During the previous four years or so, everyone thought they had discovered the secret to wealth and thought they were masters of investments. Real estate sales agents, contractors, lenders, loan originators, and Wall Street all thought the party would never end. Then suddenly the collapse of the real estate market. People continue to struggle to keep with their bills until they get to the point where a bankruptcy becomes inevitable. These individuals then start to question how and what can be done to bankruptcy. Some may wonder if they can even do a bankruptcy, some think you must be completely without assets others don't know what a bankruptcy is.
Bankruptcy law is intended to give individuals a fresh start. The idea is that risk is rewarded, so individuals can start businesses and then if they fail they can start all over again. There are generally two types of bankruptcy that are used by consumers. One is called a chapter 7 a second is called a chapter 13. The chapter 7 bankruptcy is what individuals think of as a bankruptcy, where you sell all your property and pay as much as you can of your debts and whatever remains unpaid is forgiven. There is a variation to this idea, because every state can elect to use federal exemptions or create their own. These exemptions permit the debtor to keep certain assets. You can keep some home equity, some car equity, pension plans, IRAs, 401(k) plans, family heirlooms, some jewelry. It does not mean you keep everything, but it does not mean you have to give everything up either. Some states have some very generous exemptions and therefore attract a lot of people for the sole purpose of filing bankruptcy. Some states are the opposite and because they are so stingy are often avoided and cause people to leave the state.
A chapter 13 bankruptcy is like a repayment plan over 5 years or 3 if you are eligible for a chapter 7. A certain portion of your monthly income is protected then anything in excess is considered disposable. The disposable income is available to pay off debts.
To qualify for a chapter 13 bankruptcy the individual cannot have too much debt. For example a $2 million dollar home loan would likely be too much. There is a test for secured debt and unsecured debt. Secured debt means there is some sort of security, such as a house or a car. Unsecured debt means there is no security such as credit card debt, hospital bills, and personal loans. To qualify for a chapter 7, the household income is compared to the state median income. If the household income is in excess of the median household income for a household of the same size then the debtor is not permitted to file a chapter 7, except in a few cases. There is a lot of uncertainty when it comes to counting the household size. Children are considered part of the household, but what about grown children, and children in college in children not living at home ? Not all debt can be discharged or forgiven. Student loans and taxes for example are generally not dischargeable and you continue to owe these debts after the bankruptcy. The best way to find out what you can or cannot do and what you can qualify for under bankruptcy law is to simply speak with a bankruptcy attorney.