Bankruptcy is a proceeding in which a court administers the estate (the property and other assets) of a debtor for the benefit of creditors.
A debtor (a person or business who owes money to others) may choose to file a bankruptcy proceeding to resolve a hopeless financial situation, or to stave off the collection of debts for a period of time to allow for financial reorganization.
Individuals or businesses may file for bankruptcy. In some cases, a creditor (a person or business that is owed money) may force the filing of a bankruptcy proceeding, although these "involuntary" proceedings are very rare.
The United States Constitution authorizes Congress to adopt "uniform laws" on bankruptcy. The federal bankruptcy law has two goals:
Federal bankruptcy law governs bankruptcy proceedings, except, when Congress has chosen to defer to state law.
There's no magic formula for deciding when bankruptcy is the right choice. It's an option you might consider if you:
Alternatives to bankruptcy include:
A debtor may not be fired from a job because of filing for bankruptcy. However, creditors may take a past bankruptcy into consideration when deciding whether to extend credit. Many creditors regard a person who has filed for bankruptcy to be a higher credit risk and may either refuse to extend credit or only extend credit on less favorable terms. Bankruptcy filings remain on a consumer's credit report for seven to 10 years. It usually takes at least three years to reestablish your credit rating.
Bankruptcy doesn't get rid of all debts. Among those excluded are:
A consumer, or non-business debtor, can file for bankruptcy under either Chapter 7 or Chapter 13.
Chapter 7 Bankruptcy
Chapter 7, otherwise known as "liquidation," is generally the simplest and quickest form of bankruptcy and is available to individuals, married couples, corporations and partnerships. A trustee (appointed by the court) gathers and sells your non-exempt property and uses the proceeds from the sale to pay your creditors.
"Exempt Property" is property that a debtor is allowed to keep. What property is exempt is determined by state law. In certain states you are required to use the exemptions under your state's laws. In fifteen states and the District of Columbia, you can chose the exemptions that work the best for you - either the federal exemptions or your state's exemption. It is always best to check with an attorney in your state to see what exemptions apply to your individual case.
The new law also increased the amount of time you have to live in the state before you are eligible to use that state's exemptions. This was to prevent a debtor from moving to a state with more generous exemptions just prior to filing for bankruptcy.
Most chapter 7 cases are "no-asset" cases, which simply means that you do not have any non-exempt property for the trustee to sell. At the time that you file your petition for bankruptcy, you declare whether your case is "asset" or "no-asset" and the burden is on the trustee to change the designation.
Beginning October 17, 2005, under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, you must undergo a "means test" to qualify for Chapter 7 bankruptcy. The "means test" is how the Internal Revenue Service will determine who can or cannot file for Chapter 7. Your income and expenses are examined in detail to see how they compare to the standard for your area as set by the IRS. If you earn less than the median income for a family of your size in your state, you can automatically file for Chapter 7 bankruptcy.. But if your income from the last six months is greater than the median income and you can pay at least $6,000 over five years or $100 a month toward your debt, you are not allowed to file for Chapter 7 but must file for Chapter 13 instead. Chapter 13 will require you to repay a portion of your debts over three to five years.
A part of the means test requires that you file any overdue tax returns within weeks of filing a Chapter 7 bankruptcy.
Under the new law, when you file for bankruptcy you must receive approve credit counseling and a budget analysis, at your own expense. Credit counseling should address the means test calculation for you. You can also find mean test calculators on the internet.
A bankruptcy starts with the filing of the official petition, schedules and statement of financial affairs with the bankruptcy court. In order to complete the Bankruptcy Forms, you must provide a list of all of your creditors and the amount and type of their claim; the source, amount, and the frequency of your income; a list of all of your property; and a detailed list of your monthly living expenses.
As soon as you file for bankruptcy, your creditors are prevented from trying to collect on your debts through what's called an "automatic stay." The stay is designed to preserve your property and to give you a break from litigation.
A creditor must show the bankruptcy judge, after a hearing, that there is "cause" for the creditor to be allowed to continue with collection action (for instance, by showing that the property might deteriorate in value during the bankruptcy period).
If there is property that isn't exempt, the trustee takes control of it. From the sale of your property, the trustee pays the expenses of the administration of the case, and then gives any remaining money to creditors with allowed claims, according to the priority of the claims. Any wages you earn after you file the case are yours, beyond the reach of creditors who had claims on the date you filed for bankruptcy.
Usually between 20 and 40 days after you file your petition, the trustee will hold the "first meeting of creditors" (also called a "341" meeting). You must be present for that meeting. The trustee can ask you questions under oath about your property and debts. Creditors can also question you on those subjects, but seldom do.
Generally, the only responsibilities you have with respect to the bankruptcy after the 341 meeting is to cooperate with the trustee in providing any requested information.
Creditors have 60 days after the 341 meeting to convince the bankruptcy court you shouldn't be allowed to jettison your debts.
Creditors may also approach you about what's called "reaffirmation" of debts. Reaffirmation is an agreement between you and a creditor that you will remain liable on a debt and will pay the remaining portion of the amount owed in order to keep certain property, such as an automobile, even though the debt could be discharged.
Under the old bankruptcy law, you could make your car payments when they came due. When the loan was fully paid, title to the car would be transferred to you. If you defaulted on the loan after discharge, the creditor could repossess the car, but the repossession deficiency amount that you owed would still be wiped out and you would owe nothing. Under the new law, you have to reaffirm your car loan within 45 days after the "341 meeting." You no longer have the option of continuing your car payments without reaffirming the loan. Once the loan is reaffirmed, if you default on your payments and the car is repossessed, you are liable for the repossession deficiency.
You also have the option to redeem the car within 45 days of the "341 meeting." This means that you have to pay the entire balance due within that time. Because most debtors do not have that kind of money, this option is rarely used.
If you decide to reaffirm a debt, you are required under the Bankruptcy Code to file an agreement with the court. The agreement must disclose that you were advised of the amount of the debt you are reaffirming and how it was calculated and that you are aware that the debt will not be discharged. You must indicate your income and expenses so that the court can see that there is sufficient money to pay the reaffirmed debt. Unless you are represented by an attorney, the court must approve the agreement. A hearing will be held if the court disapproves. If an attorney represents you, he or she must certify in writing that they advised you of the legal consequences of the agreement, that you were fully informed and entered into the agreement voluntarily, and that the reaffirmation will not create an undue hardship on you and your family.
Unsecured creditors may offer deals for new credit based on reaffirming the existing balance on your credit card.
The trustee may review your income and expenses to see if you have enough money left after your current living expenses to pay something to creditors.
If creditors haven't filed a suit to stop you from getting out from under your debts within 60 days of the 341 meeting, the court will enter an order granting the "discharge" of all dischargeable debts that existed on the date the case was filed.
It is extremely important to note that Chapter 7 will not stop a repossession or foreclosure because the failure to make payments or pay off any arrears that are due will relieve the "automatic stay" and allow the repossession or foreclosure to proceed. Only Chapter 13 can delay a foreclosure but the payment obligations under that chapter are extensive.
You'll want to take your time in deciding whether Chapter 7 bankruptcy is for you. Under the new law, you are prohibited from filing for 2 years after the dismissal of a case, so choosing the wrong time to file or the wrong way to file can ruin your chances of filing again when it is absolutely necessary. If you choose wisely, it can be a quick, efficient way to get a fresh financial start.
Chapter 13 Bankruptcy
If you're an individual or a sole proprietor, you can file a Chapter 13 bankruptcy to repay all or part of your debts. Under this chapter, you can propose a repayment plan in which to pay your creditors over three to five years. If your monthly income is less than your state's median income, the plan will be for three years unless the court finds "just cause" for a longer period. If your monthly income is greater than your state's median income, the plan must generally be for five years. You cannot have a plan that exceeds the five year limitation.
Many people who file Chapter 13 bankruptcies have:
Basic Chapter 13 Requirements
For a Chapter 13 bankruptcy, you'll need a stable income with disposable income (income left over after you pay the bare necessities of life such as shelter, food and utilities). You must have no more than $922,975 in secured debt (debt involving property that your creditor might take if you don't make your payments) and $307,675 in unsecured debt. These amounts are adjusted periodically to reflect changes in the consumer price index. The court filing fee is $274.
The Chapter 13 Process
Following are the steps in the Chapter 13 Wage Earner Bankruptcy process:
The process begins similarly to a Chapter 7 bankruptcy proceeding, with the filing of a petition by the debtor in the federal Bankruptcy Court. In addition to a list of creditors and a schedule of assets and liabilities and a schedule of current income and current expenditures, the debtor must also file a "Statement of Financial Affairs". This statement must indicate:
It is extremely important that all the forms are completed accurately. Debts that are not listed will not be discharged at the completion of the bankruptcy proceeding. Failing to list assets in an attempt to hide them from creditors may result in serious consequences, including the denial of discharge or charges of bankruptcy fraud.
The filing of the bankruptcy petition must be accompanied by a proposed payment plan over three to five years. The proposed payment plan must provide for the payment of all "priority claims" in full unless the particular priority creditor agrees to a different plan or, if the claim is a domestic support obligation, you agree to contribute all of your disposable income to a five year plan. "Priority claims" are those claims that are given a special status under bankruptcy law, such as taxes and the costs of the bankruptcy proceeding. There are limitations on the ability to modify the payments due on home mortgage loans under Chapter 13.
The bankruptcy trustee appointed by the Bankruptcy Court must review the proposed plan for accuracy and feasibility. The proposed plan is distributed to creditors who have the right to object to the plan if it is unreasonable. If the plan is approved, the debtor keeps all assets during the period of the plan. The debtor makes monthly payments to the bankruptcy trustee who distributes the funds to the creditors according to the plan. If the plan is completed as approved, the debtor is discharged from unpaid debts. If the proposed plan is not completed as approved, several alternatives are open to the debtor depending upon the reasons for the non-completion of the plan.
The bankruptcy trustee may support a modification in the plan if you are unable to complete it, because of circumstances such as serious illness or loss of a job. If the inability to complete the plan is due to circumstances for which you cannot "justly be held accountable," and if your creditors received at least as much as they would have under Chapter 7, and modification is not possible, you can apply for a hardship discharge. The hardship discharge does not apply to debts that were not dischargeable under Chapter 7. See 11 USC 1328(b).
If the debtor fails to keep up payments on the plan, creditors may apply to the Bankruptcy Court to terminate the Chapter 13 proceeding by dismissing the proceeding entirely. If the proceeding is dismissed in its entirety, collection efforts against the debtor's assets may resume as before.