This article is intended to provide a general overview of the bankruptcy process. For more information about bankruptcy in general, you can use the links on my website to go to some other websites.
NOTE: I AM NOT A BANKRUPTCY ATTORNEY AND THIS DOES NOT CONSTITUTE SPECIFIC BANKRUPTCY ADVICE FOR YOUR STATE. YOU ARE ADVISED TO CONSULT WITH A BANKRUPTCY ATTORNEY REGARDING YOUR PARTICULAR CIRCUMSTANCES.
BANKRUPTCY IN GENERAL
Bankruptcy is the option of last resort. I liken it to possessing a nuclear weapon – a country would not set off a nuclear weapon unless it absolutely had to and there were no other alternatives left. I say this because bankruptcy has its own consequences and a debtor who obtains bankruptcy discharge may not be able to get another discharge for as long as eight (8) years, depending on the kind of bankruptcy filed.
There are two (2) kinds of bankruptcies that most individual persons file: they are bankruptcies under either chapter 7 or chapter 13 of the Bankruptcy Code. Reorganizations for municipalities is done under chapter 9, corporations and for high asset/debt persons are done under chapter 11, family farms/fisheries under chapter 12 and are beyond the scope of this article.
Chapter 7 Bankruptcy
Bankruptcy under this chapter is a “straight liquidation.” What this means is that the debtor files bankruptcy and gets to keep any property that is exempt under the federal or state exemptions. Any excess assets which exceed the exemptions are turned over to the trustee and sold and used to pay the creditors. The debtor then gets a discharge.
The process is usually very quick and is completed within six (6) to twelve (12) months depending on how busy the court is. After the bankruptcy petition is filed, the debtor has what is called a 341 meeting within about 90 days after filing the petition. The debtor must attend the meeting and answer questions about the debts from any creditors that attend and/or the trustee. The debtor then gets a discharge of all dischargeable debts. Not all debts are dischargeable; see below. Consult your bankruptcy attorney for specifics if you have questions about the dischargeability of your particular debt.
Chapter 7 is not for everyone. As part of the 2005 amendments to the Bankruptcy Code, debtors must now undergo credit counseling in the six (6)-month period preceding the filing of the bankruptcy petition. Usually, this is not an obstacle. Of greater importance is the fact that the court now “means tests” individuals. The means test is really an income/asset test. If a debtor has too much income or too many assets, then a chapter 7 bankruptcy cannot be filed and a debtor must consider a chapter 13 if he/she wants bankruptcy relief. The means test is complicated and income of the debtor and spouse (if any) must be evaluated by the bankruptcy attorney. And each state has a different means test.
Chapter 7 bankruptcies will stay on a debtor’s credit report for ten (10) years from the date of discharge. That does not mean that a debtor emerging from bankruptcy cannot buy anything on credit for ten (10) years. Usually, the debtor should start rebuilding credit immediately, but the debtor does need to consider what happened to land them in bankruptcy court in the first place. So while credit can be re-built the debtor needs to learn to use credit wisely if this was a problem.
Chapter 13 BANKRUPTCY
Bankruptcies under chapter 13 are sometimes called “wage earner” plans. This is somewhat of a misnomer as a debtor does not have to be employed. A debtor just needs to have a steady stream of income to enable the debtor to make the payments.
Under a chapter 13 bankruptcy, a debtor still has to undergo the consumer credit counseling and still has the meeting with creditors. However, under a chapter 13, the debtor retains his/her assets. In exchange, the debtor and bankruptcy attorney come up with a plan as to what debts will be paid and by how much. Debtors who are behind on their mortgage payments and want to save their home from foreclosure will use the chapter 13 plan to get caught up on their mortgage. If no mortgage is involved, then a portion of things like medical, credit card or other dischargeable debts will have to be paid through the plan.
Plans are for a three (3)-to five (5) year period. Once a debtor completes the plan, the debtor then obtains a discharge. What the plan will be will depend on what assets the debtor has and what debts are in the plan. A debtor would have to consult his/her bankruptcy about this.
Chapter 13 bankruptcies will stay on a debtor’s credit report for seven (7) years after the date of discharge.
Not all debtors are right for a chapter 13 bankruptcy. Five years can be a long long time and many things can happen. Payment plans may be too high for a debtor to manage for that length of time especially if the debtor loses his/her job or suffers some additional financial setback. If a debtor misses too many payments, the bankruptcy will be dismissed without a discharge and the debtor will be right back where he/she started. Other debtors have too many assets or an interest in inherited property for even a chapter 13.
Other General Considerations applicable to both Chapter 7 and Chapter 13
Where a debtor is are married and only one spouse has the bulk of the debts, then the bankruptcy can be filed by only the debtor spouse (this is only for equitable distribution states – community property states may have different rules). However, assets that are jointly owned will still have to be included. Also, if the non-debtor spouse does not file he/she will remain liable for any debts that are in his/her name.
As an example: a husband and wife have a home and both are on the mortgage. The husband has most of the debts and only he needs to file. He includes the mortgage in his chapter 7 bankruptcy and discharges his liability but because his wife is also on the mortgage, the wife needs to keep paying the mortgage if they wish to keep the home.
Not all debts can be discharged in bankruptcy. Student loan debt (whether private or federal (absent a hardship), some tax debt, child support, alimony and other things (like fraud, criminal penalties or restitution) generally cannot be discharged. A debtor will have to discuss with his/her bankruptcy attorney whether a debt is dischargeable.
Copyright (c) 2012 & 2014 by Rachel Lea Hunter
www.rachelhunterlaw.com
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NOTICE: The information in these articles is provided for general informational purposes only as a public service. You are advised to check for changes to current law and to consult with a qualified attorney in your state of residence on any legal issue. The use of this material does not create an attorney-client relationship with the Rachel Lea Hunter Law Office. The material in this website may be considered advertising under applicable rules.
