There are four types of bankruptcy that an individual/consumer can file—Chapters 7, 11 12 and 13. The Bankruptcy Code, a set of federal laws, provides protection from creditors for people and businesses of all sizes in financial trouble.  For a good overview of the bankruptcy process and laws you can go to the website for the United States Bankruptcy Court for the Eastern District of North Carolina http://www.nceb.uscourts.gov/chapter7.htm (for Chapter 7) or http://www.nceb.uscourts.gov/chapter13.htm (for Chapter 13),  or www.nolo.com and click on the debt & bankruptcy link.

DEBTS

There are two main types of debt:  secured and unsecured.  A secured debt is a loan that is backed up with some collateral, called a security interest.  Examples of a secured loan are auto loans, mortgages, home equity lines of credit, and furniture loans.  Any debt that is not secured by collateral is classified as unsecured.  Common types of unsecured loans are credit cards, personal loans, medical bills, utility bills, and student loans.  Note that most student loan debts are not dischargeable.

THE PROCESS

All bankruptcy cases start when a petition is filed with the Court.  The petition is accompanied by a list of your real estate, personal property, income, expenses, and debts.  The purpose of these documents is to provide the bankruptcy court with a snapshot of your financial situation at the time of filing.  The bankruptcy process concludes with an entry of discharge.  Simply put, the discharge erases your personal liability on a debt and prohibits any attempts to collect the debt (including telephone calls, lawsuits, etc.) for debts listed in your bankruptcy petition.

Chapter 7 is sometimes referred to as a “liquidation” or “straight” bankruptcy.  In a Chapter 7, any property that is “not exempt” is sold/liquidated and the proceeds are distributed to the creditors.  A typical Chapter 7 will take approximately 3-6 months from start to finish, and starts when a petition is filed with the court.  In most Chapter 7 cases, you will only have one “court” appearance which is called the Section 341 Meeting of Creditors.  At this meeting you do not appear before a judge, instead a trustee (a local attorney) conducts the proceedings.  The trustee will ask you several questions about the paperwork you filed and generally only takes a few minutes.  In most cases you will receive an entry of discharge approximately 60 days after the 341 meeting.

Chapter 13 requires a monthly payment to the Trustee’s Office for a period of three to five years (36-60 months and is referred to as a “wage earners” plan.  There are several reasons to file a Chapter 13 rather than a Chapter 7.  The most common reasons are:

    • Stop a repossession, foreclosure or lawsuit from continuing.  (Chapter 13 allows you to pay the past due amounts over the life of the plan).

    •  You have property that you want to keep that would not be allowed under Chapter 7.

    •  You have a co-signor on a debt that you want to protect.

    •  You have sufficient income to fund a Chapter 13 plan.

The amount you pay every month depends on your income, expenses, value of any non-exempt property, and the amount and type of debts that you owe.