Finding the Right Type of Bankruptcy for You
In 2010, more than 1.5 million Americans filed for bankruptcy protection- a 9% increase over the previous year and the highest rate of filings since the new bankruptcy laws went into effect in 2005. While the states with the highest rates of bankruptcy remained in the Southwestern and Southeastern parts of the country, states in the Northeast still saw increases in the number of bankruptcy filings in 2010. For example, in Rhode Island more than 4,100 people filed for consumer bankruptcy protection last year and Massachusetts added another 17,700 filers.
High rates of unemployment coupled with soaring credit card debt and a sluggish housing market have been cited as the primary contributing factors for the record bankruptcy rates across the country. As the economy slowly begins to recover, the overall number of bankruptcy filings in 2011 is expected to decrease. But for many individuals, the recovery may not come fast enough and bankruptcy may be their best option for returning to financial stability in the new year.
Below you will find some information on the two types of consumer bankruptcy: Chapter 7 and Chapter 13. For help determining which type of bankruptcy best fits your financial situation, contact an experienced bankruptcy attorney.
Chapter 7 - Liquidation Bankruptcy
Chapter 7 bankruptcy gives debtors an opportunity to erase their debts and to start rebuilding their credit with a clean slate. In exchange for this opportunity, the debtor may have to sell, or liquidate, some of his or her personal belongings. During a Chapter 7 filing, the bankruptcy trustee will collect any nonexempt property owned by the debtor and liquidate it in order to repay some of the debt owed to the creditors.
However, in most cases, debtors filing for Chapter 7 will not lose any of their personal property, including their family home and car. Under federal and state law, certain types of property are exempt from liquidation in a Chapter 7 bankruptcy. For example, Massachusetts has a generous homestead exemption that allows debtors to exempt up to $500,000 in equity in their primary residence. Rhode Island, in comparison, allows debtors to exempt up to $300,000 in equity in their primary residence. To keep the house in any state, however, the homeowner must continue to stay current on the mortgage payment, before, during and after the Chapter 7 filing.
Other types of property that are exempt from liquidation include the family car, certain household items including clothing and furniture, jewelry and tools of the debtor's trade. After any non-exempt property has been liquidated, the bankruptcy judge will discharge any remaining debts, including credit card debts, auto loans and medical bills.
Under the 2005 changes to federal bankruptcy law, those who wish to file for Chapter 7 are required to meet a means test first in order to file. The means test takes into account the amount of disposable monthly income a debtor has versus the overall amount of his or her debt. If the debtor has sufficient disposable income to pay the debts, then he or she will not be able to file for Chapter 7 bankruptcy, but still may be eligible to file for Chapter 13.
Chapter 13 - Rehabilitation Bankruptcy
Chapter 13 bankruptcy, also known as "rehabilitation" bankruptcy, gives debtors who have a steady income the opportunity to repay some of their debts under a structured repayment plan. The repayment period runs from three to five years. Secured debts, like mortgages and car loans, generally make-up most of the payments in the repayment plan. Typically, debtors pay little to nothing of their unsecured debts, including credit card bills. After successfully completing the repayment plan, the bankruptcy judge will discharge any remaining unsecured debts. Just like in a Chapter 7, once a debt has been discharged in bankruptcy, the creditor cannot make any attempts to collect any remaining amounts from the debtor.
For some debtors, filing for a Chapter 13 bankruptcy may be more advantageous than a Chapter 7 filing. For example, those who would lose nonexempt assets to liquidation in a Chapter 7 can keep those same assets in a Chapter 13. Additionally, homeowners who have fallen behind on their mortgage payments will be able to become current on those payments as part of their Chapter 13 repayment plan. Also, in some cases, lenders may be willing to work with homeowners who file for Chapter 13 protection and allow them to renegotiate the terms of their mortgage to lower their monthly payments.
Stripping Second Mortgages
Another important - and little known - advantage of Chapter 13 bankruptcy is the possibility of having a second mortgage discharged. In a Chapter 13 bankruptcy, debtors who have more than one lien against their homes may be able to have the junior liens discharged (also referred to as "stripped") if their house has appraised for less than the first mortgage. For example, if a house appraised for $400,000 and the remaining amount owed on the first mortgage is $420,000 and there is a second mortgage for $100,000, the homeowner can petition the court to discharge the second mortgage as part of their Chapter 13 bankruptcy filing.
If the bankruptcy judge finds that the current fair market value of the home is at or lower than the amount of the first mortgage, then the judge will convert any junior liens, including second mortgages, to unsecured creditors. The reason for this is that there is insufficient value in the home to secure the second mortgage. So long as the debtor successfully completes the Chapter 13 repayment plan, the junior liens against the house will be discharged along with any other amounts owed to unsecured creditors.
Not All Debts are Dischargeable
Before filing for bankruptcy, it is important for debtors to understand that not all types of debt are eligible for discharge in bankruptcy. These debts include:
- Most back taxes
- Most student loans
- Support obligations, including child support and alimony
- Criminal fines and restitution
- Judgments from personal injury and wrongful death suits
Also, neither a Chapter 7 nor a Chapter 13 bankruptcy filing will stop a lender from foreclosing on a home if the foreclosure already has been initiated. At the most, the bankruptcy filing will slow the process down and will give the homeowner more time to try to negotiate a new deal with the lender, such as a lower interest rate.
Automatic Stay
The automatic stay is a very important protection given to debtors once they file for either Chapter 7 or Chapter 13. The automatic stay prevents creditors from continuing any and all debt collection activities once an individual has filed a bankruptcy petition. This means no more harassing phone calls, letters or notices saying that the creditor is going to take legal action - which can be a huge relief for those who are being tormented by creditors who want their money now. In general, the automatic stay remains in effect until the bankruptcy is finalized.
Work with an Experienced Bankruptcy Attorney
Bankruptcy laws are complex and difficult to understand. An attorney experienced in handling bankruptcy filings can explain the process to you, file the necessary paperwork on your behalf and help you get through the process as quickly and efficiently as possible.
For more information on Chapter 7 and Chapter 13 bankruptcies, contact a knowledgeable bankruptcy attorney today. Y Stress? Call BK Law Group PC and arrange for a FREE CONSULTATION in Massachusetts at 508-499-3366 or in Rhode Island at 401-250-5520.
