This is a good question. Most people know a little bit about the process, but are unclear what bankruptcy can and can not do.
Bankruptcy is a set of federal laws that allows for individuals and businesses to legally discharge or reorganize their debts. These laws which are administered by the United States Bankruptcy Courts situated in each judicial district in the United States.
The process begins by filing a “petition” which lists an individual’s or businesses’ debts, assets, creditors, any co-debtors and the property (real or personal) that are exempt. “Exempt” means protected from seizure by the bankruptcy court.
For people undergoing overwhelming stress and harassment by creditors, one of the greatest benefits to filing a bankruptcy is the instantaneous cessation of all collection activity, including garnishments, lawsuits, collection calls and foreclosures. I have personally stopped a foreclosure sale of a client’s house about 10 minutes before it was to be literally sold on the “steps to courthouse.”
The bankruptcy had been filed that morning and I ran from the federal courthouse to the state courthouse where the sale was to take place. The sale was stopped and my client saved his property from the foreclosure sale. That was a special circumstance were I took the responsibility to stop the foreclosure sale. Believe me it was nerve wracking and I never plan to repeat it.
There are several types of bankruptcy: Chapter 7 and Chapter 13 are the most common that apply to individuals and small businesses. Since this Blog is oriented towards the “fresh start” of individuals following bankruptcy I will only discuss these two types.
Chapter 7 Bankruptcy
“Chapter 7” bankruptcy refers to the specific section within the United States Bankruptcy Code. Suffice to say unless you’re going your attending law school this is all you need to know. A Chapter 7 is designed for debtors in financial difficulties who do not have the ability to pay their existing debts. Individuals whose debts are primarily consumer debts are subject to a “means test” designed to determine whether they qualify for Chapter 7 bankruptcy. Corporations or LLC don’t need to qualify. The means test is a function of income, household size and expenses.
Qualification for a Chapter 7 bankruptcy is the first analysis that we conduct when we interview clients. Each person and family is different, so the determination varies with each household.
Part of the means test is based upon monthly household income and depending upon when the income calculation is made it is possible to be disqualified from filing Chapter 7 one month, but next month because of lower income (or a trending downward income) you qualify. When Chapter 7 bankruptcy is considered this is one of the first (and most important) determinations since your bankruptcy could be dismissed if your income is above the maximum allowed.
Under Chapter 7, you may claim certain property as “exempt” – this means that you get to keep it. However, there are limits to what you can keep, so a through analysis of your assets (and debts against) them is very important. Any property that can not be protected through exemptions is subject to sale by the trustee who than distributes the money to your creditors.
The purpose of filing a Chapter 7 bankruptcy is to obtain a “discharge” of your debts. If a debt is discharged it means that it is legally wiped out. You do not have to pay it back. This is the second most important benefit of filing bankruptcy – wiping the slate clean.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is designed for individuals with regular income who would like to pay all or part of the debts in installments over a period of time – usually 3 or 5 year period. Chapter 13 is also available to those individuals who do not qualify (too much income) for a Chapter 7 bankruptcy.
Under Chapter 13, you must file with the court a plan to repay your creditors all or part of the money that you owe them using future earnings. There is a complicated method to determine how much of certain types of debt that you have to repay. The “plan” must be feasible and approved by the court. You have to have sufficient income to not only repay your creditors, but also have sufficient money to live on during the “plan period” (3 or 5 years). Chapter 13 is usually not feasible for someone without a job, unemployment or considering divorce because a regular and reliable source of income must be counted upon each month to make your “plan payment.”
A Chapter 13 plan is usually the type of bankruptcy that individuals use to “save” their houses and cars for foreclosure or repossession. The “plan” can allow for the repayment of the back payments that accumulated prior to filing.
Following the completion of a Chapter 13 plan (making all the scheduled monthly payments), your debts are discharged except for child support or alimony; most student loans; taxes; criminal or civil penalties, unlisted debts and debts for acts that caused death or personal injury. Also, if your house or car loan is still not repaid during the plan period you simply continue to make payments until paid in full.
Conclusion
For most people, “filing bankruptcy” usually means that they have filed one of the types of bankruptcy listed above. It is important to realize that one size does not fit all when it comes to determining which is best for you. Spend the time to get a complete picture of your options. Call today and schedule an office consultation to discuss your financial situation.
Disclaimer
Fresno-Bankruptcy-Lawfirm.com is owned by the Law Offices of Jeffery D. Rowe. We are a debt relief agency. We help people file for bankruptcy relief under the Federal Bankruptcy Code (Title 11 of the United States Code). If you would like to discuss your situation in further detail, please call our offices at: (559) 228-1500 to schedule a consultation.
Tags: assets, chapter 13, chapter 7, debts, filing bankruptcy, reorganize