Bankruptcy – A Fact Sheet

By Remar Sutton, DCU StreetWise Spokesperson

Judging by the increasing number of individuals filing for bankruptcy, the recent economic slowdown has contributed to tough times for many Americans. For the 12 months ending on March 31, 2002, the Administrative Office of the U.S. Courts reported over 1.5 million bankruptcies filed, up from approximately 1.3 million filed the previous 12 months.

Various lawyers' ads on TV and in print also present bankruptcy as an easy way to clear one's debts and make "a fresh start." Their promises sound enticing during a financial crisis when debts have become overwhelming and missed payments are mounting.

But most consumer credit experts counsel using bankruptcy as a last resort, not a "quick fix." Why? Filing bankruptcy affects your credit and financial affairs, not to mention other aspects of life, for many years.

If you're thinking about bankruptcy as an option, educate yourself fully before making a move. This fact sheet provides some basic information and links to more extensive information.

What is personal bankruptcy?

Bankruptcy is a legal procedure, filed in federal bankruptcy court, that provides certain specific relief or protection from repaying debts and from harassment by creditors for individuals who are unable to repay debts.

What types of bankruptcy exist?

There are two forms of personal bankruptcy: Chapter 7 and Chapter 13. Both forms provide certain property exemptions for the debtor, allow the discharge of certain debts without repayment, and provide at least some partial repayment of debt to the individual's creditors. Within these parameters, there are significant differences.

What are the differences between Chapter 7 and Chapter 13 bankruptcy?

The basic difference is that in Chapter 7 most of one's debts are discharged after one's nonexempt property is sold to pay creditors. Chapter 13 is a repayment plan, that the debtor develops under court supervision and that allows the debtor to repay the debts over a 3 to 5 year period while keeping certain property that might be lost under chapter 7. Both plans stop such activities as foreclosures, collection agency activities, and garnishment of wages. Here's a quick summary of these and other differences.

Chapter 7

Is often called "straight bankruptcy" or "liquidation."
Non-exempt property is sold by court-appointed trustee to pay creditors in part or turned over to creditors. Non-exempt property, which varies by state, may include part of equity in a home, real estate, certain investments or retirement accounts.
Exempt property varies from state to state but usually includes car, clothes, work-related tools, household furnishings, certain personal effects.
Creditors who hold property such as a residence or car as collateral keep their right to that property.
Chapter 7 may be filed only once every six years.
Bankruptcy filing remains on the debtor's credit report for 10 years.

Chapter 13

Is a repayment or "reorganization" plan for debtors who have a secure future income to use to repay debts over a 3 to 5 year period. The plan is supervised by the court.
The debtor gets to keep most property that would be non-exempt under chapter 7, including mortgaged house or car, investments, etc.
The plan may involve discharging portions of certain unsecured debts such as credit card debt.
Chapter 13 may be converted at any time to Chapter 7.
Chapter 13 may be filed only once every six years.
Bankruptcy filing remains on the debtors credit report for 7 years.

Does bankruptcy allow discharge of all debts?

No. The debts that can not be cancelled by bankruptcy include (but aren't limited to) child support, alimony, taxes, and some student loans.

What effect does filing bankruptcy have on your credit?

Although filing bankruptcy can relieve the immediate burden of debt, during the period it remains on your credit rating securing a mortgage for a home, a car loan or other loan, a credit card or life insurance may be virtually impossible.

Are there new rules for filing bankruptcy?

Legislation has passed and there are new rules for filing bankruptcy. New Bankruptcy Law Requires Credit Counseling Before Filing

Where can I get help when financial crisis looms and before considering bankruptcy?

Start with your credit union. DCU provides its members a Financial Wellness Program that can help you take consider your options and that provides access to the Balance credit counseling service.

Where can I find more information about bankruptcy?

You may also wish to review the April Remar's Review on Credit/Debt Counseling.

So, what do you think?

If you find this review helpful, please pass the word to your friends. Also email me with any comments or suggestions.

Remar Sutton

Updated October 17, 2002

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