What generally happens in consumer bankruptcy cases?

In a Chapter 7 case, you file several forms with the bankruptcy court listing income and expenses, assets, debts and property transactions for the past two years. The cost to file is $200, which may be waived for people who receive public assistance or live below the poverty level. A court-appointed person, the trustee, is assigned to oversee your case. About a month after filing, you must attend a "meeting of creditors" where the trustee reviews your forms and asks any questions. Despite the name, creditors rarely attend. If you have any nonexempt property, you must give it (or its value in cash) to the trustee. The meeting lasts about five minutes. Three to six months later, you receive a notice from the court that "all debts that qualified for discharge were discharged." Then your case is over.

Chapter 13 is a little different. You file the same forms plus a proposed repayment plan, in which you describe how you intend to repay your debts over the next three, or in some cases five, years. The cost to file is $185 (it cannot be waived), and a trustee is assigned to oversee the case. Here, too, you attend the meeting of creditors. Often one or two creditors attend this meeting, especially if they don't like something in your plan. After the meeting of the creditors, you attend a hearing before a bankruptcy judge who either confirms or denies your plan. If your plan is confirmed, and you make all the payments called for under your plan, you often receive a discharge of any balance owed at the end of your case.

Nondischargeable Debts

The following debts are nondischargeable in both Chapter 7 and Chapter 13. If you file for Chapter 7, these will remain when your case is over. If you file for Chapter 13, these debts will have to be paid in full during your plan. If they are not, the balance will remain at the end of your case:

• debts you forget to list in your bankruptcy papers, unless the creditor learns of your bankruptcy case
  
  
• child support and alimony
  
  
• debts for personal injury or death caused by your intoxicated driving
  
  
• student loans, unless it would be an undue hardship for you to repay
  
  
• fines and penalties imposed for violating the law, such as traffic tickets and criminal restitution, and
  
  
• recent income tax debts and all other tax debts.

In addition, the following debts may be declared nondischargeable by a bankruptcy judge in Chapter 7 if the creditor challenges your request to discharge them. These debts may be discharged in Chapter 13. You can include them in your plan, and at the end of your case, the balance is wiped out:

• debts you incurred on the basis of fraud, such as lying on a credit application
  
  
• credit purchases of $1,150 or more for luxury goods or services made within 60 days of filing
  
  
• loans or cash advances of $1,150 or more taken within 60 days of filing
  
  
• debts from willful or malicious injury to another person or another person's property
  
  
• debts from embezzlement, larceny or breach of trust, and
  
  
• debts you owe under a divorce decree or settlement unless after bankruptcy you would still not be able to afford to pay them or the benefit you'd receive by the discharge outweighs any detriment to your ex-spouse (who would have to pay them if you discharge them in bankruptcy).

What property might I lose if I file for bankruptcy?

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.

Why choose Chapter 13 over Chapter 7 bankruptcy?

Although the overwhelming number of people who file for bankruptcy choose Chapter 7, there are several reasons why people select Chapter 13:

• You cannot file for Chapter 7 bankruptcy if you received a Chapter 7 or Chapter 13 discharge within the previous six years (unless you paid off at least 70% of your unsecured debts in a Chapter 13 bankruptcy). On the other hand, you can file for Chapter 13 bankruptcy at any time.
  
  
• You have valuable nonexempt property.
  
  
• You're behind on your mortgage or car loan. In Chapter 7, you'll have to give up the property or pay for it in full during your bankruptcy case. In Chapter 13, you can repay the arrears through your plan, and keep the property by making the payments required under the contract.
  
  
• You have debts that cannot be discharged in Chapter 7.
  
  
• You have codebtors on personal (nonbusiness) loans. In Chapter 7, the creditors will go after your codebtors for payment. In Chapter 13, the creditors may not seek payment from your codebtors for the duration of your case.
  
  
• You feel a moral obligation to repay your debts, you want to learn money management or you hope new creditors might be more inclined to grant you credit after a Chapter 13 than they would after a Chapter 7.

Copyright 2005 Nolo

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.

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