Bankruptcy Q&A:

    Under the federal bankruptcy statute, a discharge is a release of the debtor from personal liability for certain specified types of debts. In other words, the debtor is no longer required by law to pay any debts that are discharged. The discharge operates as a permanent order directed to the creditors of the debtor that they refrain from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters, and personal contacts. Although a debtor is relieved of personal liability for all debts that are discharged, a valid lien that has not been avoided in the bankruptcy case will remain after the bankruptcy case. Therefore, the intentions with such lien must be specified and a secured creditor may enforce the lien to recover the property secured by the lien. 

     Generally people file chapter 7 bankruptcy if they have a large amount of unsecured debt such as credit card debt or medical expenses that they are no longer able to pay, they have no valuable assets or equity in property substantial enough to satisfy the creditors, and/or their monthly expenses exceed their income. Often garnishments, unemployment, unexpected medical expenses, or divorce prompt the debtor to seek protection from creditors by filing chapter 7 bankruptcy.

    Generally, people file chapter 13 if they have valuable property not covered by an exemption, like a home or car, but want to keep this property. If a debtor is behind on secured loan payments a chapter 13 bankruptcy can allow the debtor to make up these payments over time while keeping the home or car.  A Chapter 13 Bankruptcy is a consolidation wherein the Debtor pays a monthly installment, usually the amount of disposable income per month, to a Trustee for a period of 3-5 years who, in turn, disburses said installments monthly amongst your creditors, usually paying them a percentage on the dollar. 

    In a chapter 7 case, you can keep all the property which is exempt from the claims of creditors. In determining whether property is exempt, you must keep a few things in mind. The value of property is not the amount you paid for it, but what it is worth now. Generally the trustee is interested in the resale value of your property so for most personal effects this is the garage sale value of your property.

    In a chapter 13 case, you can keep all of your property if your plan meets the requirements of the bankruptcy law. In most cases you will have to pay the mortgages or liens as you would if you didn't file bankruptcy.

Will filing bankruptcy affect my credit? 

    There is no clear answer to this question. Unfortunately, if you are behind on your bills, your credit may already be bad. Bankruptcy will probably not make things any worse. The fact that you filed bankruptcy, if properly explained, may be less damaging than a history of unpaid accounts.

    If someone has co-signed a loan with you and you file for bankruptcy, the co-signer will still have the legal obligation to the debt.  Any co-signers must be indicated as such within the bankruptcy proceedings since they may have a contingent claim against you.