Bankruptcy is a legal proceeding that helps some people who cannot pay their bills get a fresh financial start by temporarily, or permanently, preventing creditors from collecting debts from you.

Personal bankruptcy generally is considered the debt management tool of last resort because the results are long-lasting and far-reaching. A bankruptcy stays on your credit report for 10 years, making it difficult to acquire credit, buy a home, get life insurance, or sometimes get a job. However, it is a legal procedure that offers a fresh start for people who can't satisfy their debts. Individuals who follow the bankruptcy rules receive a discharge-a court order that says they do not have to repay certain debts.

There are two primary types of personal bankruptcy: Chapter 13 and Chapter 7. Each must be filed in federal bankruptcy court. The current fees for seeking bankruptcy relief are $160: a filing fee of $130 and an administrative fee of $30. Attorney fees are additional and can vary widely. The consequences of bankruptcy are significant and require careful consideration.

Chapter 13 allows you, if you have a regular income and limited debt, to keep property, such as a mortgaged house or car that you otherwise might lose. In Chapter 13, the court
approves a repayment plan that allows you to pay off a default during a period of three to five years, rather than surrender any property.

Chapter 7, known as straight bankruptcy, involves liquidating all assets that are not exempt. Exempt property may include cars, work-related tools and basic household furnishings. Some property may be sold by a court-appointed official-a trustee-or turned over to creditors. You can receive a discharge of your debts under Chapter 7 only once every six years.

Both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, garnishments, utility shut-offs, and debt collection activities. Both also provide exemptions that allow you to keep certain assets, although exemption amounts vary. Personal bankruptcy usually does not erase child support, alimony, fines, taxes, and some student loan obligations. Also, unless you have an acceptable plan to catch up on your debt under Chapter 13, bankruptcy usually does not allow you to keep property when your creditor has an unpaid mortgage or lien on it.

What Can Bankruptcy Do for Me?
Filing for bankruptcy may help you:
  • Eliminate the legal obligation to pay most or all of your debts
  • Stop foreclosure on your house or mobile home and give you a chance to catch up on missed payments. (Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment.)
  • Prevent repossession of a car or other property or force the creditor to return property even after it has been repossessed.
  • Stop garnishment, debt collection letters, and other creditor actions to collect a debt.
  • Restore or prevent termination of utility service.
What Can Bankruptcy Not Do?
Bankruptcy cannot cure every financial problem. For example, it usually cannot eliminate the rights of "secured" creditors, those creditors who have a mortgage or lien on your property as collateral for loans, such as car loans and home mortgages. You usually cannot keep property subject to a security interest unless you continue to pay the debt; however, bankruptcy can require secured creditors to settle for installment payments and can also eliminate your obligation to make any additional payments if your property is repossessed.

A bankruptcy cannot discharge certain types of debts, including:
  • some debts incurred within 180 days prior to filing bankruptcy
  • child support
  • alimony
  • court fines and penalties
  • some taxes, especially those accrued over the past three years
  • debts not listed on your bankruptcy petition
  • loans obtained through fraud
  • student loans owed to a school or government body which became due less than 7 years before the bankruptcy was filed, unless payment would be an undue hardship
  • Discharge debts that arise after bankruptcy has been filed
Protect co-signers on your debts. When the primary debtor on a co-signed loan discharges the loan in bankruptcy, the co-signers may still have to repay all or part of the loan.

How Much Debt Do I Have To Have Before Filing For Bankruptcy?
Some experts state that you shouldn't file for bankruptcy, unless you have at least $15,000 to $20,000 in debt. In theory, you can file with less debt, but the damage to your credit rating may outweigh the benefit of discharging a smaller debt load, and it also may be more difficult to persuade the court that a discharge is warranted.

Are There Different Types Of Bankruptcies?
There are two common kinds of bankruptcies (Chapter 7 and Chapter 13) that many individuals consider. Either type may be filed individually or by a married couple filing jointly.

Chapter 7 is called "straight" bankruptcy or "liquidation." In Chapter 7, debtors are allowed to keep a certain amount of property, called "exemptions." Exempt property cannot be seized during the bankruptcy procedure. For most soldiers, all of their property will probably be exempt, and they won't actually have to give up anything at all. (Exempt property is explained below.) Property which is not exempt, however, is sold, and the proceeds of sale are used to pay off creditors as much as possible. After the proceeds of sale are exhausted, any debts still remaining are discharged. The big drawback to Chapter 7 is that property subject to a security interest, like a home or a car, is not exempt and can almost always be seized to satisfy the indebtedness related to that particular item. So if you can afford to make payments on items subject to a security interest and still want to keep them, even though you are behind on your payments, then Chapter 7 is probably not the best choice, because it does not prevent secured creditors from taking your property to satisfy your debt.

Chapter 13 "reorganization" is a special kind of repayment or debt adjustment plan. In Chapter 13 bankruptcy you file a repayment plan in court showing how you will pay off your debts over the next three to five years. The big benefit to Chapter 13 is that it prevents your creditors from harassing you and allows you to keep property subject to a security interest, as long as you make the payments required under your repayment plan. In most cases, these payments must be at least as much as the monthly payments required by the contract establishing the original debt, plus whatever extra amount is required to get caught up on the amount you have fallen behind. Chapter 13 may be the best choice for you, if you are behind on debt payments, but can catch up if given some time. For most people in this situation, however, it is usually possible to work out a payment plan directly with the creditors without ever filing bankruptcy. It is much, much better to do it that way, if possible, because: (A) You save about $1,000 in attorney fees; (B) You save another $1,000 or more in filing fees, trustee fees, and interest charges. The trustee fees may be 10% of the total amount of the payment plan, and interest charges are another 10%. Additionally, you avoid having a bankruptcy on your credit record. Basically, most people would not want to file a Chapter 13, unless they met the requirements stated above and were facing some immediate, drastic creditor action, such as foreclosure or repossession. In a case like that, it might be worthwhile to file for bankruptcy under Chapter 13 in spite of the expense involved, in order to prevent the creditor action.

What Property Is Exempt?
In a Chapter 7 bankruptcy, you can keep all property which is exempt under bankruptcy law from the claims of creditors. In determining which property is exempt, you can use either state law or federal law. In many cases the federal exemptions are more generous.
Federal exemptions include the following:

  • $16,500 in equity in your home
  • $2,575 in equity in your car
  • $425 per item in any household goods up to a total of $8,625
  • $1,625 in job-related tools, books, etc.
  • $850 in any property, plus part of the unused exemption in your home, up to $8,075
  • Your right to receive social security, unemployment, VA benefits, welfare, and pensions, regardless of the amount
The exemption amounts above are doubled when a married couple files together.

What Will Happen To My Home And Car If I File Bankruptcy?
In most cases you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt. Even if your property is not fully exempt, you will be able to keep it, if you pay its non-exempt value to creditors in chapter 13. However, some of your creditors may have a “security interest” in your home, automobile, or other personal property. This means that you gave that creditor a mortgage on the home or put your other property up as collateral for the debt. Bankruptcy does not make these security interests go away. If you do not make your payments on that debt, the creditor may be able to take and sell the home or the property, during or after the bankruptcy case.

There are several ways that you can keep collateral or mortgaged property after you file bankruptcy. You can agree to keep making your payments on the debt until it is paid in full. Or you can pay the creditor the amount that the property you want to keep is worth. In some cases involving fraud or other improper conduct by the creditor, you may be able to challenge the debt. If you put your household goods up as collateral for a loan (other than a loan to purchase the goods) you can usually keep your property without making any more payments on that debt. The answer depends on the type of bankruptcy you are filing and the status of any indebtedness on the property in question.

Can I Own Anything After Bankruptcy?
Yes. You can keep all exempt property, which for most soldiers means everything in your home right now other than property subject to a security interest. You can almost always keep anything obtained after the bankruptcy is filed, too. The main exception is that if you receive an inheritance, property settlement, or life insurance payment within 180 days after filing for bankruptcy, that money or property might have to be turned over to your creditors, unless it qualifies for an exemption.

Will Bankruptcy Affect My Credit?
Yes, but probably not a whole lot. If you are already so far behind on your bills that you are contemplating bankruptcy, then your credit is probably pretty bad already, and actually filing for bankruptcy may not make things a lot worse. Of course, a bankruptcy can usually be shown on your credit record for ten years, while bad debts can usually be shown only for seven. However, since bankruptcy wipes out your old debts, you are likely to be in a better position to pay new bills and may actually have better credit immediately after the bankruptcy than immediately before the bankruptcy.

Will Bankruptcy Affect My Security Clearance?
The status of your security clearance can be affected, but it is not automatic. The outcome depends on the circumstances that led up to the bankruptcy and a number of other factors, such as your job performance and relationship with your chain of command. The security section will weigh whether the bankruptcy was caused primarily by an unexpected event, such as medical bills following a serious accident, or by financial irresponsibility. The security section may also consider the recommendations and comments of your chain of command and co-workers. This is an issue that can be argued both ways, so as a practical matter your security clearance probably should not be a significant factor in making your decision about whether to file bankruptcy. The amount of your unpaid debts, by itself, may jeopardize your clearance, even if you don't file bankruptcy. In that sense, not filing for bankruptcy may make you more of a security risk due to the size of your outstanding debts. By the same token, using a government-approved means of dealing with your debts may actually be viewed as an indication of financial responsibility. Eliminating your debts through bankruptcy may make you less of a security risk. There is no hard and fast answer here, with one exception: it never hurts to have a good reputation with your co-workers and your chain of command.

I'm Getting Divorced. What Should I Do About My Bankruptcy?
If the debts are in both names, you probably ought to file a joint petition. That way both of you can get a discharge for the price of one. If the debts are in your name only, you should consider filing for bankruptcy after the divorce becomes final. If you have to pay any spousal or child support, that can be used as a factor in determining your ability to pay. Some court decisions amended the divorce settlement following bankruptcy because of the change in financial circumstances resulting from the bankruptcy. In other words, the court decided after the bankruptcy that the person filing bankruptcy could afford to pay a different amount of spousal support, child support, or property division.

What is the Air Force Policy on Bankruptcy?
The Air Force policy concerning bankruptcy petitions filed by military members is one of strict neutrality. Air Force members have a statutory right to invoke the procedures of the Bankruptcy Act. No adverse actions may be taken against a member of the Air Force for filing a petition for bankruptcy, receiving a discharge of a debt in bankruptcy, or consolidating his debts under a Chapter 13 bankruptcy plan. Similarly, Commanders and Supervisors may not require members to seek financial counseling assistance before allowing them to file bankruptcy. The assets and protection of rights of individual creditors are matters for the Bankruptcy Court and the Air Force cannot intervene in any matter. Creditors should receive no assistance from the Air Force to collect debts and members should be treated like any individual not in military service.

Nevertheless, the underlying circumstances of a case may involve such mismanagement of personal affairs or dishonorable failure to pay just debts as to become factors that may form a basis for adverse action against the member. However, the mere filing of a petition in bankruptcy, or receiving a discharge in bankruptcy is not considered "mismanagement" or "dishonorable."

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U.S. Air Force Academy, USAFA, CO 80840, (719) 333-1110 DSN: 333-1110, Updated: 03 Mar 15
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