Most individuals are familiar with the idea of bankruptcy. In many cases, it sounds like the perfect solution to an individual’s money problems. It may, however, be more complex than it seems.
In recent years, over half a million Americans have filed for bankruptcy. Even though it is common, many individuals do not realize there is a separate court system for bankruptcy cases.
The Constitution of the United States authorizes laws regarding bankruptcy. Congress passed and has repeatedly amended those laws.
Bankruptcy courts were established to administer these laws. These courts are part of the federal court system.
There are almost one hundred federal districts in the U.S. Each one maintains its own bankruptcy court.
The federal bankruptcy courts are the only courts that are permitted to hear bankruptcy cases. In other words, a bankruptcy case cannot be filed in state court.
A bankruptcy court judge has the authority to decide any issue connected to a bankruptcy case. This may include issues such as whether the individual is eligible to file for bankruptcy and whether they are permitted to discharge their debts. Similar to other courts, the decisions of a bankruptcy judge are binding.
What are the Types of Bankruptcy?
There are several different types of bankruptcy that may be available to an individual. It is important to be aware that a bankruptcy may do more harm than good if it is not done correctly.
An individual’s bills they were hoping to get rid of may fall into an exemption and not be discharged, depending on the type of bankruptcy chosen. Most individuals file under one of the three main chapters of the Bankruptcy Code, which includes:
Over half of the individuals who file for consumer bankruptcy file under Chapter 7. There are, however, other options that may better suit an individual’s situation.
In a Chapter 7 bankruptcy, an individual is required to sell most of their property to pay their creditors. It is also known as a liquidation bankruptcy.
An individual may be able to keep certain exempt property. It is also important to note that there are some non-dischargeable debts.
For example, if the individual engages in fraudulent behavior, including concealing financial records, they will not be permitted to discharge their debt. Other examples of non-dischargeable debt include:
- Student loans;
- Spousal support;
- Child support, and
- Certain taxes.
A Chapter 13 bankruptcy is usually filed by an individual with a higher income who wishes to keep their property. This type of bankruptcy requires the individual to submit to a repayment plan, which often lasts between 3 to 5 years.
A Chapter 11 bankruptcy is for commercial enterprises. It allows the business to repay their debts by reorganization and continuation of their business. The business may also be permitted to withdraw from certain obligations and contracts.
There are also less common types of bankruptcy which are available. These include:
- Chapter 9.
- Chapter 12; and
- Chapter 15.
A Chapter 9 bankruptcy is similar to the Chapter 11 discussed above. However, it is only available to municipalities, including cities and towns.
A Chapter 12 bankruptcy is for farmers and fisherman. It permits those who maintain a regular income to keep their businesses and to repay their debts over a certain number of years.
A Chapter 15 bankruptcy is a bankruptcy that deals with multiple countries. For example, American military personnel living abroad would qualify for a Chapter 15 bankruptcy.
Why Should a Borrower Avoid Bankruptcy Court?
In many cases, filing for bankruptcy is the best remedy for an individual’s debt problems. However, there are also some strategic reasons why an individual may want to avoid bankruptcy.
The first consideration is that bankruptcies, like all court proceedings, are public record. Some borrowers may want to avoid having their financial matters open to the public.
Another consideration is that an individual who files for bankruptcy loses a significant amount of their financial independence. A Chapter 7 bankruptcy requires the individual to forfeit all non-exempt assets. A Chapter 13 bankruptcy allows a court trustee to make financial decisions for the individual for the years they are on their payment plan.
The loss of financial freedom is often a necessary step for an individual filing for bankruptcy. Many individuals may not be in a position to allow someone else to tell them how to spend their money or how to dispose of their property.
There are some courses of action that may allow an individual to avoid bankruptcy completely. A benefit of hiring a bankruptcy attorney is that, in doing so, it may help the individual stay out of bankruptcy court.
An attorney will have knowledge regarding the proper course of action in a given situation than the average citizen would. For example, many individuals file for bankruptcy just to get their creditors off their back. Laws have been passed that prohibit excessive harassment from bill collectors. A good attorney can provide assistance in shielding an individual from aggressive creditors.
What Options do Borrowers Have Other than Going to Bankruptcy Court?
One option that a borrower has other than going to bankruptcy court is to negotiate with their creditors. A creditor would prefer an individual not file for bankruptcy.
This is because they would lose any control they have over the situation. Because of this, many creditors are willing to settle an individual’s debts for less than they owe to help avoid bankruptcy.
If an individual is facing foreclosure, they can refinance their mortgage. A borrower may be able to negotiate for a lower monthly mortgage payment in exchange for a longer payment period.
It is important to note that, in some cases, it may be in an individual’s best interests to do nothing. If an individual has no assets, they are considered judgement proof because they have nothing to seize.
In other words, the individual’s creditors will not be able to collect anything from them since they do not have anything that can legally be taken. There are certain laws which prohibit an individual’s possessions from being seized. This may save an individual the time and expense of filing for bankruptcy.
What are Bad Reasons to Avoid Bankruptcy Court?
There are some bad reasons for an individual to avoid bankruptcy court. Many individuals choose not to pursue bankruptcy even though bankruptcy is clearly the best remedy for their situation because they may be ashamed of declaring bankruptcy.
Although there are valid reasons to avoid bankruptcy court, shame and pride should not deter an individual from declaring bankruptcy if necessary. The idea of bankruptcy is to give the individual a second chance and a borrower should not be afraid to ask for that chance if they truly need it.
Should I Seek Legal Help?
Yes, if you are considering filing for bankruptcy, it is essential to consult with an experienced bankruptcy lawyer. A lawyer can review your situation and help you determine whether bankruptcy is the best step for you to take.
Your attorney can discuss the potential outcomes and consequences of filing for bankruptcy as well as what property will be exempt. Discussing bankruptcy with an attorney can ease your mind regarding the process.