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Bankruptcy Frequently Asked Questions

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by , 10-08-2011 at 05:41 PM (1042 Views)
What are the eligibility requirements for each form of bankruptcy?

Chapter 7 bankruptcy is available for individuals and businesses. However, individuals (not businesses) have two eligibility requirements that they must fulfill in order to file for Chapter 7: (1) Individual debtors must receive credit counseling from an approved budget and credit counseling agency within 180 days of filing for bankruptcy and (2) Individuals with debts primarily stemming from personal, family or other consumer expenses (not business related) must qualify under the means test.

Chapter 13 bankruptcy is available for individuals only. Like in Chapter 7, an individual must receive credit counseling within 180 days of filing for Chapter 13. This is an opportunity for an individual to create a repayment plan and submit the repayment plan with the petition. There are also debt limits that the debtor cannot exceed in order to apply for Chapter 13. As of June 2011, unsecured debt caps are at $360,471 and secured debt caps are at $1,081,400.

Chapter 11 bankruptcy is a complicated process for businesses.

Chapter 12 bankruptcy is for family farmers or family fisherman. A family farmer is defined as having at least 50% of income from farming and the debt must not exceed $3.54 million and at least 50% of the debt must be attributable to farming. The family fisherman is defined as having at least 50% of income from fishing and the debt must not exceed $1.64 million and at least 80% of the debt must be attributable to fishing.

How often can you file for bankruptcy?
Serial bankruptcy filers have limits on how often they may be discharged and how often they may file.
A debtor who had a bankruptcy case dismissed in the past 180 days may not file for Chapter 7 or 13 bankruptcy.

A Chapter 7 discharge is not available for an individual who has been discharged from Chapter 7 bankruptcy within the past 8 years or Chapter 13 within the past 6 years.

A Chapter 13 discharge is not available for an individual who has been discharged from Chapter 7 bankruptcy within the past 4 years or Chapter 13 within the past 2 years.

How will bankruptcy affect credit?

Bankruptcy may remain on an individual's financial record for up to ten years, possibly 12 years at the very most. This can lead to future credit problems from future creditors who may deny loans or charge higher interest rates. This can lead to difficulty in renting an apartment, getting a loan for a home or car, among other creditor issues. Bankruptcy does discharge debt though so it could improve credit. For example, an individual cannot be discharged from debts under Chapter 7 more than once every eight years so the landlord has the security that rent payment cannot be discharged for an individual who just emerged from Chapter 7 bankruptcy.

What happens to particular assets in Chapter 7 bankruptcy?
Chapter 7: After filing for Chapter 7 bankruptcy, a trustee is appointed to assemble the debtor's non-exempt assets. Any asset earned by the debtor after filing for bankruptcy is not reachable by the trustee. The non-exempt assets are then liquidated in order to pay off creditors to the fullest extent possible.

What is exempt from bankruptcy? Whether or not a certain asset or property is exempt from Chapter 7 bankruptcy depends on the US Bankruptcy Code or the laws of the debtor's state. States can opt out of the federal exemptions and require citizens use the exemptions laws of the state. Thus, the debtor may have the option to use federal or state law to claim a particular asset is exempt or the state may opt out of the federal law and the debtor can only use state law.

Will I Lose My House?

If the home is in foreclosure, filing for Chapter 7 will not prevent the bank from selling the home. If the debtor's home is not in foreclosure, it is possible that the equity in your home may be sold to pay creditors. Whether or not the equity can be sold depends on the applicable state law homestead exemption (or federal exemption, which is $21,165 as of 2011, if the state does not opt out of federal exemptions). To illustrate, in State X the homestead exemption is set at $50,000. Thus, if the debtor's equity in their home is below $50,000, then their equity is exempt, i.e. the equity cannot be sold for the creditor's benefit.

Will I lose my car/will it be repossessed?

This depends on the applicable state law or federal law and the amount of equity (fair market value of the car minus the amount owed on the loan). If the equity is less than the state or federal exemption, then the car will not be sold by the trustee for the benefit of the creditors. The federal exemption as of 2011 for automobiles is $3,450. If the car's equity exceeds the applicable exemption, there are other exemption categories you could apply to the car. For example, the tools of the trade exemption. Another possible option is to pay the trustee the amount the equity exceeds the exemption value and keep the vehicle.
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