It's not easy deciding on whether or not to file bankruptcy. There's no magic formula to tell you if it's right for you. However, if you're overwhelmed with credit card and other debts or facing foreclosure, and you've tried all other options, bankruptcy may be your best and only chance at a fresh start.
You need to know some basics of how the process works. For the most part, bankruptcies are controlled by federal law, the Bankruptcy Code. State laws may also play a big role, especially on your decisions about whether or not to file and which type of bankruptcy is best for you.
Starting Out and Bankruptcy Options
There are two main types of bankruptcy cases individuals use, Chapter 7 and Chapter 13. Both give you relief from your debts and a fresh financial start through discharge, the court's order ending your liability to pay and your creditors' ability to collect.
Chapter 7 is also known as "straight bankruptcy," and it's the most common type of case. Someone who uses Chapter 7 has few or no assets available to pay creditors, and the discharge applies to most debts. Discharge means to waive or dismiss your debts.
Key points to know about Chapter 7 are:
- You must qualify to file Chapter 7 based on your income and a means test set out in bankruptcy law. If you can afford to repay a portion of your debts, you may have to use Chapter 13
- Your available assets, called nonexempt property, may be sold by the bankruptcy trustee to pay your creditors
- You keep exempt property, which is protected from your creditors' reach
- The Chapter 7 discharge applies to most common debt types, including credit cards and medical bills
Most Chapter 7 cases are "no-asset," meaning there's nothing left to pay creditors after accounting for your property exemptions. State or federal law control property exemptions, and this is why bankruptcy cases can be different from state to state.
Chapter 13 reorganizes your debts: You make partial or full payments according to a repayment plan, and remaining debts are discharged at plan completion. If you have a certain amount of stable disposable income after paying for the basics, Chapter 13 may be your only bankruptcy option.
The repayment plan is the main part of a Chapter 13 case and property exemption laws factor into figuring out repayment plan details.
Here are some common situations behind Chapter 13 cases:
- You have mortgages or loans you want to bring current through the repayment plan, allowing you to keep the property
- Your debts are ineligible for a Chapter 7 discharge, such as taxes, child support or student loans
- You're driven to pay off debts by personal values or morals
This type of bankruptcy strikes a middle ground between you and your creditors. You get some debt relief, and creditors get some payment.
Alabama Law and Property Exemptions
You can only claim property exemptions given by Alabama state law. There's no choice to use state or federal exemptions, as there is in some states. Exemption amounts can change, and are found in the state code.
Alabama statutes have a full list of exempt property and value limits. Here are some key exemptions:
- Real property or a mobile home, up to $5,000 and no more than 160 acres (this is the homestead exemption)
- Disability payments, up to $250 per month
- Life insurance proceeds if you, the beneficiary, are the insured's spouse or child
- Personal property, up to $3,000, including clothing, family pictures and books
- Arms, uniforms and equipment that state military personnel are required to keep
- 75 percent of earned but unpaid wages
Your homestead exemption amount may be limited if, shortly before filing bankruptcy, you moved to a state with a very high homestead exemption. Bankruptcy law bars moving just to use a state's property exemptions, or even to defraud creditors on purpose.
Exemptions do cover many types of personal items, such as clothing, but the exact exemption amount may not matter. It's unlikely a bankruptcy trustee would try to sell them because it's not practical and probably won't raise substantial funds to pay your creditors.
Property exemptions can have a big impact on your decision to file for bankruptcy. For example, if your major assets are exempt, and your debts qualify for discharge, Chapter 7 may be the right choice for you. Every case is different, and a bankruptcy attorney can help you review your facts and decide which bankruptcy option is best.
Filing a Bankruptcy Petition and Working Through Your Case
Start Your Case Alone or Use a Lawyer
Your case starts by filing a petition, along with required forms, documents and fees. You don't have to hire a lawyer, but it's wise to do so. Bankruptcy law and rules are complex, and you don't get a break from the court if you represent yourself and make a mistake.
A bankruptcy lawyer helps you protect the fresh financial start you want bankruptcy to deliver. Your lawyer helps you plan your case and is there to handle problems that come up.
Chapter 7 and 13 cases both require a meeting with your creditors. This is held by the bankruptcy trustee who manages your case as it moves through the process. The purpose is to confirm your file is in order, and it gives the trustee and creditors a chance to ask any questions they may have about your finances. Drafting the repayment plan is handled at the meeting in a Chapter 13 case.
- Chapter 7: The trustee sells your nonexempt property to pay creditors, and the court grants your discharge. Cases are usually completed in a few months
- Chapter 13: The plan is approved by the court, and your discharge is granted when you complete your repayment plan, which lasts 3 to 5 years
After Your Bankruptcy Is Complete
Once your case is over, it's time to enjoy a fresh financial start. Discharged debts are gone - it's illegal for creditors to make any collection attempts. You need to continue payments for:
- Nondischarged debts, like your mortgage and past-due child support
- Debts you reaffirmed or agreed to repay after bankruptcy, such as your car loan
It's important to stay on track with payments because the law limits your ability to file for bankruptcy more than once. Generally, you must serve out a waiting period before you file again. The wait can be 180 days, 2 years or 8 years, depending which type of bankruptcy you first filed and whether you received a discharge or not.
Don't believe the myths that you're unable to get credit after bankruptcy. When you file either Chapter 7 or 13, you'll have to go through credit counseling, so you'll have a better idea about how to manage your money in the future.
It's not always easy, credit terms may not be the best and it can take time, but it can be done. Once you get new credit, the key is to manage it wisely. You don't want to fall into the same financial position as before.
Questions for Your Attorney
- Is Chapter 13 a good choice for me if I'm barely able to manage my bills?
- I'm unsure about my job security. How does that affect bankruptcy planning?
- I'm underwater on my mortgage and home equity loans and I have high credit card balances. Which type of bankruptcy is best for me?