Bankruptcy Information Handout

I.  Kinds of Bankruptcy

There are two kinds of bankruptcy available for individuals and families – Chapter 7 and Chapter 13.

 Download the PDF of Cloon Legal Services Kansas Bankruptcy Information Handout

II.  Kinds of debt

There are two kinds of debt – secured and unsecured.

(a) Secured debts are those kinds of loans with collateral pledged on them, for example, car loans and house loans.  Most loans from finance companies are usually also secured.  In addition, some credit cards can be secured.  For example, furniture store credit cards (Nebraska Furniture Mart), jewelry store credit cards (Helzberg’s, Zale’s) and electronic store credit cards (Radio Shack, Best Buy) usually claim a security interest in items purchased on the cards.

(b)  Most other kinds of debt are unsecured.  Examples are medical bills, credit cards, utility bills, personal loans, payday loans, rent and phone bills.

III.  Can I file for bankruptcy protection?

Most people can, although the higher your income, the greater the chance you will have to pay some debts that would otherwise get wiped out.  However, 90% of the people who contact us meet the requirement.  If you don’t, we will advise you at your appointment what options you have.

IV.  What gets wiped out and what must I pay back?

The following discussion assumes that you will be able to file.

Unsecured debt 

Bankruptcy generally “wipes out” unsecured debt, such as credit cards, medical bills, signature loans, and payday loans.  However, some types of unsecured debt don’t get wiped out in bankruptcy:

1.  Income taxes (if more than 3 years old, it may be dischargeable; please      discuss with the attorney);

2.  Student loans, tuition;

3.  Child support or spousal maintenance (alimony);

4.  Debts you were ordered to pay in a divorce decree (these are dischargeable        in a Chapter 13, but not in a Chapter 7);

5.  Court fines, fees and restitution;

6.  NSF checks (payday loans and overdrafts are NOT considered NSF checks);

7.  401(k) loans.

There are some other unusual kinds of debt that are not dischargeable.  When we review your debts, we will be able to tell you if there are any of your debts that may fall into this category.

Secured debt 

The main thing to remember is that, if you want to keep property that is pledged on a loan, you must pay for it.  If you give it back, you will not owe anything.

In Chapter 7, you have three options for the treatment of secured debt:

1.  Surrender the secured property and wipe out the debt.

2.  If you wish to keep the property, you can do so.  You must keep making the payments direct until it is paid for, just as if you hadn’t filed bankruptcy.  If you are behind, you have a limited amount of time to catch up.  You may have to sign a document called a reaffirmation agreement, which basically takes the secured debt back out of the bankruptcy.  This is subject to Court approval.

3.  If you wish to keep the property, but it is worth far less than you owe, you can make a cash settlement with the creditor, provided you both agree on the value and you can pay it within 60 days.  If you can’t agree on the value, you can ask the judge to set the value after hearing evidence.

In Chapter 13, you can:

1.  Surrender the secured property and wipe out the debt.

2.  If you wish to keep the property, you can do so.

(a) If it is a house loan, you continue to pay your regular house payment.  If you are current on your house payments, you can pay them direct.  If you are behind on your house payments, you will pay them through a consolidated payment to the Court Trustee.  He will not only make your regular house payment, he will also catch up any amount you are behind on your house.  After your case is over, and you are caught up, you would resume making your house payments directly.

(b) If it is a vehicle loan or any other kind of secured loan, you pay it as part of the payment you make to the Court Trustee each month.

(c) If it is a vehicle you bought more than two and a half years ago, or other secured stuff (besides houses) that you bought more than one year ago, you only have to pay the amount of the loan or the value of the stuff, whichever is less.

V.  Comparison of Chapter 7 and Chapter 13

When Chapter 7 is Better 

Chapter 7 is usually a better choice when:

1. Most of your debts are unsecured, and you would not have a problem making your house and car payments if the credit cards, medical bills and other unsecured debt were wiped out;

2. If you are current on your payments on the secured debt, particularly your house;

3. If you have no non-dischargeable debts such as taxes or student loans;

4. You don’t anticipate any large uncovered medical expenses in the next 4-5 years; and

5. You can afford to pay the fees upfront.

When Chapter 13 is Better

If you fall into one of the following categories, Chapter 13 may be a better choice for you:

1. You have a large amount of secured debt; or

2. You are behind on your payments on the secured debt; or

3. You owe more on your vehicle than it is worth and the debt is more than 2 1/2 years old; or

4. You owe non-dischargeable debts such as taxes, student loans or back child support; or

5. You have a medical condition that will cause you to rack up significant medical debt in the next 4 years; or

6.  You cannot afford to pay the fees upfront.  However, to be eligible for Chapter 13, you must have regular income (such as a job), because you must be able to show that you are capable of making monthly payments to the Trustee.

When we meet with you, we will go over your specific situation, and discuss with you which option would work better for you.

VI.  Exempt Property

There is certain property you are allowed to keep in bankruptcy, and the neither the Court or your creditors will be able to take it away from you, provided that, if you owe money on the property, you pay the debt on it (subject to the above – remember, in Chapter 13, you often only have to pay the value if it is less than you owe).  This is called exempt property:

1. Your house, provided you live in it;