According to federal law and the United States Bankruptcy Court, the rules concerning personal bankruptcy in Title 11 were passed by Congress in accordance with its Constitutional grant of authority. While states may pass laws that govern other aspects of a debtor-creditor relationship, they may not regulate bankruptcy itself. It is important to understand this as so many individuals are uninformed about bankruptcy laws.
If you are considering filing for personal bankruptcy, you will only need to be concerned with two types – Chapter 7 and Chapter 13. While it's certainly not required that people use an attorney, it is usually best to seek legal advice at some level and preferable to let a lawyer handle everything. Bankruptcy is one of those things that could be very costly if not done properly. In other words, the cost of your mistakes could far outweigh an attorney's fees.
Most bankruptcy lawyers will tell you; consider any realistic alternatives before filing for bankruptcy, such as reducing your debt or paying your bills. Filing for bankruptcy will be an irreversible step that will have a long term impact on your creditworthiness.
What are the two types of personal bankruptcy?
Chapter 7 and Chapter 13 are both named after the numeric title of its corresponding statute in the U.S. Bankruptcy Code.
Chapter 13 Bankruptcy
When one files under Chapter 13, it is possible to keep some property that might have otherwise been liquidated in a bankruptcy. It also allows you the chance to reduce the amount you pay toward your debts. Whenever possible, a Chapter 13 bankruptcy should be considered before any other type of bankruptcy.
The requirement for Chapter 13 bankruptcy is that the amount owed cannot exceed $250,000 in unsecured debt or more than $750,000 in secured debt. These limits were expanded in 1994, allowing Chapter 13 accessible to be more accessible to individuals.
Unsecured and Secured Debt
Unsecured debt, also known as "uncollateralized debt" includes credit card debt, medical bills and signature loans. When preparing a reorganization plan, your unsecured debt will be the lowest priority for payment.
Secured debt, which is often called "collateralized debt," is secured with the property itself, such as the house, car, boat or other big-ticket item. When a debtor defaults on secured debt, the lender can seize the property to recover what is owed.
How does Chapter 13 work?
Chapter 13 requires you to repay your debts over three to five years. You must begin paying on the plan 30 days after you file the petition with the court. It is customary for the petitioner to make one monthly payment to a trustee, who then distributes the funds to their creditors according to a payment schedule.
Chapter 7 Bankruptcy
When a person files for Chapter 7 bankruptcy protection, most of their debts are wiped out and will never have to be paid. However, once a Chapter 7 bankruptcy is filed one cannot file again for six years.
In Chapter 7 bankruptcy, petitioners provide the court with a full list of debts and a complete list of everything they own. They may also be required to answer questions about past financial dealings. Certain property is exempt and allowed to be kept by law but the trustee has the right to liquidate everything else, the proceeds of which are applied to repay debt.
For property that is excluded from liquidation, one must still purchase pay "purchase-money liens" or contractual payments in order to keep the car or house.
Which debts are not discharged in Chapter 7 bankruptcy?
While most of your major debts will be eliminated in a Chapter 7 bankruptcy, it may be impossible to get a fresh start from everyone.
Exclusions may include debts not listed on the petition, debts incurred by fraud, alimony or child support payments, or debts incurred from damages that occurred while intoxicated or in the course of a violent crime. Certain educational loans may also be excluded, as well as most types of taxes and debts from a prior bankruptcy. Some consumer debts may not be forgiven as well, such as purchases for more than $1,000 of luxury goods or services that were incurred within 60 days of a bankruptcy petition.
As you can see, it helps to know which type of bankruptcy is right for your situation. If you have questions about filing a petition for personal bankruptcy, consult with an experienced Colorado bankruptcy lawyer.