Understanding Personal Bankruptcy

What you need to know about filing for non-business bankruptcy

Dispelling the Myth of Bankruptcy

Contrary to popular belief, bankruptcy can actually provide a way to protect your assets. Filing for bankruptcy can create a financial barrier from aggressive creditors who use the courts to seize your possessions. In this presentation, we’ll examine common reasons for bankruptcy, explain the difference between the two different types of personal bankruptcy and what it all means for you.

Personal Bankruptcy: By the Numbers

• 96% of all bankruptcy filings are non-business consumer bankruptcies. In 2013 there were approximately 1.03 million consumer bankruptcies filed, compared with 812,898 twenty years prior.

• In Kentucky, there were ~17,000 bankruptcies filed in 2014. So far in 2015, there have been ~6,000 Chapter 7 filings and ~2,400 Chapter 13 bankruptcies filed in Kentucky.

• A Harvard study reports that in 2007, before the economic downturn, an American family filed for bankruptcy in the aftermath of illness every 90 seconds; three quarters of them were insured.

Reasons People File For Bankruptcy

• Healthcare - 62 percent of those who file for personal bankruptcy do so because of debt from medical bills and health care expenses. This is not exclusive to people without health insurance.

• The second most common reason cited for personal bankruptcy is loss of job-related income. This includes job loss or significantly reduced pay.

• Other reasons that people file bankruptcy include divorce, credit card debt and unexpected expenses.

Two Types of Personal Bankruptcy

Those filing for non-business consumer bankruptcy do so under Chapter 7 and Chapter 13. Chapter 7 accounts for roughly 70 percent of all non-business bankruptcy filings. There are important distinctions between these two types.

Chapter 7 Bankruptcy• Most common type of bankruptcy, often called ‘liquidation

bankruptcy’ as non-exempt assets are sold to pay creditors.

• Sometimes the “preferred” choice because it offers a clean slate, discharging most debts, in ~3-6 months.

• Often the preferred bankruptcy option for those who have barely enough income for basic living expenses.

• Chapter 7 remains on your credit report for up to 10 years.• Your post-bankruptcy income is yours and not subject to

garnishment by your creditors.

Chapter 7 Bankruptcy (part 2)• Must pass a “Means Test” to qualify• Last 6 months’ income must be less than the state’s median

income.• And, may not have disposable income to repay debts via Chapter

13.• Chapter 7 bankruptcy can only be filed once every eight years.• No minimum amount of debt required to file Chapter 7.• Immediate protection from collections and wage garnishment.• All non-exempt assets are taken over by a bankruptcy trustee to

sell, using the proceeds to pay creditors.• In most cases, Chapter 7 does not result in a stay of foreclosure

actions if the debtor is behind on mortgage payments.

Chapter 7 Bankruptcy (part 3)• Co-signers on your debts can be held responsible, unless they also

declare bankruptcy.• While there are some tax debts eligible for discharge, most owed

taxes are not wiped out in Chapter 7.• Child support debts and other domestic support obligations are

considered “priority debts” and are non-dischargeable in bankruptcy proceedings.

• Child support, maintenance and alimony payments are non-dischargeable in bankruptcy, and the debtor is responsible for making those payments post-bankruptcy.

• Typically, student loans are not discharged in a Chapter 7 – unless the debtor meets the “undue hardship” criteria.

Chapter 13 Bankruptcy• Chapter 13 is usually the best option when the debtor wishes to keep

non-exempt assets or business property at the end of a bankruptcy. Also helpful to debtor by changing the payment terms of secured creditors, such as lowering interest rate and monthly payments.

• As a general rule, Chapter 13 is the bankruptcy option for individuals who can pay their living expenses, but not their debts.

• Chapter 13 remains on your credit report for 7 years.• Typically provides a 3-5 year repayment plan that allows debtors to

fulfill their obligations to creditors and still discharge some debts entirely.

• Your income after filing for Chapter 13 is used to pay your debts according to the repayment plan.

Chapter 13 Bankruptcy (part 2)• Chapter 13 can be filed, repeatedly, at any time.• Immediate protection from collections and wage garnishment.• If you can manage the repayment plan, you are able to keep all

exempt and non-exempt property.• A Chapter 13 filing will stop mortgage foreclosure actions and give

you more time to catch up the missed payments during the Chapter 13 case.

• Chapter 13 can often stop the repossession of a vehicle by forcing the creditor into a new repayment plan. Debtors may be eligible for a ‘cramdown’ option.

• If the repayment plan provides for full repayment of the debt, co-signers are immune from collection efforts.

Chapter 13 Bankruptcy (part 3)• Tax debts are usually paid during the Chapter 13 bankruptcy

– but they are not discharged completely.• Child support debt and obligations are considered “priority

debt” and are paid ahead of other creditors from your monthly payments to the Chapter 13 Trustee.

• Chapter 13 does not discharge or forgive child support, maintenance or alimony payments, but it gives you more time to catch up the arrearage.

• Chapter 13 will not provide long-term relief from student loans, but may allow you to make lower payments during the 3-5 year bankruptcy period.

Avoid These Common Mistakes Before Filing

Once you make the difficult choice to file, it is important to avoid common mistakes that could prove costly down the road:• Failing to disclose the whole truth• Charging debt to your credit card• Paying off family and friends before filing • Using your 401k to pay down debt• Transferring property prior to filing• Failing to obey court orders.

If You’re Considering Filing For Bankruptcy

Bankruptcy can be a complicated legal maze. With over 35 years of experience in our community, the Fayette County bankruptcy lawyers at Bunch & Brock are committed to providing each of our clients with a high level of personal service. Let us work with you to make the best plan for eliminating or repaying your debts. We encourage you to contact our office by calling 859-254-5522 or filling out this online form.