“At the end of every seven years you shall grant a release of debts. And this is the form of the release: Every creditor who has lent anything to his neighbor shall release it; he shall not require it of his neighbor or his brother, because it is called the LORD’s release” (Deuteronomy 15:1-2).

Pretty strong support for the basic principle of bankruptcy.  Under our current bankruptcy law one can file Chapter 7 every eight years.  Chapter 7 is the quickest, easiest, and cheapest bankruptcy that is the best, unless you don’t qualify, or prefer Chapter 13.

EXEMPTIONS

Chapter 7 bankruptcy is the method by which American law permits debtors to liquidate (sell and convert into cash) their estates (everything they own) and use the funds to pay unsecured creditors.  But the states and the federal government provide laws called exemptions that are used to protect property of the debtors that does not have to be liquidated.  In Illinois, a married couple can keep $30,000 worth of a home; $4,800 worth of two cars; pensions, $3,000 worth of tools of the trade (if both husband and wife are involved in trades);, all clothes, Bibles, school books and family pictures; and $8,000 worth of everything else except real estate (this exemption is known as the wildcard, because it covers almost anything).  If you are an individual filing, divide the above numbers in half.

But you say, my house is worth $50,000 so I guess I’ll have to lose it.  Here is where you must understand the meaning of equity.  Equity is the portion of you interest in a piece of property that you own – and most people share ownership of their house with a bank.  So if you have a mortgage that you owe $30,000 on for that $50,000 house, take its value, $50,000, subtract the value that you do not own because of the loan (here it is $30,000), and the remaining figure is $20,000.  You do not own a $50,000 home, you have equity of $20,000 in that home – you own $20,000 of that home.  The exemption for a house for a married couple is $30,000, so your home is protected by the exemption, and you do not have to give it up in a Chapter 7.

But what happens to the home?  Nothing, it is not affected by the bankruptcy, because the debt you own is secured.  The debtor, or the mortgagor, has filed papers that legally establish his interest in the property to the extent of the remaining amount you owe on the home.  The mortgage is untouched by the bankruptcy as long as you keep the bank happy and continue to make your payments.  And the same reasoning applies to cars that are secured by a loan.  If you are filing Chapter 7, and want to keep your cars and house, if they are financed by secured loans, keep the bank happy or you can lose them – not because of the bankruptcy, but because you have violated the terms of the financing contract.

The average person filing bankruptcy keeps everything she owns.  Most debtors have been diligently paying their bills all their lives because of a failing business, medical bills, out of control credit card debts, or a divorce; they get in a bind and can no longer pay their bills.  As long as all the stuff they own is protected by the exemptions, they keep everything – and most people do.

Categories: Bankruptcy

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