Bankruptcy in the United States seeks to benefit both debtors and creditors by seeing that debtors get relief from debts they cannot afford to pay and creditors get paid from whatever assets are not necessary for the debtor’s existence.

Bankruptcy is governed by federal law found in Title 11 of the United States Code. As federal law, it supersedes any conflicting state law by reason of the Supremacy Clause of the Constitution. With the exception of exemptions (i.e., things debtors can keep in a bankruptcy), it is the same from state to state.

Bankruptcy Chapters

There are four kinds of bankruptcy proceedings and they are referred to by the chapter of the federal Bankruptcy Code that describes them. There is Chapter 7, Chapter 11, Chapter 12, and Chapter 13.

Chapter 7 is the most common form of bankruptcy. It is a liquidation proceeding in which the debtor’s non-exempt assets, if any, are sold by the Chapter 7 trustee and the proceeds distributed to creditors according to the priorities among creditors established in the Code.

Chapter 7 is available to individuals, married couples, corporations and partnerships. Individual debtors get a discharge within 3-4 months of filing the case.

If there are assets that are not exempt, the trustee takes control of those assets, sells them and pays creditors as much as the proceeds permit. However, in Colorado, most of the time debtors can keep their home, cars, furniture, clothes, jewelry, and retirement accounts.

Any wages the debtor earns after the case is begun are the debtor’s; the creditors have no claim on those earnings.

Chapter 11 is a reorganization proceeding, typically for corporations or partnerships. Individuals, especially those whose debts exceed the limits of Chapter 13, may file Chapter 11.

In Chapter 11, the debtor usually remains in possession of his assets and continues to operate any business, subject to the oversight of the court and the creditors committee.

The debtor proposes a plan of reorganization which, upon acceptance by a majority of the creditors, is confirmed by the court and binds both the debtor and the creditors to its terms of repayment. Plans can call for repayment out of future profits, sales of some or all of the assets, or a merger or recapitalization.

Chapter 12 is a simplified reorganization for family farmers, modeled after Chapter 13, where the debtor retains his property and pays creditors out of future income.

Chapter 13 is a repayment plan for individuals with regular income and unsecured debt less than $336,900 and secured debt less than $1,010,650.

The debtor keeps his property and makes regular payments to the Chapter 13 trustee out of future income to pay creditors over time (3-5 years).

Repayment in Chapter 13 can range from 1% to 100% depending on the debtor’s income and the make up of the debt.

Certain debts that cannot be discharged in Chapter 7 can be discharged in Chapter 13. Chapter 13 also provides a mechanism for individuals to prevent foreclosures and repossessions, while catching up on their secured debts.

Why choose Chapter 13 over Chapter 7 bankruptcy?

Although Chapter 7 is the more common form of bankruptcy, there are several reasons why people select Chapter 13 instead:

1. You can remove a second mortgage from your home if the home value is less than the first mortgage.

2. You have valuable nonexempt property.

3. You can pay your car off for what it is worth rather than what you owe.

4. You’re behind on your mortgage or car loan. In Chapter 7, you’ll have to give up the property or stay current on your payments during your bankruptcy case. In Chapter 13, however, you can repay the arrears through your plan and keep the property by making the payments required under the contract.

5. You cannot file for Chapter 7 bankruptcy if you received a Chapter 7 or Chapter 13 discharge within the previous eight years. However, you can usually file for a Chapter 13 despite having recently received a discharge.

6. You have debts that cannot be discharged in Chapter 7.

7. You have co-debtors on personal (nonbusiness) loans who need protection from creditors. In Chapter 7, the creditors will collect from your co-debtors. In Chapter 13, the creditors may not seek payment from your co-debtors for the duration of your case.

8. You make too much money to qualify for a Chapter 7, but not enough money to pay your credit cards or other bills.

Chapter 13 bankruptcy is a repayment plan that protects the debtor from collection action during the case and discharges any unpaid balance of dischargeable debts at the end of the plan.

In Chapter 13, the debtor can impose a debt management plan on creditors, which creditors must accept, stopping the running of interest on credit card debt. The court will enforce the plan against uncooperative creditors. Compare the benefits of 13 with debt management or debt repayment plans.

The discharge in Chapter 13 covers many debts that cannot be discharged in Chapter 7. It is a powerful tool for debtors to regain control of their financial lives and to get a meaningful fresh start.

To file Chapter 13, you must be an individual (no corporations or partnerships); have a regular income greater than your reasonable living expenses; have liquidated, unsecured debts not exceeding $336,900 and secured debts not exceeding $1,010,650.

While you can only file Chapter 7 every 8 years, you can file a Chapter 13 bankruptcy even if you got a discharge in a Chapter 7 case filed at least 4 years ago. Under the amended Bankruptcy Code, you can file a second Chapter 13 within two years of filing a previous Chapter 13.

THE TOP 10 MYTHS ABOUT BANKRUPTCY Myth #1: I will lose my house and car if I file bankruptcy.

Most people keep their house and cars when they file bankruptcy. In Colorado, you are allowed up to $60,000 of equity in your house ($90,000 if you are over 60 years old) and up to $5000 of equity in one car for a single person and two cars with $5000 of equity apiece for married couples ($20,000 if you are over 60).

Myth #2: When I file bankruptcy someone from the court will come to my house and go through my possessions.

Generally no one will come out to your house. You simply list your possessions on your bankruptcy schedules under oath.

Myth #3: If I file bankruptcy, I will never be able to finance a car again.

Many of clients actually find it easier to get financed for a car after they receive a Chapter 7 discharge. This is because their debt to income ratio has improved and the car lender knows that the individual cannot file bankruptcy again for at least 8 years. Clients can buy a car after the bankruptcy is filed, but interest rates will be higher than those with good credit.

Myth #4: If I file bankruptcy, I will never be able to get another credit card.

Unfortunately, clients get inundated with credit card offers once they receive their Chapter 7 discharge. It’s important to have some credit, but one should limit their credit card use for reservations that require a credit card.

Myth #5: Filing a bankruptcy is easy. All I need to do is go down to the court and file a couple of papers.

The legal system is a complex maze of rules, laws, and regulations. The creditors have aggressive legal counsel to fight you and certain items can be taken from you by the trustee. If you want to be successful in this process, then you ought to get the best possible legal counsel to guide you through the system.

Myth #6: When I file bankruptcy all my debts get erased.

Not necessarily. Child support, alimony, and student loans do not get wiped out, along with some types of recent taxes, and you must keep paying on secured debt that you want to keep such as a house or car.

Myth #7: To file bankruptcy, I must be delinquent on all my debts.

I often have clients that file bankruptcy who are current on all their debts. However, they see the writing on the wall. Often times they are transferring debts from one credit card to another and want to end the vicious cycle of debt. Other times a change in income forces a measure to eliminate debt. Regardless, it doesn’t matter if your current or delinquent.

Myth #8: If I file bankruptcy I will have to go to court where my creditors and a judge will grill me over the coals.

Although you need to attend what is called a meeting of creditors, creditors rarely show up for the meeting. An attorney will attend the meeting with you and the court appointed trustee has only simple, straightforward questions for you to answer.

Myth #9: If I file bankruptcy, I have given up on my dreams and my chances of becoming a success.

What do former U.S. President Ulysses S. Grant, Burt Reynolds, Anna Nicole Smith, Larry King, Kim Bassinger, and Rush Limbaugh all have in common? You guessed it; they all have filed for bankruptcy in the past. There is no shame in coming to the realization that you are in over your head with debt, and there is certainly nothing wrong with doing something about it. Bankruptcy is the largest area of law in the world. Most of the time it is a great way to restructure your likfe so you can do great things without the huge debt burden on your shoulders.

Myth #10: I will lose my job if I file bankruptcy.

This is simply not true. Under the bankruptcy code, an employer cannot discriminate because of a bankruptcy filing.