Bankruptcy is a chance at a new beginning
Very few things that strike fear into people like the thought of going into bankruptcy. Many emotions go along with the need to go through this process. People might think that they have failed themselves or their families. They believe that they are never going to be able to own a home or buy a car. In a day of employers running credit checks before employment, there is also a fear that bankruptcy will mean that they will not be able to get a job.
The truth is that although deciding to file for bankruptcy may be an emotional one, filing for bankruptcy will relieve your stress and worry and give you a fresh start in life. People use this process when there is no end in sight. One thing that is extremely important to understand is that the States and Federal governments do not design the Bankruptcy Laws to be punitive. It is a legal remedy to help individuals, families, and businesses protect themselves from spiraling debt and harassing phone calls from creditors demanding payment.
The biggest question that people have is whether they will lose their home, their car, or their personal belongings.
When it comes to personal bankruptcy, there are two options. They are referred to as Chapter 7 and Chapter 13. Your circumstances will dictate which form of bankruptcy will be utilized.
Chapter 13 – Get on a plan, and stay there
Chapter 13 bankruptcy is essentially a court-approved repayment plan and court-monitored budget over a time of three to five years. The program gives you time to get your mortgage up to date. You are also responsible for all your secured debt. Secured debt means that if you own something that has a lien on it, like your home or your car. You will need to catch up on payments and continue to pay the loan to keep your property. If you continue to fall behind and miss payments, then there is a chance you can lose the home or your car.
Unsecured debt is debt that is not backed by collateral. The most common unsecured debt is credit card debt. Medical debt, student loans, court-ordered child payments are also unsecured debt.
With unsecured debt, how much of it you will have to repay depends on your household income and expenses. The net amount must be paid to a trustee every month for a period of 3 to 5 years regardless of whether the amount pays off 100% of your debt or not. You cannot wipe out student loans, taxes owed, or child support payments, and you will have to repay these debts.
Chapter 13 is generally the path taken when you want to save your home from foreclosure, and the bank is refusing to work with you, or you have lawsuits against you where they will get a judgment and start garnishing your wages. Chapter 13 is an option when you earn a salary that is above the medium level for where you live.
Chapter 7 – A straight bankruptcy
Chapter 7 bankruptcy is what most people think of when they think of bankruptcy. Chapter 7 is far less complicated than Chapter 13. It is mostly utilized by people when they do not have many non-exempt assets, and they do not have the income or the means to repay any portion of their debt through a Chapter 13 plan.
In Chapter 7 straight bankruptcy, also called liquidation bankruptcy, a trustee is appointed by the courts to take possession of your non-exempt assets, which are assets you are not allowed to keep and sell them to pay the monies you owe. Quite often, when dealing with Chapter 7, after considering the allowed exemptions, there is usually not much remaining in terms of assets for a trustee to sell and repay your creditors.
As a part of the chapter 7 proceedings, you will go to court for a meeting of the creditors where the trustee will examine you. If no one objects to you wiping out your debt, then the court will grant you a discharge of your debt. The courts cannot discharge certain taxes, child support, or spousal support. You will still owe that money.
Even in liquidation, there are exemptions made, so the trustee cannot sell certain assets. There is a list of federal exemptions, and New York also has a list of exemptions. You can choose to follow either list based upon the types of assets you want to protect, but you cannot pick and choose from each list.
New York Homestead Exemption
One of the main exemptions is a certain amount of equity that you have in your home. The amount of the exemption for New York, if you follow the New York State exemptions, depends in which county you live and whether you are filing as an individual or are filing jointly with a spouse. If you are filing jointly, you each can claim an exemption, effectively doubling the amount you can exempt.
If you begin a bankruptcy proceeding and you have built up equity in your home above the allowed limit, the trustee will attempt to negotiate a buy-out amount from you. If you cannot afford to buy-out the trustee’s interest in the house, they may sell the house and use the monies to pay your creditors.
There are also similar exemptions for your car. The exemption for the car is higher if a disabled driver uses the vehicle. There are also exemptions to a certain amount for items like personal belonging, clothing, jewelry, and any tools or equipment required for you to earn a living in your field, among other things.
Filing bankruptcy is an emotional decision, regardless of the type. If you are experiencing financial difficulties such as not being able to pay your mortgage or your credit card debt and generally cannot make ends meet, you should consider filing for bankruptcy.
It is essential to understand that while bankruptcy is complicated and we discuss things like selling assets and the possibility of even having to sell a home, bankruptcy is not designed to be punitive. It is designed to help you get a fresh start and alleviate the stress of being harassed by collections agencies and allow you to breathe, knowing that there is a light at the end of what seems like endless darkness. As we like to say, bankruptcy is not the end; it is a new beginning.
If you have any questions about Chapter 7 or Chapter 13 bankruptcy, contact Kamini Fox for a free case evaluation.