What is bankruptcy? Bankruptcy is a procedure to relieve individuals and businesses from debts, while protecting and preserving the rights of secured creditors and providing unsecured creditors with equal treatment of their claims. There are four types of bankruptcy that individuals may select, depending upon their particular financial circumstances. Most individuals file under Chapter 7 of the bankruptcy Code, sometimes known as "straight" or "liquidation" bankruptcy. Chapter 11 is available to individuals, but generally used by corporations to reorganize their business affairs. Chapter 12 is designed for use by farmers. Chapter 13, is available to individuals and unincorporated businesses that intend to use future income to pay some or all of the debts according to the plan designed by the individual (within certain statutory limitations) to meet his or her needs. Who may declare bankruptcy? There are few limitations on who can file bankruptcy; the decision of whether to file, and under what Chapter, is based upon each individuals's need for relief from debts and their capacity and willingness to undertake a procedure that will have long-term consequences on their financial life. What are some of the advantages and disadvantages to filing Chapter 7 bankruptcy? Advantages: With a few notable exceptions, bankruptcy stops all ongoing legal actions against the debtor, prevents a creditor from beginning new legal actions against the debtor, and prohibits creditors with notice of the bankruptcy case from contacting the debtor, or anyone else besides the debtor's attorney, to seek collection of a debt; Most liabilities relating to credit card debts, civil judgments, past-due accounts and judgments due to repossessions and foreclosures may be discharged; A debtor may be able to keep all or most of his or her property through federal and/or state exemptions; and Certain liens and certain involuntary transfer (such as garnishments), may be avoided if timely action is taken. Disadvantages: Debts relating to certain taxes, governmental fines, forfeitures and restitution, criminal or fraudulent conduct, child and spousal support, drunk driving, most student loans and intentional malicious injuries may not be dischargeable; although taxes and student loans may be dischargeable depending upon how old the debts are. In addition, certain abuses of cash advances and credit cards on the eve of bankruptcy are nondischargeable. -Creditors having a mortgage or security interest, in a home or in motor vehicles, may be able to repossess their collateral after the bankruptcy unless the debtor reaffirms the debt or redeems the collateral; -A debtor may receive a discharge only once in six years. A debtor contemplating bankruptcy must carefully consider his or her financial stability and ability to avoid the problems resulting in the bankruptcy during that period; and -There may be tax consequences from a bankruptcy. What property may I keep in a Chapter 7 bankruptcy? Wisconsin law and federal law provide certain protections, called exemptions, that limit the types of property that a creditor holding a judgment may seize and sell to satisfy the creditor's claim. The types of property for which exemptions are permitted include a limited amount of equity in, among other things, one's personal residence, vehicles, household goods and personal effect, tools of the trade, life insurance and even deposit accounts. Generally, qualified retirement benefits are excluded from the bankruptcy estate altogether. When a debtor's property (called collateral) is secured by a lien (such as a home mortgage or vehicle purchase loan), the debtor must decide to retain it or surrender it to the secured creditor. If the decision is to surrender the collateral, the unpaid portion of the loan (or any deficiency after sale of the collateral) generally is subject to discharge along with the unsecured debts. If the debtor wishes to retain the collateral, the debtor must choose either to reaffirm the debt (sign a written document agreeing to continue making regular or agreed-upon payments on the debt and grant the creditor all pre-bankruptcy rights upon a subsequent default) or redeem the collateral (pay the creditor the present fair market value of the collateral in one lump-sum). Only items used for personal, household and family use (including vehicles, but not real estate) are subject to redemption. Finally, a debtor may be able to avoid certain liens on items held for personal or household use (but not vehicles or real estate), and retain the items without either reaffirming the debt or redeeming the collateral. Who may file Chapter 13 bankruptcy? Unlike the other bankruptcy chapters, Chapter 13 is limited to individuals and unincorporated businesses that have a regular source of income and whose secured debts are less than $750,000 with unsecured debts of less than $250,000.00 The term "regular source of income" is income that is sufficiently definite and certain to enable the debtor to assign it to the trustee on a regular basis for payment by the trustee to creditors. What are some of the advantages and disadvantages of Chapter 13 bankruptcy? Advantages: Bars post-filing creditor actions against co-debtors if the creditor will be paid in full under the Plan; Debtor retains all desired property, provided creditors obtain at lease as much under the plan as they would under Chapter 7; Debtor may "write-down" secured nonhomestead debts to the value of the collateral; Debtor may be able to modify interest rates on some loans and extend the payment term on most debts to make them more affordable; Debtor may cure loan defaults by making installment payments, and reinstate accelerated mortgage and other notes; The Chapter 13 discharge is broader than under Chapter 7, so that more types of debts are dischargeable; and Debtor may be able to force ("cram-down") affordable payments on secured and tax creditors that cannot be done under Chapter 7. Disadvantages: Debtor's future income is subject to administration by the trustee for three to five years; Under the Plan, the debtor must establish and live under a firm budget during the repayment period; The trustee is entitled to a commission on payments paid to creditors which reduces the value of what is paid to creditors; and Still appears as a bankruptcy on credit reports. Disclaimer: This summary offers basic legal information only and does not offer legal advice. If you have legal problems, please seek legal advise; only an attorney can advise you on how the law applies to the specific facts of your situation and in your location. Top

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