Introduction
People who are having difficulty paying their debts sometimes consider bankruptcy to obtain relief from collection efforts, eliminate some or all of their debts or restructure their debt payments to a more manageable level. This article gives you general information about bankruptcy and is not intended to be a substitute for consulting qualified legal advisors.
What is bankruptcy?
Bankruptcy is a uniform, federal court- supervised procedure to relieve individuals and businesses from debts, while protecting and preserving the rights of secured creditors and providing unsecured creditors with equal treatment of their claims.There are four types of bankruptcy that individuals may select, depending upon their particular financial circumstances. Most individuals file under Chapter 7 of the Bankruptcy Code (the Code), sometimes known as "straight" or "liquidation" bankruptcy. Chapter 11 is available to individuals, but generally is used by corporations to reorganize their business affairs. Chapter 12 is designed for use by farmers. Chapter 13, also referred to as a "wage-earner" or "debt-adjustment" plan, is available to individuals and unincorporated businesses that intend to use future income to pay some or all of one´s debts according to a plan designed by the individual (within certain statutory limitations) to meet his or her needs.This document concentrates on the more frequently used procedures, Chapter 7 and Chapter 13.
Who may declare bankruptcy?
There are few limitations on who can file bankruptcy. The decision of whether to file, and under what Chapter, is based upon each individual´s need for relief from debts and their capacity and willingness to undertake a procedure that will have long-term consequences on their financial life. A competent debt-counselor or attorney can help you consider alternatives to bankruptcy.
Who is involved in bankruptcy proceedings?
In general, bankruptcy proceedings under any Chapter involve:
the debtor - the person who files bankruptcy, also known as "the petitioner";
the creditors - any persons, firms or entities that claim the debtor owes them money;
the trustee - a court-appointed person who administers the bankruptcy proceedings and any property available for distribution to creditors (called the bankruptcy estate). The trustee represents the interests of the unsecured creditors, and is required to liquidate nonexempt assets, to investigate the debtor´s financial affairs, examine creditors´ proofs of claim, provide information to parties in interest, file reports, estate tax returns and recommend, when appropriate, criminal or civil proceedings against the debtor who has committed fraud or other crimes in connection with the case.
the bankruptcy judge - who presides over any hearings on disputed matters in connection with the case.
What constitutes the bankruptcy estate?
In general, the bankruptcy estate consists of all property owned by the debtor or in which the debtor has an interest whether individually or as a co-owner with any other person. The estate includes property the debtor acquires by gift, devise, inheritance, divorce settlements and life insurance proceeds the right to which arises within 180 days after the filing of the case, and also includes property recovered by the trustee under certain provisions of the Code. The estate is reduced by exempt assets. The balance of any property remaining for administration by the trustee constitutes the final bankruptcy estate.
What is Chapter 7 bankruptcy?
The most commonly used form of bankruptcy, Chapter 7, provides honest debtors with a fresh start by eliminating many of a debtor´s most common financial obligations through the discharge (which is generally granted at the end of the case). In return for the discharge, the debtor must turn over to the trustee certain nonexempt assets. These nonexempt assets are sold with the proceeds distributed to creditors according to priorities set forth in the Code. Generally, expenses of administering the estate, unpaid wages and related taxes are paid ahead of ordinary unsecured claims. If assets remain for distribution to unsecured creditors, those creditors who file formal proofs of claim within the time periods fixed by the court share proportionately in the remaining proceeds.
What are some of the advantages and disadvantages of filing bankruptcy?
Advantages:
With a few notable exceptions, bankruptcy stops all ongoing legal actions against the debtor, prevents a creditor from beginning new legal actions against the debtor, and prohibits creditors with notice of the bankruptcy case from contacting the debtor, or anyone else besides the debtor´s attorney, to seek collection of a debt; Most liabilities relating to credit card debts, civil judgments, past-due accounts and judgments due to repossessions and foreclosures may be discharged; A debtor may be able to keep all or most of his or her property through federal and/or state exemptions; and Certain liens and certain involuntary transfer (such as garnishments), may be avoided if timely action is taken.
Disadvantages:
Debts relating to certain taxes, governmental fines, forfeitures and restitution, criminal or fraudulent conduct, child and spousal support, drunk driving, most student loans, and intentional and malicious injuries, may not be dischargeable; Creditors having a mortgage or security interest in a home or in motor vehicles, may be able to repossess their collateral after the bankruptcy unless the debtor reaffirms the debt or redeems the collateral (see discussion below); Bankruptcy filings are matters of public record and are generally noted on a debtor´s credit history for 10 years, making it more difficult to obtain credit in the future. A stigma also may be associated with bankruptcy which views a debtor as being financially or socially irresponsible. Some debtors may find the proceedings embarrassing since they must submit to a public examination about their financial affairs and must provide detailed financial disclosures, which are open to the public; A debtor may receive a discharge only once in six years. A debtor contemplating bankruptcy must carefully consider his or her financial stability and ability to avoid the problems resulting in the bankruptcy during that period; and There may be tax consequences from a bankruptcy.
What debts are not discharged in a Chapter 7 bankruptcy?
When considering whether to file bankruptcy, it is important to understand that not all debts are subject to discharge under Chapter 7. Among the more common debts that are unaffected by bankruptcy are certain income and business taxes, alimony, child support, certain property divisions incident to divorce, governmentally imposed fines, forfeitures or restitution, most student loans, and liabilities resulting from drunken driving. In addition, certain abuses of cash advances and credit cards on the eve of bankruptcy are nondischargeable, as are debts arising from fraud, misrepresentation, theft and intentional or malicious injuries to a person or property.For these latter forms of debts to be held nondischargeable, the creditor must bring a lawsuit against the debtor in the bankruptcy court within 90 days of the filing, and obtain a judgment declaring the debt, or some portion thereof, to be nondischargeable. In such a proceeding, the debtor has most of the rights attendant to any other civil trial in federal court.The discharge may be denied or revoked within one year after it is granted because of the debtor´s fraud (such as making false statements, concealing assets or fraudulently transferring assets) prior to or in connection with the filing of the case. Again, proceedings to deny or revoke a discharge are subject to the same right to a trial on the merits as with claims for nondischargeability of debts.Finally, while a debtor´s personal liability for debts secured by a home, car, boat, furnishings and the like may be discharged in a Chapter 7 bankruptcy, the affected creditor´s right to enforce its lien against collateral pledged for a loan (such as the right of repossession) is mostly unaffected by bankruptcy. To retain the collateral, the debtor may have to reaffirm the debt or redeem the collateral. These concepts will be discussed later in more detail.
What property may I keep in a Chapter 7 bankruptcy?
State law provides certain protections, called exemptions, that limit the types of property that a creditor holding a judgment may seize and sell to satisfy the creditor´s claim. The federal bankruptcy laws also contain certain property exemptions that protect similar assets, but in different amounts. Because the dollar value of these exemptions are subject to legislative change, specific amounts are not listed here. However, the types of property for which exemptions are permitted include a limited amount of equity in, among other things, one´s personal residence, vehicles, household goods and personal effects, tools of the trade, life insurance and even deposit accounts. Generally, qualified retirement benefits are excluded from the bankruptcy estate altogether.When a debtor´s property (called collateral) is secured by a lien (such as a home mortgage, vehicle purchase loan, some furniture purchases, and so on), the debtor must decide to retain it or surrender it to the secured creditor. If the decision is to surrender the collateral, the unpaid portion of the loan (or any deficiency after sale of the collateral) generally is subject to discharge along with the unsecured debts.If a debtor wishes to retain the collateral, the debtor must choose either to reaffirm the debt (sign a written document agreeing to continue making regular or agreed-upon payments on the debt and grant the creditor all pre-bankruptcy rights upon a subsequent default) or redeem the collateral (pay the creditor the present fair market value of the collateral in one lump-sum). Only items used for personal, household and family use (including vehicles, but not real estate) are subject to redemption.Finally, a debtor may be able to avoid certain liens on items held for personal or household use (but not vehicles or real estate), and retain the items without either reaffirming the debt or redeeming the collateral. Lien avoidance generally is a matter for the bankruptcy court, and usually is an item of additional cost to the debtor above and beyond the basic cost of a bankruptcy case. Debtors should inquire about such additional costs when contacting an attorney about bankruptcy.
What is a Chapter 13 bankruptcy?
Chapter 13 is a proceeding under which a debtor proposes to his or her creditors and the court, a plan that enables the debtor to repay as much debt as is feasible given the debtor´s financial circumstances. To be confirmed by the court, a plan must provide that the debtor´s future income be subject to court administration. After determining a reasonable budget, the debtor´s remaining income is paid (generally monthly) by the debtor´s employer to the trustee who, after taking a commission, pays the creditors in accordance with the provisions set forth in the plan. A plan generally lasts three years, but may last up to five years if the court approves the longer period. At the conclusion of the plan, the debtor is entitled to receive a discharge of any remaining debt.
Who may file Chapter 13 bankruptcy?
Unlike the other bankruptcy chapters, Chapter 13 is limited to individuals and unincorporated businesses that have a regular source of income and whose secured debts are less than $750,000 with unsecured debts of less than $250,000. The term "regular source of income" has been interpreted to mean income that is sufficiently definite and certain to enable the debtor to assign it to the trustee on a regular basis for payment by the trustee to creditors.
What are some of the advantages and disadvantages of Chapter 13 bankruptcy?
Advantages:
Bars post-filing collection actions against co-debtors if the debt is non-business and the creditor will be paid in full under the Plan; Debtor retains all desired property, provided creditors obtain at least as much under the Plan as they would under Chapter 7; Debtor may "write-down" secured nonhomestead debts to the value of the collateral; Debtor may be able to modify interest rates on some loans and extend the payment term on most debts to make them more affordable; Debtor may cure loan defaults by making installment payments, and reinstate accelerated mortgage and other notes; The Chapter 13 discharge is broader than under Chapter 7, so that more types of debts are dischargeable; and Debtor may be able to force ("cram-down") affordable payments on secured and tax creditors that cannot be done under Chapter 7.
Disadvantages:
Debtor´s future income is subject to administration by the trustee for up to three and possibly as long as five years; Under the Plan, the debtor must establish and live under a firm budget during the repayment period; The trustee is entitled to a commission on payments paid to creditors which reduces the value of what is paid to creditors; and Still appears as a bankruptcy on credit reports.
What procedures are involved in filing bankruptcy?
Bankruptcy involves a series of steps that usually include the following actions:
The debtor gathers financial information for use in preparing the petition for bankruptcy and the schedules of assets, debts, income and expenses, the statement of financial affairs and statement of intentions concerning secured debts;
The debtor files the petition, schedules, statement of financial affairs and pays the filing fee to the bankruptcy court;
The court provides notice to scheduled creditors of the filing of the case, the meeting of creditors, the injunctive stay against creditor actions, the last date for creditors to file challenges to the debtor´s discharge or the dischargeablity of a particular debt, the initial "asset" or "no-asset" status of the case, and other pertinent information relative to the case;
The debtor appears under oath and on record before the trustee to be examined at the meeting of creditors and submits to creditors´ questions;
The debtor completes the reaffirmation, redemption or surrender of secured collateral according to the Statement of Intentions filed with the case; and
All parties receive the discharge notice approximately 90 days after filing a Chapter 7 case or at the conclusion of payments in a Chapter 13 case.
Do I need a lawyer to file bankruptcy?
As with most other legal matters, any person may represent himself or herself before the bankruptcy court. Bankruptcy, however, is a highly refined procedure that is full of detail and interpretations based upon prior case law. Each case is different, as are the individual consequences to the debtor. Proper planning in anticipation of bankruptcy may save a debtor not only money or property, but countless hours of revising improperly completed documents. After a thorough analysis, bankruptcy may be unnecessary. A lawyer skilled in bankruptcy law can assist and advise a debtor so that the process is as effective for the debtor as the specific circumstances allow.
