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Understanding how bankruptcy works | Brian Harris
Before diving into the world of bankruptcy, it is best to understand some basics about what it is.
There are four types of bankruptcy. The most common bankruptcies, the one your friend or neighbor may have filed, are chapter 7 and chapter 13. So, what are they?
Chapter 7, which is the most common filing, is a liquidation case. Basically, when you file, you list all of your assets and all of your debts. In other words, you turn everything over to the court. After liquidation you receive a discharge, which is an order relieving you of any further liability on your debts, except those debts you are allowed to keep, for example a car payment because you want to keep the car.
Before thinking you lose everything in bankruptcy, you are granted exemptions to apply toward your property. The property that is not exempted is liquidated. For example, each debtor, under federal exemptions, is granted a $3,450.00 exemption for equity in a vehicle. A very important one is retirement accounts. If they are IRS recognized, (i.e. 401(k) or IRA’s) they can be 100-percent exempted. Before you wipe out your retirement to pay off debt, make sure that you are not ultimately going to file for bankruptcy relief. The purpose of these exemptions is to give you a fresh start by making sure you have some property when you come out of bankruptcy. Otherwise, you are simply going back into debt to by new property.
A chapter 13 case is a plan payment case. The same process for your property in a chapter 7 is used in a chapter 13. The difference is that you will make a plan payment for a period of time, typically five years. At the end of that period you are discharged and relieved of any unpaid listed debt, if you make all of the payments.
You may be asking why not just file chapter 7? The first thing to understand is that not everyone can qualify for chapter 7, while most can qualify for chapter 13. The Bankruptcy Code has established that those making above a certain gross income level must file chapter 13. This varies by location and depends on household size. If you make above that income level, you are considered to have expendable income that must be paid into a plan for a time period.
Now, some individuals have decided to voluntarily file for chapter 13. There are many reasons for doing this. For example, they filed a chapter 7 within a certain time period therefore they are not allowed to file again. Another may be someone has fallen behind in house payments. So, they use the chapter 13 as a way to catch up the payments and save the home. In this economy, some have even used it as a means to remove liens on their property under certain conditions, known as a lien strip.
Bankruptcy is an important decision but one that may be considered if you have fallen behind on debt and see no end in sight. Some fear bankruptcy as the end of their financial life. However, those making the right decisions after filing can rebuild their credit. Some have even bought homes again within a few years after filing.
Whatever the reasons, it is always good to discuss with a professional to see how bankruptcy can pertain to your specific situation.
Brian Hanis is a bankruptcy attorney with the Kent Law Firm of Hanis Irvine Prothero, PLLC. For more information, call 253-520-5000.