Bankruptcy FAQ:
What is chapter 13 bankruptcy and who would consider it?
A chapter 13 bankruptcy is generally filed by debtors who have a valuable asset like a home or other property that is not covered by exemptions. If they file for a Chapter 7 bankruptcy they are in danger of loosing the property. Hence a Chapter 13 bankruptcy is preferred.
Unlike a Chapter 7 bankruptcy, a Chapter 13 bankruptcy does not discharge all debts immediately. Instead the debtor proposes to pay the creditors over a period of three to five years according to a planned payment schedule. The debtor needs to plan fortnightly or monthly payments to clear his debts.
Since Chapter 13 bankruptcy requires scheduled payments to the creditors it is generally appropriate only for those debtors who have a regular source of income. Freelancers or job workers are not considered good prospects for a Chapter 13 bankruptcy.
What is chapter 7 bankruptcy and who is eligible?
Chapter 7 bankruptcy is also known as straight bankruptcy. The proceedings involve taking all the borrower’s non-exempt property and selling it off. The money that is collected via liquidation of assets is then distributed among the creditors to clear off debts.
Once all the bankruptcy proceedings have been completed, the court discharges the borrower from the debts. He is no longer liable for the debts and can start over with a clean slate. However, the record of the bankruptcy can remain a part of his credit history for 10 years so it does have long-lasting effects.
Chapter 7 bankruptcy is generally filed by individuals. Businesses may file for Chapter 11 bankruptcy. The following conditions make an individual eligible for a Chapter 7 bankruptcy.
- Residence, business or property in the United States.
- There should be no history of Chapter 7 or 16 bankruptcy in the past 6 years.
- There should be no prior dismissed bankruptcy in the last 180 days.
- The individual should not be using the bankruptcy filing as a means to get out of debt. Only if an individual does not have sufficient funds after living and household expenses, to repay debt then it is considered a valid filing.
What is bankruptcy reform?
Bankruptcy reform acts as a check against debtors misusing the bankruptcy law to get out of making payments. U.S. Bankruptcy laws were originally written to help those citizens who faced financial distress. It was assumed that these well meaning citizens intended to repay debts, but could not due to some misfortune.
Unfortunately, as time progressed and buying on credit became the norm instead of the exception, it became more and more easy for debtors to declare bankruptcy. Simultaneously, it became more and more difficult for creditors to collect payments owed to them.
The Bankruptcy Reform Act corrects this very situation by making it easier for creditors to collect money and more difficult for debtors to evade debt. The Bankruptcy Reform Act attempts to create a need-based bankruptcy system.
What are the federal and state bankruptcy exemptions?
Federal bankruptcy exemptions:
As per Title 11 U.S.C. Section 522 the following assets are classified as bankruptcy exemptions. Couples who file for a joint bankruptcy can double the amount of exemptions listed.
- Real property or personal property not to exceed $18,450 in value is exempt. This includes co-ops and mobile homes.
- Motor vehicles up to $2,950 are exempt.
- Items not to exceed $425 for any single item or $9,850 in aggregate value of the items. This includes household furnishings, goods, appliances, books, animals, crops and even musical instruments.
- Jewelry not to exceed $1,225.
- Occupational or trade tools not to exceed $1,850.
- Alimony, child support payments needed for support are exempt.
- Health aids are exempt.
- Lost earnings payments, public assistance, social security, unemployment compensations, veterans’ benefits, wrongful death payments are all exempt.
- Personal injury compensation payments not to exceed $18,450.
State bankruptcy exemptions:
Every State has its own set of bankruptcy exemptions. As per new bankruptcy laws taking effect from October 17, 2005 the State that a debtor uses for exemptions must be the State in which he has lived for the 2 years prior to filing the bankruptcy. If the individual has not lived in any particular state for 2 years, then he must use the State in which he spent the majority of the 180 days preceding the 2-year period. If neither of the above two options are valid, the debtor may use the Federal exemptions.
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