What is Bankruptcy?
Authored By: Legal Aid Services of Oklahoma, Inc.
What is BANKRUPTCY?
Bankruptcy is a legal procedure that allows you to handle your debts. If your debts are getting out of hand, bankruptcy may be one way to get a fresh start. There are two types of bankruptcy for individuals: Chapter 7 (or "straight bankruptcy"), and Chapter 13 (the "wage earner plan"). In a Chapter 7 bankruptcy, the court takes legal ownership of all of your property, except certain items that you are allowed to keep. The court sells your property and divides the proceeds among your creditors. You are then excused from paying the rest of your debts.
In a Chapter 13 bankruptcy, the court takes your wages and pays your creditors a little bit each month for 3-5 years. You receive an allowance to live on, and your creditors are prohibited from taking steps to collect their debts. At the end of the period, you are excused from paying the remainder of your debts. Your creditors may not receive everything you owe, but they get more than they would if you filed Chapter 7 bankruptcy.
CHAPTER 7 - Facts
Under Oklahoma law, you are allowed to keep basic necessities, including your home, furniture, clothes (up to $4,000), and car (up to $7,500 equity).
If you owe money on a "secured" debt, such as a car, different rules apply. A secured debt is one for which you have put up some property as collateral. If you do not pay the debt, the creditor can then take or "repossess" the collateral.
In a bankruptcy, you must reach an agreement to make payments on the secured debt, or lose the collateral. For example, if you still owe money on your car and you want to keep it after you file bankruptcy, you must reach an agreement with the creditor to make payments, or the creditor can take the car back. Special rules also apply to certain kinds of debts. Student loans can only be discharged in very limited cases of hardship and you can only discharge taxes in certain circumstances. Also, criminal fines and child support cannot generally be wiped out in a bankruptcy.
CHAPTER 13 - Facts
Chapter 13 gives you breathing room to pay your bills, but you must have enough income every month to cover basic living needs and pay into the Chapter 13. In a Chapter 13, you can keep your secured property, like cars, and pay them off over time. You may be able to catch up on your house payments and avoid foreclosure. In addition, a Chapter 13 may keep creditors from suing other people who may have signed with you on the debt. Moreover, Chapter 13 may allow you to pay debts that would not be covered by Chapter 7, like child support and taxes. While Chapter 13 does have some advantages over Chapter 7, you must remember that both chapters are forms of bankruptcy.
What you should know about filing:
- Bankruptcy stops wage garnishments and phone calls from bill collectors. It can also allow you to restore utility services or get a driver's license.
- Bankruptcy can appear on your credit report for seven to ten years. As a result, you may have trouble obtaining credit in the future.
- If you file Chapter 7 bankruptcy, you cannot file again for at least 6 years. If you develop more credit problems, your only bankruptcy option would be a Chapter 13.
- Whether you file Chapter 7 or Chapter 13, you must pay a filing fee.
- To determine if bankruptcy would be helpful for you, contact an attorney. Attorneys' fees vary, so shop around.