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There are two ways a person can become a bankrupt. The first and more common way is to have the person file a petition to voluntarily go bankrupt. The second, and rarely used way, is for creditors to ask the Court to make an Order that a person is bankrupt. In both these cases a Bankruptcy Trustee is required to administer the bankruptcy. (see Filing Bankruptcy)
The two main types of bankruptcies available to individuals deal with different debt situations in different ways. The typical Chapter 7 debtor has few assets and considerable debts primarily associated with credit cards, store purchases, hospital bills and other dischargeable debts. Creditors are paid, if at all, from anything that the debtor currently owns that cannot be claimed as exempt. Certain debts are not dischargeable in a Chapter 7 proceeding but are dischargeable in a Chapter 13. Dischargeable means that by filing for bankruptcy you will not have to pay the debt if the court grants the discharge.
Typical Bankruptcy Filings
The typical Chapter 13 debtor files because the debtor is in arrears with rent, mortgage payments, car loan or other secured debt, because the debtor has substantial debts which cannot be discharged in a Chapter 7 bankruptcy, or because the debtor has some assets which he or she wants to keep but cannot be claimed as exempt. Another reason to file a Chapter 13 is to protect someone else who may be liable for your debts, such as a co-signer or spouse. In Chapter 13, creditors are paid out of the debtors future earnings and a plan must be proposed to pay these creditors. In order to qualify for a Chapter 13 bankruptcy the debtor must be an individual with regular income. This regular income may consist of wages, commissions, rents, public benefits, social security, unemployment compensation, alimony, child support, pensions or other types of income which can be estimated.
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Many state courts, including those in Illinois, have ruled that IRA accounts are safe from creditors in a bankruptcy. But bankruptcy professor Charles Tabb at the University of Illinois College of Law in Champaign notes that assets in a Roth IRA may not be protected. A Roth IRA does not have all the characteristics of the traditional IRA, since there are no restrictions on withdrawal of contributions. So thats still an open issue.
Deciding which type of bankruptcy to file, and what is protected are but a few of the issues that arise during a bankruptcy.
Guidelines for Filing Bankruptcy
Your bankruptcy petition must include a detailed list of your current sources of income and regular expenses as they will be after you have filed your petition. This is very important. If the judge assigned to your case decides that your budget reflects that you can repay your creditors without difficulty, the judge may dismiss your case. In a Chapter 13 bankruptcy, the amount that you will have to pay your creditors monthly is based upon the budget you supply to the court. Regular monthly income from all sources must be disclosed in your budget, including salary, commissions, business income, investment income, tax refunds, rent, public benefits, unemployment compensation and the like. Any change in your income or expenses during the bankruptcy proceeding should be disclosed to the court.
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