Sometimes, when there are no alternative means for overcoming financial problems, bankruptcy may be the only answer. Filing bankruptcy doesn't mean one will lose their house or car. In fact, in most cases, one will be allowed to keep both personal and real property.
A Bankruptcy case does stop ALL CREDITOR HARASSMENT, including telephone calls, wage garnishments, and all ordinary lawsuits. It will also temporarily stop the foreclosure of secured debts, such as a home mortgage, and the repossession of an automobile, mobile home, or other personal property. It will also temporarily prevent the marshal from evicting a person who files bankruptcy from an apartment.
In virtually all instances, bankruptcy results in the discharge of unsecured debts, such as credit card charges, unsecured lines of credit, medical and doctor bills. This means that these debts will never have to be paid. One will still be required to pay child support payments and some spousal support payments. Certain taxes and student loans will not be discharged. But even in these instances, actions taken in the Bankruptcy can often allow for a more favorable payment schedule of these debts.
If there are some creditors that one wants to pay, that can be done at any time after filing, or any time in the future. Bankruptcy allows one to avoid paying a debt, it does not mean that if an individual wishes to "reaffirm" a debt they cannot do so. While fraudulently incurred debts are not dischargeable, it is up to the creditor to raise that issue with the Bankruptcy court, and since the law is intended to give debtors a "fresh start" it is not easy for creditors to collect under these circumstances.
There are four different bankruptcy procedures--Chapter 7, Chapter 11, Chapter 12 and Chapter 13. It is essential to retain a skilled bankruptcy attorney to determine which procedure is most appropriate and beneficial for you. Chapter 7, often called a "straight" bankruptcy, is usually the best remedy for people who have mainly unsecured debts, and who are current on their house and car payments. For the individual who has a small amount of assets, who does not own real estate, and who wants to be rid of debt, it is usually the best remedy.
How do you know if Chapter 7 is right for you?
If you do not own real property, if your assets are worth less than approximately $20,000.00 at sale prices, if your primary source of income is from employment, and if your debt is primarily unsecured, then Chapter 7 is most likely the correct remedy for you.
Of course, each individual has different obligations, and it is crucial that an attorney be consulted who is familiar with bankruptcy practice in your jurisdiction. The amount of assets that you will be allowed to keep, upon filing of a bankruptcy, varies from state to state. The amount referred to above is for California.
Once you have decided to file a Chapter 7, what should you do?
First, a complete listing of all your debts, and assets, is required. You must have names and addresses of creditors, the people or companies you owe money to, so that they can be notified by the Bankruptcy Court. You should then meet with your attorney, who will prepare the bankruptcy forms, called "Schedules" and "Statement of Affairs" in which all of your debts and assets are listed. You will also need to provide your attorney with your social security number, addresses for the last two years, any other names used by you for the last 6 years, and your income for the last 3 years. Finally, a monthly budget, listing income and expenditures on an average monthly basis should be prepared. These forms will then be filed with the Bankruptcy Court.
The filing of the bankruptcy results in the imposition of the "automatic stay." What this means is that from the minute that the bankruptcy is filed, before anything else happens, all of your creditors are stopped, or "stayed" from taking any further legal action against you. If you are being sued, they must stop it. If your wages are being garnisheed, they must stop that, and give back any money withheld by your employer, and not yet sent to the creditor. If you are in foreclosure, they must stop that also, and if you are being evicted from your apartment, they cannot continue that action either.
Creditors do, of course, have an action they can take, called a "relief from stay." but that usually takes several weeks, at least, to have argued before the court, and you will have an opportunity to respond to it.
The primary purpose of filing a Chapter 7 is to obtain a discharge of your unsecured debt. Chapter 11 or 13 is usually more appropriate for individuals, or businesses, with significant property holdings. The court cost for filing a Chapter 7 is $175.00 which must be paid to the Clerk of the Bankruptcy Court. This amount is in addition to any legal fees required by the attorney. For individuals with no money and who do not have an attorney, payment of this fee may be extended by the Court, but under no circumstances can it be waived or excused by the court or the judge. It must be paid or the case will be dismissed.
Chapter 12 is limited to "family farmers" and is available to only a few individuals. It is similar, in many instances to Chapter 13 and allows for repayment of debt over several years.
What about Chapter 11?
Chapter 11 is usually reserved for businesses, or for individual debtors who wish to pay off their creditors, over time, but do not otherwise qualify for Chapter 13. Chapter 11 can be filed by individuals, corporations or other business entities such as partnerships. The filing fee of $830.00, plus quarterly fees of at least $250.00 payable to the United States Trustee, make Chapter 11 logical only for those with significant assets.
Upon the filing of a Chapter 11, a debtor is required to open special bank accounts, and prepare statements of income and expenses on a monthly basis, which is then reviewed by the United States Trustee. The office of the U.S. Trustee is a unit of the U.S. Justice Department, and reviews Chapter 11 filings on a regular basis to make sure that they are being properly administered.
In a typical Chapter 11, a debtor will be required to prepare a "Plan of Reorganization" which will be submitted to all of the creditors. In this Plan, the debtor must specify how all of the debts will be repaid. The Debtor's attorney will prepare this document and the creditors will be able to vote on it. If they vote to accept the proposed payments, the plan will be "confirmed" and the case is be essentially over. If the creditors do not approve the plan, the debtor may still be able to have the plan approved, and to force creditors to accept the payments that have been proposed. This is known as a "Cram down" and is a difficult procedure, which is dependant on a number of complex factors.
Chapter 11 imposes several duties upon the debtor including the preparation and filing of various reports and documents with the Trustee. The debtor must submit bi-weekly and monthly reports, must make quarterly payments to the U.S. Trustee, and must comply fully with the complex legal requirements. Within these guidelines, however, under Chapter 11 the debtor is often allowed to keep valuable assets, including real property or a business. Chapter 11 can also either reduce the amount of debt to be paid or extend the time within which the debt must be repaid.
Is Chapter 13 an alternative?
Chapter 13, for people whose homes are in foreclosure, allows them to continue occupancy and to pay off all of the past due payments in a 3-5 year period, by means of regular monthly payments, in addition to their regular mortgage payments. Chapter 13 also allows for payment of overdue taxes. Chapter 13 Bankruptcy allows one to pay creditors all or a portion of their debts over a 36-60 month period. While it can be employed by an individual or married couple (but cannot be used by a corporation) in a variety of circumstances, it is most commonly used in situations where one has fallen behind on home mortgage payments.
In that instance, in order to avoid a pending foreclosure, the filing of a Chapter 13 allows one to pay the arrearage on the mortgage over the 3 to 5 year period. Thus, foreclosure is avoided and the mortgage loan is brought current within the 3 to 5 year period. Any unsecured debts not paid in full during this period are deemed to be discharged in total.
Another instance in which a Chapter 13 is preferable to filing a Chapter 7 is when one owes non-dischargeable taxes. While many people believe that Federal, State and Local taxes are never dischargeable in bankruptcy, that is not the case. One should never assume, without consulting with a lawyer or accountant, that one's taxes are non-dischargeable in Chapter 7 bankruptcy. In those instances in which the taxes are not dischargeable in a Chapter 7, then a Chapter 13 might very well prove to be the best way to get those taxes paid, again over a period of 3 to 5 years.
There are many other reasons why a Chapter 13 might be preferable to a Chapter 7 or, in some instances, a Chapter 11. In instances where a one has assets that might be liquidated in a Chapter 7, often that can be avoided in a Chapter 13. There are also instances in which debts not dischargeable in a Chapter 7 can be easily discharged in a Chapter 13.