Car loans, mortgages, student loans, as well as other loans and expenses that you have, may make it difficult to afford necessities for a decent quality of life. Bankruptcy can be a frightening concept, but knowing what options are out there can help bring peace of mind and long-term financial success.
There are many different types of bankruptcy available to people who find themselves in an overwhelming amount of debt and no other viable options. Two of the most common types of bankruptcy are chapter 7 and chapter 13. Chapter 7 debtors get their fresh start quickly, and Chapter 13 debtors repay their obligations based on what they can afford and not what the moneylenders demand. While both have their place, knowing what each one entails will help you make the best decision as every situation is different.
Chapter 7 bankruptcy is one of the most common types of bankruptcy declared, and it comes with the benefit of having all of your debts discharged upon filing. This means that you will be given a fresh start, as none of the debts that you have will continue after filing. Creditors are also required to cease contacting you as soon as bankruptcy filings begin to be processed by the court.
Exemptions in Chapter 7 Bankruptcy
Somewhere along the line, someone labeled this type of bankruptcy as “liquidation,” and the tag stuck. Most consumer assets are exempt from liquidation. So, most all debtors in Georgia can keep their:
- House: Single filers can exempt up to $21,500 in home equity; joint filers may be able to double that figure. Moreover, up to $5,000 of the unused homestead exemption ($10,000 for some joint filers) can be applied to the wild-card exemption.
- Cars: Up to $5,000 in vehicle equity is also exempt. As a general rule, newer cars have almost no equity (and therefore they are of no interest to creditors) and older cars have almost no monetary value, so this exemption seems small but is actually quite generous.
- Retirement Accounts: Earned IRAs, 401(k)s, pension plans, and other nest eggs are all exempt regardless of their cash value.
- Income: 75 percent of current wages, and even more in some cases, are exempt, as are most public benefit and spousal/child support payments.
- Personal Property: Clothes, furniture, jewelry, and personal effects are all exempt up to certain limits.
- Any Other Property: Under Georgia law, debtors can exempt up to $1,200 of any otherwise non-exempt property; some joint debtors can exempt up to $11,200.
Because of these exemptions, “liquidation” is a misnomer, since most people have few, if any, non-exempt assets. Examples of unprotected assets include extremely valuable homes and vehicles, vacation homes, and inherited IRAs.
Even if an asset does not fall under a recognized or wild-card exemption, it is not automatically liquidated. The trustee (whose role is explained more fully below) has a duty to act in the best interests of the creditors and not a duty to seize as much property as possible. Assume Donny Debtor has a bass boat that he cannot exempt. Once the trustee factors in the bother and expense of seizing the boat, storing it, making necessary repairs, and listing it for sale, the trustee may well allow Donny to keep the boat.
Chapter 7 Bankruptcy Eligibility and Requirements
About six weeks after the voluntary petition is filed, the 341 Creditors’ Meeting takes place. This too is a misnomer, because the creditors hardly ever appear. In a Chapter 7, the trustee basically looks for red flags in the bankruptcy paperwork and ensures that the debtor is eligible for Chapter 7. In most cases, the discharge order follows about six on nine months later, and the case is over.
That eligibility comes from the Means Test, a relatively new addition to the Bankruptcy Code. Only people whose income falls below the average income for that geographic area can file Chapter 7. In Georgia, that figure is typically $70,325 for a family of four.
Prior to your petition being considered, the court will mandate that you go through credit counseling with an appointed financial advisor to ensure that no other options are available to you. Your assets and liabilities will be compiled by a trustee and assets you have will be sold off to pay down as much of the debt as possible, then the rest will be discharged.
Credit Score After Chapter 7
The major drawback to chapter 7 is the initial damage that will be done to your credit score after filing. Depending on where your score is, you may see a drop of up to 200 points in your score, and chapter 7 stays on a credit report for 10 years after filing has taken place. Chances are if you are in a position considering bankruptcy, your credit score could be damaged just as badly by missed payments if it has not already been. There are steps that you can take to help repair your credit score as well, such as attaining secured lines of credit or getting larger loans as your credit score begins to improve. In some cases, individuals can even get their score back to where it was before the bankruptcy within 5 years of filing.
Chapter 13 Bankruptcy is often considered to be ideal for people who have a source of income and a desire to repay their debts, but because of life circumstances or high-interest rates are unable to do so.
Chapter 13 bankruptcy will re-structure debt instead of eliminating it as chapter 7 does. Most often, people considering this option are expecting a life change like a promotion or new job, and the debt is only difficult to manage for the time being. This plan will also allow for the debtor to keep most assets, as the debt will not be eliminated, simply made more manageable. The court will create a plan for the debtor to pay off the debts and will dictate the new terms of the loan. This can be a huge benefit to the debtor, as the creditors will not have a say in new interest rates or payment schedules. The debtor is also protected from any wage garnishments, lawsuits, or contact by the creditor.
Chapter 13 Exemptions and Eligibility
There is no eligibility requirement for the “wage-earner” or “repayment” plan, and the same exemptions apply. The main difference between Chapter 7 and Chapter 13 is the debtor’s financial goal. Liquidation is a great way to quickly get rid of excess debt and start over; the repayment plan gives debtors a chance to catch up on delinquent debt, like past-due mortgage payments, so they can still keep the property.
Chapter 13 Repayment Plan
Chapter 13 normally lasts either three or five years. In addition to the voluntary petition, the debtor files a proposed repayment plan. Later, instead of simply reviewing the paperwork, the trustee essentially places the debtor on an allowance for the repayment period. After paying for monthly essentials, the debtor gives any excess money to the bankruptcy trustee for distribution among the creditors. Secured creditors (house, car, and so on) must be paid in full; unsecured creditors (credit card, medical bill, and so on) divide whatever is left. Any remaining unpaid unsecured debt is discharged.
Credit Score After Chapter 13
Chapter 13 will stay on an individuals credit score for 7 years after the filing and the initial impact to a credit score will not be as large. As with chapter 7, it is still possible to bring your credit score back up. However, this type of bankruptcy should really only be considered by individuals that will be able to make the payments on the re-structured debts.
Non-Consumer Bankruptcies: Chapter 11 & Chapter 15
Chapter 11 is almost exclusively used by corporations who want to continue business. Similar to chapter 13, debts will be repaid through a court-approved reorganization plan. For individuals who own shares in a company or even own their own business, going into chapter 11 is not the end of the company, merely an attempt to get back to profitability. Options vary for companies under chapter 11 on how to deal with the debt, whether that be a simple re-structuring or a discharge of some contracts and debts while others are repaid.
Chapter 11 reorganization is a very complex proceeding that few consumers file. In addition to the complexity, it is very expensive (the filing fee alone often exceeds $1,500), so while Chapter 11 is ideal for large or medium-sized companies that need to make major changes in order to return to profitability and also need the protection of the bankruptcy court, Chapter 11 is not really for consumers.
Chapter 15 is not really a consumer bankruptcy either, especially after the Second Circuit Court of Appeals in New York basically changed the eligibility requirements in 2014. Moreover, in most cases, only municipal governments can file Chapter 9. A fourth type (Chapter 12) only applies to a handful of family fisheries and family farms.
What Can I Do?
Both Chapter 13 and Chapter 7 involve an automatic stay, at least in most cases. While the case is pending, most creditors may not garnish wages, foreclose on property, pursue civil lawsuits, or otherwise attempt to collect on a debt without special permission from the bankruptcy judge.
Whatever situation you find yourself in, declaring bankruptcy does not necessarily mean the end of the world. Some situations of overwhelming debt call for extreme action like bankruptcy and your wellbeing is something to consider in these situations. If you cannot afford even basic necessities because of your debt, it may be time to consider bankruptcy.
Although you may be able to find bankruptcy petitions that you can file by yourself online, it is still the best option to contact a bankruptcy attorney in Georgia. Having someone experienced in bankruptcy can first help you evaluate if it is the best option first, and then help you with the petition itself. It is not uncommon for people to keep their most important assets when they have assistance in these cases.