Frequently Asked Bankruptcy Questions Answered
What types of bankruptcy are there and which one should you choose? What debts are dischargeable and not dischargeable? What is the difference between secured and unsecured debts? And what are the effects of bankruptcy?
These are among the most frequently and most commonly asked questions about bankruptcy. Here are the answers.
- What types of bankruptcy are there?
The U.S. Bankruptcy Code provides creditor protection for individuals and businesses under Chapters 7, 11, 12, 13 and 15. Individuals may file under Chapter 7, a liquidation, or Chapter 13, which gives debtors the opportunity to manageably pay debts over time. If the debtor has an unincorporated business in financial difficulty, he may include it in his Chapter 13 filing, but he could not directly file it under Chapter 13. Incorporated businesses may file under Chapter 11 to reorganize the business. Fisher folks and farmers are given the special Chapter 12. Foreign companies may file under Chapter 15.
- For individuals, which bankruptcy should one choose?
It depends on the debtor’s financial position, preference and eligibility. Chapter 7 is recommended for those with substantial unsecured debts and not much asset to lose. Under a Chapter 7, a trustee liquidates the assets of the creditor and uses the proceeds to pay debts. If one has a regular income and has some assets he would like to keep, he is better off with Chapter 13. Chapter 13 allows the debtor to enter a debt payment plan with creditors and keep some assets.
But either way, there are eligibility requirements under the ‘means test’ introduced in October 2005. Under it, an individual is qualified for Chapter 7 if his earning is less than the average income of his state or if he earns more than the average, but his excess income is still insufficient to reasonably service debt. An individual is qualified for Chapter 13 filing if his secured and unsecured debts meet a particular bracket (this figure varies yearly). To check for qualification, visit www.usdoj.gov.
- What debts are dischargeable and not dischargeable in bankruptcy?
Most unsecured debts are dischargeable under Chapter 7, but there are those that remain in both Chapter 7 and Chapter 13. Income-related taxes, medical bills, loans to friends, and credit card bills could be forgiven, but family support payments, student loans, debts incurred as a result of willful and malicious acts or driving while drunk, as well as criminal fines and penalties and forfeitures remain.
- What is the difference between secured and unsecured debts?
Secured debts are those on which collateral has been pledged to ensure that a creditor gets paid for the loan. Typical collateral includes real estate, motor vehicles, inventories and accounts receivable. But even if originally, a transaction is not secured by collateral, it might become secured once a creditor has filed a notice of claim or lien on certain of the debtor’s properties. For example, a contractor or subcontractor could secure a lien on a property after successfully obtaining court judgments that he is entitled payments for unpaid work performed for the debtor. Secured creditors could foreclose on the collateral to recoup payment for the debt.
Unsecured debts are not tied to any collateral and most are cancelled under a Chapter 7, whether or not they were fully paid. Secured debts remain and secured creditors get paid first from the sale of the assets of a debtor; unsecured creditors are paid with whatever is left. Unsecured debts include loans from friends and relatives, medical bills, newspaper subscriptions, health insurance premiums, gasoline charges, credit card debts, and payday loans. Alimony and child support are unsecured debts but they are considered priority debts and remains in bankruptcy. They take higher priority over general unsecured debt.
- What are the effects of bankruptcy?
In bankruptcy, the debtor is freed of general unsecured debts and depleted of assets but might still continue paying some non-dischargeable debts like family support. If the filing was under Chapter 13, there might be some assets left but the debtor is committed to a plan to service debt.
Bankruptcy is recorded in the debtor's credit history for several years depending on the type of bankruptcy filing. While obtaining credit is still possible after bankruptcy, it is at the cost of higher interest rates or tighter security requirements. A discharged debtor may also still obtain mortgage after his exit from bankruptcy but it would be after a certain period of time.
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