Although a scary concept and usually a last resort, filing for bankruptcy can be the proverbial life vest for those who find themselves in over their head in financial trouble. Bankruptcy is a legal proceeding in which individuals in financial trouble can organize and pay debts within a federal court process under the protection of the bankruptcy court.
The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court. Bankruptcy law is federal statutory law contained in Title 11 of the United States Code. Congress passed the Bankruptcy Code under its Constitutional grant of authority to "establish. . . uniform laws on the subject of Bankruptcy throughout the United States." See U.S. Constitution Article I, Section 8. Under this authority, filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law.
The following article is a general overview of bankruptcy and its benefits and consequences. There are several different types of bankruptcies but this article will focus on Chapter 7 and Chapter 13 bankruptcies. Moreover, if anyone is seriously considering filing for bankruptcy, the expertise of an attorney should be sought immediately. Bankruptcy law is an extremely complex and specialized field of legal practice. No one should attempt to tackle it on his or her own. Now, the basics:
What filing for bankruptcy can do for you:
Bankruptcy eliminates the legal obligation to pay most or all of your debts. This is called a 'discharge' debts. By freeing the debtor from personal liability on almost all debts it gives the debtor a fresh financial start. Bankruptcy can also stop the foreclosure on your house, catch you up on missed payments, prevent repossession of property, stop some wage garnishments, and cease debt collection harassment.
What bankruptcy cannot do:
Bankruptcy does not automatically eliminate mortgages or "secured"debts. A secured creditor is a creditor who has taken a security interest in the property for which they extend the loan or credit. Also bankruptcy cannot discharge child support, alimony, some student loans, court restitution orders, criminal fines, debts not listed or scheduled by the debtor, debts from willful and malicious injury to another, some taxes, and debts incurred through false pretenses or fraud. Also, bankruptcy protection is not extended to the co-signer on a debt. Therefore, even if you have discharged a debt, the creditor can still hold the co-signer responsible for the entire amount of the debt.
Common types of consumer bankruptcy:
There are two basic types of bankruptcy proceedings. A filing under Chapter 7 is called liquidation. It is the most common type of bankruptcy proceeding. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors. Only individuals may obtain a discharge in a Chapter 7 proceeding. The most common reasons for a Chapter 7 bankruptcy are unemployment, large medical expenses, seriously over-extended credit, marital problems and other large unexpected expenses.
Bankruptcy proceedings under Chapter 13 involve the rehabilitation of the debtor to allow him or her to use future earnings to pay off creditors. Under Chapter 13 proceedings, a trustee is appointed to supervise the assets of the debtor. The purpose of Chapter 13 is to enable financially distressed individual debtors to propose and carry out a repayment plan under which creditors are paid over an extended period of time under court supervision and protection. Under this chapter, debtors are permitted to repay creditors, in full or in part, in installments over a three-year period, during which time creditors are prohibited from starting or continuing collection efforts.
What generally happens in consumer bankruptcy cases:
In a Chapter 7 case, you file several forms with the bankruptcy court listing income and expenses, assets, debts and property transactions for the past two years. The cost to file is $200, which may be waived for people who receive public assistance or live below the poverty level. A court-appointed person, the trustee, is assigned to oversee your case. About a month after filing, you must attend a "meeting of creditors" where the trustee reviews your forms and asks any questions. Despite the name, creditors rarely attend. If you have any nonexempt property, you must give it (or its value in cash) to the trustee. The meeting lasts about five minutes. Three to six months later, you receive a notice from the court that "all debts that qualified for discharge were discharged." Then your case is over.
Chapter 13 is a little different. You file the same forms plus a proposed repayment plan, in which you describe how you intend to repay your debts over the next three, or in some cases five, years. The cost to file is $185 (it cannot be waived), and a trustee is assigned to oversee the case. Here, too, you attend the meeting of creditors. Often one or two creditors attend this meeting, especially if they don't like something in your plan. After the meeting of the creditors, you attend a hearing before a bankruptcy judge who either confirms or denies your plan. If your plan is confirmed, and you make all the payments called for under your plan, you often receive a discharge of any balance owed at the end of your case.
The Automatic Stay: Simply by filing a bankruptcy petition, a debtor brings to his/her aid an instrument of power, the automatic stay of the Bankruptcy Code. The automatic stay takes effect the moment a petition for bankruptcy is filed. The automatic stay stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization, or simply to be relieved of the financial pressures that drove him/her into bankruptcy.
Trustee: In every case under Chapter 7 and Chapter 13 of the Bankruptcy Code, a trustee is appointed. The trustee's role is to represent the interest of the unsecured creditors. An unsecured creditor is a creditor who has extended credit but does not hold a lien on any property to secure the payment of that credit. The duties of the trustee include collecting property of the estate, invalidating certain transfers made by the debtor, objecting to a claim of exemption, objecting to discharge, liquidating any nonexempt property and distributing it to creditors with valid claims, and making a final accounting to the court.
Discharge: The principal goal of most bankruptcies is the discharge, which frees the debtor from personal liability on almost all debts. The discharge from debt gives debtors the fresh start that bankruptcy is meant to provide. In Chapter 7 cases, discharge orders are usually entered a little over sixty days after the first meeting of the creditors, assuming that no objection to discharge has been filed by that time. In a Chapter 13 case, the court grants a discharge after the debtor completes payments under a confirmed plan or upon application by the debtor for a hardship discharge.
The following debts are nondischargeable in both Chapter 7 and Chapter 13. If you file for Chapter 7, these will remain when your case is over. If you file for Chapter 13, these debts will have to be paid in full during your plan. If they are not, the balance will remain at the end of your case:
- debts you forget to list in your bankruptcy papers, unless the creditor learns of your bankruptcy case
- child support and alimony
- debts for personal injury or death caused by your intoxicated driving
- student loans, unless it would be an undue hardship for you to repay
- fines and penalties imposed for violating the law, such as traffic tickets and criminal restitution, and
- recent income tax debts and all other tax debts.
In addition, the following debts may be declared nondischargeable by a bankruptcy judge in Chapter 7 if the creditor challenges your request to discharge them. These debts may be discharged in Chapter 13. You can include them in your plan, and at the end of your case, the balance is wiped out:
- debts you incurred on the basis of fraud, such as lying on a credit application
- credit purchases of $1,150 or more for luxury goods or services made within 60 days of filing
- loans or cash advances of $1,150 or more taken within 60 days of filing
- debts from willful or malicious injury to another person or another person's property
- debts from embezzlement, larceny or breach of trust, and
- debts you owe under a divorce decree or settlement unless after bankruptcy you would still not be able to afford to pay them or the benefit you'd receive by the discharge outweighs any detriment to your ex-spouse (who would have to pay them if you discharge them in bankruptcy).
Negative Consequences of Bankruptcy:
Does all of this sound to good to be true? Filing for bankruptcy does not come without consequences. As mentioned earlier, filing for bankruptcy is generally the last resort for individuals who are so inundated with debt that they can no longer properly manage their affairs. Bankruptcy information will stay on your credit report for at least 10 years. That means that during that time you will likely be denied credit for buying a house, starting a business or any other major investment. Such negative information on your credit report will also likely prevent you from obtaining low interest credit cards or taking out smaller loans for things such as cars, jewelry, travel or furniture. For servicemembers, bankruptcy information may affect your security clearance, as well.
Is there a preference for Chapter 13 as opposed to Chapter 7?
- You cannot file for Chapter 7 bankruptcy if you received a Chapter 7 or Chapter 13 discharge within the previous six years (unless you paid off at least 70% of your unsecured debts in a Chapter 13 bankruptcy). On the other hand, you can file for Chapter 13 bankruptcy at any time.
- You have valuable nonexempt property.
- You're behind on your mortgage or car loan. In Chapter 7, you'll have to give up the property or pay for it in full during your bankruptcy case. In Chapter 13, you can repay the arrears through your plan, and keep the property by making the payments required under the contract.
- You have debts that cannot be discharged in Chapter 7.
- You have codebtors on personal (nonbusiness) loans. In Chapter 7, the creditors will go after your codebtors for payment. In Chapter 13, the creditors may not seek payment from your codebtors for the duration of your case.
- You feel a moral obligation to repay your debts, you want to learn money management or you hope new creditors might be more inclined to grant you credit after a Chapter 13 than they would after a Chapter 7.
The intent of this article was to provide a general overview of the bankruptcy process and the two most utilized for individuals. Although it is in most part an administrative process, bankruptcy is a very technical and complicated area that deserves thorough consideration. This article is for general informational purposes only. For further questions about Bankruptcy or other legal issues, contact the Fort Gordon Legal Assistance Office at 791-7883 or DDEAMC OCJA on Wednesdays at 706-787-7812/7813 to speak with an attorney. Don't forget your ID card. Remember, seeing a lawyer early may not only solve a problem you have, it may resolve or allow you to avoid a problem in the future.