What is bankruptcy?
Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts or repay them under the protection of the bankruptcy court. Bankruptcies can generally be described as “liquidation” (Chapter 7) or “reorganization” (Chapter 13 for individuals and Chapter 11 for businesses). Under a Chapter 7 bankruptcy, you ask the bankruptcy court to discharge the debts you owe. Under a Chapter 13 bankruptcy, you file a plan with the bankruptcy court proposing how you will repay your creditors. Under such a plan, you must repay some debts in full; others may be repaid only partially or not at all, depending on what you can afford.
Most people who file for bankruptcy would rather file for Chapter 7 bankruptcy because it is simpler and does not require you to repay a portion of your debts. There are times, however, when Chapter 13 is the better choice. For example, if you have nonexempt property that you want to keep (say, a home with more than $75,000.00 of equity for an individual or $150,000.00 of equity for a married couple), a Chapter 13 bankruptcy may allow you to keep the property. A consultation with an attorney will you enable you to determine which option is best for you.
Can anyone file a Chapter 7 bankruptcy?
No. Bankruptcy law only allows business or individual debtors with income under certain median income guidelines to file a Chapter 7 petition. If filing as an individual and your current monthly income is less than or equal to median income for a family of your size in this state, then you can file for Chapter 7. If your current monthly income is above the median, then you must pass “the means test” in order to file for Chapter 7. The “means test” determines whether you should have enough disposable income, after subtracting certain allowed expenses and required debt payments, to repay at least a portion of your unsecured debts over a five-year repayment period.
If you are considering this option, or if you wish to file a Chapter 7 for your business, we encourage you to call and discuss it with our attorneys. We want to help.
What about a Chapter 13 bankruptcy? What happens to my debts?
Unlike in a Chapter 7 bankruptcy, in which most unsecured debts, including most credit debt, will be discharged, if you file for Chapter 13 relief, you may have to pay back some portion of your unsecured debts. Certain debts, such as back child support, alimony, and certain kinds of unpaid tax liabilities, cannot be discharged in bankruptcy. Those debts will remain in place just as if you had never filed for bankruptcy. Also, student loans will not be discharged unless you can show that repaying the debt would be an undue burden, a standard that is very difficult to meet. We can help you to assess what the most likely scenario will be in your particular case.
What happens to secured debts?
If you have provided collateral for a loan, the loan is called a secured debt. The most common examples of secured debts are home mortgage loans and car loans. If you have filed for bankruptcy and are behind on your payments for this type of loan, the creditor can ask the bankruptcy court to have the automatic stay lifted in order to foreclose or repossess the property. However, if you are current on your secured loans, you can usually keep the property and keep making payments as before.
What is the automatic stay? When you file a petition for any type of bankruptcy, a court order called an “automatic stay” goes into effect. The automatic stay prohibits most creditors from taking any action to collect the debts you owe to them, even if they have already started a lawsuit or obtained a judgment against you. In certain circumstances this also means that filing for bankruptcy will stop harassing telephone calls. You should be aware, however, that the bankruptcy court may, on occasion, permit a creditor to proceed with the collection of a debt.
How will filing for bankruptcy protection affect my credit?
Filing a petition for bankruptcy will negatively affect your credit. It will normally stay on your credit report for 10 years, but does become less significant over time. Two years after the completion of the bankruptcy, debtors are usually eligible for mortgage loans on terms often as good as those of others, with similar financial profiles, who have not filed for bankruptcy protection. Whether you will be allowed to keep your credit cards after filing bankruptcy (even if you have a zero balance), is up to the credit card company. If you are discharging credit card debt, the affected credit card companies will likely cancel the card unless you agree to pay the debt notwithstanding the bankruptcy.