A bankruptcy is a legal procedure. The bankruptcy process is invoked by individuals and companies. Individuals and businesses use the bankruptcy process because they are unable to pay their debts. An individual or business initiates a bankruptcy petition by filing a bankruptcy petition with the federal bankruptcy court. Federal law provides for several types of bankruptcy proceedings.
The most recognized of the proceedings are filed under Chapter 7, 11, or 13 of the United States Bankruptcy Code, a federal law. A so-called “Chapter 7” bankruptcy proceeding involves an individual filing a bankruptcy petition. Here, the individual who owes money (the “debtor”) liquidates assets (sells assets to off pay creditors), settles, or discharges debts. A discharge of debt is cancellation of that debt, after having gone through the Chapter 7 proceeding.
In Chapter 13 proceedings, individuals who regularly earn income come up with a plan to repay a portion or all of their debts. The repayment plan consists of installment payments to creditors who are owed money. The repayment plan lasts from three to five years. A Chapter 7 bankruptcy is also an option for businesses that lack sufficient assets to pay creditors. By filing this proceeding, a company goes out of business. Its assets are sold and used to pay off debts.
What’s the Main Goal of Bankruptcy?
Individuals and companies file for bankruptcy because they are unable to pay existing debts, either in part or in full. The main purpose of an individual or business filing for bankruptcy is to have debt discharged. In a Chapter 7 proceeding, the debt is discharged by means of the court issuing a discharge order. Individual debts under Chapter 7 are discharged if the filer meets an income and means test.
In a Chapter 13 bankruptcy, the main goal is to make payments according to the payment plan so that debts can be discharged. If a Chapter 13 debtor successfully makes payments under the plan, the remaining debt is discharged, or “wiped out.”
Will Bankruptcy Wipe Out All My Debt?
If an individual successfully completes a repayment plan under Chapter 13, the court will award a discharge order. This order discharges, or wipes out, any remaining debt balance. In a Chapter 7 proceeding, the debtor will receive a discharge order, which also wipes out debts. Chapter 7 and Chapter 13 differ as to what debts can be discharged. In both a Chapter 7 and a Chapter 13 proceeding, the following debts are discharged:
- Personal loans;
- Money owed under a lease or a contract;
- Medical bills;
- Credit card debt; and
- Promissory notes.
However, certain discharges are allowed in a Chapter 13 proceeding but not in a Chapter 7 proceeding. These include, among others.
- Debts that the debtor could not previously discharge;
- Debts for retirement plan loans;
- Debts resulting from payment of tax debts that can’t be discharged.
Certain debts are neither dischargeable in Chapter 7 or Chapter 13. These include:
- Child support debts;
- Alimony; and
- Any fines incurred, or restitution made, as the result of violating the law.
What Are Some Consequences of Bankruptcy?
Both Chapter 7 and Chapter 13 bankruptcies have positive and negative consequences. A Chapter 7 bankruptcy proceeding is generally completed quickly (from 3 to 6 months). Chapter 7 debtors may receive new credit lines within a few years of being discharged. The filing of a Chapter 7 proceeding also “automatically stays,” or temporarily stops, collection activities. On the downside, filing a chapter 7 results in a notation of “filed for bankruptcy” on your credit report. This notation can remain for up to 10 years before being removed. Chapter 7 bankruptcy does not eliminate student loan debt.
A Chapter 7 bankruptcy also makes obtaining a mortgage extremely difficult. Filing for Chapter 13 bankruptcy gives you time (3-5 years) to pay off debt. In some circumstances, the length of payment time can be extended. When you are involved in a Chapter 13 bankruptcy proceeding, you are allowed to keep the property that you are making repayments on. In addition, successful completion of a repayment plan bars individual creditors from seeking “payment in full.” In other words, individual creditors are entitled to what they were owed under the terms of the repayment plan, and not more.
Disadvantages of a Chapter 13 bankruptcy include having to pay repayment debts out of disposable income. Disposable income refers to all remaining income after necessities (food, shelter, medical treatment) have been paid for. A Chapter 13 bankruptcy also makes obtaining a mortgage extremely difficult.
What Effect Does Bankruptcy Have on Taxes?
In a Chapter 7 bankruptcy, an individual can receive federal tax refunds while the proceeding is ongoing. At the end of the proceeding, individuals are discharged from payment of some taxes. The tax debts that are discharged depend upon the facts of your case. The same is true with respect to a Chapter 13 proceeding. Individuals may be entitled to refunds during the proceeding. Individuals may be entitled to discharge of certain tax debts, depending on the circumstances.
What Happens to Co-Signers Of My Debts when I File for Bankruptcy?
A co-signer is an individual who has agreed to pay a debt in the event you are unable to pay it (if you default). If you default, the creditor can obtain the money from the co-signer. If you file a Chapter 7 petition, the automatic stay extends only to you. It does not extend to co-signers. This means that when you file for bankruptcy, creditors can immediately act to collect the debt from the co-signer. Under Chapter 13 co-signers are eligible for a “codebtor stay.” This means they will receive the same automatic stay you receive.
During the automatic stay period, creditors cannot collect from co-debtors. A co-debtor stay ls which means the automatic stay also applies to any codebtors, including cosigners. While the co-debtor stay is in place, creditors cannot collect against a cosigner. The co-debtor remains in place until the proceedings are finished. A creditor may request that the co-debtor stay be terminated.
The creditor must show that there is a good reason for termination of the stay. An example of a good reason is that the co-debtor was the person who received the benefit of the debt. Another example is that payment of the debt is not provided for in a Chapter 13 repayment plan.
How Can Creditor Harassment Be Stopped?
Creditor harassment is the practice of repeated abuse, coercion, or intimidation of individuals to get them to pay off debts. Harassment may occur through telephone calls. It may also occur through regular mail and email. Filing for bankruptcy can put a stop to harassment. After filing, the automatic stay kicks in. During the time of the automatic stay, creditors must cease collection activity.
How Can I Protect My Property from Repossession?
When creditors lend money, they often take a security interest in certain debtor assets. Creditors do this to ensure the loan is repaid. An example of this is the process of obtaining a mortgage. A creditor extends money to an individual to purchase a home. The creditor takes a security interest in the home. If the person cannot repay the loan, the creditor can foreclose on the home.
To prevent creditor repossession, a debtor can contact their creditors. The debtor can request that the repayment terms be modified to allow for a smaller monthly or installment amount. A creditor may extend the life of the loan, or increase the rate of interest, in exchange for a smaller monthly payment. If someone cannot maintain payments under a voluntary plan, the person may consider filing bankruptcy.
Bankruptcy discharges certain debts, meaning that at the end of the bankruptcy proceeding, the debt is cancelled. If the debt is mortgage debt, the debtor may be able to redeem (recover) the property even after it has been foreclosed. This is the case in states that allow for the “equity of redemption.” The equity of redemption is a legal right that allows debtors to recover their home, provided they pay all current loan amounts, fees, and costs.
Should I Hire a Lawyer for My Bankruptcy Issue?
If you are contemplating whether to file bankruptcy, you should consult a bankruptcy lawyer. An experienced bankruptcy attorney near you can review the facts of your situation. They can also advise you of the pros and cons of filing a bankruptcy proceeding under Chapter 7 or 13, and represent you at court hearings.