All About Bankruptcy
The following information is intended to acquaint you with the four chapters of the federal Bankruptcy Code under which you may file a bankruptcy petition. The bankruptcy law is complicated and not easily described. You have a choice in deciding what chapter of the Bankruptcy Code will best suit your needs. Even if you have already filed for relief under Chapter 7, you may be eligible to convert your case to a different chapter. Therefore, you should seek the advice of an attorney to learn your rights and responsibilities under the law should you decide to file a petition with the court. Court employees are prohibited from giving you legal advice.
Chapter 7 is designed for debtors in financial difficulty who do not have the ability to pay their existing debts.
Under Chapter 7, a trustee takes possession of all your property. You may claim certain of your property as exempt under governing law. The trustee then liquidates the property and uses the proceeds to pay your creditors according to priorities of the Bankruptcy Code.
The purpose of filing a Chapter 7 case is to obtain a discharge of your existing debts. If, however, you are found to have committed certain kinds of improper conduct described in the Bankruptcy Code, your discharge may be denied by the court, and the purpose for which you filed the bankruptcy petition will be defeated.
Even if you receive a discharge, there are some debts that are not discharged under the law. Therefore, you may still be responsible for such debts as certain taxes and student loans, alimony and support payments, criminal restitution, and debts for death or personal injury caused by driving while intoxicated from alcohol or drugs.
Under certain circumstances you may keep property that you have purchased subject to valid security interest. Your attorney can explain the options that are available to you.
Possible Consequences of Filing Chapter 7
The following contains only general principles of law and is not a substitute for legal advice. If you have questions or need further information as to how the bankruptcy laws apply to your specific case, you should consult your lawyer.
What is a Discharge?
The filing of a Chapter 7 petition is designed to result in a discharge of most of the debts you listed on your bankruptcy schedules. A discharge is a court order that says you do not have to repay your debts, but there are a number of exceptions. Debts which may not be discharged in your Chapter 7 case include, for example, most taxes, child support, alimony, and student loans; court-ordered fines and restitutions; debts obtained through fraud or deception; and personal injury debts caused by driving while intoxicated or taking drugs. Your discharge may be denied entirely if you, for example, destroy or conceal property; destroy, conceal or falsify records; or make a false oath. Creditors cannot ask you to pay any debts which have been discharged. You can only receive a Chapter 7 discharge once every six (6) years.
What Are The Effects of a Discharge?
The fact that you filed bankruptcy can appear on your credit report for as long as 10 years. Thus, filing a bankruptcy petition may affect your ability to obtain credit in the future. Also, you may not be excused from repaying any debts that were not listed on your bankruptcy schedules or that you incurred after you filed bankruptcy.
What are the Effects of Reaffirming a Debt?
After you file your petition, a creditor may ask you to reaffirm a certain debt or you may seek to do so on your own. Reaffirming a debt means that you sign and file with the court a legally enforceable document, which states that you promise to repay all or a portion of the debt that may have been discharged in your bankruptcy case. Reaffirmation agreements must generally be filed with the court within 60 days after the first meeting of creditors.
Reaffirmation agreements are strictly voluntary and are not required by the Bankruptcy Code or other state or federal law. You can voluntarily repay any debt instead of signing a reaffirmation agreement, but there may be valid reasons for wanting to reaffirm a particular debt.
Reaffirmation agreements must not impose an undue burden on you or your dependents and must be in your best interest. If you decide to sign a reaffirmation agreement, you may cancel it at any time before the court issues your discharge order or within sixty (60) days after the reaffirmation agreement was filed with the court, whichever is later. If you reaffirm a debt and fail to make the payments required in the reaffirmation agreement, the creditor can take action against you to recover any property that was given as security for the loan and you may remain personally liable for any remaining debt.
Repayment of All or Part of an Individual's Debts with Regular Income
Chapter 13 is designed for individuals with regular income who are temporarily unable to pay their debts but would like to pay them in installments over a period of time. You are only eligible for Chapter 13 if your debts do not exceed $1,077,000 ($269,250 in unsecured debts and $307,750 in secured debts) as set forth in the Bankruptcy Code.
Under Chapter 13 you must file a plan with the court to repay your creditors all or part of the money that you owe them, using your future earnings. Usually, the period allowed by the court to repay your debts is three years, but no more than five years. Your plan must be approved by the court before it can take effect.
Under Chapter 13, unlike Chapter 7, you may keep all your property, both exempt and non-exempt, as long as you continue to make payments under the plan.
After completion of payments under the plan, your debts are discharged except alimony and support payments, student loans, certain debts including criminal fines and restitution and debts for death or personal injury caused by driving while intoxicated from alcohol or drugs, and long term secured obligations.
Business or Individual Reorganization
Chapter 11 is designed primarily for the reorganization of a business but is also available to consumer debtors. Creditors vote on whether to accept or reject a plan, which also must be approved by the court. While the debtor normally remains in control of assets, the court can order the appointment of a trustee to take possession and control of the business. Since Chapter 11 provisions are quite complicated, and the proceedings often expensive to prosecute, any decision by an individual to file a Chapter 11 petition should be reviewed by an attorney.
Family Farmer Debt Repayment
Chapter 12 is designed to permit family farmers to repay their debts over a period of time from future earnings and is in many ways similar to Chapter 13. The eligibility requirements are restrictive, limiting its use to those whose income arises primarily from a family-owned farm. Family farmers must propose a plan to repay their creditors over a three to five year period and it must be approved by the court. Plan payments are made through a Chapter 12 trustee, who also monitors the debtors' farming operations during the pendency of the plan.
The Other Side of Bankruptcy
How To React If You Are A Creditor
"What do I do if my customer files bankruptcy?" Hopefully that's a question business owners don't have to ask very often, but it's important to know the answer.
Business people need to learn to minimize losses and maybe even collect their debts when a customer files bankruptcy.
Bankruptcy is intended as a fresh start, but is not a panacea for people with no money. What happens in many cases is that people borrow from Peter to pay Paul and then they peak out at all their limits
What about those fraudulent cases? For those of you who thought there was no debtors' prison, don't be so sure. A person who files for bankruptcy can go to jail if it's determined that he or she made a false oath or claim. The possible maximum penalty is $5,000 or five years in jail. That sentence is not usually enforced, but the U.S. Bankruptcy court is trying to discourage fraudulent bankruptcies.
What should business owners do when they receive a bankruptcy notice? Read it! Do you know who the person is? If not, contact the attorney, preferably by letter.
One thing that creditors should be aware of is the automatic stay. From the moment the bankruptcy filing receives the stamp from the court, creditors must stop trying to collect the debt. They cannot enforce any collection or they risk being fined by the court.
If you are a creditor, you may not get anything out of the bankruptcy, but you do have rights. You can get a copy of the petition and evaluate your rights. However, just because you have a judgment doesn't mean you're necessarily in any better shape than any other creditor, unless there's real estate attached.
Attend the meeting of the creditors. This usually occurs about 30 days after the notice is issued and provides creditors with an opportunity to ask questions of the debtor, such as, "When did you first consider bankruptcy?" and "When did you first see an attorney?" That helps determine whether the person anticipated filing before doing business with you. This may tend to establish fraudulent activity on the part of a debtor.
Did the debtor do something to affect the discharge of the debt? Was there misrepresentation in writing, a loan application with misinformation? Did the consumer run up credit cards just prior to filing? Did the debtor make luxury purchases (in excess of $1,000)?
Look at the timing between when charges were made and when the filing of bankruptcy occurred. Did the borrower exceed the limit on his cards? Was the debtor employed? Did his lifestyle change dramatically? All of this may affect whether or not the debt is discharged.
Sometimes the debtor will enter a reaffirmation agreement with a creditor of his own accord to re-negotiate a discharged debt. This doesn't always work in the debtor's best interest, but it may be advantageous to the creditor.
Negotiating a new payment arrangement creates a new debt, and if the debtor reneges again, the creditor can take him to state court and pursue it as though there were no discharge of the debt through the first bankruptcy and the debtor cannot file again under Chapter 7 for six years.
The bottom line for creditors is to be aware of all important dates. With a Chapter 7 you generally have 90 days to do something.
There are three common types of bankruptcy filings: Chapter 7, 11 and 13. Chapter 7 bankruptcies are liquidation cases and the most common type of filing. They are used by individuals and businesses. A trustee is appointed to administer the estate; all non-exempt property is sold and liquidated. (exempt property includes the cash value of life insurance policies, Workers Compensation, wages, tax refunds, a home - if there's less than $10,000 in equity per person, a car with less than $2,400 in equity, real property, cash up to $2,500, pensions, Keough and 401K plans, IRAs, security deposits for rent and utilities, Social Security, unemployment compensation, public assistance, and veterans' and disability benefits.)
Chapter 13 is for individuals and is concerned with the adjustment of debts. The debtor goes to a counseling service to work out a payment plan, and if that doesn't work, the debtor files Chapter 13. Under recent amendments, a debtor can file Chapter 13 even if he or she owns a home with a mortgage of $750,000 or has unsecured debts of up to $250,000. Why choose Chapter 13 over Chapter 7? In Chapter 13, you keep everything you own.
Chapter 11 is intended for business organizations and can be used by small businesses and big ones. The process is very expensive, but the purpose is to give breathing space to allow the debtor to continue to conduct business, but under the protection and supervision of the U.S. Bankruptcy Court.
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