Bankruptcy Basics

There are four types of bankruptcy that individuals can file. When we speak of bankruptcy types, we refer to them as “Chapters.” The bankruptcy code is contained in large book. Just as the bible or a novel has chapters, so does the bankruptcy code. So, for instance, when we speak of a Chapter 7 Bankruptcy, we are talking about the type of bankruptcy created and described in Chapter 7 of the bankruptcy code.

Of the four types of bankruptcy which are available to consumers, two are very infrequently used and will not be focused on in this discussion. Chapter 12 bankruptcies are only available to family farmers and Chapter 11 is a very complex and costly type of bankruptcy which is most commonly filed by business enterprises.

The most frequently filed type of bankruptcy is Chapter 7. Chapter 7 is a very fast kind of bankruptcy. Usually, our clients are in and out of that type of bankruptcy in about 100 days. In a Chapter 7, individuals unsecured debt, debts like medical bills, personal loans and credit cards are generally “discharged.” When a debt is “discharged,” it is “wiped out.” The debt is legally, no longer due and owing.

There are three primary types of debts. Unsecured debts include, credit cards, most personal loans, old utility bills, automobile repossession deficiencies and medical bills. These debts are the easiest to eliminate in bankruptcy.

Debts involving houses and cars are usually “secured” debts. With this type of arrangement, the creditor has a “lien” against the property which was financed. In a bankruptcy, the consumer has a choice with this type of debt. If they do not want the house or the car, they can agree to surrender the property and, by virtue of the bankruptcy, the debt will be discharged.

If they want to keep the property they usually only have to keep making the payments. Sometimes lenders, particularly automobile lenders, request that the consumer “reaffirm” the debt. If the debt is reaffirmed, it means that the consumer is vulnerable to being pursued after the bankruptcy if the payments are not made. We rarely recommend that our clients reaffirm such debts.

Another category of debt are priority claims. Priority claims are debts such as restitution, child support and taxes. Other than taxes, these debts cannot normally be discharged. Taxes can generally only be discharged if a tax lien has not been filed and 3 years have elapsed from the time the taxes were first due.

Technically speaking, student loans are unsecured debts but unlike virtually every other unsecured debt, they are very difficult to discharge. Persons who are permanently disabled probably have the best chance to discharge a student loan. In order to discharge a student loan, a complaint must be filed with the bankruptcy court requesting discharge on the grounds that repayment would pose an “undue hardship.” Unfortunately, the law’s notion of what is an “undue hardship” is pretty severe and difficult to prove.

So, as you can see, the primary focus in a Chapter 7 Bankruptcy is the elimination of unsecured debt such as credit cards and medical bills.

Chapter 13 bankruptcies are very different from filings under Chapter 7. Chapter 13 bankruptcies are designed to be payment plans lasting between 3 to 5 years.

The most common use of a Chapter 13 is to save a house from foreclosure. Under Chapter 13, the foreclosure is stopped or “stayed” and the consumers have up to five years to get caught up on the mortgage, thus saving the house.

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