Bankruptcy
When people have accumulated debts they are unable to pay, filing for bankruptcy has advantages for both debtor and creditors. It is, however, a complex proceeding in which the advice of a bankruptcy attorney can provide invaluable help during a stressful time.
Bankruptcy Overview
Bankruptcy is a legal process that occurs when a person or organization has incurred debts, but is financially unable to pay them all. It may be voluntary, which means the debtor files the bankruptcy petition, or involuntary, which means the creditors, rather than the debtor, begin the proceedings. Bankruptcy cases cannot be filed in state courts. They are, instead, filed in bankruptcy courts, one of which exists in each of the ninety-four federal judicial districts in the United States. It is then up to the court to decide whether bankruptcy should be declared.
The main purposes of bankruptcy are to help both the creditors and the debtor. Through a bankruptcy declaration, creditors may be able to recover at least a part of the money owed to them. For the debtor, the process is a way of making a fresh financial start, released from liability for unsecured debts and therefore free of the risk of prosecution by creditors. A declaration of bankruptcy will usually have an adverse credit rating effect, but this can be balanced by the new financial start and the ability in some states to keep various assets.
Since 2005, the United States Bankruptcy Code has required most debtors to meet with an approved credit counseling agency for a briefing before being permitted to file a case in bankruptcy court. A list of approved providers in most states for this type of briefing is available from the United States Trustee program, the section of the Justice Department that supervises the running of bankruptcy cases. The exceptions are the six judicial districts in North Carolina and Alabama, where the counseling providers are approved by the bankruptcy administrator offices in these districts.
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Chapter 7 Bankruptcy
Also known as "straight bankruptcy," Chapter 7 bankruptcy refers to the Bankruptcy Code chapter that allows for the sale of the debtor's non-exempt property. Non-exempt property can include such assets as household furnishings, cars, and work-related tools. Exempt property includes that which is subject to mortgages and liens. The proceeds of the sale are then distributed to the creditors, after which the debtor is free of most debts apart from possible alimony payments and taxes.
In a Chapter 7 bankruptcy proceeding the filing of a repayment plan is not required. The sale of the non-exempt assets and the payments to creditors is carried out by the bankruptcy trustee according to the Bankruptcy Code provisions. All businesses and individuals can file for Chapter 7 bankruptcy subject to a means test, if the current monthly income of the debtor exceeds the state median. The discharge of all dischargeable debts usually takes place within four months, unless an interested party files an objection to the discharge or seeks to extend the objection time. Anyone considering a Chapter 7 bankruptcy, however, is strongly advised to consult a bankruptcy attorney, because a Chapter 7 discharge is subject to various exceptions.
While a Chapter 7 bankruptcy can result in the loss of property, it also enables the debtor to make a new start fairly soon. A debtor who falls into financial difficulties once more is able to file again for bankruptcy under Chapter 7, but not until eight years has elapsed from the previous discharge. Debtors who want to find an alternative to the financial relief provided by Chapter 7 bankruptcy should consult a bankruptcy attorney.
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Chapter 13 Bankruptcy
Also known as "reorganization bankruptcy" or a wage earner's plan, Chapter 13 of the Bankruptcy Code enables debtors with regular income to plan to repay their debts over a three to five year period. People who want to keep non-exempt income that would be lost under a Chapter 7 bankruptcy may prefer Chapter 13 for this reason. It also provides an option for people with predictable income from which they will be able to pay their debts after dealing with living expenses.
A Chapter 13 plan cannot provide for debt repayments for over five years. With the help of a bankruptcy attorney, under Chapter 13, a debtor can prepare a repayment plan to make installment payments to creditors over whatever period the bankruptcy court allows within the five years. Unless the court approves a longer time, this will be three years, if the current monthly income of the debtor is less than the applicable state median, and five years if the current monthly income of the debtor is more than the applicable state median.
Reasons for filing a Chapter 13 bankruptcy can range from not wishing to lose non-exempt property such as a home to a determination to wipe out debts and start again with a clean slate. If you decide on Chapter 13, a bankruptcy attorney will, however, remind you that you must still make all your mortgage payments on time while the Chapter 13 plan is in force. Among the other advantages of Chapter 13 bankruptcy is the fact that secured debts, other than a mortgage for your main residence, can be rescheduled, which result in lower repayments.
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Chapter 11 Bankruptcy
Similar to Chapter 13, but generally applicable to partnerships or corporations, Chapter 11 of the Bankruptcy Code is also known as a reorganization bankruptcy. Unlike Chapter 7, it indicates an attempt to continue operating a business while debt and contractual obligations are supervised by a bankruptcy court, with creditors receiving payments over a period of time. Although Chapter 11 usually involves a partnership or corporation, individuals can also use it.
Under the provisions of Chapter 11, a bankruptcy court can make it possible for a company to start again by granting full or part relief from the majority of its debts. When the bankruptcy process is completed, the company's stockholders may be left with nothing in relation to their investment, if the debts of the company exceed the assets. However, because the debtor is an entity, the personal assets of the stockholders, apart from that investment, are not at risk. If the case involves a partnership, however, a bankruptcy attorney will advise that when a partnership is a debtor, the personal assets of the partners may in some cases have to be used to pay creditors.
As far as the company's creditors are concerned, they may find themselves owning the newly organized company. This can happen, if it is more economically viable to cancel some debts and allow the company to continue operating under the ownership of its creditors rather than to sell its assets individually. In this situation, the creditors could eventually be compensated for the loss they have suffered if the new company achieves financial success.
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Remaining Debts
Bankruptcy does not mean the elimination of all your debts. The main types of bankruptcy that concern individuals, Chapter 7 and Chapter 13, both leave you with remaining debts after you have finished in the bankruptcy court. You should discuss such debts with your bankruptcy attorney to ensure that you understand your situation and know what you have to do about it.
The debts that have to be paid at the end of a Chapter 7 bankruptcy or during the repayment period of a Chapter 13 are child support, alimony, government student loans, unless undue hardship is involved in their repayment, legal penalties and fines, debts you forgot to list when you filed for bankruptcy, and any debts for death or personal injury resulting from driving while intoxicated. Also on the list of debts that will have to be paid are all tax debts including recent income tax debts. In the complex area of tax debts, you will have particular need of a bankruptcy attorney to guide you through bankruptcy court.
There are a number of other debts in a Chapter 7 case that may be declared non-dischargeable by the bankruptcy court and which may be discharged in a Chapter 13 bankruptcy case. These may include debts results from fraud, from credit purchases or loans made or taken out within 60 days of filing for bankruptcy, as well as debts from larceny, breach of trust, embezzlement, or willful or malicious injury to a person or property. You should also seek the advice of a bankruptcy attorney about debts for which you may also still be liable under a divorce decree or settlement.
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Alternatives to Bankruptcy
If you prefer not to find yourself in bankruptcy court, you may want to investigate some of the alternatives. A bankruptcy attorney can help explain the options and whether they would be appropriate in your particular situation. The alternatives sometimes require the help and support of your creditors, but they may be prepared to lend this support in the interests of getting you back on your feet financially.
As your creditors are vitally concerned with your money problems, you could try working out an arrangement that you think would be helpful for them as well as for you, and then approaching them about it. Some creditors are willing to help in such cases, especially if they see you are making a genuine effort to repay the money you owe them. Apart from creditors, an organization that may be able to help you is a bank or other type of financial institution that may be willing to consolidate your debts and put them into one loan. You may be able to borrow enough to pay off all your debts, with one monthly payment lower than the sum total of all your debts.
There may not even be the need to borrow money from a financial institution. You may be able to preserve your credit rating by arranging to pay each of your creditors a specific amount over a set period, an informal arrangement that is similar to debt consolidation. The difference is that, provided you know you will have the ongoing income to meet the financial commitments you make with your creditors, you will not have to borrow money to meet those repayments.
Do you have Credit Card Debt? Call 800-689-1714
Staying out of Debt
If you have been through bankruptcy, or know someone who has, you may see it as a means to an end when there seem to be no other financial answers for you. It is, however, not the ideal goal of anyone who starts a business with the high hopes and expectations natural to such a venture. Once you see trouble looming, before passing the point of no return, seek expert advice from someone such as a bankruptcy attorney about ways to avoid getting into debt and about ways to get out once you find yourself there.
Before deciding that bankruptcy court is your best option, you may be in the position to get out of financial difficulties or to at least have more control over your debt. Consider your assets and discuss with a bankruptcy attorney the advisability of selling some or all of them and using the proceeds to pay off your outstanding debts. Deciding to sell your home or car doesn't have to leave you on the streets and without transport. It is quite likely that you will have to downgrade, but depending on the size of your total debt, by studying the market and selling carefully, you may be able to avoid bankruptcy court while still functioning financially and satisfying your creditors.
If your home is one of your assets, you may be able to borrow enough money on it to reduce the debt substantially or to pay it off completely. Getting a second job, if possible, and using all the money from it to pay off your debts, starting with those with the highest interest rates, would make a difference, as would cutting out the use of credit cards until times improve.
Do you have Credit Card Debt? Call 800-689-1714
Choosing a Bankruptcy Attorney
It is not compulsory to hire a bankruptcy attorney when you are filing for bankruptcy. However, it is an extremely complex process and one in which you should give yourself the benefit of the most expert help available. No matter how well you think you are coping, this will be a worrying and stressful time. Having someone on hand to take care of the legal work and to appear on your behalf in bankruptcy court will reduce that stress and probably help you obtain the best outcome and save money in the process.
There are various ways to locate a bankruptcy attorney. If you are comfortable with the Internet, you will find a variety of sites advertising firms and lawyers in your locality with their areas of specialty categorized. The Yellow Pages of your phone book are also a good guide to such help. You may also be able to get a word of mouth recommendation from a lawyer you know who, while not working as a bankruptcy attorney, is quite likely to be able to recommend someone who does. The initial consultation is often free.
Once you have decided to see a bankruptcy attorney to discuss your case, make sure that you are as well prepared as you can be and already have all the information your lawyer has asked you to take to the initial meeting. At the meeting, make sure you don't hold back any information about your financial situation. This is essential if your bankruptcy attorney is to be able to give you the most relevant and helpful advice and to represent you capably in bankruptcy court.
Do you have Credit Card Debt? Call 800-689-1714
Life after Bankruptcy
Life assuredly goes on after bankruptcy. The main purpose of a proceeding in the bankruptcy court is not only to try to recover as much money for your creditors as possible, but also to help you make a new start. The sooner you can get that new start organized, the better for you and your family.
Your bankruptcy will not necessarily affect the finances of your spouse, provided he or she did not sign a contract or agreement for any of the debt you incurred. A spouse who owns a supplemental credit card is likely to be responsible for its debt although this differs in the community property states of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these states, one partner can contract for a debt without the other's signature, but that other partner would still have a legal obligation in relation to the contract. This is a matter in which you need the information and advice available from a bankruptcy attorney.
Some people worry about losing their jobs after becoming bankrupt, but the law prevents an employer from discriminating against you in this way. Even credit cards are not necessarily lost to you. Once your case is filed in the bankruptcy court, credit card companies have the right to cancel your cards, but it is not the end of the road in this regard. There are secured cards, limited to an amount you deposit with the issuing organization, but increasing as you prove you are paying the debt and can continue to do so. You can also take out a mortgage loan two years after a bankruptcy discharge with terms equal to those of people in a similar financial situation who have not filed in the bankruptcy court. This fact remains on your credit report for the next ten years, but as time progresses is regarded as less negative.
Do you have Credit Card Debt? Call 800-689-1714
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