What is Bankruptcy?
Bankruptcy is a federal court process calculated to help consumers and businesses erase their debts or repay them while protected by the bankruptcy court. The two consumer bankruptcies are "liquidation" (Chapter 7) or "reorganization" (Chapter 13). Under a Chapter 7 bankruptcy, you ask the bankruptcy court to eliminate (discharge) the debts you owe. Under a Chapter 13 bankruptcy, you file a plan with the bankruptcy court stating how you will repay your creditors. Depending on how much "disposable" income you have at the end of each month, you pay that amount to the trustee for 36 to 60 months.
When you file bankruptcy, a court order called an "automatic stay" becomes effective. The automatic stay prevents creditors from taking action to collect the debts owing unless the bankruptcy court releases the stay and allows the creditor proceed with collections.
Some debts cannot be discharged in bankruptcy. These debts include back child support, alimony, and tax debts. Student loans are rarely discharged. You must show that repaying the debt would be an undue hardship, which is very difficult to show. And other types of debts, such as fraud, criminal restitution, and other such debts may not be discharged if the creditor can convince the court the debt should not be discharged.
Consumer Bankruptcies – Chapter 7 and Chapter 13
There are two types of consumer bankruptcies. In Chapter 7 bankruptcy, you want the bankruptcy court to discharge, or eliminate, any of the debts you owe. In exchange for this discharge, the bankruptcy trustee can sometimes take property you own if it is not exempt from collection, sell it, and give the proceeds to your creditors. However, in about 90% of all Chapter 7 cases, the debtor loses no property at all.
In Chapter 13 bankruptcy, you propose a repayment plan with the bankruptcy court to pay back all or a portion of your debts over 36 to 60 months. The amount you have to repay depends on how much you earn, the amount and types of debt you owe, and how much property you own. You must pay your creditors at least as much as they might have received in a Chapter 7.
You usually lose no property in Chapter 13, because you are paying back your creditors through your plan payments. In Chapter 7 bankruptcy, you elect property you can keep from a list of state or federal exemptions. Both New Mexico and federal exemptions allow you to keep these types of property in a Chapter 7 bankruptcy:
Homestead exemption. Under the federal exemptions, you can exempt up to $20,200 of equity in your house (double for married couples). The New Mexico homestead exemptions allow you up to $120,000 equity in your residence.
Insurance. You usually get to keep the cash surrender value of your insurance policies.
Retirement plans. Almost all retirement benefits are protected by either the federal or state exemptions.
Personal property. You’ll be able to exempt most household goods, furniture, furnishings, clothing, appliances, books and musical instruments. You will be able to keep jewelry potentially up to $3,000 or so. New Mexico lets you keep a vehicle as long as your equity doesn’t exceed four thousand dollars. The federal "wild card" exemption can be as much as $22,000. The New Mexico wild card exemption is only $500.
Public benefits. Most public benefits, such as welfare, Social Security, and unemployment are fully protected.
Tools used on your job. New Mexico allows you to keep up to a few thousand dollars worth of the tools used in your trade or profession.
The Choice between Chapter 7 bankruptcy and Chapter 13 bankruptcy
If you are eligible for both types of bankruptcy, then you can choose the type of bankruptcy that best suits your situation. Sometimes, you don’t have a choice.
Under the 2005 bankruptcy law, debtors whose incomes are too high may not be allowed to file for Chapter 7 bankruptcy if they could pay back some portion of the unsecured debt over a five-year repayment period. There is now an income "means test". For a single person in Bernalillo County, the figure is $36,000. However, you may be able to fit into a Chapter 7 if your expenses are higher than normal. For a married couple the number is $48,000, a family of four around $58,000. Your bankruptcy attorney can tell you if you still qualify even if you are making more money than that, possibly up to $20,000 more.
If you have secured debts greater than $1,010,650 and unsecured debts greater than $336,900, you are ineligible for Chapter 13 bankruptcy. .
Many people who file for bankruptcy elect to use Chapter 7, if they meet the eligibility rules; Chapter 7 is the popular choice because it is over quickly and does not require many payments to the bankruptcy trustee.
Sometimes Chapter 13 is a better choice. If you are behind on your mortgage or car payment and want to keep your house or car, you can catch up on your missed payments in your Chapter 13 plan and repay them over time. In Chapter 7, you would have to get caught up in three months or face a potential foreclosure. The other instance where a 13 is preferable to a 7 is when you make too much money to file for Chapter 7 but still need bankruptcy protection.
A debtor’s involvement with the bankruptcy judge is very limited. A typical chapter 7 debtor will never appear in court and will not see the bankruptcy judge unless an objection is raised in the case. A chapter 13 debtor may usually has to appear before the judge at a confirmation hearing. The only formal proceeding involving the debtor is the meeting of creditors held in the federal building in Albuquerque.
The goal of the federal bankruptcy laws enacted by Congress is to give debtors a financial "fresh start" from burdensome debts. The Supreme Court discussed this in a 1934 decision:
[I]t gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.
The process begins by meeting with your lawyer for 30 to 45 minutes. After the initial consultation, your lawyer will give you a list of items he needs to get the case filed. These are items such as tax returns, pay stubs, and credit reports, and a list of everyone you owe money to.
After you get all the requested items to your attorney, he will prepare and file your case. It takes about 30 days from the date of filing to attend your hearing, and another 60 days until the case is closed. People are often pleasantly surprised by how easy it is.
Bankruptcy Information Center
Chapter 7 – An Overview
Chapter 13 – An Overview
The Automatic Stay – How You Are Protected in Bankruptcy