FAQs about Bankruptcy: Is this the Best Debt Solution for You?

Bankruptcy has the perception of being a free ticket for irresponsible spenders to skip out on their obligations. But research by the Consumer Bankruptcy Project indicates otherwise. In the United States, the three most common reasons for bankruptcy filings include medical bills, job loss, and divorce.

Bankruptcy petitions are filed in federal court, and federal regulations generally govern the process. The federal government allows for certain assets to be exempt from seizure or liquidation. However, most states have assembled their own exemption list – often with more exemptions than the federal list. In most cases, you must choose whether to follow the State or Federal list, and you would be wise to consult an attorney due to these differences. Also, a good attorney will be well-versed in the overall process, and in dealing with the court to get you the best possible settlement. That said, it is always helpful to bring some basic information with you to the table.

What is the difference between Chapter 7 and Chapter 13 bankruptcy?
A Chapter 7 bankruptcy will ultimately discharge most, if not all, of your unsecured debts. A Chapter 13 bankruptcy establishes a payment plan, in which you repay part of your outstanding debts over time. Keep in mind, however, that a Chapter 7 bankruptcy will impact your credit worse than a Chapter 13 bankruptcy.

What will happen to my home?
Generally, Federal and State exemptions will allow you to keep a certain amount of the equity in your home. If you have an outstanding mortgage and are filing Chapter 7, however, you may have to repay the lender any balance above and beyond the exemption amount to keep the house. Keep in mind that mortgage debt is not dischargeable in either Chapter 7 or Chapter 13 bankruptcy – but a Chapter 13 filing may allow you to set up a payment plan for any mortgage arrears that will allow you to stay in the house.

What will happen to my car?
If you have a clear title to the car, Federal and State exemptions will allow you to keep it. If you have an outstanding car loan, however, you will be required to continue to work with the lender to keep the car. For Chapter 7 filers, you generally have the option of reaffirming your responsibility to pay the outstanding balance (thus exempting it from discharge), paying off the balance in one lump sum, or giving up the car to the creditor.

What will happen to my retirement savings?
These will be exempted to varying extent; some states have a surprisingly high cap – or no cap at all – on the amount of your retirement funds exempt from liquidation.

How long does the process take?
A Chapter 7 bankruptcy can take as little as 4 months; a Chapter 13 bankruptcy can take from 3 to 5 years from the initial filing to completion of the payment plan and discharge of the remaining debt.

Which debts cannot be discharged through bankruptcy?
Child support and/or alimony payments, back taxes, and most student loans cannot be discharged in bankruptcy. In addition, any debt you incur after filing, or incur under false pretenses, cannot subsequently be discharged.

How long does a bankruptcy filing remain on my credit file?
A Chapter 7 filing remains on your credit file for 10 years; a Chapter 13 filing remains for 7 years.

What changes in bankruptcy law were recently enacted?
The Bankruptcy Abuse Prevention and Consumer Protection Act, which took effect in 2005, places some additional responsibility upon debtors, including means testing for some Chapter 7 filers, a lengthened repayment period for Chapter 13 filers, and mandatory credit counseling prior to receiving a discharge. The notion that the bill guts the protections previously afforded to debtors, however, is far from true.