Friday, August 19, 2011

Introduction to Bankruptcy

The Bankruptcy Code is divided into chapters. The chapters that usually apply to consumers are Chapter 7, where most or all of your debt is wiped out, and Chapter 13, which involves a repayment plan. In most cases, once you file your case, the "Automatic Stay" immediately goes into effect. The Automatic Stay means that a bankruptcy filing automatically stops, or stays, and brings to a halt most lawsuits, repossessions, foreclosures, evictions, garnishments, attachments, utility shut-offs, and debt collection harassment. Generally, creditors cannot take any further action against you or your property without permission from the Bankruptcy Court.

Chapter 13 is a valuable tool that lets consumers catch up overdue mortgage or car payments, taxes and domestic support obligations. It also applies where a consumer has the ability to repay some or all of his or her debts over time. A consumer must have less than $360,475.00 in unsecured debt (such as credit cards and doctor's bills) and less than $1,081,400.00 in secured debt (such as mortgages and car loans) to qualify for Chapter 13. The filing fee for a Chapter 13 is $274.00.

Under Chapter 13, a consumer keeps all of his or her property, both exempt and non-exempt, as long as the consumer resumes making the regular payments on secured debt and keeps current under the bankruptcy repayment plan. A repayment plan can last for up to five years. After finishing the plan's payments, most of the consumer's unsecured debts are discharged.

Chapter 7 is designed for people who are having financial difficulties and are not able to repay their debts. Consumers can usually qualify for a Chapter 7 if the consumer's average gross monthly income for the last six months is below the state’s Median Income, the consumer's gross income less certain expenses is below the state’s Median Income, or the consumer can show "special circumstances" that would allow the consumer to qualify for Chapter 7. The filing fee for a Chapter 7 is $299.00.

Under Chapter 7, a consumer can usually exempt, or keep, most or all of the consumer's assets under California law, or, if the consumer has not lived in California for the past two years, under the state’s exemption law that applies to the consumer's case. Most retirement accounts and pensions are also exempt. Secured property, normally the consumer's car and house, may not have any net equity, in which case the consumer can keep it as well. The Trustee liquidates most non-exempt property and uses the proceeds to pay the consumer's creditors according to priorities of the Bankruptcy Code.

Once the Chapter 7 case is over, the consumer receives a Discharge. The discharge prevents creditors from taking any steps to try to collect their unsecured debt. They cannot call, write, sue, or take any steps that could be considered an attempt to collect its debt. If a consumer wants to keep property that has a lien on it, the consumer must keep payments current, and may be required to reaffirm the debt. Some debts can not be discharged. Typical examples are child support, alimony, and other domestic support obligations, some taxes, student loans, criminal restitution, and debts for death or personal injury caused by operating vehicles while intoxicated with alcohol or drugs.

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