If you are seriously in debt, you might consider filing for bankruptcy. Here are some common questions and answers designed to help you understand the bankruptcy process and what bankruptcy can and cannot do for you.

What exactly is bankruptcy?

Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts or repay them under the protection of the bankruptcy court. Bankruptcy's roots can be traced to the Bible. (Deuteronomy 15:1-2 "Every seventh year you shall practice remission of debts. This shall be the nature of the remission: Every creditor shall remit the due that he claims from his neighbor; he shall not dun his neighbor or kinsman.")

Aren't there different kinds of bankruptcy?

Yes. Bankruptcies can generally be described as "liquidation" or "reorganization."

Liquidation bankruptcy is called Chapter 7. Under Chapter 7 bankruptcy, a consumer or business asks the bankruptcy court to wipe out (discharge) the debts owed. Certain debts cannot be discharged. (These are discussed below.) In exchange for the discharge of debts, the business's assets or the consumer's nonexempt property is sold (or "liquidated"), and the proceeds are used to pay off creditors. The property a consumer might lose is discussed below.

There are several types of reorganization bankruptcy. Consumers with secured debts under $871,550 and unsecured debts under $269,250 can file for Chapter 13. Family farmers can file for Chapter 12. Consumers with debts in excess of the Chapter 13 debt limits or businesses can file for Chapter 11 -- a complex, time-consuming and expensive process. In any reorganization bankruptcy, you file a plan with the bankruptcy court proposing how you will repay your creditors. Some debts must be repaid in full; others you pay only a percentage; others aren't paid at all. Some debts you have to pay with interest; some are paid at the beginning of your plan and some at the end.

Will filing for bankruptcy stop harassing phone calls from bill collectors?

What generally happens in consumer bankruptcy cases?

In a Chapter 7 case, you file several forms with the bankruptcy court listing income and expenses, assets, debts and property transactions for the past two years. The cost to file is $200, which may be waived for people who receive public assistance or live below the poverty level. A court-appointed person, the trustee, is assigned to oversee your case. About a month after filing, you must attend a "meeting of creditors" where the trustee reviews your forms and asks any questions. Despite the name, creditors rarely attend. If you have any nonexempt property, you must give it (or its value in cash) to the trustee. The meeting lasts about five minutes. Three to six months later, you receive a notice from the court that "all debts that qualified for discharge were discharged." Then your case is over.

Chapter 13 is a little different. You file the same forms plus a proposed repayment plan, in which you describe how you intend to repay your debts over the next three, or in some cases five, years. The cost to file is $185 (it cannot be waived), and a trustee is assigned to oversee the case. Here, too, you attend the meeting of creditors. Often one or two creditors attend this meeting, especially if they don't like something in your plan. After the meeting of the creditors, you attend a hearing before a bankruptcy judge who either confirms or denies your plan. If your plan is confirmed, and you make all the payments called for under your plan, you often receive a discharge of any balance owed at the end of your case.

The following debts are nondischargeable in both Chapter 7 and Chapter 13. If you file for Chapter 7, these will remain when your case is over. If you file for Chapter 13, these debts will have to be paid in full during your plan. If they are not, the balance will remain at the end of your case:

• debts you forget to list in your bankruptcy papers, unless the creditor learns of your bankruptcy case
• child support and alimony
• debts for personal injury or death caused by your intoxicated driving
• student loans, unless it would be an undue hardship for you to repay
• fines and penalties imposed for violating the law, such as traffic tickets and criminal restitution, and
• recent income tax debts and all other tax debts.

In addition, the following debts may be declared nondischargeable by a bankruptcy judge in Chapter 7 if the creditor challenges your request to discharge them. These debts may be discharged in Chapter 13. You can include them in your plan, and at the end of your case, the balance is wiped out:

• debts you incurred on the basis of fraud, such as lying on a credit application
• credit purchases of $1,150 or more for luxury goods or services made within 60 days of filing
• loans or cash advances of $1,150 or more taken within 60 days of filing
• debts from willful or malicious injury to another person or another person's property
• debts from embezzlement, larceny or breach of trust, and
• debts you owe under a divorce decree or settlement unless after bankruptcy you would still not be able to afford to pay them or the benefit you'd receive by the discharge outweighs any detriment to your ex-spouse (who would have to pay them if you discharge them in bankruptcy).

What property might I lose if I file for bankruptcy?

You lose no property in Chapter 13. In Chapter 7, you select property you are eligible to keep from either a list of state exemptions or exemptions provided in the federal Bankruptcy Code. Most debtors use the exemptions provided by their state.

Exemptions are generally as follows:

• Equity in your home, called a homestead exemption. Under the Bankruptcy Code, you can exempt up to $17,425 of equity. Some states have no homestead exemption; others allow debtors to protect all or most of the equity in their home.
• Insurance. You usually get to keep the cash value of your policies.
• Retirement plans. Pensions which qualify under the Employee Retirement Income Security Act (ERISA) are fully protected in bankruptcy. So are many other retirement benefits; often, however, IRAs and Keoghs are not.
• Personal property. You'll be able to keep most household goods, furniture, furnishings, clothing (other than furs), appliances, books and musical instruments. You may be limited up to $1,000 or so in how much jewelry you can keep. Most states let you keep a vehicle with more than $2,400 of equity. And many states give you a "wild card" amount of money -- often $1,000 or more -- that you can apply toward any property.
• Public benefits. All public benefits, such as welfare, Social Security and unemployment insurance, are fully protected.
• Tools used on your job. You'll probably be able to keep up to a few thousand dollars worth of the tools used in your trade or profession.
• Wages. In most states, you can protect at least 75% of earned but unpaid wages.

Will I lose my house or apartment?

Home Ownership and Bankruptcy. If you are behind on your mortgage payments, you will almost certainly lose your house if you file a Chapter 7 bankruptcy. Your mortgage lender will ask the bankruptcy court to lift the automatic stay to begin or resume foreclosure proceedings. In a Chapter 13 bankruptcy, you will not lose your house if you immediately resume making the regular payments called for under your agreement and repay your missed mortgage payments through your plan.

If you are current on your mortgage payments, you will not lose your house if you file for Chapter 13 bankruptcy, as long as you continue to make your mortgage payments. In Chapter 7 bankruptcy, whether or not you will lose your house depends on the amount of equity you have in the property and the amount of any homestead exemption (which varies state-to-state) to which you are entitled.

If the total amount of debt against your house is less than the market value, you may lose your house unless a homestead exemption entitles you to all or most of the equity.

Renting and Bankruptcy. If you are current on your rent payments and file for bankruptcy, it's unlikely your landlord would ever find out. But if you are behind on your rent, there's a good chance that your landlord will begin eviction proceedings to get you out. Your inclination may be to file for bankruptcy just to get the automatic stay in place to stop the eviction. This will work, but not for very long. Expect your landlord to come into court to have the stay lifted, which is likely to be granted.

Why choose Chapter 13 over Chapter 7 bankruptcy?

Although the overwhelming number of people who file for bankruptcy choose Chapter 7, there are several reasons why people select Chapter 13:

• You cannot file for Chapter 7 bankruptcy if you received a Chapter 7 or Chapter 13 discharge within the previous six years (unless you paid off at least 70% of your unsecured debts in a Chapter 13 bankruptcy). On the other hand, you can file for Chapter 13 bankruptcy at any time.
• You have valuable nonexempt property.
• You're behind on your mortgage or car loan. In Chapter 7, you'll have to give up the property or pay for it in full during your bankruptcy case. In Chapter 13, you can repay the arrears through your plan, and keep the property by making the payments required under the contract.
• You have debts that cannot be discharged in Chapter 7.
• You have codebtors on personal (nonbusiness) loans. In Chapter 7, the creditors will go after your codebtors for payment. In Chapter 13, the creditors may not seek payment from your codebtors for the duration of your case.
• You feel a moral obligation to repay your debts, you want to learn money management or you hope new creditors might be more inclined to grant you credit after a Chapter 13 than they would after a Chapter 7.