What is bankruptcy?

Bankruptcy allows people and businesses, who are unable or partially unable to pay outstanding debts, to rid themselves of these debts and obtain a fresh start. Bankruptcy gives debtors a “fresh start” by wiping out debts that can be discharged, allowing debtors the ability to look forward financially instead of continuing to make payments on old debt.

Federal bankruptcy law consists of statutes published in the Bankruptcy Code. In addition, state statutory law on bankruptcy also addresses areas delegated to states or not covered by federal law. Bankruptcy is filed in Federal court and governed by a federal judge.

What are the different types of bankruptcy?

The Bankruptcy Code provides for six different types of bankruptcy, two of which are generally available to individuals. Most people choose between Chapter 7 or 13 when considering bankruptcy options.

Chapter 7 provides for liquidation of the debtor’s non-exempt assets. Certain assets, such as a home, household furnishings, retirement accounts, motor vehicles, are generally exempt from bankruptcy. Whether an asset can be protected in bankruptcy or not depends on the equity the debtor has in that asset. An experienced attorney will be able to assist you in determining whether or not your assets are at risk if you file a Chapter 7 bankruptcy.

Chapter 13 provides for bankruptcy of an individual with a regular income, which is used to make a payment plan to pay debts, usually within three to five years. Prior to filing bankruptcy, your attorney will complete a draft of the petition, including the Means Test, which will assist you in determining which chapter of bankruptcy may be available to you. As in a Chapter 7, upon filing Chapter 13, an Automatic Stay is entered by the Court. This prevents all creditors from communicating with you directly and stops all attempts to collect debt. Each creditor, depending on the type of debt owed to them, may or may not get paid in the Chapter 13. Any debts still owing to general unsecured creditors at the conclusion of the Chapter 13 are discharged, just like in Chapter 7.

Differences between Chapter 7 and 13

Chapter 7 bankruptcy is what most people are thinking of when they think of bankruptcy. The case generally remains active for approximately four months and there is one meeting with the assigned Trustee that the debtor must attend. The Trustee can continue the meeting if the Trustee requires additional documents and/or has additional questions.

If the debtor has assets that are not exempt (protected), the Chapter 7 trustee may sell the assets and pay money to your creditors. Prior to filing, you must decide whether to use the Federal exemptions or the State exemptions. Your attorney will discuss each option and inform you as to which exemptions would be recommended for your specific situation. An experienced bankruptcy attorney will be able to guide you through this process and inform you early on whether you have assets that may not be protected in a Chapter 7 bankruptcy.

In a Chapter 13 bankruptcy, the debtor proposes a 3-5 year plan to make payments to creditors on a monthly basis. Which creditors receive payment, when they receive payment and the amount of the plan payment paid by the debtor is determined with the assistance of your attorney. The plan payment has many variables such as a debtor’s monthly net income, what types of debts they have and how much is owed on the various debts.

Assets are generally protected in Chapter 13. The Chapter 13 Trustee is not looking for unprotected assets to sell so they can pay your creditors. If the debtor has assets that could not be protected in Chapter 7, a Chapter 13 bankruptcy can be a good option. Even with a payment plan, the amount of the Chapter 13 plan payment is often significantly lower than the amount currently being paid monthly to creditors.

How can Chapter 7 bankruptcy help me?

When you file Chapter 7, all collection efforts stop immediately. Once creditors receive a notice of the bankruptcy filing, they must stop all efforts to collect (no letter, no phone calls, stop all legal proceedings, stop any garnishment actions). When the Chapter 7 bankruptcy is completed, all debts that can be discharged will no longer be a worry for you.

Additional benefits to Chapter 7 bankruptcy.

If a creditor has sued you and obtained a judgment against you, they will likely have a lien against your real property (home). Within a Chapter 7 bankruptcy, a motion can be filed to remove this lien from your real estate and the debt will be permanently discharged.

What if my wages are being garnished?

Once a bankruptcy is filed, the garnishment must stop immediately. In addition, depending on how much has been garnished recently, you may be able to force the creditor to return some of the garnished funds to you. Your attorney will be able to assist in this process. Some charge an additional fee for this service – my office does not.

What are some benefits of filing Chapter 13 bankruptcy?

Several debts that cannot be discharged in a Chapter 7 can be handled within a Chapter 13. Although the debts will not be discharged, Chapter 13 can be set up to make sure certain debts are paid before the credit cards. These include:

Child support/alimony – you can create a plan that will make the monthly payments and include extra to catch up on any arrears.

A Chapter 13 filing will stop a pending foreclosure and allow you time to catch up on mortgage payments through the Chapter 13 plan.

A benefit of Chapter 13 that Chapter 7 does not provide is that you can discharge some debts stemming from a divorce that cannot be discharged in Chapter 7. These do not include alimony or child support, but may include property settlement agreements.

Can I file bankruptcy on my own or do I need to hire an attorney?

A person may file for bankruptcy without an attorney. However, the rules and procedures governing the bankruptcy process are complex. The assistance of an experienced bankruptcy lawyer can, therefore, be very beneficial.

Debtors who decide to proceed without a lawyer are responsible for knowing how the relevant bankruptcy laws and local court procedures apply to them. A few of these include: which exemptions to use, how to complete pre-filing and post-filing credit counseling, which documents must be provided to the trustee and when those are due. Additionally, a bankruptcy attorney will explain what to expect at the Trustee Meeting so that you are properly prepared. Chapter 13 cases, in particular, are likely to involve complexities that necessitate the involvement of an attorney. An individual who files bankruptcy without the assistance of an attorney is held to the same standard as an attorney.

Will bankruptcy take care of all of my debts?

Depending on what type of debts you have will determine whether they will be discharged in a bankruptcy. There are secured debts, priority debts and general unsecured debts. Generally, most consumer debts will be discharged in bankruptcy, such as credit cards, personal loans, medical and deficiency debts.

The bankruptcy code outlines 19 categories of debt that are considered “non-dischargeable”, which means that they will survive the bankruptcy filing. Some debts that cannot be discharged in Chapter 7 can be discharged in Chapter 13.

What happens to my mortgage if I file bankruptcy?

A major concern for many homeowners contemplating Chapter 7 or Chapter 13 bankruptcy is how the bankruptcy will affect their mortgage. Although your mortgage company can’t raise your interest rate or change other loan terms, some homeowners filing for Chapter 7 bankruptcy may be at risk of losing their homes if they’re behind on mortgage payments or can’t protect all home equity with a bankruptcy exemption. If you’re behind on your mortgage, Chapter 13 can be very helpful. Chapter 13 bankruptcy helps filers bring homes out of foreclosure by providing a way to catch up on missed mortgage payments over a three to five year period.

Can I keep my retirement accounts if I file for bankruptcy?

Under most circumstances, you can keep your retirement accounts, such as 401ks and IRAs, if you file for Chapter 7 bankruptcy. However, for some accounts, the protected amount may be capped.

When is my bankruptcy over?

Most debtors file for bankruptcy relief to “discharge” or wipe out their debts. But your bankruptcy doesn’t end when you receive your discharge. Your case is not officially over until the court closes it by entering a final decree or order. Until your case is closed, you must continue cooperating with the bankruptcy trustee appointed to oversee your bankruptcy case. If you make an error, the court can close your case by dismissing it without issuing a discharge order.

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Mark A. Carter

Mark A. Carter

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Dainen N. Penta

Senior Attorney

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Disclaimer

Every legal issue is very unique. Accordingly, the information in this blog is intended as general education material and not as legal advice. If you think you may have a legal issue, you should consult an attorney.