Bankruptcy allows individuals or businesses (debtors) who owe others (debtors) more money than they can pay to either work out a plan to repay the money over time or eliminate (discharge) most of their debt.
Normally, individuals file for personal bankruptcy in one of two ways under the Bankruptcy Code: Chapter 7 or Chapter 13.
In a Chapter 7 bankruptcy, individuals with little or no ability to repay debts in the future have most debts eliminated (discharged). The process moves quickly and the individual usually receives their discharge in just a few months.
In a Chapter 13 bankruptcy, individuals are allowed to restructure their debt burdens and payment schedules so that they can catch up on past-due debts. The process is longer than a Chapter 7, usually giving the debtor 3 to 5 years to catch up on past-due accounts and to repay some or all of their debt. The portion of an individual’s debt that cannot be repaid is usually discharged.
Bankruptcy is meant to give individuals and businesses a fresh start and not to leave them destitute. In a Chapter 7 case, the law allows you to keep (exempt) a fair amount of your belongings (clothing, furniture, jewelry, computers, TVs) from being used to pay off creditors. That said, highly valuable assets – such as a home with equity above amounts exempted by law – may have to be given up to repay creditors some of what they are owed. Unlike in a Chapter 13 bankruptcy, a Chapter 7 debtor gets to keep all of their regular income after filing.
In a Chapter 13 case, you get to keep most, if not all, your assets and belongings in exchange for committing all their disposable income for the next 3 to 5 years to catch up on past-due accounts and repay some or all of their debt.
It is more likely that you’ll be able to keep your home in a Chapter 13 because the court will roll the payments you have fallen behind with your lender into the monthly payments you make during the 3 to 5 year repayment period. During the repayment period, you must not only repay the monthly home payments you fell behind on, but also pay your future regular mortgage payments on time in order to keep your home. If you pay on time through the length of the repayment plan, you are out of bankruptcy and can keep your home. If you fall behind on your repayment plan payments or your regular home payments again, you are will likely lose the home.
In a Chapter 7 bankruptcy, the person handling your case (the trustee) is obligated to sell off any non-exempt assets to pay off your creditors. You are able to keep your home if the equity you have in it is close to or below the amount exempt by law. This is why determining the non-exempt equity in your home is important. Where you stand on your mortgage payments is also a consideration. If you are current on your payments, you are more likely to keep your home. If you are not, you are more likely to lose it. If you fall 90 days or more behind on your mortgage, the lender can foreclose unless you pay all past due amounts.
In a Chapter 7 bankruptcy, if you own your car and do not owe any balances on it, you are able to keep it as long as its market value is below the amount exempted by law. If you owe money on it to a lender, you may able to keep your car as long as you can afford to keep making payments on time or, alternatively, if possible pay down the car loan in full.
In a Chapter 13, and as with a home, it is more likely that you’ll be able to keep your car in because the court will roll the payments you have fallen behind with your lender into the monthly payments you make during the 3 to 5 year repayment period. During the repayment period, you must not only repay the monthly home payments you fell behind on, but also pay your future regular mortgage payments on time in order to keep your car. If you pay on time through the length of the repayment plan, you are out of bankruptcy and can keep your car. If you fall behind on your repayment plan payments or your regular home payments again, you are will likely lose the car. Similarly, you are more than likely to be able to keep your car if you do not owe any money at the time you file for Chapter 13 bankruptcy protection.
Generally speaking, no. The most common retirement plan is a 401k, which is a type of deferred compensation plan. The majority of 401k retirement plans are through your employer. There is a federal bankruptcy exemption that is used to protect 100% of your money through the 401K.
Another common type of retirement plan is an Individual Retirement Plan (IRA), which is a savings or investment account for the employee. To be exempt from seizure under the bankruptcy process, the IRA must be ERISA qualified, which stands for Employee Retirement Income Security Act of 1974. This law was enacted to protect your retirement accounts from risky investments by your employer or plan administrator. If your IRA is ERISA qualified, then your IRA cannot seize your retirement money to pay your creditors. That said, an example of when the court may have the ability to seize some of your retirement is if you have a 401K through your employer and right before bankruptcy, you make a large contribution to hide some of your money. This is considered fraud, in which the court can allow creditors to get to your funds in order to get paid, even though the plan is ERISA qualified.
Social Security benefits are protected from being used to pay debts in bankruptcy. Once paid, the benefits continue to be protected only as long as they can be identified as Social Security benefits. For example, money in a bank account where the “only” deposits into the account are direct deposits of Social Security benefits are identifiable and generally protected.
A Chapter 13 bankruptcy stays on your credit report for 7 years after filing; Chapter 7 stays on for 10 years. That said, if you are already considering bankruptcy chances are you already have missed payments on one or more of your loans and credit accounts. Being late or missing payments also has significant negative effect on credit scores. The fact is that you may be able to rebuild your credit score quicker through bankruptcy than you could by attempting to repay one creditor at a time.
Filing for bankruptcy is a matter of public record. That means your employer or landlord could find out you filed for bankruptcy by doing a public records search on you.
In a Chapter 7 case, unless you owed your employer money, your employer need not know and probably would not care if you filed for bankruptcy. Similarly, if you are paying your rent on time, your landlord need not know nor would they care if you sought bankruptcy protection.
In a Chapter 13 case, most employers have to know so that they can deduct the Chapter 13 plan payments from your paycheck and send it to the bankruptcy trustee for distribution to your creditors.
Further, it is illegal for any employer – governmental or private – to fire you because you filed for bankruptcy protection. No federal, state, or local government agency may take your bankruptcy into consideration when deciding whether to hire you. That said, there is no corresponding rule for private employers taking into consideration a prior bankruptcy in a decision as to whether to hire a job applicant. Some people find that having a bankruptcy in their past can hurt them when applying for jobs that require them to deal with money such as book¬keeping, accounting, payroll, and so on.
The answer depends on whether: (1) the debts giving rise to the possibility of filing for bankruptcy are joint debts of the married couple incurred during the marriage or whether the debts are primarily those of just one spouse acquired before the marriage and (2) whether the couple lives in a community property or common law marriage state. If the debts are jointly owned and a spouse who does not file remains liable as a co-debtor and may continue to be pursued by the creditors, then a joint bankruptcy filing is usually recommended.
If it is determined that the best course of action is for both spouses to file for bankruptcy jointly, filing jointly has its advantages. The court filing fees for joint cases are the same as for an individual case and can provide the advantages of a bankruptcy discharge.
Regardless, it is highly recommended that you and your spouse consult an attorney before making such an important decision.
Generally speaking, credit card debts, business debts, leases, personal loans, deficiencies after home and vehicle repossessions are all dischargeable in bankruptcy.
On the other hand, some taxes (for a certain period of time), most student loans, alimony and child support obligations, debts obtained through fraud or false pretenses, debts not disclosed by the debtor in the bankruptcy filing, debts for willful and malicious injury, fines or penalties to government units, and debts for judgments in wrongful death or personal injury while driving under the influence or while impaired are all non-dischargeable debts (i.e. debts that bankruptcy will not eliminate and the debtor will be liable for after bankruptcy).
It is common for clients to believe that bankruptcy cannot eliminate IRS or state tax debt. That is not true. Bankruptcy can eliminate some, though not all, types of tax debts. In some cases, you can get a better outcome for your tax debt through bankruptcy.
In order to eliminate (i.e. discharge) your state or federal tax debts, the following 4 requirements must be met:
- Three (3) years must have passed since your tax returns were last due to be filed;
- You must have filed your tax returns when they were due or you must have filed the tax returns for the tax debt at issue at least 2 years before the filing of the bankruptcy petition;
- There was no tax fraud committed or an attempt to evade the tax debt at issue; and
- The taxes at issue must not have been assessed in the last 240 days.
Chapter 7 bankruptcy will eliminate all dischargeable income tax debt. Chapter 7 does not discharge/eliminate tax debt which was recorded as a lien. Chapter 13 bankruptcy has certain advantages over Chapter 7 for some persons. Chapter 13 in particular helps persons who have been assessed civil tax penalties for non-dischargeable tax debt. Tax penalties are not eliminated in a Chapter 7 bankruptcy. However unlike Chapter 7 bankruptcy, in Chapter 13 bankruptcy stops additional IRS interest on the tax debt at issue from accruing, and allows the debtor to pay any penalties and interest accrued before the bankruptcy filing to be paid through the Chapter 13 bankruptcy payment plan.