Bankruptcy for Consumers
Prepared as a public service by the Community
Relations Committee of the Nashville Bar Association
This pamphlet made possible by a generous grant from the Kroger Company
WHAT IS BANKRUPTCY?
Bankruptcy is a method by which debts are discharged by filing a
petition in federal court.
WHY DO PEOPLE FILE BANKRUPTCY?
Often, consumers, especially those who have maximized their credit
limits and have no savings, cannot pay their bills when a crisis hits, such as a job
layoff, accident, or illness. Bankruptcy provides consumers with relief from creditor
pressures and a fresh start.
WHAT TYPES OF CONSUMER BANKRUPTCIES ARE THERE?
A Chapter 7 bankruptcy (liquidation or straight bankruptcy) allows you
to discharge your debts, subject to certain exceptions, through a liquidation of your
assets. After you file a Chapter 7, most creditors will be prohibited from taking your
wages to pay your debts.
A Chapter 13 bankruptcy (reorganization) allows you to pay your debts to
the best of your ability without creditor pressure. To succeed in a Chapter 13, you must
have a regular income, such as wages from employment, alimony, or monthly Social Security
benefits.
DO YOU LOSE YOUR PROPERTY WHEN YOU FILE BANKRUPTCY?
In a Chapter 7, most of your property will be sold by a Chapter 7
trustee and the money will be given to your creditors. You can keep some of your property
if it is considered to be exempt property under the laws of Tennessee. You can protect up
to $4,000 worth of property that is not real estate (personal property). If you own the
house in which you live, it might be sold in bankruptcy. However, a single homeowner can
exempt $5,000 from the sale and a married couple filing bankruptcy together can exempt
$7,500. There are other exemptions an attorney can discuss with you.
Also, in a Chapter 7, if a debt is secured (you granted a creditor an
interest in property, such as a home or car, to secure payment of the debt), you will
probably be required to surrender the property, unless you become re-obligated to the
creditor on that debt (reaffirmation of debt).
In a Chapter 13, you usually keep all of your exempt and nonexempt
property so long as you make monthly payments, as approved by the court, to the Chapter 13
trustee.
WHAT DEBTS CANNOT BE DISCHARGED?
Not all debts are discharged in bankruptcy. The Chapter 7 exceptions to
discharge are broader than those in Chapter 13. In Chapter 7, the exceptions that most
often affect consumers include alimony and child support obligations, other debts you
agreed to pay for your ex-spouse pursuant to a divorce decree or separation agreement,
certain student loans, debts arising from drunk driving, certain fines and penalties,
certain restitution obligations, debts obtained through fraud or misrepresentation, debts
for willful and malicious acts, and certain taxes.
In Chapter 13, the exceptions to discharge include alimony and child
support obligations, certain student loans, debts arising from drunk driving, criminal
fines and restitution included in a criminal sentence, and certain long-term debts. If you
are not truthful in disclosing your property and debts to your attorney, the bankruptcy
trustee, or the court, you risk losing all or part of your discharge under Chapter 7 or
Chapter 13.
WHAT ARE THE ADVANTAGES OF BANKRUPTCY?
Bankruptcy gives you a fresh start without the burden of oppressive debt
and creditor pressure. When a bankruptcy is filed, federal law prohibits any attempt to
collect a debt, subject to certain exceptions. There is immediate relief from creditor
pressure, and a bankruptcy can stop a pending foreclosure sale of your home, a garnishment
of your wages, or a threatened repossession. Most creditors cannot call, write, or sue you
after you have filed bankruptcy.
A Chapter 13 allows you to keep property that you might lose in a
Chapter 7, and you can change the repayment schedule and interest rate of most of your
debts, except for your home mortgage. If you fell behind making the payments on your home
or car prior to bankruptcy, a Chapter 13 will let you make up the overdue payments within
a reasonable time.
WHAT ARE THE DISADVANTAGES OF BANKRUPTCY?
You will have trouble getting credit in the future because a bankruptcy
remains on your credit record for ten years. Not all your creditors will be paid in full.
You may lose your house and car, especially if you file a Chapter 7 bankruptcy. In a
Chapter 13, you will be required to send most of your excess income to a Chapter 13
trustee for up to five years. (The Chapter 13 trustee will, in turn, use the money to pay
off the debts you incurred prior to bankruptcy.)
WHAT ARE THE ALTERNATIVES TO FILING BANKRUPTCY?
You can attempt to work out different arrangements or payment plans with
your creditors to allow you some relief until your circumstances improve. If most of your
debts are student loans, you should call the holder of your student loans, explain your
situation, and ask if a new payment plan can be worked out. Some nonprofit agencies, such
as Consumer Credit Counseling Service (in Middle Tennessee, call 615-227-3350), are
available to assist you in managing your money and overcoming your financial problems. A
lawyer can assist you in avoiding bankruptcy by helping you determine how to repay your
creditors and by contacting the creditors for you.
PRACTICAL SUGGESTIONS
In order to determine how to deal with oppressive debts, consult with an
attorney to help you accomplish your goals. When you go to meet with your attorney, bring
a list of the following information:
1. Your income.
2. Your monthly expenses.
3. Your property (assets).
4. Your debts.
For assistance in finding a lawyer for a bankruptcy or any other
legal matter, you may want to contact the Nashville Bar Association
Lawyer Referral Service.
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