What are chapters?
A chapter refers to a chapter in the U.S. Bankruptcy Code. For instance, chapter 7 deals with liquidations, chapter 11 deals with business reorganizations, chapter 12 deals with reorganizations of family farms, and chapter 13 deals with wage-earner reorganization plans. For consumers, by far and away chapters 7 and 13 are the most common.
If I file bankruptcy, will I be able to keep my property that I've pledged as collateral?
It depends on two things: the chapter under which you file, and your ability to repay. Liens on collateral survive bankruptcy, so a bankruptcy filing does not automatically make a lien disappear. Under certain circumstances, the debtor's attorney can ask the Bankruptcy Court to take away a lien.
What is the difference between a secured and unsecured creditor?
A secured creditor is any creditor that has collateral for your loan (i.e., home mortgage, car note, household appliances, etc.). In other words, if you default on your loan, does that creditor have something that they can repossess? If so, they are secured. An unsecured creditor is one with no collateral (i.e., credit cards, medical bills, signature loans, etc.). A secured creditor is absolutely entitled to their collateral, or its value, when a bankruptcy is filed.
I have a creditor that I don't want to offend. Can I continue to pay them and keep them out of the bankruptcy?
Yes, if you can repay the debt. You can accomplish this by signing a reaffirmation agreement in a chapter 7, and by repaying the full value of the loan under a chapter 13.
What is exempt property?
Exemptions are very important in bankruptcy law. Property that is "exempt" is property that cannot be seized or attached by creditors. Under Mississippi law, which the bankruptcy court uses for exemptions, each person has up to $10,000.00 in personal property that is exempt: it cannot be seized. Generally speaking, cash, bank accounts and luxury items such as jewelry, boats, guns, etc. are not eligible for exemption. Most other items of personal property are exempt. A husband and wife filing jointly can combine their exemptions and have up to $20,000.00. As to real property, your homestead has up to $75,000.00 in equity that is exempted from seizure. Other real property other than the homestead is not exempt and may be seized.
What happens in a chapter 7 (liquidation)?
Generally, it is the job of the bankruptcy trustee to seize all of the debtor's unencumbered, non-exempt property, and sell them to use the proceeds to pay unsecured creditors. This sounds harsh, but as a practical matter, it rarely happens because people who are forced to file bankruptcy seldom have unencumbered, non-exempt property. To accomplish this, the trustee requires, upon filing, a detailed statement of assets owned, creditors, and collateral held. Since liens survive bankruptcy, the debtor must make a decision on their secured debts. They must either surrender the collateral to the creditor, or they must reaffirm the debt. After the bankruptcy is administered, the debtor gets his/her discharge, which is the release from all pre-filing debts not reaffirmed.
What happens in a chapter 13 (wage earner plan)?
Your attorney works with you to construct a monthly budget. Reasonable living expenses are subtracted from income, and the amount that remains is "disposable income." The disposable income is then used to fund the plan, which typically lasts 36 to 60 months. The trustee enters a wage withholding order to your employer, and your employer then sends that amount to the trustee, who uses it to pay your bills. With the notable exception of home loans, secured creditors are entitled only to the value of their collateral, not the amount you owe. Home loans cannot be modified in a chapter 13, so you must make the full amount of the monthly payment to your lender. You can do this directly or through the plan.
My creditors are constantly hassling me. Does a bankruptcy stop the harassment?
Absolutely yes! When you file under any chapter, the automatic stay arises and creditors must immediately stop all collection activities, including repossessions, foreclosures, phone calls and collection letters.
What is the advantage of filing a chapter 13 as opposed to a chapter 7?
Recall that, in a chapter 7, you must either reaffirm your debt with secured creditors or surrender the collateral. Chapter 13 allows you the option of keeping all your collateral, and to pay for it at its market value as opposed to the amount you are actually indebted. In many cases, there is also money left to pay toward unsecured debts. Although there is no empirical data to support this, many creditors have stated that they look more favorably on chapter 13 debtors as opposed to chapter 7 debtors. Also, though the fee is higher for a chapter 13, it can be paid through the plan, which reduces the up-front payment required.
What is the advantage of filing a chapter 7 as opposed to a chapter 13?
Chapter 7 bankruptcies are discharged sooner than chapter 13's. Typically, a chapter 7 is completed within 6-7 months after filing. A chapter 7 is also less expensive from a legal fee standpoint. There is no wage withholding order, so no funds are deducted from your paycheck. Also, you don't have to worry about losing your job and/or reductions in your pay, both of which would require significant modifications to the plan.
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