Bankruptcy cases in the US are increasing rapidly. Rising medical costs and university fees cause a lot of people to become overextended and lose control of their finances. A study by Harvard University suggests that medical debt accounts for 62% of bankruptcies. Even scarier though, is that 72% of those cases were filed by people with medical insurance. Another surprising statistic is that only 5% of bankruptcies result from people spending beyond their means.
People can, and frequently do, become mired in debt through no fault of their own. Often there is no way out other than filing for bankruptcy. In Georgia, the options for personal bankruptcy are Chapter 7 and Chapter 13. These laws are governed at federal level rather than state level.
With a Chapter 13 bankruptcy, a debtor still repays most or all of their debts. The Chapter 13 process forces creditors into restructuring debts and agreeing to a payment plan. The payment plans typically run from three to five years. The benefit of Chapter 13 is that the debtor does not end up losing their assets.
Chapter 7, on the other hand, clears unsecured debts. It does present the risk of loss of assets though. At least some of your non-essential assets will probably have to be liquidated. If you’re behind on your mortgage or vehicle finance, you could even lose them too.
There is a silver lining though. Chapter 7 does stipulate certain exempt or protected assets.
The major exemptions are:
- A primary property used as a residence up to $21,500 per person
- A motor vehicle up to $1,000 in value
- A wildcard exemption of any asset to the value of $1,200. The wildcard also allows you to use up to $10,000 of unused residential property exemption to protect other assets of your choice.
- Annuities, endowments and certain insurance policies. There limits to the exemptions
- Certain categories of personal effects such as clothing, books, musical instruments and so forth. Again, the exempt value is limited
The exemptions are doubled in the event that spouses file jointly. It is important to note that the exemptions relate to the equity you have in an asset. The equity is the value of the asset less the amount owed on it. If the equity on a property exceeds the exemption, the trustee may choose to sell the asset to maximize the distribution to creditors. In such a case, you would receive the exempted amount in cash.
Although you can file a Chapter 7 bankruptcy after living in Georgia for 180 days you can only utilize the exemptions if you have been resident in Georgia for a minimum 730 days. If this is not the case, yo have to use the exemptions from your previous state.
Federal Non-bankruptcy Exemptions
In addition to state exemptions, you may also be eligible for federal exemptions. The state exemptions generally cover insurances and benefits. Some of them apply only to certain groups or in certain circumstances.
The Bankruptcy Process
Before filing for bankruptcy, you will be required to undergo credit counseling. This is done six months before you can file.
The next step is to analyze your means through the 2005 Bankruptcy Act Means Test. If your income for the last six months falls below the median for Georgia, then you will be able to file under Chapter 7. If not, then further tests are applied to see if you have the means to file under Chapter 13.
After the bankruptcy has been completed, you have to complete a second course on financial management.
So, we have seen that the Chapter 7 bankruptcy process will erase a large part of your unsecured debt. But, just because you can, it doesn’t mean you must. There is a risk that you could lose your house. Particularly if you’re not up to date on the mortgage.
Bankruptcy is not something to take lightly. It should really only be done as a last resort. And, although it is possible to complete the entire process by yourself, you should really consult an experienced lawyer. A bankruptcy lawyer can assist in proper preparation of all the forms and ensure that your case does not get rejected. They will also advise how to keep your house.