When deciding to file for bankruptcy, you should ask questions like whether you will get to keep your home, vehicles and other properties. You should also know how bankruptcy will treat the different types of debts that you have when deciding whether to file for Chapter 7 or 13 Bankruptcy.
Debts can be divided into 3 general categories: secured, unsecured and priority debts.
Secured debts are debts tied to a property as collateral. Common examples of secured debts are home mortgages, car loans, mechanic liens, furniture loans, jewelry loans. If the borrower fails to repay the debt, the lender can repossess the collateral. Next, they will sell the collateral and file a lawsuit to collect on any deficiency from the sale. After the lender received a judgment, the lender can request an order for wage garnishment to collect on the unpaid debt plus costs and interests. In California, wage garnishments are usually up to 25% of your paycheck or net income. The lender can also request an order for bank account levy or record a judgment lien (aka judicial lien) on your house or real estate.
Unsecured debts are debts that are not tied to a property. Common examples of unsecured debts are credit cards, medical bills, payday loans. If the borrower fails to repay the debt, the lender can file a lawsuit. Once the lender received a judgment, the lender can request an order for wage garnishment or bank account levy or record a judgment lien (aka judicial lien) on your real estate or house.
Priority debts are debts that cannot be discharged or eliminated through bankruptcy. Common examples of priority debts are child support, alimony, recent tax liabilities. As discussed above, failure to pay your debt can result in wage garnishment, bank account levy, lien recorded on your house or other real estate.
Should I file Chapter 7 or Chapter 13 Bankruptcy?
The common bankruptcy filed by consumers and small business owners, which are Chapter 7 and Chapter 13 Bankruptcy, treats assets and debts differently. Once you file for bankruptcy, "automatic stay" takes effect immediately and stops creditors from their collection activities.
Chapter 13 Bankruptcy can stop foreclosure and repossession because it is a repayment plan to catch up on your mortgage or car payment arrears. You will repay your secured debts in Chapter 13 Bankruptcy. It also allows you to keep non-exempt properties by paying some portions of unsecured debts to your creditors.
Chapter 7 Bankruptcy does not stop foreclosure or repossession. Automatic stay will only delay it because Chapter 7 Bankruptcy does not have a repayment plan so you can catch up on your delinquent payments. Moreover, the Chapter 7 Trustee can sell your non-exempt properties and use the proceeds to pay your creditors. When your non-exempt properties are distributed to creditors, the court eliminates most of your debt except priority debts, student loans, fines, restitution, damages resulting from intentional acts.
Bankruptcy Law is the same whether you live in Sacramento, Roseville, Woodland, Yuba City, Stockton, Modesto, or Fairfield, California or surrounding cities because those cities belong to the Eastern District of California.
Bankruptcy can be complicated and you should consult an experienced Bankruptcy Attorney to determine which bankruptcy chapter is right for you.