Making Sense of Bankruptcy: The Most Basic Information
Bankruptcy empowers you with options, including “straight bankruptcy vs. an “adjustment of debts,” and options about creditors in each.
This is the sentence we’re focusing on today:
Bankruptcy is a Constitutionally and legally valid option for addressing your debts in an honest and realistic way through (for consumers) two primary choices—Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts (and a couple possible others), within which you usually have some options about how to deal with particular creditors.
The U.S. Constitution, which was ratified 227 years ago as of this last June, specifically gave Congress the “Power… To establish… uniform Laws on the subject of Bankruptcies throughout the United States.” (See Article 1, Section 8, clause 4.) Accordingly bankruptcies are directly governed by federal law, passed by Congress and contained in the Bankruptcy Code.
But in our federalist system state laws also significantly affect bankruptcies, because states are allowed to make laws in areas that the federal Constitution does not cover. Those state laws impact how the federal bankruptcy laws operate state to state. For example, states can make laws about how property and debts are divided in a divorce, about the procedures through which creditors collect debts, and about how survivors inherit a decedent’s property, all of which can affect what assets a debtor owns at the time he or she files a bankruptcy case, and issues that flow from that. The federal bankruptcy court must respect state law in appropriate areas.
So your bankruptcy case will likely be affected by both federal and state laws. It is a legal and often wise option. Bankruptcy may or may not be right for you, but if you are financially struggling you owe it to yourself to find out about it.
Chapter 7 “Straight Bankruptcy” and Chapter 13 “Adjustment of Debts”
You can choose among different “Chapters” of bankruptcy to file, each of which is quite different from the others. They provide some powerful tools, and different ones for each Chapter. Sometimes which one is best for you will be very clear, other times there will be advantages and maybe disadvantages to each to consider carefully as you decide.
Chapter 7 “straight bankruptcy” is the most common, usually a 3-4 month procedure with the main purpose to discharge (legally write off) your debts. You can usually keep the collateral on secured debts (vehicle, home, furniture and appliances), especially if you are current or close to it, or if you want you can surrender such collateral and then usually owe nothing on the debt. Usually you can keep everything else that you own.
Chapter 13 “adjustment of debts” is usually (but not necessarily) for more complicated situations, when you need more help than just discharging debts. It comes with powerful tools for dealing with special debts (like income and property taxes, child and spousal support obligations, home mortgages and vehicle loans) that may not be handled adequately by Chapter 7. A Chapter 13 payment plan takes 3 to 5 years, often resulting in relatively little or nothing paid to most creditors (especially the “general unsecured” ones), with most money going to special creditors (usually secured or “priority” ones). At the end of the case all or most of the remaining debt is discharged, often leaving you debt-free.
The Other Chapters
Almost all bankruptcies filed by individuals are under Chapters 7 or 13. But there are a few others you may hear about:
- Chapter 9 is for local governments—cities and counties and such.
- Chapter 11 is usually used for businesses, but is also sometimes used by consumers, particularly if there’s an extraordinarily high amount of debt.
- Chapter 12 is for ranchers, farmers, and fishermen, a blend of Chapter 11 and Chapter 13 procedures.
Options within the Chapters
Almost everybody has options within each Chapter about how to deal with creditors and other aspects of financial life. Focusing on Chapter 7 and 13:
Chapter 7, as mentioned above, usually enables you to keep the collateral on secured debts if you want to and if you’re current or can get current quickly. Or sometimes you can pay off the debt through a “redemption” loan or renegotiate the loan terms with the creditor (such as a mortgage modification). If you have a personal debt or any other kind of debt that you simply want to pay out of a sense of moral obligation or because of a co-signer, you usually have a choice to do so, or to just discharge the debt and any obligation to your co-signer.
Chapter 13 gives you many more tools and options, but also some limitations. With secured debts, you have more ways to catch up on late payments, and in certain special situations can even get rid of liens or reduce their value so you can pay less on the debt and still keep the collateral. You have more ways to protect a co-signer. Chapter 13 also provides ways to catch up on or pay special debts like child/spousal support or income taxes, but also requires you to do so (and also to keep current on them) during the life of the payment plan.