What is Bankruptcy?
Bankruptcy is a process in which consumers and businesses can eliminate or repay some or all of their debts under the protections of the Federal Bankruptcy Code in order to obtain a fresh financial start.
What are the Differences Between Chapter 7, 13 and 11?
Chapter 7 bankruptcy is a basic liquidation for individuals and businesses and commonly referred to as a “straight bankruptcy.” It is often the simplest and quickest form of bankruptcy available. In a Chapter 7 bankruptcy a trustee is appointed to liquidate all of the debtor’s non-exempt assets for payment to creditors in accordance with the priorities set out in the Bankruptcy Code.
Chapter 13 bankruptcy is a rehabilitation bankruptcy and commonly referred to as a “wage earner bankruptcy.” A Chapter 13 bankruptcy is used solely by individuals and enables individuals with regular income to develop a plan to repay all or part of their debts over a three to five-year period.
Chapter 11 bankruptcy is a rehabilitation or reorganization bankruptcy and commonly referred to as a “business reorganization.” Chapter 11 is used primarily by businesses, but can be used by individuals with substantial debts and assets. It is a form of a financial reorganization which allows individuals or businesses the opportunity to restructure debts by proposing a plan to repay creditors all or a portion of their claims over time. Unlike a Chapter 7 or Chapter 13, a Chapter 11 does not typically have an appointed trustee, but rather the debtor is in control of the process pursuant to the Bankruptcy Code.
What is the Role of the Bankruptcy Trustee?
In the vast majority of bankruptcy cases, a trustee is automatically appointed from a panel. The trustee administers the bankruptcy case by reviewing the debtor’s documentation. In a Chapter 7 case, the trustee will attempt to sell any non-exempt property to pay creditors. The trustee also has the obligation to be vigilant for fraudulent conduct and failures to disclose information on the part of the debtor. The trustee owes a fiduciary duty to the creditors of a debtor, and must collect as many assets as possible to pay creditors.
What is the Automatic Stay?
At the moment your bankruptcy is filed, the automatic stay goes into effect. The automatic stay immediately prevents your creditors from attempting to collect debts from you in any way, including phone calls, letters and pending court proceedings. There are some exceptions to the automatic stay including criminal and government proceedings or those related to most domestic relations matter.
What is a Bankruptcy Discharge?
The desired outcome for individuals in a bankruptcy case is a discharge. A discharge is an order from the bankruptcy court permanently disallowing any creditor from attempting to satisfy a debt against the debtor. Although the discharge is permanent, it is not all inclusive. For example, most tax debts cannot be discharged, nor can child support or spousal support awards be discharged. As the bankruptcy discharge is a very powerful remedy, it is only given to honest debtors that disclose all of their assets and debts.
What Can Bankruptcy Do for Me?
Bankruptcy may make it possible for you to:
Eliminate the legal obligation to pay most or all of your debts.
Stop or substantially delay foreclosure on your house and allow you an opportunity to catch up on missed payments.
In some cases, “strip off” a second mortgage if the value of your home exceeds the balance on the first mortgage.
Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
Stop wage garnishments.
Stop debt collection calls, harassment, lawsuits, and similar creditor actions.
Restore or prevent termination of utility service.
Challenge the claims of creditors who have committed fraud or who are trying to collect more than you really owe.
Actually improve your credit score, as your old debts, defaulted debts, and bad debts are discharged.
What Bankruptcy Cannot Do?
Eliminate child support, alimony (spousal maintenance), and in most cases other debts related to divorce, most student loans, court restitution orders, criminal fines, and some taxes.
Eliminate certain rights of secured creditors. You may be able to force secured creditors to take payments over time, but generally, you cannot keep the collateral unless you continue to pay the debt or some portion of the debt.
Protect guarantors on your debts. When a relative or friend has guaranteed a loan, even though the debt is discharged as to the debtor in bankruptcy, the guarantor may still have to repay all or part of the loan.
Discharge debts that arise after a Chapter 7 bankruptcy has been filed.
Bankruptcy cannot solve all money problems. If your individual income or business income is insufficient to pay your mortgage and other regular bills you may need to consider making significant and painful choices, which may well include a bankruptcy filing. In addition, there are restrictions upon filing another bankruptcy proceeding after receiving a discharge.
Will Bankruptcy Affect My Credit?
Yes, but not for as long as you may think. Unfortunately, if you are already behind on your bills, your credit may already be bad. Bankruptcy will probably not make things any worse. A credit reporting agency (Experian, TransUnion and Equifax) can report a bankruptcy filing on your credit report for 10 years and it is ultimately up to each creditor whether or not to extend credit to you. It is important to take the step of updating your debts with all three credit reporting agencies once you have received your bankruptcy discharge as that will make it easier to begin rebuilding your credit. And since bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills, and you may be able to get new credit.
If I File, Does My Spouse Have to File Also?
Bankruptcy is an individual process and one spouse files without the other all the time. However, spouses often find it makes sense to file together as both owe money to the same creditors. In cases where both spouses are not liable for the same debts, one individual filing may make sense and is desirable. Having only one spouse file leaves the other spouse without debt and without a bankruptcy on his or her credit history. But remember, while the debts may only be in one spouse’s name, many of their assets are in both names. A careful examination of property owned and its value is necessary before one spouse files bankruptcy.
What is an Out-of-Court Workout?
Prior to filing either an individual or business bankruptcy, it may be advisable to approach your creditor(s) to attempt to restructure the debt. The workout may involve an agreement by the creditor to forbear from collection, re-amortize the balance of the loan, reduce the interest rate and possibly even forgive a part of the debt. It is important to work with an attorney who has experience in debt restructuring and also with a CPA or tax advisor who can advise the borrower as to the tax implications of restructuring or forgiving debt.
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