What is a Chapter 13? - There are several types of bankruptcy. We have all heard about the huge Chapter 11 cases of Enron and WorldCom or United Airlines. Chapter 11 is generally reserved for the 'rehabilitation' of businesses. A Chapter 13 case is a similar proceeding for families. Instead of discharging your debts without payment, you may propose a plan to repay your creditors over time. Your repayment plan can be for only a percentage of what you owe paid over a number of years. This is not without serious cost. The Court-appointed Trustee will criticize your budget to maximize your payments to creditors and will charge you a 'service charge' of 10% of all payments. The payment plan will last from 3 to 5 years based on your ability to pay. As a result, these types of bankruptcy are better reserved for cases when the goal is to pay mortgage arrearages in the face of a foreclosure. However, Congress now requires individuals to file Chapter 13 if they make more than the median income for your area.
What about cost? - Currently the filing fee for a Chapter 7 case is $299.00 and a Chapter 13 is $274.00. The filing fee can be paid to the Court in installments or waived entirely as ordered by the Court under certain circumstances. Attorneys fees are always a consideration, but beware of advertisements of low fees by attorneys or paralegal firms. Generally, you get what you pay for and good representation is always a must. Ask yourself, "Would I represent myself before the IRS?" We all know the horror stories of a tax audit. The bankruptcy process is at least as serious as that. Don't take chances!
How long does a bankruptcy case take? - Even with the fifteen-fold increase in bankruptcy filings over the last 20 years, a typical case only takes about four to six months once it is filed. Of course, preparation for filing the case may take longer, depending on your circumstances. There is the new requirement for credit counseling which takes about 45 minutes of your time and a 5 minute phone call. There is typically only one hearing which occurs about thirty days after the filing date and that hearing usually takes about ten minutes. Don't be mistaken however, the hearing is a serious matter and your responses are recorded on tape for future reference. Thereafter, creditors are given 60 days to object to your case. While the creditors are deciding whether to object to your case, you are required to take a family budgeting education course which takes about 90 minutes. Then the Court reviews the matter for bookkeeping and a discharge finalizing your case is usually issued within five months of the filing date.
Can I hide my property from my creditors? - Much of your assets are always protected from creditors. There are both state and federal laws which protect certain items you own from seizure. A good example would be retirement accounts such as pensions, IRAs, or 401Ks. These funds are 'exempt', which means that no creditor may take them. Household goods are another example, provided you don't have anything extravagant such as a Picasso painting or gold-plated faucets. You cannot simply 'give' your non-protected assets to others solely to place them beyond the reach of creditors. You may not defraud the Bankruptcy Court or your creditors; these acts carry serious penalties. Failure to be completely honest with the Bankruptcy Court can result in criminal charges providing for jail time (up to 5 years) and fines (up to $250,000.00). However, it is likely that that most of your property would be covered by one exemption or another.
Are all debts dischargeable? The simple answer is no. Student loans are no longer discharged unless there is proof of a serious hardship. Family support obligations and DUI penalties are other examples of non-dischargeable debts. Fraud is another additional consideration. If a creditor can prove that you incurred a debt by submitting a fraudulent financial statement or if you incurred the debt knowing that you had no ability to repay, that debt may also be declared non-dischargeable. It is an urban myth that you should 'charge up' your credit cards if you know you are going to file bankruptcy anyway. The consequences are severe. On the other hand, it is not unsual to be able to discharge many kinds of taxes, thus disproving the old adage, "The only two things certain in life are death and taxes."