Bankruptcy: One Solution To Financial Problems
More people are borrowing more money than ever before. High consumer debt
levels have led to high numbers of bankruptcy filings. Knowing about
bankruptcy can help anyone consider if and when to seek bankruptcy protection.
A Fresh Start
Bankruptcies are a way for people with financial difficulties to eliminate some or
all of their debts and get a fresh start. Problems that may lead a
person to file bankruptcy include:
• you lost your job and have a lot of debt;
• you have large medical bills and don't have insurance to pay for them;
• you went through a divorce and are now having trouble paying for
food, housing and other essentials; or
• you took on a lot of credit card debt and are having trouble making minimum payments.
If any of these situations applies to you, or if bill collectors are writing
or calling and threatening to take legal action against you, bankruptcy may be
the best way for you to cancel certain debts and get a fresh start.
Bankruptcies begin with the debtor filing a petition in bankruptcy court. The
petition is usually completed by a lawyer. Filing the petition automatically
stops most creditor actions, including harassing calls, threatening
letters, foreclosure proceedings, eviction proceedings and most lawsuits.
Although bankruptcy is a court procedure, most people who file bankruptcy spend
very little time in a courthouse. There are several types of bankruptcy. The most commonly used types
are:
Chapter 7
This is for people whose debts far exceed their assets and ability to pay. In
a Chapter 7 bankruptcy (also called a "liquidation"), the debtor turns over all
non-exempt property to a bankruptcy trustee, who then converts it to cash for
distribution to creditors. Generally, most property of the average debtor is
exempt and he or she continues to own it. The definition of “exempt property”
differs in each state, and it can include clothing, furniture, household
appliances, tools of the trade, retirement plans and perhaps your home and car.
In most Chapter 7 cases, debtors receive a discharge that makes them no longer
liable for certain debts.
Changes made to the bankruptcy law in 2005
added a "means test" to determine if a person is eligible to file a Chapter 7
bankruptcy. If a debtor makes over a certain amount of money (the amount
varies from state to state), he or
she cannot use Chapter 7 and will likely be forced into a Chapter 13 bankruptcy.
Chapter 13
These bankruptcies are designed for people who have a regular income source
and can work out a way to pay their debts over time. Under chapter 13 (often
called a "wage earner bankruptcy" or "Adjustment of Debts of an
Individual with a Regular Income"), the debtor is placed in a repayment plan
that is approved by the bankruptcy court. The debtor
then makes payments to the bankruptcy trustee for distribution to creditors. The
repayment plan usually lasts three to five years, and it can be used to extend
the time to repay bills. Chapter 13 is very different from chapter 7, since a chapter 13 debtor usually
keeps possession of property and makes payments to creditors, through the
trustee, based on his or her anticipated income over the life of the payment
plan. The debtor must complete the payments required under the plan before the
discharge is completed. While the plan is in effect, the debtor is protected
from lawsuits, garnishments and other creditor action. More debts are usually eliminated
under chapter 13 than under chapter 7.
Chapter 11
These bankruptcies are used mostly by businesses with financial problems. They allow a
business to "reorganize" its debts while it continues to operate. The
business, often with the participation of its creditors, creates a
plan under which it will pay part or all of its debts.
In many cases, the business can also end burdensome contracts and leases in order to
return to profitability. Most Chapter 11 debtors emerge
with a reduced debt load and a reorganized business.
The Bankruptcy Discharge
A main goal of filing bankruptcy is to obtain relief from burdensome debt.
Relief is achieved through the bankruptcy discharge. A discharge is a release of
the debtor from liability for certain types of debts. In other words,
the debtor is no longer required by law to pay these debts. The discharge is a
permanent order to creditors to stop all collection action on discharged
debts, including legal action. If a creditor tries to collect a discharged
debt, the debtor can ask a court to impose sanctions, including fines.
• When the discharge occurs. In chapter 7 cases, the discharge usually occurs when the
time to file a complaint objecting to the discharge expires, which is often
about four months from when the debtor files the petition. In chapter 13 cases,
the discharge is granted by the court as soon as practicable after the debtor
completes payments under the plan (usually three to five years).
• Which debts bankruptcy discharges. Bankruptcy does not discharge all debts. The debts
discharged vary according to the type of bankruptcy. The most common types of
debts that usually cannot be discharged are certain tax claims, debts not set forth by
the debtor on lists filed with the court, alimony, child support,
most student loans, debts for intentional injury to person or property, and government fines and
penalties.
Pre-Bankruptcy Credit Counseling
Changes enacted to the bankruptcy law in
2005 added a rule requiring most debtors to undergo credit counseling by
government approved credit counseling agencies before filing bankruptcy. There are
specific rules as to
when the counseling must take place.
Importance of Legal Help
People who are considering filing bankruptcy should seek legal help. Bankruptcy
laws are complicated, and bankruptcy typically involves following complex rules
and procedures as well as filing many documents
with the court. If a debtor's case is dismissed because there was a problem with the documents
or the debtor missed certain requirements for filing bankruptcy,
the debtor may be unable to file another case right away or may lose protections
in another case, like the automatic ending of harassing calls, letters,
foreclosure proceedings and other creditor actions. In addition, a mistake could
result in certain debts not being discharged, meaning the debtor is still
responsible to pay them. Because there are important
long-term financial consequences to filing bankruptcy -- the success of a
bankruptcy can determine if you will be relieved from burdensome
debt -- using a lawyer when filing bankruptcy is highly recommended.
Today, the old stigma of bankruptcy is gone, as it is used by many honest,
hard-working people who just took on too much debt, lost a job, had uninsured
medical bills or had other financial problems. For these people, bankruptcy
provides a fresh start and helps them get back on their feet.
If you have financial problems, call us to learn about the choices for solving
them as well as the benefits and other aspects of filing bankruptcy.
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