What is Bankruptcy?
Bankruptcy occurs when an individual or business is no longer able to pay back debts or borrow money to do so. They can therefore petition the court to file for bankruptcy thereby putting a stay on any debts owed. While the matter is being decided creditors are forbidden to contact the debtor to demand payment. These debts can then either be discharged under a Chapter 7 bankruptcy or a payment plan can be established under a Chapter 13 petition needing the legal help of a chapter 7 and chapter 13 attorney. Otherwise, you may need to file bankruptcy yourself.
Alternatives to Bankruptcy
Declaring an individual as bankrupt is a complex process and can have serious consequences. It is important to ensure that all other alternatives have been exhausted before resorting to Bankruptcy. The first alternative is that of debt consolidation which means you can essentially combine all of your unsecured loans such as credit card debts into one repayable amount. This is a much more manageable and generally lower interest method of getting back in control of your finances. If this is not an option then you can also seek credit counseling. This step involves a credit counseling agency which will provide you with advice on your situation and help to draw up a Debt Management Plan with your creditors which will allow you to repay them over a 5 year period.
What is the Bankruptcy Code?
The Bankruptcy Code was developed in 1978. Under the Bankruptcy Code there are five different types of Bankruptcy. This article deals specifically with those types which apply to personal bankruptcy under Chapter 7 and Chapter 13 of the code.
Chapter 13 Bankruptcy
Bankruptcy is clearly a last resort for individuals who can no longer manage their finances. Personal bankruptcy under Chapter 13 offers a breathing space. If you are unable to pay all of your debts in the immediate however you are in receipt of a regular income and therefore would be able to draw up a repayment plan of between 3 – 5 years then this may provide the best option for you.
To begin with you must file your petition with your local bankruptcy court. Forms for bankruptcy are available for purchase from stationary stores. Once filed all actions against you will be put on hold while the matter is dealt with. Your petition must include details of:
- All assets and liabilities
- All income and monthly expenditures
- Any contracts or leases you are obligate to
- A list of all assets which can be considered as exempt
Either at the same time or within the next fifteen days you must also submit a repayment plan. A meeting is then held with all creditors. You are obliged to attend and answer questions put to you. This is then followed by a court hearing at which it will be decided if your repayment plan is realistic and complies with the Bankruptcy Code standards. At the hearing creditors have the right to object if they feel that what they will receive under such a repayment plan is less than they would under a Chapter 7 liquidation. They can also object on the grounds that you have not committed all of your extra income to the repaying of debts.
If successful then you must begin making repayments to an appointed trustee. If unsuccessful you can then either modify the repayment plan to a more acceptable one or file under Chapter 7.
Chapter 7 Bankruptcy
This type of bankruptcy is referred to as liquidation and an individual, partnership or business can apply. As an individual to apply for a Chapter 7 bankruptcy you will be means-tested to ensure you are not eligible to file under Chapter 13. If you are in receipt of a regular income that would be sufficient to repay your debts under a repayment plan then you will not be able to apply to have these debts discharged. Chapter 7 Bankruptcy is intended for use by honest individuals who have found themselves unable to repay debts. It is not to be misused by people who just want to shirk responsibilities.
The process by which a Chapter 7 petition is filed is similar to that of a Chapter 13 action. First a petition is filed with the same information attached as under Chapter 13. Then a meeting is held for creditors. Then at a court hearing instructions will be given regarding the liquidation of all non-exempt assets to repay the debts and the debt will be discharged.
It is important to also realize that some debts will not be discharged such as alimony and child support. The Bankruptcy Code does not offer an individual the chance to wipe the slate completely clean when it comes to certain key responsibilities such as parenting.
Exempt Assets
These are assets which are precluded from liquidation under Chapter 7. It generally applies to items such as clothing, work tools and vehicles up to a certain amount. It can also be argued that a certain portion of equity in your own home is exempt. However as the law changes between states and also between state and federal law it is best to talk with your lawyer.
Types of Debt
In order to understand the law surrounding bankruptcy it is essential to know the differences between secured and unsecured debts. Secured debts are those which the credit was based upon the right of the creditor to seize certain assets, for example a mortgage. Unsecured loans are those in which the credit was given based upon an assessment being made of the debtor’s ability to repay, for example credit card debt.
Tips on Finding a Bankruptcy Lawyer
Technically you do not need to have a lawyer to file for bankruptcy. However it is a particularly specialized area of law and you will not be given any special treatment because you are without legal representation. Therefore it is advisable to retain a lawyer. It is also possible that if you submit incorrect documents you could actually face charges of bankruptcy fraud.
When searching for a lawyer ensure they are fully trained in bankruptcy law, knowledgeable in the local rules, up-to-date on legal developments and that their bankruptcy attorney fees are reasonable. Go to your local bar association or do some online research to find a list of local lawyers. When selecting a lawyer ensure they are aware of local bankruptcy laws as they can vary from state-to-state. Also those assets which are considered exempt can vary from state-to-state.
Also look for law firms which are knowledgeable in credit repair resources. After filing for bankruptcy it will be important that you seek professional advice on ways in which you can start to repair your negative credit history
Consequences of Bankruptcy
It is important that you do not consider filing for bankruptcy, especially under Chapter 7, as an easy way out. There are serious consequences of being declared bankrupt. It will negatively affect your credit rating and preclude you from applying for a home loan for two years after the debt has been discharged under Chapter 7, or two years after all debts have been repaid in full under Chapter 13.
Filing for bankruptcy can also have implications for your career as you will no longer be eligible to hold the directorship of a company. Also you may lose personal assets such as property and expensive cars. Creditors do have the right to petition the court for this.
If, after taking into account the potential consequences of filing a bankruptcy claim, you still feel it is the only option available to you then remember to seek legal advice immediately
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