to determine and approve your exemptions.
Typically, it will take approximately five months before you receive the final discharge.
Exemptions Under Chapter 7
The Chapter 7 bankruptcy trustee evaluates the character and value of a debtors property to determine if any of the assets qualifies under an exemption under federal or state.
Exemptions allow the debtor to keep certain assets after the bankruptcy is over. This means the debtor must select the exemptions that best fit the debtor’s financial circumstances and needs. Exemptions vary from state-to-state. Exemptions are based on the theory that there are certain types of assets that the debtor should not be legally obligated to surrender, such as tools-of-the-trade, health aids, life insurance, and social security benefits.
The public policy behind bankruptcy is to provide the debtor with a fresh start, not decimate the debtor and render the person broke and homeless. So states determine how much a debtor can keep of certain forms of properties. For example, some states let you keep 100% of your home – assuming you are in a state that allows for a 100% homestead exemption. Other states allow you to keep up to 50% of the value of your home. Another type of exemption is called the car exemption which allows you to keep your car if the equity in it is less the $5,000 – other states set that amount at $10,000.
The Wild Card Exemption
Under many state laws, you can stack certain types of property under the Wild Card exemption. For example, this means if your state provides an overall $5,000 Wild Card exemption for personal property, you can combine your non-exempt property and protect it from liquidation. Under some states, including the federal system, the Wild Card exemption can apply to any type of property – exempt and nonexempt.
In California, for example, The Real Property Exemption is $24,060 so long as it is your primary residence. Under the Wild Card exemption (C.C.P. Section 703.140(B)(5)) you can exempt $1,280 plus any unused portion of the $24.060 exemption. So, if a debtor does not claim an exemption in his primary residence, the debtor still has a $25,0340 exemption that he can claim in any of the other asset(s).
When Chapter 7 Converts To A Chapter 13
If you are a debtor with assets of sufficient value or make a significant amount of money, the chances are the court will convert your Chapter 7 into a Chapter 13 bankruptcy plan.
Chapter 13 is more of a reorganization of your debts than it is a straight liquidation. A Chapter 13 is effectively a repayment plan that is set-up in favor of your creditors. Your final discharge under a Chapter 13 plan happens only when you have successfully completed your repayment plan to your creditors. Usually, creditors are willing to take substantially less then what is owed, since the goal is to pay back as many of the creditors as possible under the plan.
Whether To File For Bankruptcy – The Threshold Question
Filing for bankruptcy is a debtor’s most extreme remedy. It is available only once every six years, so once you use it, you are barred from using it again for quite a while, no matter how badly you may need it. So don’t use it until you understand what you will get out of it and what alternatives you might use instead.
Some people file for bankruptcy when there is little need to do so. Perhaps the problem could have been resolved by negotiating with creditors or getting help from a credit counseling service.
Be aware that bankruptcy courts are on the lookout for what they perceive as an abuse of the bankruptcy system. If a debtor has sufficient income to make substantial repayment of debt, the court might dismiss the bankruptcy filing as a violation of the debtor’s duty of good faith.
Bankruptcy can be a very complicated area to navigate. It is almost always recommended that you retain the services of a qualified bankruptcy attorney.