If you find yourself struggling with a significant amount of debt, you may be nervous about your creditors suing you to take your property or other possessions. And while it is within a creditor’s rights to sue debtors for what they owe, the law provides certain protections that those who owe can take advantage of. Here is a short guide to debt relief practices and what to do if you find yourself in these situations.
There are two types of bankruptcy for individuals: the Chapter 7 consumer bankruptcy debt discharge option and the Chapter 13 repayment option. Which one will be best for you depends on your specific circumstances. Chapter 7 bankruptcy is the more traditional option. When you file for Chapter 7 bankruptcy, you are agreeing to give up all non-exempt property in order to pay for as much of your secured debt as possible. The rest of the debts are then discharged by the court.
It is important to note that Chapter 7 has an income requirement. Specifically, you must not have enough coming in to pay a certain portion of your outstanding debts. There is a way to calculate just how much that amount is, which a bankruptcy attorney can help you with.
The other type of personal bankruptcy is Chapter 13. This is known as the repayment option. Filing for Chapter 13 bankruptcy means that you have a different goal than someone would under Chapter 7. While Chapter 7 is all about discharging as much debt as possible, Chapter 13 is more about structuring a manageable payment plan for long term debt relief.
Some of your debts will automatically be discharged, but not nearly the amount that would be with Chapter 7. A court-appointed trustee will oversee your finances for the duration of the repayment period, which can last up to five years.
The type of bankruptcy used for businesses often depends on the corporate structure. For sole propiertorships, the business is essentially a legal extension of its owner. As such, they can file for either Chapter 7 or Chapter 13 bankruptcy depending on the circumstances. For liquidation, Chapter 7 is the better option. For rehabilitation, you may need to go through Chapter 13.
Partnerships, LLCs, and corporations are separate legal entities, so the best choice is usually Chapter 11 bankruptcy. This type’s goal is reorganization and rehabilitation, just like with Chapter 13, but solely for businesses who still want the business to operate. A court appointed trustee will oversee the process, which can take up to twenty years and be incredibly complex.
While bankruptcy offers a number of legal protections, you may not want to go through the process, or it may not be practical. For example, if you only have one creditor, going through the bankruptcy process may take more time and money than it is worth. You and your attorney can always negotiate individually with creditors for a different solution.
You may draw up a contract agreeing to pay a certain amount of money to discharge the debt as a whole, or work out a payment schedule with them personally. As long as both parties agree to the plan and sign it, you may be able to avoid bankruptcy court altogether.
One of the major aspects to the bankruptcy process is debt prioritization. While some debts can be discharged outright, there are some that cannot by law (“non-dischargeable debts”). The most common types are:
- Student loans;
- Child support; Spousal support; and
- Any fines incurred by violating the law (for example, parking and traffic tickets).
In addition, creditors can ask for certain other debts to be labeled as non-dischargeable by the court, such as debts incurred by fraud or embezzlement.
On the other hand, there are times when a debtor can call themselves judgment proof. This is when the creditor sues the debtor, but the debtor can prove that they do not have the income to pay them back, and any other property they own is protected by law.
The most common is homestead laws, which protect the family home from creditors, liens, and other debts. Being judgment proof is not necessarily a permanent situation, though. If creditors can prove a significant rise in income in the future, they can file suit to recover the past debt.
Yes. If you are being sued or contacted by creditors or debt collection agencies, you need to contact a bankruptcy lawyer as soon as possible. They will know if there are any legal defenses you can assert to avoid some of or all of the debt. They can also help you to come up with a payment plan for your creditors if needed.