What is Bankruptcy?Individuals who are having problems paying their bills or who are threatened by a creditor with a lawsuit, a garnishment or a seizure of property often consider bankruptcy as a solution to their problem. The bankruptcy law is a federal law which is available to individuals throughout the United States. Bankruptcy Courts are federal courts.
How do I obtain relief from my creditors?For certain people, filing a bankruptcy case will achieve the relief from debt that they seek because a bankruptcy can result in the grant of a discharge of debts to an individual. A discharge is the forgiveness of personal liability for debts which have been incurred prior to the filing of the case. With few exceptions, creditors are prohibited from suing a debtor, obtaining a judgment, or collecting for debts which have been discharged and will have no claim on the future income or assets of the individual who has filed for bankruptcy relief as a debtor.
Bankruptcy, while it may relieve a personal obligation to repay a debt, does not eliminate most mortgages or liens on property. Thus, in order to retain a car or a house which has been pledged as collateral on a loan, a debtor will ordinarily have to repay the creditor the full amount of the debt over time or redeem the property by paying the full value of the collateral in cash to the creditor.
What is a discharge and how do I get one?In exchange for the receipt of a discharge, a debtor must turn over all non-exempt property to a court-appointed trustee. The trustee is required to sell the property and distribute the proceeds to creditors according to the priorities established by the Bankruptcy Code. Frequently, creditors receive no distribution from a bankruptcy case.
In some cases, a debtor is denied a discharge and thus continues to be obligated on all the debts that were the subject of the bankruptcy. Reasons for the denial of a discharge include court determinations that the debtor has concealed assets, has fraudulently transferred assets to avoid payment to creditors, or has made a false statement under oath. Such acts may also be the subject of criminal proceedings against the debtor which may result in fines or imprisonment.
In those cases where a debtor receives a discharge, certain debts may nonetheless be excepted from discharge. These include obligations for alimony or child support, certain taxes and student loans, and debts incurred by false statements or representations. If the Bankruptcy Court determines that a particular debt was incurred through the debtor's fraud, that debt may likewise be excepted from discharge.
What are my alternatives?Individuals may choose several different types of bankruptcy. The choice of a particular chapter will depend upon the financial circumstances of the debtor, the amount and nature of the debts to be dealt with in the bankruptcy, the exemptions available and the types of assets owned by the debtor.
What is a Chapter 7 Bankruptcy Case?Chapter 7 is what most people refer to as "straight bankruptcy." In a Chapter 7, the debtor turns over all of his or her assets to a Chapter 7 trustee. The Chapter 7 trustee liquidates the assets and distributes the proceeds to the debtor's creditors. By order of the Bankruptcy Court, the person is then discharged from all debts.
Will all my debts be discharged?A debtor cannot discharge certain debts, including most taxes, student loans, alimony and child support, debts incurred through fraud or theft, and certain other types of non-dischargeable debt.
Will I be able to retain any of my property?In Georgia, debtors can retain:
- $5,000 in real estate equity of your principal residence (the amount of property value in excess of liens on the real property);
- Social Security benefits, unemployment compensation, veteran benefits, disability benefits, and alimony;
- $1,000 in equity in vehicles;
- $200 in each of various items of household furnishings and wearing apparel, up to a total value of $3,500;
- $500 in jewelry;
- $500 in professional implements, books and tools of the trade; and
- $400, plus the unused portion of the principal residence exception as a wildcard.
There are other less common exemption rights. In addition, if the creditor holding a lien on a particular item of property consents, and the Bankruptcy Court finds that it is in your best interest, you can retain additional property by reaffirming the debt to the creditor and paying the creditor's claim pursuant to which you had previously agreed.
How often can I file a Chapter 7 Bankruptcy case?A debtor can receive a discharge from his or her debts only once every six years.
How do I benefit from a Chapter 7 case?By filing the case, your creditors are prohibited from continuing suits against you or from attempting to collect their claims against you and your property. Rather, creditors must look solely to the Bankruptcy Court and the assets within its control for payment of their claims. By filing the Chapter 7 case and obtaining a discharge, you receive a total forgiveness of the discharged debts and receive a "fresh start."
What are the differences between Chapter 7 and Chapter 13?Chapter 7 of the Bankruptcy Code is entitled "Liquidation" and as the name implies, generally requires sales or foreclosure of all property except property deemed to be exempt. In most instances, the Chapter 7 debtor is promptly discharged from all or most pre-bankruptcy debts and receives a fresh start on a new economic life. This new economic life frequently begins only with exempt assets.
Chapter 13 is entitled "Adjustment of Debts of Individuals with Regular Income." It is often called "wage earner" or just "Chapter 13." Chapter 13 debtors pay all or part of their debts through future income rather than through liquidation or foreclosure of present assets. Chapter 13 is available only to individuals with regular income whose non-contingent, liquidated unsecured debts are less than $250,000 and whose secured debts are less than $750,000. Corporations and partnerships are not eligible for Chapter 13. The Chapter 13 debtor's income must be regular but can come from such things as self-employment, pension, welfare or alimony.
How does Chapter 13 work?Under Chapter 13, the debtor presents a plan of debt repayment which is reviewed by the Chapter 13 trustee, creditors and the Bankruptcy Court. The plan must be filed in good faith, must provide for payments that are feasible in light of the debtor's income and expenses and must also provide for payments over time that are equal in value to the money creditors would have received if the debtor had chosen Chapter 7 liquidation instead of Chapter 13. If a proper objection is made to the plan, then the plan must also provide that, for a period of three years, all of the debtor's income above reasonable expenses will be used to pay debts.
If the Chapter 13 plan is approved, all payments are made through the Chapter 13 trustee's office, and the trustee is paid a commission. Most plans must run at least three years and cannot exceed five years. Chapter 13 provides that the debtor receives a discharge from most pre-bankruptcy debt upon making the payments called for by the plan.
Can I keep my property?Chapter 13 debtors often keep property they would lose in a Chapter 7. Keeping secured property in a Chapter 7 usually requires the creditor's agreement. Secured creditors do not have such control in a Chapter 13.
Consequently, Chapter 13 debtors usually keep their cars, their house and other important property subject to security interests even if the creditor wants the property back. Property not subject to security interests can also be kept in a Chapter 13 even though its value is not exempt and would be lost in a Chapter 7.
How about paying taxes?Filing bankruptcy under either Chapter 7 or Chapter 13 will stop all IRS or state tax collection activities on taxes accruing prior to filing bankruptcy. But if a Chapter 7 is filed, these tax collection activities often resume shortly after filing because the tax obligation usually cannot be discharged in bankruptcy. Furthermore, interest and penalties continue to accrue. Under Chapter 13, on the other hand, filing a Chapter 13 halts the accumulation of interest and penalties and taxes may be paid over the life of the plan. The filing of bankruptcy does not stop the IRS or state from assessing or demanding payment of taxes arising after bankruptcy.
What about nondischargeable debts?Most debts can be discharged under either Chapter 7 or Chapter 13, some cannot be discharged under either Chapter and some can only be discharged under Chapter 13. For example, debts involving fraud and embezzlement may be dischargeable through a Chapter 13 if the plan is confirmed. Debts arising from child support, alimony, student loans, criminal fines and criminal restitution debts, on the other hand, are among those which cannot be discharged under either Chapter. However, Chapter 13 has an advantage over Chapter 7 because the Chapter 13 debtor is protected by the bankruptcy court while making payments under the plan.
Can I protect others liable on the debt?Creditors are prohibited from attempting to collect pre-bankruptcy debts from a debtor under either Chapter 7 or Chapter 13. But the filing of a Chapter 13 can also stop all actions against certain co-debtors, even though those co-debtors are solvent and do not join the Chapter 13 petition. This protection may be permanent if the plan provides for payment of the cosigned debt in full and is fully performed.
What are the disadvantages of Chapter 13?Debtors remain under court supervision for the life of the plan, up to five years. They are not free to make new debts or sell assets without permission. Debtors who propose less than full payment to their unsecured creditors will be required to live on a budget for the life of the plan. The plan payments may be deducted directly from the debtor's salary by order of the court. If plan payments are not made, the case may be dismissed by the court on motion by the trustee or any creditor may petition the court to have their property returned. Some courts require that you surrender recently purchased property or luxury items before they will confirm a Chapter 13 plan. Chapter 13 is a form of bankruptcy and will appear as such as on your credit record if you pay all of your creditors in full.
What is a Chapter 12 Bankruptcy?Chapter 12 is designed to allow family farmers to retain their property and pay their creditors over an extended period of time.
Who can file?If you are an individual you may file a Chapter 12 if your total debts do not exceed $1,500,000 and at least 80 percent of that debt arises out of a farming operation which you own, and 50 percent of your taxable income for the year preceding the filing of your case arises from farming operations. Corporations and partnerships can also file a Chapter 12 bankruptcy with certain restrictions.
How does the Chapter 12 work?As with any other bankruptcy case, the debtor files a bankruptcy petition and detailed financial disclosure documents disclosing his or her assets and liabilities. Within 90 days after filing the case, the debtor must file a plan which provides for the payment of the debt from future earnings or other funds. In general, the plan must provide for the full payment, over time and with interest, of debts secured by land or other property. The plan can modify the terms of prior debt agreements by changing the interest rate payable and the timing of payments. However, the interest rate and other terms must be reasonable and consistent with then current market conditions. Unsecured claims (claims for which creditors hold no collateral) must receive a pro rata share for at least three years of all your earnings remaining after payment of secured claims and reasonable living expenses.
Do I receive a discharge of my debts under Chapter 12?Yes. If you complete all plan payments in a timely manner, then, at the end of the plan, the court will grant you a discharge, with certain exceptions. These include tax obligations, claims incurred through fraud, alimony, maintenance, and child support payment.
What happens if I do not complete my plan payments in either a Chapter 13 or Chapter 12?If you are unable to complete your plan payments, you or any of your creditors can ask the court to convert your case to a Chapter 7 bankruptcy case. Alternatively, if the failure of the plan was due to circumstances beyond your control and your creditors have received, through payments made, an amount equal to what they would have received under a Chapter 7 case, the court may grant you a discharge of some, but not all, of your debt.
If I cannot make my plan payments, can I request that the plan be changed to more lenient terms?Yes. Under certain circumstances you can request that the court change your plan so that your payments will be more in line with your ability to pay. If you then complete the payments under the modified plan, you will receive a discharge.
What is Chapter 11?Chapter 11 is a reorganization proceeding usually involving corporate debtors but also available to individuals who have been engaged in a commercial enterprise and desire to stay in business, restructure existing debts and attempt to reorganize and retain assets under court supervision.
Legal Referral ServiceIf you need legal assistance and do not know an attorney, call the Lawyers Referral Service in your local directory (in Atlanta, 404-521-0777) or your local county bar association president.
This pamphlet is published as a public service by the Bankruptcy Law Section of the State Bar of Georgia. It has been issued to inform, not to advise, and is based on the Federal Bankruptcy Code and Georgia law in effect at the time of publication. Your individual financial situation may alter the generalities and conclusions set forth. For your specific situation, you should always seek counsel from an attorney when considering filing for bankruptcy relief.