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Overview of consumer bankruptcy

Virginia residents may want to know more about how a bankruptcy works. Bankruptcy is a federally-governed legal process designed to provide a fresh start to individuals and businesses by restructuring or eliminating certain debts. A case begins when a debtor files a petition with the bankruptcy court listing all assets, debts, income and other relevant financial information. At that point, an automatic "stay" is placed on all debt collection efforts.

Although other forms of bankruptcy exist, most individuals will file under either Chapter 7 or Chapter 13. A Chapter 7 filing is used when there is insufficient income to repay debts. Debtors are allowed to keep certain property classified as exempt, which typically includes certain household goods and a limited amount of cash. Nonexempt property is sold, and proceeds are distributed to creditors. Most of the remaining unsecured obligations are discharged, wiping the slate clean and allowing a person to start over.

Chapter 13 bankruptcies allow debtors with regular income to repay all or a portion of their debt over a fixed time period, usually three to five years. Chapter 13 filings are often chosen by individuals who want to keep their home or other properties that are secured by loans. Chapter 13 filings are often useful in stopping foreclosure proceedings and sometimes result in a reduction of debt or a reduction in interest rates. The debtor pays a fixed amount each month to the bankruptcy trustee who makes payments to creditors.

Although bankruptcy may be the best choice for some individuals, other forms of debt relief are available, including programs offered by consumer credit counseling agencies and out-of-court settlements. Anyone having trouble repaying debt may want to speak with a bankruptcy attorney who could help them determine their best course of action for obtaining debt relief.

Source: Virginia State Bar, "The Bankruptcy Process", September 10, 2014

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