Personal Bankruptcy

Personal BankruptcyPersonal Bankruptcy is a form of debt relief that is distinct from Corporate Bankruptcy. Most of the world’s legal systems allow an individual to achieve at least one kind of debt relief. In the United States, that debt relief is governed by federal and state laws. In order to file for debt relief in bankruptcy in this country, an individual must file under one of 4 federal chapters, including Chapter 7, which is a straight bankruptcy or “liquidation,” Chapter 11 for business relief, Chapter 12 for a family farm’s reorganization or Chapter 13 for individual reorganization. Most individuals in the United States who file for relief in bankruptcy file under Chapter 7 for straight bankruptcy or under Chapter 13 for reorganization. Whether you file under Chapter 7 or Chapter 13, the entire process from filing to either Chapter 7 discharge or Chapter 13 commencement by payment schedule is about 4 – 6 months. The difference between achieving bankruptcy relief under Chapter 7 or Chapter 13 usually hinges on the means of the individual. All individuals might file under Chapter 7 but people with lesser means according to the “means test” discussed below tend to end up in Chapter 7 bankruptcy while people with greater means tend to end up in Chapter 13 bankruptcy.

In Chapter 7 bankruptcy, the goal is to get a “fresh start” by keeping as much exempt property as possible while discharging as much debt as possible. The exempt property that may be kept by the individual is set by federal and state schedules and might include such property as the individual’s primary residence and tools of his/her trade. In Chapter 7, the discharge of debt releases the individual from responsibility for a debt. Typically, those debts are owed to either unsecured creditors, who have no special insurance that a debt will be paid, and secured creditors, who have special assurance – such as a mortgage or lien on property – that a debt will be paid. Unsecured creditors usually receive little or no payment in personal bankruptcy and the individual’s debts to them are discharged. Secured creditors have an assurance to back them up, so an individual owing money on property that has a secured debt (for example, a car with a secured car loan), will often reaffirm the debt and continue to pay on the debt in order to keep the car. In addition to secured and unsecured debts, the law automatically makes some debts nondischargeable debts, such as some taxes, student loans, spousal support and child support. Other debts that are normally dischargeable can be made nondischargeable by proving that the individual committed fraud or embezzlement to obtain the money. Due to the “fresh start” given by Chapter 7 Bankruptcy, an individual can receive relief only once every 8 years.

In Chapter 13 bankruptcy, the goal is to keep large assets by setting up a payment plan and actually paying the debts. Chapter 13 bankruptcy forces creditors to accept a court-approved payment plan, usually for a period of 3 – 5 years, allows the debtor to save his/her home from foreclosure, protects others who have cosigned loans with the individual, and allows the individual to have no contact with his/her creditors. After the loans are repaid through the bankruptcy trustee, Chapter 13 loans are discharged debts. Due to the fact that debts are repaid under Chapter 13 bankruptcy, an individual can file for this relief at any time.

What, then, should an individual do if he/she is contemplating filing for personal bankruptcy?

First, you should determine whether the benefits of bankruptcy are worth the financial consequences of, for example, having bankruptcy on your credit history for 10 years. Normally, bankruptcy is worth the consequences if you are suffering from a combination of factors such as being sued, your assets are being seized, your wages are being garnished, you have high unpaid taxes, your home is about to be foreclosed, and you don’t foresee obtaining the money to resolve these problems. If your life is being seriously affected by one or more of these factors, personal bankruptcy might be the answer for you.

Secondly, you should hire a Bankruptcy lawyer who will be able to handle the complexity of bankruptcy, can advise you of the costs and can work out a fee/costs arrangement with you.

Third, with your lawyer’s help, decide whether you should pursue Chapter 7 Bankruptcy or Chapter 13 Bankruptcy.

Fourth, you must obtain mandatory credit counseling, part of which is the “means test” that will tell the court whether you are eligible for Chapter 7 or Chapter 13 Bankruptcy. Your lawyer will know which credit counseling entity is approved by the court and how to complete your “means test.”

Fifth, with your lawyer’s help, you will complete and file many documents, including but certainly not limited to a petition, schedules of assets and liabilities, a schedule of your income and expenditure, one or more tax returns, and a certificate of credit counseling.

Sixth, you will attend a “meeting of creditors” or a “341 meeting” with your lawyer and at that meeting you will be sworn in to give your answers under oath and the bankruptcy trustee will ensure that your documents are truthful, that you understand the consequences and that you agree to filing for bankruptcy. In addition, creditors might show up (which they probably won’t do) and ask you questions (which you probably must answer).

Seventh, you wait for your creditors’ responses. If a creditor challenges the discharge of your debt to him/her/it, your lawyer will help you fight or otherwise deal with the challenge. If no creditor challenges you, you will receive notice of discharge under Chapter 7 or you will begin your repayment plan under Chapter 13. In the case of Chapter 13 bankruptcy, your discharge will come 1 or 2 months after you make your final payment. The specter of personal bankruptcy can be frightening but as you move through the steps you will notice that the reality is civilized and that there are many, many people in the same boat with you.

Kathy Catanzarite

[Note from This article is to be used as an educational guide only and should not be interpreted as a legal consultation. Readers of this article are advised to seek an attorney if a legal consultation is needed. Laws may vary by state and are subject to change, thus the accuracy of this information cannot be guaranteed. Readers act on this information solely at their own risk. Neither, or any of its affiliates, shall have any liability stemming from this article.]