Understanding Bankruptcy Basics

Bankruptcies

What Kinds of Bankruptcy Are There? There are two main types of consumer bankruptcy: Chapter 7 and Chapter 13. Chapter 11 is mainly for large companies like Chrysler and General Motors and for individuals who have too much debt to qualify for Chapter 13.  Chapter 12 applies to family farmers.

Chapter 7 is what comes to mind for most people when they think of bankruptcy.  Sometimes referred to as “straight bankruptcy”, the court will appoint a trustee to supervised the sale and liquidation of the debtor’s assets that are not protected by law.  The proceeds are distributed to the creditors by the trustee.  The debtor can keep items that are exempt under the law and items that have little or no equity.  Most of the Chapter 7 cases that I file last about 4 months from filing to discharge.

Chapter 13 is a partial repayment plan spread out over 3 to 5 years.  You must have less than $360,475 in unsecured debts (usually debts like credit cards and medical bills) and less than $1,081,400 in secured debt (usually home mortgages and car loans) to qualify for Chapter 13.   In most cases, you can modify car loans, pay little or no interest to your unsecured creditors and pay them pennies on the dollar.  You generally keep all of your assets.

What’s Involved in Filing for Bankruptcy? A bankruptcy is started by filing a Petition with the U.S. Bankruptcy Court.  The petition will include a complete list of your assets, debts, income and expenses.  The exact requirements for the petitions vary depending on the Chapter under which the bankruptcy is filed, but involve detailed forms and schedules.  Filing fees are $299 for a Chapter 7 and $274 for a Chapter 13.  Attorney’s fees in San Diego generally range from $1500-$2500 for a Chapter 7 and $3300-$4000 for a Chapter 13.

Will I Lose Everything If I File? No.   In fact, most of my clients keep everything that they own.  A person who files for bankruptcy may exempt certain items from the bankruptcy. In most cases, this lets you keep your home, your car, your furniture, your household items and your retirement.  Different states have different allowances for exemptions, so you must consult an attorney in your state to help you know what property might be vulnerable to liquidation.  You also can keep assets that have no equity, such as a car that’s worth less than is owed on it, or a house where the mortgage is higher than the property value.  Even if there is a small amount of equity, you can normally keep the asset.

Can All My Debts Be Wiped Out? There are certain debts which cannot be discharged.  Federal and state taxes incurred less than three years before the date of filing, most student loans, child support and alimony are the among the most commons.  Debts incurred fraudulently cannot be discharged either, so don’t run your credit cards right before filing for bankruptcy.

What Happens Once I File? Once the Petition is filed, the Court mails an Automatic Stay to your creditors.  This stops all legal proceedings against you.   Foreclosures, repossessions and garnishments are halted, creditors cannot call or write you, and lawsuits against you cannot be filed or pursued if they are pending.

How Are My Creditors Treated? Creditors are broken down into three main categories: priority, secured and unsecured.  Priority creditors are those creditors that receive special treatment under the law and they are paid first. The most common examples of priority creditors are the IRS and people owed child or spousal support.  Secured creditors are the next in line.  These are creditors who have a security interest or lien on your property like the bank having a deed of trust against your house. Most of the time, secured creditors will be paid due to their lien.  Everyone else is an unsecured: credit cards, private loans, most “signature” loans, medical bills and most older income taxes and other claims for money are all unsecured debt.  In most cases, unsecured creditors receive little of what they are owed or nothing at all.  You may also use bankruptcy to break certain contracts such as leases on a car or an apartment.

How Do I Keep My House and Car? If your payments are current, you have to keep making them.  If you’re behind, you can try to make up the payments in a Chapter 13 Plan.  However, you need to re-start the payments after you file.

Where Can I Get More Information? Bankruptcy is a complex and confusing area of the law.  You need legal advice you can count on to guide you through the process.  We are experienced in helping you through your financial difficulties.  If you have any questions, please call us at (619) 448-2129 to set up an appointment.

Photo credit: taberandrew

Carl Starrett

Carl Starrett is a consumer bankruptcy attorney in San Diego, California helping debtors file for protection under Chapter 13 and Chapter 7 of the Bankruptcy Code.

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