Bankruptcy: The ins and outs of what you should know before filing Published July 8, 2010 By Staff Reoports 90th Missile Wing Judge Advocate F.E. WARREN AIR FORCE BASE, WYO. -- According to the Office of United States Courts in 2009, more than 1.1 million people filed for bankruptcy in the United States. Given the current economy, that trend is likely to continue. Whether an individual is considering filing for bankruptcy or just wants to know more about it, here are a few things to keep in mind about the bankruptcy process. Individuals filing for bankruptcy typically file a petition for bankruptcy under Chapter 7 or Chapter 13 of the Bankruptcy Code. A Chapter 7 bankruptcy is commonly known as a "liquidation bankruptcy." When someone files under chapter 7, a bankruptcy trustee is appointed to liquidate all of the assets of the individual debtor to pay that debtor's creditors. Once all of the proceeds from the sale of those assets are exhausted, the remaining debts are discharged. The debtor is then declared debt-free. Keep in mind certain debts are not dischargeable in bankruptcy; e.g., child support payments, alimony, taxes and student loans. Additionally, if one is considering filing for a liquidation bankruptcy and is worried about losing property, know that under Chapter 7, some property may be exempt from creditors. Under both federal- and most state-exemption guidelines, certain amounts of equity in a home are exempt from claims of creditors, as well as certain amounts of clothing, jewelry and professional tools. If still concerned about losing property or simply want to repay creditors under a different payment schedule, filing a Chapter 13 bankruptcy petition may be an option. Chapter 13 of the bankruptcy code is reserved for those individuals who file a petition for bankruptcy and want to retain a good portion of their assets, as well as pay off what is owed to creditors. A Chapter 13 bankruptcy is commonly known as a "payment-plan bankruptcy." Like a Chapter 7 bankruptcy, a bankruptcy trustee will be appointed, but the trustee administers a payment plan. He does not liquidate the assets of the debtor. In fact, the debtor gets to keep most of his property under Chapter 13, and the trustee works with all of the debtor's creditors to arrive at a suitable payment plan for satisfaction of a creditor's claim. The payment plan must, by statute, pay priority and secured creditors in full. A secured creditor is a creditor who has the right to repossess or sell certain property of the debtor in satisfaction of his or her claim against the debtor. A priority creditor is given priority over unsecured creditors by virtue of law. At the end of the payment plan, any remaining unsecured debts; i.e., those debts not secured by a debtor's property or collateral, are discharged. Payment plans typically last five years. It is important to note, in 2005, Congress passed several amendments to the bankruptcy code in order to prevent abuse of the bankruptcy system. Among the amendments passed by Congress are provisions which require all debtors to receive financial counseling before filing a petition for bankruptcy. Further, the amendments also include provisions which presume an individual is abusing the system if the individual cannot pass the "means test." The means test is a test that ultimately determines that an individual has enough monthly income to pay debts as they become due. If the bankruptcy court finds that a debtor has abused the system, the court will dismiss the bankruptcy petition, and the debtor will not be able to file again for six months. Also, debtors who are military members should be aware that filing for bankruptcy can affect their ability to perform alerts as well as their ability to apply for and retain their security clearance. Whereas being a debtor in bankruptcy alone will not be a sufficient reason to suspend or decertify a member from pulling alerts or to deny access to classified materials, the member's underlying debt and potential financial irresponsibility may call into question that member's ability to perform his job or his character. Moreover, military members taking on debt knowing they are unable to pay that debt may face prosecution under the Uniform Code of Military Justice. Finally, filing for bankruptcy will almost always negatively affect a person's credit score. To avoid these negative consequences, it may be possible to consolidate debt through a debt consolidation agency in lieu of filing for bankruptcy. Additionally, the Airman & Family Readiness Center is available to discuss further options for managing debt and finances. Creditors may involuntarily force bankruptcy upon individuals. Although this is rare, if a creditor is owed $13,500 or more, that creditor can sue in bankruptcy court to liquidate assets and get whatever money results from the sales of those assets. If a creditor is threatening this action, seek legal counsel immediately. Above all, whether considering filing for bankruptcy or planning to file, seek competent legal counsel early in the process. Attorneys at the 90th Missile Wing Legal Office, 773-2256, are available for any questions.