Bankruptcy basics

Federal bankruptcy laws were changed in 2005 in an attempt to force more people seeking protection from creditors to pay at least a portion of the bills that pushed them into court. The two main types of bankruptcies filed by individuals are Chapter 7, which is a liquidation of assets and debts, and Chapter 13, which imposes a repayment plan lasting up to five years.

Chapter 7: Sweeps away unsecured debt. Generally over within 90 days but available only once every eight years. Debtors seeking to use Chapter 7 must either have an income below the median for their state and family size or, through a means test, show that they have no regular income that could be used to pay a portion of the debts.

In Missouri, a single person with an income less than $38,100 or a family of four with an income below $67,761 qualify automatically. The means tests uses standard allowances for various expenses, such as housing and transportation. Some allowances are based on local amounts while others use state or national amounts. In Cape Girardeau County, a single person with a car payment is allowed about $2,200 monthly and a family of four about $4,200 monthly.

The debtor can reaffirm a secured debt, such as a house or automobile, or surrender the items to the creditor without any further liability. In a Chapter 7 filing, assets that exceed exemption amounts are usually sold.

Chapter 13: Creates a payment plan by comparing actual expenses with income and setting aside what remains in a pool for distribution to creditors. Income beyond regular expenses is deposited with the court's bankruptcy trustee each month for delivery to creditors.

During a Chapter 13 bankruptcy, past-due mortgage payments are termed "arrearage" and can be dealt with in the debt plan. Payments due after filing must be made in full and on time. The amount owed on a car may, in some instances, be reduced and payments extended for the term of the plan, usually at a lower interest rate. The amount owed on a car purchased within 910 days of filing cannot be changed.

Chapter 13 can stop creditor calls, and unsecured creditors may only receive a portion of the amount they are due.

Exemptions: Federal rules allow, with certain exceptions, a debtor to keep assets of a certain value. In Missouri, exemptions include $15,000 equity in a home, $3,000 worth of household goods and a motor vehicle worth up to $3,000. Two "wild card" exemptions totalling $1,850 for a head of household can be applied to any asset.

Credit counseling: Every person filing bankruptcy must first undergo approved credit counseling to determine if there are ways to repay debt without using the bankruptcy courts.