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What Is Bankruptcy?
by Adam Mack, J.D.
Most people don't realize that their ability to file bankruptcy is rooted in the Constitution itself. Article 1, section 8 of the US Constitution specifically gives Congress the power to establish laws regulating bankruptcy, and our current bankruptcy proceedings are a direct result of that Constitutional power. More generally, bankruptcy can be considered a system of federal statutes and courts created specifically to help people who are "insolvent" or unable to pay their debts. The purpose of bankruptcy is two-fold: to give a debtor a fresh start and to make sure his or her creditors get their fair share. Most of a debtor's creditors will have attorneys to make sure they're getting everything they can; it's in a debtor's best interest to find a good attorney who can make sure her or his rights are protected, too.
What makes Chapter 7 bankruptcy unique?
When people think of bankruptcy, what they usually think of is a Chapter 7 bankruptcy. Chapter 7 is the most common and simplest form of bankruptcy in which all of a debtor's assets are sold or liquidated (except for exempt property that's protected by law). Some states use Federal bankruptcy exemptions to determine what you will get to keep while other states have opted to draft their own exemptions. Kansas bankruptcy debtors are able to take advantage of the exemptions created specifically for Kansas residents.
When your non-exempt assets are liquidated, the money from those assets is pooled together in the bankruptcy estate, that estate is divided up among the various creditors, and the debts owed to the creditors are discharged. At that point, the debtor's obligation to pay most of those debts is wiped out and the debtor walks away with a clean slate. (Exceptions include priority and other non-dischargeable debts.)
Who would benefit from a Chapter 7 bankruptcy?
The primary purpose of Chapter 7 bankruptcy is liquidation. The focus is on selling all non-exempt assets to pay off creditors, and so a debtor who doesn't have any significant assets to lose (i.e. debtors who only own exempt assets) usually benefits most from a Chapter 7 bankruptcy. Chapter 7 is also the most inexpensive form of bankruptcy, making it a more viable option for some, but the fees for a Chapter 7 filing must be paid up front. Additionally, Chapter 7 bankruptcies remain on a debtor's credit report for 10 years (as opposed to 7 years for Chapter 13).
What makes Chapter 13 bankruptcy unique?
The primary purpose of Chapter 13 is to restructure debts (as opposed to liquidating them under Chapter 7). Under a Chapter 13 bankruptcy, debtors have to repay a portion of their debt, but that also means they get to keep more of their assets, particularly secured assets like a home. It's a more complicated form of bankruptcy, but it has many of the same processes as a Chapter 7 filing. The debtor's non-exempt assets are pooled together in the bankruptcy estate, that estate is divided up among the various unsecured creditors, and then those debts are discharged. Unlike a Chapter 7 filing, a debtor under Chapter 13 can elect to keep some or all of the secured debts that they can feasibly pay. Thus, at the end of the bankruptcy proceeding, a debtor under Chapter 13 continues to pay the secured loans he or she chooses to keep (as well as any non-dischargeable debts) through a court-approved Chapter 13 Plan, while the secured debts they don't want to keep are liquidated and discharged. The Plan functions much like a loan consolidation; it allows debtors to lump certain debts together and spread the payments out over a longer period. That being said, it is important to understand that under either a Chapter 7 or Chapter 13, the debtor will likely get a discharge of many of their debts. This is because only certain debts must be included in a Chapter 13 bankruptcy plan.
Who would benefit from a Chapter 13 bankruptcy?
Since the primary purpose of Chapter 13 bankruptcy is restructuring debt, the people who benefit most from a Chapter 13 are those who have significant assets that they want to keep. For example, home owners who want to stop foreclosures on their houses would file under Chapter 13. Some people who have an income that's significantly higher than average are also required to file a Chapter 13.
Another group of people who may benefit from a Chapter 13 bankruptcy are those who cannot afford to pay the upfront fee required for Chapter 7. In some states, filing a Chapter 13 plan that only pays the attorney's fees is not allowed, but Kansas bankruptcy law allows such a plan to be filed and confirmed by the Court. This is extremely useful because it allows a potential bankruptcy filer to spread the costs of filing bankruptcy over a three to five year period.
The Most Important Part
There are pros and cons to any form of debt relief, but a qualified attorney can help you find the best options for your circumstances if you're overwhelmed by debt.