What is Bankruptcy?
Bankruptcy is a legal process where individuals and businesses can either eliminate or reorganize and repay their debts under the protection of the Bankruptcy Court. There are several sections or “chapters” under the Bankruptcy Code where individuals and corporations may seek protection. If you are having problems paying bills or being threatened by creditors with lawsuits, wage garnishment or property seizure, bankruptcy may offer a solution.
There are several types or “chapters” of Bankruptcy. Bankruptcy cases are either reorganization or liquidation cases. For individuals, most of these cases are either under Chapter 7 or Chapter 13 of the Bankruptcy Code.
Chapter 13 cases are reorganization cases. In most Chapter 13 cases a person filing for bankruptcy protection can keep all of their assets. In exchange you must make monthly reorganization plan payments to a Chapter 13 trustee. These payments usually last for between three (3) to five (5) years and repay some or all of your debts. Chapter 7 cases are liquidation cases. Liquidation cases mean that the Chapter 7 trustee may be able to take and liquidate (sell) some of your assets and use the sales proceeds to pay toward your creditors. However, the majority people who file for Chapter 7 bankruptcy protection are able to keep their assets. There are exemptions available to individuals who file bankruptcy. Most property is exempt and protected from creditors under applicable State exemption laws.
In addition to Chapter 13 reorganization cases there are also other two (2) other main bankruptcy reorganization cases. These are Chapter 11 and Chapter 12. These types of reorganization cases are beyond the scope of the information included in this web site but a brief explanation of these cases is listed for informational purposes. Chapter 11 is a reorganization proceeding usually involving corporate debtors. However, it is also available to individuals who have been engaged in a commercial enterprise and desire to stay in business, restructure existing debts and attempt to reorganize and retain assets under Bankruptcy Court supervision. Chapter 12 is designed to allow family farmers to retain their property and pay creditors over an extended period of time. To be eligible, a high percentage of your taxable income and debt must arise out of a farming operations.
How to obtain relief from creditors under Bankruptcy Laws?
For most people, filing a bankruptcy case will achieve the relief from debt they seek because a bankruptcy can result in the grant of a discharge of debts to an individual. A discharge is the legal forgiveness of personal liability of a debt that was incurred prior to the filing of the case. With very few exceptions, creditors are prohibited from suing a debtor, obtaining a judgment, lien or collecting for debts which have been discharged in a bankruptcy case. Creditors generally will have no claim on the future income or assets of an individual who has filed for bankruptcy relief and obtained a discharge as a debtor.
While Bankruptcy may relieve a personal obligation to repay a debt, it does not eliminate most mortgages or liens on property. Thus, in order to retain a car, house or other property which has been pledged as collateral on a loan (purchased with the loan proceeds or PMSI), a debtor will ordinarily have to repay the creditor over time or redeem the property by paying the full value of the collateral in cash to the creditor in order to retain the property. Basically if a debtor desires to retain this type of collateral they just continue paying the account as normal. The account is assumed or reaffirmed during the bankruptcy case.
What is a discharge and how do I get one?
In exchange for a discharge, a debtor must turn over all non-exempt property to a court appointed trustee. The trustee is required to sell the property and distribute the proceeds to creditors according to certain criteria included in the Bankruptcy Code. However, in most cases, debtors can claim all of their property as exempt and keep it. As such, most of the time creditors receive no distribution from a Chapter 7 bankruptcy case and debtors do not lose any property. On very rare occasions, a debtor can be denied a discharge. If this happens that person will continue to owe on the debts that were listed in the bankruptcy case. There are several reasons where the Bankruptcy Court will deny a discharge. These reasons include when a debtor has concealed assets, committed fraud upon the Court, has fraudulently transferred or hidden assets or has made a false statement. There are also some cases where a debtor receives a discharge and certain debts are not included (excepted) in the discharge. These usually include debts owed for alimony, child support, certain taxes and student loans.
I heard the Bankruptcy laws changed recently; can I still file a Bankruptcy Case?
Congress passed a new set of bankruptcy laws ("bankruptcy abuse prevention and consumer protection act") more commonly referred to as BAPCPA which resulted from many years of intense lobbying by banks, financial institutions and credit card companies. These new laws were passed and signed into law by then President Bush effective with all cases filed on or after October 17, 2005.
Contrary to popular belief and erroneous news coverage, the new bankruptcy laws did not eliminate bankruptcy or change many of the protections for debtors. With the assistance of an experienced bankruptcy attorney, an individual or corporation can still avail themselves of the same protections as under the prior “old” bankruptcy laws. In some cases the new laws are even more advantageous. There are just a few more hoops to jump through and more documentation required.