What is Bankruptcy?
Bankruptcy is a means for individuals and businesses to resolve their debts in times of financial hardship. This can involve discharge of the entire debt or a plan to repay as much as possible during a period of up to 5 years.
The United States Constitution Article 1, Section 8, Clause 4 States:
“The Congress shall have power… To establish … uniform Laws on the subject of Bankruptcies throughout the United States;”.
Congress does provide for the right to file Bankruptcy pursuant to Title 11 of the United States Code. Individuals and businesses have a moral, constitutional, and legal right, if qualified, to file for Bankruptcy protection.
What Bankruptcy type is best for me?
Generally, most individuals will only qualify for one chapter or the other. There are various factors that will determine which chapter is best. A good Bankruptcy attorney will help you make the correct choice.
Chapter 7
To qualify for Chapter 7 Bankruptcy, you must be at or below the State median income for your household size. If you are above the State median income, then you will perform what is known as the means test. If you have no or nominal disposable income under the means test, then you would qualify to file for Chapter 7 Bankruptcy. If you have too much disposable income, you will have to consider Chapter 13 Bankruptcy. Chapter 7 will discharge your obligation to pay dischargeable debts.
Chapter 13
If you do not qualify for Chapter 7, you have the option of filing Chapter 13, personal reorganization. Chapter 13 Bankruptcy requires that you have disposable income to make some payments for what is usually a 3 – 5 year period. Any balance that is not paid in full during this time will be discharged at the end of the plan.
If your unsecured debt exceeds $394,725 and your secured debt exceeds $1,184,200, then you will not qualify to file Chapter 13 and would have to consider Chapter 11.
Chapter 13 is also an option for people who fall behind with secured debts, such as a mortgage on their home. They may have enough income to pay their monthly bills outside of bankruptcy, but do not have sufficient funds to bring the mortgage or other secured debt current. Chapter 13 will allow them 3 to 5 years to bring the loan current rather than losing their home to foreclosure or other asset to repossession or property execution.
How will bankruptcy help me?
From the moment your Bankruptcy petition is filed, you are under the protection of the Bankruptcy Stay. Creditors cannot act against you, without first obtaining permission from the Bankruptcy Court. No creditor can start a lawsuit or continuing one that’s already in process. If the Bankruptcy concludes successfully, the debt will be discharged, and the creditor will never be entitled to obtain judgment. This is significant for several reasons. Most important, avoiding judgments will help your future credit profile. Also, a lien cannot be filed against your property and there will be no wage garnishments or bank executions. You are living your new and brighter financial future.
Bankruptcy relieves the stress of unpaid bills and harassment from collection agencies. It provides a better quality of life for your family. Lifting the weight of debt comes with incredible peace of mind and a better night’s sleep.
Most debt, including medical expenses are dischargeable in Bankruptcy. Below is a list of common debts that are not dischargeable in Bankruptcy.
Bankruptcy will not normally wipe out:
- Money owed for child support or alimony;
- Most fines and penalties owed to government agencies;
- Most taxes and debts incurred to pay taxes which cannot be discharged, HOWEVER, Bankruptcy can discharge income tax if it is for a tax year that is more than 3 years old, the return was filed at least 2 years before filing Bankruptcy and the tax has been assessed;
- Student loans, unless you can prove to the court that repaying them will be an ‘‘undue hardship’’;
- Debts not listed on your bankruptcy petition;
- Loans you got by knowingly giving false information to a creditor, who reasonably relied on it in making you the loan;
- Debts resulting from ‘‘willful and malicious’’ harm;
- Debts incurred by driving while intoxicated;
Can I keep my assets?
Your assets become property of the Bankrupt Estate when the petition is filed. You can use Federal Bankruptcy exemptions or your state’s exemptions to protect certain property to a specified value. Almost all our clients over the past 31+ years have been able to keep all their assets by properly claiming the appropriate exemptions.
How bad does Bankruptcy effect my credit?
On the one hand, Bankruptcy is not a positive on your credit profile. However, not filing is often more damaging to your ability to obtain credit. If you qualify to file Bankruptcy, you have credit problems. You are probably past due on payments to creditors. Your credit score can be damaged even when your payments are current if the outstanding balance on credit cards is too high. These derogatory marks will continue your credit report indefinitely, until brought current or discharged in bankruptcy, and then for another 7 years. Bankruptcy can speed the process of repairing your credit.
Proper Bankruptcy planning should produce a positive impact with your future finances. You should have disposable income to provide a better quality of life for your family. Proper planning can also help your credit score improve significantly, even in the first year. Managing your finances properly going forward will help you qualify for a mortgage within a few years of discharge. Bankruptcy is not the end of your financial life; it is the beginning of a brighter financial future.
