Two Different Types of Bankruptcy
There are two basic types of personal bankruptcies: Chapter 7 and Chapter 13.
An individual may file for bankruptcy under Chapter 7, which is sometimes called “fresh start” or a “liquidation” bankruptcy. In a Chapter 7 bankruptcy, an individual may keep certain kinds of property (called “exempt” property), and his or her remaining property will be sold to pay off his or her debts. When an individual is discharged from Chapter 7 bankruptcy, most of his or her preexisting debts will be discharged (i.e., will disappear).
In the Bankruptcy Code, the majority of individual bankruptcies are Chapter 7. People choose this for a variety of reasons, one of which is they have a large payment that they are incapable of paying due to unemployment. This process is faster and can only take four to six months to be resolved.
Filing for bankruptcy under Chapter 13 is different than doing so under Chapter 7. Chapter 13 (sometimes called a “wage earner plan”) allows an individual to pay his or her debts over an extended period using a court-approved, supervised, and enforced payment plan. Not all creditors are paid in full, and unpaid amounts will be discharged (with some exceptions). Chapter 13 bankruptcy filers help create their own payment plans, which give them three to five years to pay personal debt from their disposable incomes (i.e., whatever is left after necessary expenses, like food and shelter, have been paid). In a Chapter 13 bankruptcy, individuals are often allowed to keep their property.
Eligibility for either Chapter 7 or 13 is determined by the person’s living expenses, debts, and income.
Why Do Courts Allow Bankruptcy Filings?
In the case of businesses, the primary purpose of allowing bankruptcy or debt is restructuring not to eliminate insolvent entities, but rather to help them to remodel the financial and organizational structure of debtor companies experiencing financial distress so as to make them viable, so they can continue to hire workers, provide goods and services and operate their business.
For private households, it goes beyond dismissing debt but also focuses on addressing the underlying problems to minimize the risk of financial distress re-occurring. Credit counseling, a supervised rehabilitation period, financial education and social help to find sources of income and to improve the management of household expenditure can help individuals and families find paths to long-term solvency.
Who can file for bankruptcy?
Anyone can file but not all can be qualified to file for a particular type of bankruptcy. If you have the previously filed a Chapter 7 bankruptcy, you cannot file for the same type within eight years. Filing for bankruptcies are for honest debtors with no way to pay for their debts. If you cannot honestly afford to pay your debts, you may qualify to file for bankruptcy. You have to show proof, however, that you are incapable of paying your debts by showing your personal tax returns, proof of income for the last six months prior to filling and certificate of attendance at a mandatory counseling class.
What is the Process in Filing for Bankruptcy?
Common elements in obtaining a bankruptcy discharge:
- Attending a pre-filing credit counseling course at an approved credit counseling agency.
- Drafting paperwork with an attorney.
- Providing proof of your income over the past six months to determine eligibility.
- Determining which assets are safe in a bankruptcy.
- Filing paperwork with the bankruptcy court.
- Attending a short meeting with the United States Trustee.
- Attending a post-filing personal finance management class.
- Receiving a final discharge of debts from the bankruptcy court.
Pre-Bankruptcy Credit Counseling
It is required that before you can file for a bankruptcy petition, you must first meet with a counseling agency approved by the United States Trustees Office six months prior to your application. The purpose of this consultation is to see if there are ways for you to pay your debt without resorting to the filing of bankruptcy. If repayment plan is impossible, you should secure your certificate from the agency confirming that you have undergone counseling. Attending a personal finance management class, where another certificate is issued, is another requirement to complete bankruptcy application.
2005 Bankruptcy Reform Act
In 2005, Congress significantly amended the bankruptcy law making it more difficult for an individual to file for bankruptcy. However, bankruptcy relief is still available for those who are qualified. The revised elements of the bankruptcy laws were:
- A credit counseling class is required before someone can file for bankruptcy and a financial management class is required after the filing
- Individuals with higher income must file under Chapter 13, making it harder to walk away from debt obligations
- The courts scrutinize bankruptcy filings more closely and require additional documentation
- Additional burden on Lawyers representing bankruptcy clients – they must personally vouch for the accuracy of all of the information their clients provide them, requiring more time and more fees
- Credit and financial budget counseling is required
- Property must be valued at replacement cost, instead of a “fire sale” cost
- A particular state’s exemptions may not available to recent residents (although those residents may be able to use their prior state’s exemptions).
Saving your Home and your Car
A person’s home and car is recognized by the bankruptcy law as essential to his or her existence. In a “homestead exemption” or “automobile exemption” a person is allowed to keep his or her home and car.
Personal Property Exemptions and Other Assets
Personal items by the person who filed for bankruptcy can be kept as long as they only have nominal value. Expensive items however, must be disclosed to the bankruptcy court and will likely be sold to pay off your creditors. Individuals’ “tools of trade” can be retained because it is use to do their jobs.
Can Credit Card Debt be Forgiven?
Yes, with the exception of credit card charges that were run up immediately before a bankruptcy filing, credit card debts may be forgiven. Credit card companies can no longer press you for payments after filing for bankruptcy. An “automatic stay” of all collections activity goes into effect, so you will be spared from harassing phone calls, letters or threats from lawyers of the credit card companies.
Which Other Debts can be Discharged?
Many others debts can be dischargeable in bankruptcy except spousal and child support payments, criminal fines, and penalties and other debts not set forth in the debtor’s filed bankruptcy list. Common dischargeable debts are medical bills, lease and contract obligations, credit cards balances, personal loans and promissory notes. Students’ loans may also be discharged depending on the discretion of the bankruptcy court to decide if the debts are dischargeable based on the debtor’s circumstances.
A person is responsible for his or her own debt. In case of married individuals, the responsibility to repay the debt depends upon the circumstances in which the debt was incurred. If both spouses co-signed a debt obligation together, both of them share this debt. One spouse may file bankruptcy to discharge their individual debts, or both may file jointly. However bankruptcy filing by one spouse does not exempt the other spouse from the debt obligation. In order to file a bankruptcy petition jointly, you need to be legally married.
Common Mistakes to Avoid
A short list of common mistakes made before and during the bankruptcy process is as follows:
- Repaying money to relatives or friends. A court can require that the relative that received the money return it so that it can be redistributed equitably across all creditors. This will happen if you repaid applies to any repayment to relatives or friends in the year before you file for bankruptcy.
- Hiding creditors. You cannot discharge a debt that is not on your disclosed list. You have to list all person and company in which you own money.
- Shifting assets to a child or relative before you file for bankruptcy is not allowed.
What are the Risks in Concealing Assets?
Disclose all your assets, as required by the bankruptcy law. The U.S. Trustee, IRS auditor and the FBI fraud division are checking on all the bankruptcy filings. Bankruptcy fraud is a serious offense, and you could be charged with a felony or a Federal crime if it is found out that you did not disclose all your assets.
What about Credit Consolidation Services?
These companies offer to help you avoid bankruptcy by restructuring your debt outside of bankruptcy. If you negotiate lower payments or reconstruct your debt outside of bankruptcy, you could incur tax liability for the financial benefit. These organizations are funded by big industries that try to collect as much money from you as possible.
What are the Alternatives to Bankruptcy
The alternative is to find other ways to pay off your debt obligations. Bankruptcy may not be the best solution for you. You might want to take some steps to settle your debts by selling your valuable assets. You can also ask the aid of your family if they are willing to help you.
Source: 1-2-Law: www.12law.com