Here’s a question from a reader:

My husband and I are going through some hard times paying our bills. We, recently, had a baby and between credit card payments and medical bills it is getting harder to pay them. I would like to know is that if We file for bankruptcy We need to surrender our home and vehicles as part of the bankruptcy ?and how much of our credit card debt We are supposed to pay back?. I’ll appreciate if you answer my questions. Thank you.

Mrs Annett Jones

Answer – Annett, the answer to that question depends on whether or not you file for a chapter 7 or chapter 13 bankruptcy. Even then, it depends on your state laws and your individual circumstances. But first, a very quick explanation of a chapter 7 and 13 bankruptcy.

Chapter 7 : – A chapter 7 bankruptcy plan simply means that you do not intend to pay back your debts. Hence, all non exempt assets will be sold to pay back your creditors. You can keep exempt items, which includes the following:

Can you keep your home in a chapter 7 bankruptcy? – The answer is not clear bcut. It depends on your state laws. So it is best to consult a BK attorney. It may also depend on whether you are behind your mortgage. If you are, then technically you can still be foreclosed. And it can also depend on the equity you have on your home. If the equity in your home (less certain non exempt items) is negative, you may be allowed to keep your home. Once again, it is best to consult an attorney.

How about credit card debt in a chapter 7 bankruptcy? – Your credit card debt and your medical bills will be wiped out. Any non-exempt items will be used to pay your unsecured creditors.

Chapter 13 bankruptcy – Unlike a chapter 7 bankruptcy, a chapter 13 bankruptcy requires an agreed payment plan such that you can continue to service your existing debt. This is likely to apply to folks who have a regular income and fail the means test to qualify for a chapter 7 bankruptcy. Hence, going through a chapter 13 bankruptcy involves setting a debt repayment plan with your creditors.

You are expected to come up with a plan that pays back within 3 to 5 years and under favorable terms. That means that you will still have your credit card debt (though any late fees and interest rates will be freezed) and you can keep your home. Hence, if keeping your home is very important, then chapter 13 would be the safer route.

Once you meet with a lawyer to file for bankruptcy you are granted an “automatic stay”. What this means is that your creditors have to stop calling you and if they do, just provide them with your filing information or refer them to your attorney. Your attorney will help you work out a repayment plan and get the courts to approve it.

You will also be expected to attend a “341″ meeting – which is just a meeting with your creditors. After that, you will also have to attend one more court session. You must then make your payments as agreed under your chapter 13 filing. Your bankruptcy will be discharged once you have finished your payment.

Best to consult a bankruptcy attorney in your state – In your situation, it would be best to consult a bankruptcy attorney in your state who can help you make the most informed choice. You might want to consider debt settlement as an option as well.

For more details on chapter 7 and chapter 13, refer to our previous blog post. They are more in depth than my reply here because I do not want to repeat what we have already written:

Bankruptcy Chapter 7 Explained

Bankruptcy Chapter 13 Explained

This entry was posted on Wednesday, June 24th, 2009 at 07:20 and is filed under Bankruptcy FAQ. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.