The concept of bankruptcy itself is not that hard to understand. The United States has a whole area of law to help you take control of debt. The idea is you can erase some debt while reorganizing the repayment of other debts. All of this is done while, in most cases, allowing you to keep your property. The words in bankruptcy are not what real people use every day. For example, an ARREARAGE, is an amount you are behind on a debt. Missed your mortgage payment for 2 months? You are 2 months in ARREARS. ASSETS are things you own: your home; your car; your clothing; bank accounts-your possessions. EXEMPTIONS are the laws that allow you to protect your possessions-they are limits in value on what you can protect. CREDITORS are companies or people you owe money. COLLATERAL-that is your possessions that secure a loan. For example, your car is collateral for the loan-don’t pay the car loan and the collateral (car) gets repossessed. You go get a loan at a finance company and list your tv as collateral –the idea being if you don’t pay-the finance company will take your tv. The AUTOMATIC STAY is what protects your things/possessions/assets once you actually file a bankruptcy case. Think of the AUTOMATIC STAY like a big blanket that covers all of your assets-this protection blanket keeps creditors from taking any of your possessions. A LIEN is what attaches to your possessions-it’s just another word for debt. If you have a car loan, the bank has a lien, or contract to pay on your car.
A DISCHARGE is when your debt is erased at the end of a bankruptcy-it is no longer on your credit report. But be careful-once you get a discharge you will be likely swamped with offers of credit. There are other confusing sounding words that are easy to understand once you get their meaning.
A GENERAL INTRODUCTION
Very generally Chapter 7 and Chapter 13 Bankruptcy are the two types of bankruptcy that individuals or couples file. At its most basic, Chapter 13 is called a wage earner’s plan. Your debts are reorganized or restructured so a repayment plan can be set up. Chapter 7 is where there is no repayment plan, the debts are being erased. In Chapter 13 there are debt limits which you cannot exceed to be eligible to file: unsecured debt is capped at $419,275; secured debt is limited to $1,257,850.
PROTECTING YOUR ASSETS
In either type of bankruptcy there are protection limits on your assets. Assets are things you own and the government has limits as to how much in value you can protect in each separate category. There are about 53 different categories from clothing and cars to guns and animals. You determine the value of your assets by figuring out how much it would cost to replace an item of similar age and condition. Things like clothing, electronics, furniture and cars typically lose value as they age. In bankruptcy you will be assigned a Bankruptcy Trustee who will collect information from you and manage the case. The Trustee will look to see if the value of your assets is higher than the protection limits in each category. If your asset value is over the protection limit the Trustee could take those assets and sell them to pay some of your debts. In a Chapter 13 you could still keep the asset by paying the unprotected amount of the value of the asset to the Trustee over 60 months. A couple can protect $12,650 worth of one car. If the car is worth $20,000 but you owe $15000 on it you only have $5000 worth of ownership in the car-clearly well below the protection limit. As a practical matter most people can protect the assets and are below the protection limits in each category.
TYPES OF DEBT
There are debts that neither Chapter 7 nor Chapter 13 can erase: child support; domestic support; criminal restitution; most tax debts. In a Chapter 13 you could pay any amount you are behind on say child support over 60 months and depending on the age of the tax debt, possibly pay the tax debt as low as 1% of the total. Once you complete putting values on each different asset category, you can move on to getting a look at the debt you have. I typically run a credit report and give it to you. There are basically two types of debt: secured and unsecured. Secured is pretty easy to identify-if you do not pay that debt someone is going take that asset-repossess a car, foreclose on a house, threaten to come and get assets you may have put up to get a loan. Unsecured debt is credit card debt, medical debt and other debt you have which is not secured by an asset. If you are behind on a debt like a car payment, that amount you are behind is called an arrearage. In a Chapter 13 you can propose to pay the arrearage back over up to 60 months and reduce the interest rate on that debt to the Federal Interest rate. If, for example you are behind $12,000 on your mortgage, you could propose to pay the 12,000 back over 60 months or $200 per month. You would also have to be able to make the normal mortgage payment going forward in order to keep the home. If you have been paying the same lender for more than 910 days-about 2.5 years- you can cram down debt on a car or mobile home as long as there is no land home package on the mobile home. If your car debt is $12000 but the NADA value is $6000, you can propose to pay the car off at $6000 over 60 months at the Federal Interest rate of currently 5.75%-for a payment of just over $115 per month. Unsecured debt must be paid at least 1% of the debt. If you have a $10000 credit card you could propose to pay $100 total spread out over 60 months or about $1.60 per month.
THE CHAPTER 13 PLAN PAYMENT
Now imagine each debt is like a piece of pie, and each piece of pie has a number written on it. The car piece of pie would be $115 in my example above; the credit card piece would be $1.60. What you are doing is determining how much you have to pay on each debt you have-whether it is secured or unsecured and also remembering you are restructuring secured debts to be paid over 60 months AND at a reduced interest rate while paying at least 1% to unsecured debt. Add all those pieces of pie up and you have what is called the Chapter 13 Plan payment. This payment is to be sent each month to your Chapter 13 Trustee. The Trustee will take your payment and just like a pie, slice it up to pay each debt you have-AFTER you have restructured/reorganized how each debt will be paid. In order to know if you can afford your Chapter 13 Plan payment you have to do some simple math. First add up all of your household income: what you earn; your Social Security; your retirement; your child support; any monthly contributions from someone to you; you get the picture-all sources of income are added up. Next you subtract your monthly expenses-remember these expenses do NOT include debt being repaid in the Chapter 13- these debts are: utility bill; cell phone; cable or internet; food; car insurance, etc. The idea is you need to have enough left on your budget to make the Chapter 13 Plan payment. The way we operate is my fees are paid monthly IN the Chapter 13 Plan payment over up to 60 months. At the end of a Chapter 13 Plan all secured debt is paid or brought current and unsecured debt is discharged. Discharged remember means being erased from your credit report.
Because I will explain this to you and you can call ME anytime to review your case-not a paralegal. I have filed bankruptcy cases for people from the midlands to the coast. The one thing I tell everyone I Meet is there are no bad questions- the last thing I want you to do is blindly trust me to take care of all of this-I want you to UNDERSTAND it- I will talk as long as you want to and as many times as you want to be sure you feel comfortable that you understand this. I give my cell phone to my clients-have a question? Call me-don’t sit and worry about this.
The last thing I will say is this is a very stressful time for people trying to pay bills and debts-do not give into the stress-there are answers and options.