Some of the Questions We Are Usually Asked

What is Bankruptcy?

Bankruptcy law allows debtors, who are unable or partially unable to pay outstanding debts, to rid themselves of these debts and obtain a fresh start. As stated by the US Supreme Court, bankruptcy gives “the honest but unfortunate debtor … a new opportunity in life and a clear field for the future, unhampered by the pressure and discouragement of preexisting debt.” (Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934)).

Federal bankruptcy law consists of statutes published in the Bankruptcy Code (11 U.S.C. §§ 101-1330). In addition, state statutory law on bankruptcy also address areas delegated to states or not covered by federal law. Debtors usually file bankruptcy cases in federal bankruptcy court (an adjunct of the federal district courts).


What are the different types of Bankruptcy?

The Bankruptcy Code provides for six different types of bankruptcy, each known by the chapter in the Bankruptcy Code in which it is located. Although they differ in form and procedure, they all provide for permanent relief from certain debts. In bankruptcy terms, the debtor’s dischargeable debts are discharged. Most debtors file for bankruptcy under Chapters 7, 11, and 13.

Chapter 7 provides for liquidation of the debtor’s non-exempt assets. Certain assets, such as a home or car, may be exempt from bankruptcy. A court-appointed trustee conducts the sale of debtor’s non-exempt assets and distributes the proceeds to creditors. Both individuals and businesses may file for bankruptcy under Chapter 7.

Chapter 9 provides for the reorganization of municipalities (which includes cities, towns, villages, taxing districts, municipal utilities, and school districts).

Chapter 11 is usually relied upon by partnerships and corporations. It provides for a supervised reorganization of a business, and allows the debtor to maintain the business while implementing a payment plan confirmed by the court.

Chapter 12 contains bankruptcy provisions applicable to family farmers and fisherman.

Chapter 13 provides for bankruptcy of an individual with a regular income, which is used to make a payment plan to pay debts, usually within three to five years.

Chapter 15 applies to cross-border bankruptcies. It adopts and implements the United Nations’ Model Law on Cross Border Insolvency.


Should I file for Bankruptcy?

Since it can adversely affect your credit, bankruptcy should be considered a last resort. Some people want to file for bankruptcy because they become stressed by the creditor harassment that arises out of minor debts. In most cases, creditors and collection agencies will not file a lawsuit against you to collect minor debts, since filing a lawsuit is expensive. If you just want to stop this type of harassment, you can use the Fair Debt Collection Practices Act, and in some cases, state law, to get creditors and collection agencies to stop harassing you.

Pressing reasons to file for bankruptcy include multiple wage garnishments, a creditors’ threat to repossess property that is important to you, or delaying foreclosure. Filing for bankruptcy triggers an automatic stay, which will stop foreclosure, wage garnishment, lawsuits, and collections efforts. If you need to stop foreclosure on your home or repossession of your car, and you believe you have the income to pay off these debts and keep this property, it may be a sound decision to consult a credit counselor and file for Chapter 13 bankruptcy.

However, it is a good idea to hold off on filing for bankruptcy if you believe you will have substantial expenses in the near future. The law limits how often you file for bankruptcy. A Chapter 7 bankruptcy will only erase the debt you have as of the filing date, and your Chapter 13 bankruptcy debt repayment plan may not take into account the future expenses. You can only discharge those debts included in your bankruptcy paperwork, so if you wait to file, you can include all your debts in the petition and receive the biggest possible discharge.

In general, bankruptcy law is complex and can be confusing for a lay person. It is a good idea to consult a bankruptcy lawyer about your particular circumstances.


What is the process of filing for Bankruptcy?

The process of filing for bankruptcy is different depending on whether you are filing for Chapter 7 or Chapter 13 bankruptcy. The first step is determining which type of bankruptcy you are eligible to file. You are only eligible for Chapter 7 if you pass the means test. You can only file Chapter 13 bankruptcy if you have the income necessary to make monthly payments to the trustee.

Once you have determined which type of bankruptcy to file, filing a bankruptcy petition starts your case and triggers an automatic stay of all collection efforts by creditors. Both types of bankruptcy require you to collect information about all your debts at the outset.

Before filing for Chapter 13 bankruptcy, you will also need to receive credit counseling from an agency that has been approved by the United States Trustee’s office. The agency will charge a fee for services, but there is a fee waiver or reduction for those that need it. You will also need to create a debt repayment plan, which your counselor can help you design.

In both types of bankruptcy, creditors will have the opportunity to object to the discharges of the debts they are owed. You will need to attend a 341 hearing, which is a meeting of creditors run by your bankruptcy trustee, and you will need to answer the trustee’s questions about your financial situation. In Chapter 13 bankruptcy, you will also need to make monthly payments to the trustee over 3-5 years, and give the trustee annual income and expense statements. At the conclusion of this process, you will receive a discharge.


Does Bankruptcy eliminate all of my Debts?

Possibly. Most consumer debt can be eliminated through a bankruptcy discharge. If you forget to include a debt in the paperwork, however, it will not be discharged. Moreover, creditors have the opportunity to object to the discharge of any debt. There are 19 categories of debts that are considered “non-dischargeable,” including many tax debts, child support, alimony, fines or penalties owed to the government, personal injury debts arising out of drunk driving accidents, criminal restitution, debts based on tax-advantaged retirement plans, and condo fee debts.

Some debts considered non-dischargeable can nevertheless be discharged if a creditor does not challenge your effort to get them discharged. These include credit card purchases worth more than $650 for luxury goods owed to a single creditor and incurred 90 days before filing, debts incurred due to willful and malicious personal or property injuries, and fraudulently obtained debts. Student loans are only discharged if you are able to convince the court that repaying the debt is an undue hardship for you.


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