Bankruptcy is a legal action in which a person (or business) who cannot pay his or her bills can get a fresh financial start. The right to file for bankruptcy is provided for by federal law and all bankruptcy cases are handled in federal court.
STRAIGHT BANKRUPTCY- CHAPTER 7In a straight bankruptcy under Chapter 7, a debtor files a petition asking the court to discharge his or her debts. The basic idea in a Chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up your property except for EXEMPT property which the law allows you to keep. In many cases, much or all of your property may be exempt. Property which is not exempt is sold and the money distributed to creditors. In most cases, Chapter 7 debtors KEEP all of their property.
Filing for Chapter 7 bankruptcy places an automatic stay upon the attempts of your creditors to collect debts owed by you. In order that you get the maximum benefit from your bankruptcy, you must understand exactly what is required of you during the months that follow your filing.
Under Chapter 7 you also have a number of important rights:
1. You cannot be harassed or contacted by any creditors. If a creditor calls, put them in touch with your attorney immediately.
2. You have a right to retain all of your property unless your attorney has stipulated otherwise.
CHAPTER 13 BANKRUPTCYIn a Chapter 13 case, you, the debtor, file a PLAN showing how you will pay off some of your past-due and current debts over an extended period, normally three (3) years. This is different from Chapter 7 bankruptcy, where you ask the court to wipe out (discharge) your debts.
The most important thing about a Chapter 13 case is that it will allow you to keep valuable property – especially your home – which might otherwise be lost.
You should consider filing a Chapter 13 plan if you:
1. Own your home and are in danger of losing it because of money problems;
2. Are behind on debt payments, but can catch up if given some time, and
3. Have regular income (including government benefits such as social security or public assistance).
Certain creditors may have a SECURITY INTEREST in some of your property – that is, a right in your property to make sure you pay your debt. When you borrow money, the lender may take a security interest in some of your property (collateral). If you don’t make your loan payments, the lender may be able to foreclose on or repossess that property.
Other creditors may not have any security interest in your property. Such creditors are called unsecured or general creditors. Secured creditors generally have greater rights to your property than unsecured creditors.
A creditor may have a security interest or other claim against property which you claim as exempt. You may be able to keep this property in some situations.
If everything goes normally in a bankruptcy case, the final thing the court does is to grant you a DISCHARGE, which excuses you from paying all of your debts (except possibly for the few mentioned above). The discharge order also forbids creditors from doing anything to try to collect a debt that has been discharged.
The court can refuse to grant a discharge, but only in very limited cases if you have done something improper, such as: trying to cheat a creditor by hiding your property; giving false information to the court; refusing to obey a court order, etc.