Mr. Shapiro is not a bankruptcy attorney. Typically there are two types of Bankruptcy. The first is the Chapter ’7′ or “Liquidation Bankruptcy” the second type is Chapter 13.
Chapter 7 Bankruptcy
– In general, Chapter 7 wipes away unsecured debts like credit card debt, medical bills, money judgments, and contractual debt. There are exceptions, and a competent attorney should be consulted. When you file Chapter 7, you are turning over control of your finances to the Trustee, appointed by the court. He or she will throughly examine your situation and determine what property you may keep, and whether there is any property in excess of your exemptions that are available to pay off your creditors.
“Exempt property” is property you may keep. In Florida, the are many categories of exemptions. Basically, assuming you qualify for the Florida state exemptions, each filing debtor can exempt equity in a motor vehicle up to $1,000 and any personal property up to $1,000. In addition, if there is no equity claimed as exempt in the homestead, or any ‘benefit’ derived from the homestead exemption, each filing debtor may claim another $4000 each in personal property–222.25(4) Fla.Stat) This means if you rent, you can keep $5000 each in personal property (money, clothes, electronics, basically ANYTHING). If you own where you live, it gets more complicated, and you should consult an attorney. If you bought your home within the 40 months prior to filing, you may keep up to about $136,000 equity in your home. If you bought earlier than 40 months before you file, what you keep in equity is unlimited in Florida. Annuities are typically exempt, too.
Chapter 13 Bankruptcy
Chapter 13 Bankruptcy is also called a wage earner’s plan. It enables individuals with regular income to develop a plan to repay a portion of their debt that they can afford. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” (In Florida, the median income for 1 person is about $41,600/year, and for 2 persons it is about $52,000/year.) If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for five years. If less than the median, a 3 year plan may be done. During this time the law forbids creditors from collection efforts.
Chapter 13 offers individuals a number of advantages over liquidation under chapter 7. Perhaps most significantly, chapter 13 offers individuals an opportunity to save their homes from foreclosure and keep all or most of their property. Most significantly in this economy, a home owner can STRIP a second mortgage when the value of the property is less than the balance due on the first mortgage. The second mortgage is then treated as just another unsecured loan and is paid through the plan according to what the debtor can afford. When the plan is completed, it is eliminated like other unsecured debt.
Filing stops foreclosure proceedings, and the debtor may cure delinquent mortgage payments over time in the plan. Chapter 13 also has a special provision that protects third parties who are liable with the debtor on “consumer debts.” This provision may protect co-signers. Finally, chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a chapter 13 Trustee who then distributes payments to creditors. Individuals usually will have no direct contact with creditors while under chapter 13 protection.