Bankruptcy Basics You Need to Know
Bankruptcy may not be for everyone who is behind on bills, but for some, bankruptcy can provide the fresh start they need to free them from financial ruin and get on with their lives. As the American economy flounders, many people who used to live at a fairly high standard of living are finding themselves in financial trouble. The news runs rampant with stories of credit card payments doubling, interest rates being hiked up, and credit limits being spontaneously lowered by banks to amounts lower than what debtors already owe on their unsecured credit card debts. Then there are the American mortgage industry’s recent, totally outrageous tactics, which need not be repeated here, as they have been highly-publicized. People who were financially secure just a few years ago are having to tighten their belts now.
Meanwhile, people who were already having financial difficulty before the current troubles may have plummeted now to the point of severe problems, insolvency, inability to make all of their credit payments as they come due. Many people are taking advantage of lowered monthly payments obtained with the help of credit counseling companies that negotiate with creditors. For those whose creditors refuse to negotiate, bankruptcy may be their only option.
If your creditors are threatening collection and foreclosure lawsuits against you in your local courts, the higher authority of the federal bankruptcy court may be your best protection. Once a bankruptcy suit of any kind is filed, all creditors and courts that receive notice of your bankruptcy are automatically “stayed” from pursuing further collection efforts against you. After that, they must all file claims with the federal bankruptcy court, and only the bankruptcy court will determine who gets paid, how much they get paid, and when they get it.
There are two main types of bankruptcy available to individuals in the United States. One is the “Chapter 7,” a bankruptcy that discharges the debtor from the obligation to pay most of the debts involved in the bankruptcy. The other is a “Chapter 13,” sometimes also called an “Adjustment,” and commonly referred to also as a “Wage Earner’s Plan,” which requires the debtor to make payments on outstanding debts. These bankruptcy nicknames are taken from the U.S. Bankruptcy Code, which divides bankruptcy law into various chapters, some of which apply to individuals and some of which apply to businesses.
When Congress amended the federal bankruptcy code in 2005, rumors flew widely to the effect that Congress was nearly outlawing Chapter 7 discharges. This was not exactly true. Congress did amend the code in a couple of ways, making it more difficult for certain persons to qualify for Chapter 7, in order to curb “abuse” of the system, but most people who need Chapter 7 discharge can still get it. Although a Chapter 7 does set a person free from overwhelming debt, it may not be the preferred path. If a person owns real estate and other valuable property that he would like to keep, it is important to know that aside from certain “exempt” assets, a Chapter 7 action may liquidate your property and use the money to pay toward the debts that you are discharging. That means that you could lose your home, for example, if it has value above the exemption amounts, or even business property that you own as an individual.
Before filing a Chapter 7 now, a person must have undergone credit counseling from an approved agency within 180 days of the date of filing. Beyond that, the law now utilizes a mathematical formula, in the form of a so-called “means test,” to further determine whether you qualify for a Chapter 7 bankruptcy. The test deducts certain expenses from your income to determine what amount you would be able to pay to your unsecured creditors (like credit cards, medical bills, or unsecured loans, for example) under a Chapter 13 proceeding. If you could not pay enough, you “pass” and can file a Chapter 7. (A means test “calculator” is readily available on the federal bankruptcy court’s website.) Even if you fail the “means test,” a bankruptcy court judge can still allow you to file a Chapter 7, if you can show “special circumstances,” as described in the bankruptcy law. However, if you would be able to pay a certain amount toward your unsecured debts, and you have no “special circumstances,” you must instead turnto a Chapter 13 proceeding.
Chapter 13 bankruptcies, generally speaking, involves repaying your debts, either in whole or in part, over the course of three to five years. It is often preferred by individuals who are self-employed or own their own businesses. It also offers people a chance to save their homes from foreclosure, without losing them to liquidation as in a Chapter 7 proceeding. In order to be eligible, an individual must have less than $336,900 in unsecured debt and less than $1,010,650 in secured debt. You must file statements with the Court listing your assets, liabilities, income, tax returns, and other information, and the Court will develop a repayment plan which you must follow.
In either “Chapter” of bankruptcy, a husband and wife may file a joint petition, or either of them may petition individually. Currently, the filing fees are set at just under $275, but filing fees are subject to change from time to time. It is also important to realize that in any bankruptcy action, what happens to individual assets is largely a matter of state law in your state of residence. The bankruptcy code and other federal court rules prescribe the procedure followed, and to a certain extent, the substance of bankruptcy law, but that federal law itself defers to state law on a number of issues. Other forms of bankruptcy may apply to you if you do not fit into the eligibility requirements described above. Corporations or partnerships, for example, file “Chapter 11” bankruptcies. Bankruptcy law involves a complex synthesis of federal and state law. It is a very specialized area of legal practice, and if you’re considering bankruptcy to deal with debt problems, you should gather the kind of financi
al information described in this article and seek the advice of a qualified bankruptcy attorney to find out whether bankruptcy may really be the best solution for you.
Thank you to Valerie Bock for this "Information on Bankruptcy" article.
