Understanding your consumer bankruptcy options

Consumers overwhelmed with severe debt and contemplating bankruptcy should understand the various options available to them. Even though the American Bankruptcy Institute reports than almost 70 percent of bankruptcies are Chapter 7 filings, there is no "one size fits all" bankruptcy.

The state of Maine recorded a total of 3,113 Chapter 7, Chapter 11 and Chapter 13 bankruptcies in 2012. Most people have heard of Chapters 7, 11 or 13 but few truly understand the differences between the three. All are available to consumers and, given individual circumstances, one is likely better for your specific situation.

Key elements of a Chapter 7 bankruptcy

Commonly referred to as the "liquidation" bankruptcy, a Chapter 7 bankruptcy is ideal for people with a large amount of unsecured debt. It releases a debtor from his or her obligations without the need to repay the debts. Any collateral used for a secured debt is at risk of being lost in order to pay the debt. Unsecured debts have no collateral and, therefore, consumers need not worry about losing possessions when discharging unsecured debts.

A common misconception with Chapter 7 bankruptcies is that homeowners are guaranteed to lose their homes in the process. This is typically not the case, however. Homestead Exemption laws allows homeowners to retain a certain amount of property value, essentially making a portion of their assets "off limits" to the bankruptcy court.

The amount allowed as an exemption varies from state to state. In Maine, the amount of a home's equity exempt from bankruptcy is as follows:

  • Up to $47,500 for persons under 60 years old with no minor children or disabilities.
  • Up to $95,000 if a minor dependent lives in the home.
  • Up to $95,000 for persons over 60 years old or with verifiable mental or physical disabilities.
  • Up to $190,000 for joint debtors over 60 years old or with verifiable mental or physical disabilities.

These values are higher than in some states and allow a great number of Cumberland County residents to retain their homes even while filing a Chapter 7 bankruptcy. In 2012, 85 percent of Maine consumer bankruptcies filed were filed under Chapter 7.

Chapter 13 overview

A Chapter 13 bankruptcy is known as the "wage earner's plan" as it requires sufficient income to be approved for a structured repayment of debts. All assets are allowed to be kept and debtors make regular payments to a trustee over a period of three to five years. The trustee disperses the payment among the creditors to repay the debts. Almost 14 percent of 2012 consumer bankruptcies filed in Maine were Chapter 13 bankruptcies.

Chapter 11 overview

Chapter 11 is most commonly associated with businesses but it can be applicable for individuals looking for a repayment-based bankruptcy but whose debts are greater than what is allowed under a Chapter 13. The concept of a Chapter 11 is similar to that of a Chapter 13 in that they both set up some version of a repayment plan for their debts. Chapter 11 is the least common form filed, with less than 1 percent of 2012 filings in the state of Maine.

Understanding the basics of each form of bankruptcy can give you an idea of your options. Working with an experienced attorney if you must file bankruptcy is vital to ensure that your case is appropriately handled and your assets properly protected.