Bankruptcy is a federal legal proceeding where a person who owes more money then he or she can pay asks the court for relief from those debts. The right to file for bankruptcy is a fundamental right protected by the U.S. Constitution.

There two common types of bankruptcy that apply to most individuals:

• Straight Bankruptcy (Chapter 7): A straight bankruptcy includes a court administered sale of any of the person filing for bankruptcy relief property that is not exempt, with the proceeds going to pay his or her debts. The filer may keep some secured property (such as a home or car) by entering in agreements with the creditor of the property. Many people are allowed to keep all of their property because it all falls within exemptions discussed below.
• Wage earner plan (Chapter 13): A person who has a regular source of income (wages, welfare, pension, etc.) Works with the bankruptcy court to pay off debts with an instalment plan run by a court chosen Trustee. This plan can be helpful to individuals that want to avoid having property securing debts repossessed. This plans may protect co-signers of debts as well as the filer. This plan usually takes three to five years to complete.
• Remember! Bankruptcy is a serious legal proceeding and should only be considered after other options, such as budgeting and credit counseling have been weighed. Bankruptcy may appear on your credit record for up to ten years and will interfere with getting credit from many lenders. However, a person thinking about bankruptcy probably will already have bad credit. In some cases, bankruptcy will help a person restore credit by getting them on top of their bills more quickly.

Bankruptcy is NOT a substitute for financial responsibility. If a person without the skills or responsibility obtains relief through bankruptcy but does not act financially responsible afterwards, that person will simply find deeper financial problems.

Will I Be Able to Keep Any Of My Property?

Yes. Certain property is exempt from a bankruptcy and can be kept by the person filing for bankruptcy relief. He or she can choose either the state or federal exemption standard. Most Pennsylvania residents choose the more liberal federal standard.

The typical federal exemptions are:

• $16,150 in equity which serves as a residence
• $2,575 on a motor vehicle
• $8,625 in household furnishings with no single item worth over $425.
• $1,075 in jewelry
• $850 plus up to 2 of the unused residence exemption in any property
• social security, support, unemployment benefits, welfare, VA disability and certain pension benefits.

Husbands and wives who file together double the above amounts. Nothing requires both spouses to file, though.

What if I have no assets after the exemptions?

Often those filing for bankruptcy have no property above and beyond the exemptions. In those cases, no property is sold by the court, but the debt are discharged anyway.

What is the effect of discharge of a debt in Bankruptcy?

A Creditor, in most cases, cannot attempt to collect a debt that has been discharged by the bankruptcy court. This means the creditor cannot take the property or earnings for those claims that have been discharged. Property that was put up (security) for a loan, such as a car or mortgage, the creditor may take that property back in exchange for the discharge of the debt. The filer and creditor, however, may agree to continue the loan if it is in the best interest of the filer. In other words, if a filer owes $3,000 on a car worth $5,000, he or she may agree with the bank to keep paying the loan, keep the car, and use the $2,575 motor vehicle exemption to protect the value built up in the car from the other creditors. Equity in a home may be protected similarly.

Is Bankruptcy right for you?

Persons considering bankruptcy should consult an attorney. This information is intended to inform and not advise. Before undertaking any major legal proceeding, such as bankruptcy, individuals should discuss the matter with an attorney. J. Wesley Rowden, Attorney at Law, will discuss your rights in a free, no obligation initial consultation.