Bankruptcy FAQ

Answers to common questions about bankruptcy.

What's Below:

What exactly is bankruptcy?

Will filing for bankruptcy protect me from creditors' efforts to collect what I owe?

What is the difference between Chapter 7 and Chapter 13 bankruptcy?

Am I free to choose between Chapter 7 and Chapter 13?

Which type of bankruptcy should I use?

Will all of my debts be wiped out in bankruptcy?

What property might I lose if I file for bankruptcy?

Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts or repay them under the protection of the bankruptcy court. Bankruptcies can generally be described as "liquidation" or "reorganization."

Under a liquidation bankruptcy (Chapter 7), you ask the bankruptcy court to wipe out (discharge) the debts you owe. Under a reorganization bankruptcy (typically Chapter 13, for consumers), you file a plan with the bankruptcy court proposing how you will repay your creditors. You must repay some debts in full; others may be repaid only partially or not at all, depending on what you can afford.

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When you file either kind of bankruptcy, something called an "automatic stay" goes into effect. The automatic stay prohibits most creditors from taking any action to collect the debts you owe them unless the bankruptcy court lifts the stay and lets the creditor proceed with collections.

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In Chapter 7 bankruptcy, you ask the bankruptcy court to discharge most of the debts you owe. In exchange for this discharge, the bankruptcy trustee can take any property you own that is not exempt from collection (see "What property might I lose if I file for bankruptcy?" below), sell it, and distribute the proceeds to your creditors.

In Chapter 13 bankruptcy, you file a repayment plan with the bankruptcy court to pay back your debts over time. The amount you'll have to repay depends on how much you earn, the amount and types of debt you owe, and how much property you own.

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If you meet the eligibility requirements for both, then you can choose which type of bankruptcy makes the most sense for your situation. However, you may not have a choice: If you have secured debts of more than $922,975 and unsecured debts of more than $307,675, for example, then you cannot use Chapter 13.

Under the new bankruptcy law, filers whose incomes are higher than the median income for a family of their size in their state may not be allowed to file for Chapter 7 bankruptcy if their disposable income, after subtracting certain allowed expenses and required debt payments, would allow them to pay back some portion of the unsecured debt over a five-year repayment period.

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Most people who file for bankruptcy choose to use Chapter 7, if they meet the eligibility requirements; Chapter 7 is a popular choice because, unlike Chapter 13, it doesn't require filers to pay back any portion of their debts.

However, Chapter 13 might be a better choice, depending on your situation. For example, if you are behind on your mortgage and want to keep your house, you can include those arrearages in your Chapter 13 plan and repay them over time. In Chapter 7, you would either have to make up the whole past due amount right away -- and you might lose your house, if your equity exceeds the exemption amount available to you.

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It depends on the type of debts you owe. Certain debts cannot be discharged in bankruptcy; you will continue to owe them just as if you had never filed for bankruptcy. These debts include back child support, alimony, and certain kinds of tax debts. Student loans will not be discharged unless you can show that repaying the debt would be an undue burden -- and this is a very tough standard to meet. And other types of debts might not be discharged if a creditor convinces the court that the debt should survive your bankruptcy.

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You lose no property in Chapter 13, because you fund your repayment plan through your income. In Chapter 7, you select property you are eligible to keep from either a list of state exemptions or exemptions provided in the federal Bankruptcy Code.

Although state exemption laws differ, they typically allow you to keep these types of property:

• Equity in your home, called a homestead exemption. Under the Bankruptcy Code, you can exempt up to $17,425 of equity. Some states have no homestead exemption; others allow debtors to protect all or most of the equity in their home.
• Insurance. You usually get to keep the cash value of your policies.
• Retirement plans. Pensions which qualify under the Employee Retirement Income Security Act (ERISA) are fully protected in bankruptcy. So are many other retirement benefits; often, however, IRAs and Keoghs are not.
• Personal property. You'll be able to keep most household goods, furniture, furnishings, clothing (other than furs), appliances, books and musical instruments. You may be able to keep jewelry only worth up to $1,000 or so. Most states let you keep a vehicle with more than $2,400 of equity. And many states give you a "wild card" amount of money -- often $1,000 or more -- that you can apply toward any property.
• Public benefits. All public benefits, such as welfare, Social Security, and unemployment insurance, are fully protected.
• Tools used on your job. You'll probably be able to keep up to a few thousand dollars worth of the tools used in your trade or profession.
• Wages. In most states, you can protect at least 75% of wages that you have earned but not yet received.

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