Chapter 7
A chapter 7 bankruptcy is known as a traditional or liquidation bankruptcy. A borrower’s dischargeable debts are discharged (no longer owed), and a trustee is entitled to liquidate your non-exempt assets to pay your creditors. Changes in the law in 2005 mean that borrowers now have to qualify to file a chapter 7 bankruptcy based on a calculation of their “current monthly income.” Borrowers whose income is too high may not be able to file a chapter 7 bankruptcy. Generally, borrowers whose income is below the median income for their state can file a chapter 7 bankruptcy, while those whose income is higher than the median are subject to the “means test” to see if they can file a chapter 7.
Despite being a liquidation bankruptcy, filing a chapter 7 bankruptcy does not mean you will lose your assets. Many people are able to file a chapter 7 bankruptcy without losing any assets, because some assets are exempt from being taken by a bankruptcy trustee or unsecured creditors. Exemptions vary by state. In Kansas, the home you live in is exempt from being taking by the chapter 7 trustee or your unsecured creditors. Each individual who files a chapter 7 bankruptcy can keep one car up to $20,000 in value. Household goods are generally exempt. Most retirement assets are exempt. Assets that are not exempt in Kansas, and thus can be taken by a trustee, include additional cars, stocks and bonds not held in retirement accounts, and boats or RVs.
Chapter 7 bankruptcies are ideal for people who have endured a job loss or medical emergency and have high credit card or medical debt. However, if you’ve fallen behind on your house payment or car payment, a chapter 7 bankruptcy will not help you save the house or car. To do that, you will need to file a chapter 13 bankruptcy.
Chapter 13
A chapter 13 bankruptcy lasts three to five years. It requires the debtor to make a payment of a portion of his or her disposable income to a trustee who then pays creditors according to a plan proposed by the debtor and approved by the court. This is known as a “wage-earner plan.”
Contrary to what many people think, you do not have to repay creditors in full. The amount you pay depends on what you can afford. Many people can file a chapter 13 without having to repay anything to unsecured creditors. Chapter 13 is ideal for people who have fallen behind on house or car payments or need to pay off non-dischargeable debts like taxes. In a chapter 13, debtors have the opportunity to save a house or car before a foreclosure or repossession by paying the creditor the loan arrears through the wage-earner plan. Borrowers can also choose to keep a non-exempt asset that they would lose in a chapter 7 bankruptcy by making an increased payment to the chapter 13 trustee to compensate.
Bankruptcy FAQs
Q: What property can I keep?
A: In Kansas, the following is exempt, regardless of which chapter you file:
- The home you live in
- One car per debtor up to $20,000 in value
- Ordinary household goods
- Your clothes
- Jewelry up to $1,000 in value
- Most retirement assets
- Trade tools up to $7,500 in value
Q: What property can the trustee take?
A: In Kansas, the following property may be taken by your bankruptcy trustee:
- Additional cars beyond the one exempt car per debtor
- Stocks and bonds not held in retirement accounts
- Boats, RVs, 4-wheelers, etc.
- This is not an exhaustive list. Consult an attorney for details on your specific situation
- The trustee will not take the above property in every situation and an attorney can help you through the process of pre-bankruptcy planning, so you can keep the property you want to keep.
Q: What debt will bankruptcy not get rid of?
A: Most taxes, most student loans, alimony and child support, criminal fines and debts not listed in your bankruptcy. There are exceptions for taxes and student loans.
Q: Can I have money in my bank account when I file bankruptcy?
A: No. You should have a minimal amount of money in your account on the day of filing. An attorney can advise you of what it's OK to spend money on before filing, so you don't leave money in your account.
Q: Can I use my credit cards before filing bankruptcy?
A: No. If you're considering filing bankruptcy you should stop using your credit cards immediately.
Q: Can I use my bank account before filing bankruptcy?
A: Yes, but you will want to stop writing checks several weeks before filing. Money left in your account on the day you file to cover outstanding checks can be taken by your trustee.
Q: Can I use my bank account after filing?
A: Yes, you can use your account as you normally would.
Q: Can I file bankruptcy without my spouse?
A: Yes, but any debt that your spouse is also liable for will still have to be paid by your spouse. In Kansas, medical debts incurred while married are automatically also owed by your spouse, even if your spouse did not sign for the debt.
Q: Will I have to go to court? What is the 341 meeting of creditors?
A: In most cases you will not have to go to court. You will have to attend the 341 meeting of creditors, but it's not a court hearing, and creditors do not show up most of the time. At the 341 meeting, the trustee asks you questions about your case. Debtors from other cases will also be in the same room.
Q: When will my case be over?
A: Most chapter 7 cases last 4-6 months. Chapter 13 cases must last between 3 to 5 years.