What is bankruptcy?
Bankruptcy is a legal proceeding in which an individual who cannot pay his or her bills can get a fresh financial start. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law.
What can bankruptcy do for me?
- Bankruptcy may make it possible for you to:
- Eliminate the legal obligation to pay most or all of your debts. This is called a “discharge” of debts. It is designed to give you a fresh financial start.
- Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. (Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment.)
- Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
- Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt.
- Restore or prevent termination of utility service.
- Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.
What different types of bankruptcy should I consider?
There are four types of bankruptcy cases provided under the law:
- Chapter 7 is known as “straight” bankruptcy or “liquidation.” It requires a debtor to give up property which exceeds certain limits, called “exemptions”, so the property can be sold to pay creditors.
- Chapter 11, known as “reorganization”, is used by businesses and a few individual debtors whose debts are very large
- Chapter 12 is reserved for family farmers.
- Chapter 13 is called “debt adjustment”. It requires a debtor to file a plan to pay debts (or parts of debts) from current income.
Most people filing bankruptcy will want to file under either chapter 7 or chapter 13. Either type of case may be filed individually or by a married couple filing jointly. (see Wisconsin Bankruptcy Laws Chapter 7 or 13)
Is Wisconsin Chapter 7 (Straight Bankruptcy) Bankruptcy Right for Me?
In a bankruptcy case under chapter 7, you file a petition asking the court to discharge your debts. The basic idea in a chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property, except for “exempt” property which the law allows you to keep. (see bankruptcy – Wisconsin exemptions) In most cases, all of your property will be exempt. But property which is not exempt is sold, with the money distributed to creditors. If you want to keep property like a home or a car and are behind on the payments on a mortgage or car loan, a chapter 7 case probably will not be the right choice for you. That is because chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt. (see Wisconsin Chapter 7 Bankruptcy)
Is Wisconsin Chapter 13 bankruptcy (Reorganization) right for me?
In a chapter 13 case you file a “plan” showing how you will pay off some of your past-due and current debts over three to five years. The most important thing about a chapter 13 case is that it will allow you to keep valuable property – especially your home and car – which might otherwise be lost, if you can make the payments which the bankruptcy law requires to be made to your creditors. In most cases, these payments will be at least as much as your regular monthly payments on your mortgage or car loan, with some extra payment to get caught up on the amount you have fallen behind. You should consider filing a chapter 13 plan if you:
- own your home and are in danger of losing it because of money problems;
- are behind on debt payments, but can catch up if given some time;
- have valuable property which is not exempt, but you can afford to pay creditors from your income over time.
You will need to have enough income in chapter 13 to pay for your necessities and to keep up with the required payments as they come due. (see Wisconsin Chapter 13 bankruptcy)
Can I own anything after bankruptcy?
Yes. Many people believe they cannot own anything for a period of time after filing for bankruptcy. This is not true. You can keep your exempt property and anything you obtain after the bankruptcy is filed. However, if you receive an inheritance, a property settlement, or life insurance benefits within 180 days after your bankruptcy, that money or property may have to be paid to your creditors if the property or money is not exempt. You can also keep any property covered by Wisconsin bankruptcy exemptions through the bankruptcy.
Can filing bankruptcy stop bill collectors from calling?
Yes. The automatic stay prevents bill collectors from taking any action to collect debts.
Can I erase my student loans by filing bankruptcy?
Generally, student loans are not discharged in bankruptcy. In 11 U.S.C. sec. 523(a)(8) there are two exceptions to this general rule:
- The student loan may be discharged if it is neither insured or guaranteed by a governmental unit nor made under any program funded in whole or in part by a governmental unit or nonprofit institution.
- The student loan may be discharged if paying the loan will “impose an undue hardship on the debtor and the debtor’s dependents.”
Student loans more than 7 years old used to be dischargeable under certain circumstances, but this provision was removed by an appropriations bill passed in October of 1998.
Whether an exception applies depends on the facts of the particular case and may also depend on local court decisions. Even if a student loan falls into one of the two exceptions, discharge of the loan may not be automatic. You may have to file an adversary proceeding in the bankruptcy court to obtain a court order declaring the debt discharged.