One of the main purposes of Bankruptcy Law is to give a person overwhelmed by debt a chance for a fresh start by erasing his debts and distributing his assets (usually few) among his creditors. Bankruptcy law is federally controlled and administered by the United States Bankruptcy Courts. The two most common types of bankruptcy are Chapter 7 (liquidation) and Chapter 13 (reorganization).
Chapter 7 bankruptcy is a liquidation proceeding. The debtor turns over all non-exempt property to the bankruptcy trustee who then converts it to cash for distribution to the creditors. The debtor receives a discharge of all dischargeable debts usually within four months. In the vast majority of cases the debtor’s assets are minimal in comparison to his liabilities so Chapter 7 will give that person a fresh start.
Chapter 13 Bankruptcy is also known as a reorganization bankruptcy. Chapter13 bankruptcy is for people who want to pay off their debts over a period of three to five years. It allows individuals who have non-exempt property to keep those assets while pursuing a payment plan. Individuals who have predictable income sufficient to pay their reasonable expenses with some amount left over to pay off their debts are those who find Chapter 13 the best option.
For the vast majority of people Chapter 7 is still available with very little extra effort! It's true that there are more steps to undertake and more restrictions as to eligibility. It's also true that the “bankruptcy means test” will result in some people having to file chapter 13 instead of Chapter 7. However, Chapter 7 should still be available for the majority of filers with some extra effort.
There are two stages of the “bankruptcy means test”.
In the first stage, if the monthly average of your last 6 months gross income is below the median income for your state, you can file Chapter 7. (In Florida, as of March 17, 2008, the median income for one earner is $40,036.00.)
In the second stage, even if your income is slightly higher than your state's median income, you may still be able to file Chapter 7 depending upon certain allowable expenses that you might have. Your bankruptcy lawyer will be able to make this calculation and also advise on which expenses that can be used in the calculation.
Yes! By law, all actions against a debtor must cease once the documents are filed. Creditors are prohibited from initiating or prosecuting any lawsuits. Wage garnishments must cease as well as all telephone calls for payment. These types of actions are stayed by the filing of the Bankruptcy petition. Secured creditors may be successful in lifting the stay (only as to their particular debt) if payments cannot be made by the debtor. (e.g. car loan with a lien on the car)
Your wife or husband will not be affected by your bankruptcy if they are not responsible (did not sign an agreement or contract) for any of your debt. If they have a supplemental credit card they are probably responsible for that debt. Spousal rights will be determined by state law and it is important to consult your attorney to know how, or if, these laws will apply.
Bankruptcy filings are public records. Unless you are a public figure, generally no one will know about the bankruptcy other than the immediate parties involved. (e.g. attorneys, creditors, etc.) The Credit Bureaus will record your bankruptcy and it will remain on your credit record for 10 years.
The most common reasons for filing bankruptcy are:
Unemployment
Large medical expenses
Seriously overextended credit
Marital problems
Other large unexpected expenses.
In 2005, a Harvard study published in “Health Affairs” concluded that approximately one-half of bankruptcies studied in 2001 were caused by high medical bills.
In a bankruptcy, certain assets are protected by a personal exemption. These vary from state to state. Assets in excess of your allowed personal exemption will be liquidated by the trustee.
In Florida, a person’s Homestead is exempt. Certain personal property is allowed by law or by the State Constitution to be exempt from levy and sale; the debtor may claim such personal property to be exempt from sale by making, within 15 days after the date of the levy, an inventory of his or her personal property.
These are the major bankruptcy exemptions. You should check with your bankruptcy lawyer for a full exemptions list.
A person can file Chapter 7 again if it has been more than 8 years since he or she filed the previous Chapter 7 bankruptcy.
Whether a debtor keeps credit cards after filing bankruptcy is a decision made by the credit card company. If the credit card debt is being discharged, the credit card company will cancel the card unless you reaffirm the debt after the discharge. It is possible that they will cancel the card even if you have a zero balance once you declare bankruptcy.
Bankruptcy legislation has been designed to give a person hopelessly burdened with debt the chance to erase his or her debt and get a fresh financial start. A bankrupt's debt is erased when he or she is discharged. This usually occurs within 3 - 5 months after bankruptcy is filed. At that time all debts (with some exceptions) are written off.
A number of banks now offer "secured" credit cards where a debtor puts up a certain amount of money (as little as $200) in a bank account to guarantee payment. The credit limit is equal to the security given and will increase if the debtor makes his (or her) payments on a timely basis. Two years after a bankruptcy discharge, debtors are eligible for mortgage loans on similar terms as those with the same financial profiles but who have not declared bankruptcy. Income stability and the size of the down-payment will be much more important than the fact you filed bankruptcy in the past. Although your credit report will show the bankruptcy for 10 years, it will become less significant as time passes and you remain current with your debts and expenses. Remember, lenders also know that you are probably a better credit risk after bankruptcy than before.
Chapter 13 Bankruptcy allows a debtor to retain certain assets that would otherwise be liquidated by a Chapter 7 Bankruptcy Trustee. In most cases, you can keep your home and your car under either plan (provided your equity does not exceed certain limits). However, under Chapter 7 Bankruptcy, you wouldn't be able to keep non-exempt property (e.g. non-homestead real estate, art collection). The goal of most Chapter 7 bankruptcies is to discharge your existing debts and allow you a fresh start on your finances. In other words, once your discharge is granted, you no longer need to repay the debts that were incurred before you filed your bankruptcy. Under a Chapter 13, however, you repay most or all of your debts before your slate, so to speak, is wiped clean. And because you repay your debts, you gain certain advantages over a Chapter 7 Bankruptcy.
Only an individual with regular income who owes, on the date you file the petition, less than $336,900.00 in unsecured debt and $1,010,650.00 in secured debt may file under Chapter 13. (These amounts are valid as of April 1, 2007, but are adjusted periodically.) The debts must also be noncontingent and liquidated, meaning that they must be for a certain, fixed amount and not subject to any conditions.
Chapter 13 Bankruptcy protects individuals from the collection efforts of creditors; permits individuals to keep their real estate and personal property; and provides individuals the opportunity to repay their debts through reduced payments. Another benefit is that the time your Chapter 13 bankruptcy shows on your credit report is less, so it takes less time to rebuild your credit.
The size of your monthly plan payments is determined by the amount you can afford to pay after paying necessary living expenses (including insurance, mortgage payments, etc.).
Typically, the Plan payments last for 36 months, unless additional time is requested, but in no event will they last more than 60 months. Therefore, if your payment analysis shows, for example, that you can afford to pay $400.00 per month (above and beyond your normal living expenses), you would pay that each month to the Chapter 13 Trustee, who would disperse it pro rata among your creditors. At the end of 36 months, you are discharged from all dischargeable unsecured debts, regardless of how much your creditors have received. In addition to your plan payments, you must stay current with any ongoing obligations you have to secured creditors, such as on your mortgage. Chapter 13 only affects debts that you owe on or before you filed the bankruptcy. Therefore, on your mortgages and other secured debts, your Plan payment goes to pay any arrearages that existed on the date you file and you can repay that arrearage over the life of the Plan; but, you must stay current from the filing date forward with any mortgage payments, etc.
Secured debts (e.g. your mortgage) must be repaid in full, but Chapter 13 Bankruptcy enables you to cure the defaults (reinstate the loans) over 36 months (or up to 60 months with creditor consent and court approval).
If you miss any payments at all that are due under your Plan, your case will be dismissed by the Court. In certain cases (e.g. medical issues affecting work), the Court, upon proper application, may temporarily suspend payments due under the plan. The bankruptcy will appear on your credit report for 7 years after you file. However, this means you will only have 4 years left with this on your credit report-- an advantage over Chapter 7 Bankruptcy.