What you should know about bankruptcy and how it can help you.
Bankruptcy, for most is a very scary term, which the vast majority of people do not fully understand or simply only have a very basic knowledge of what it is. When you hear the word bankruptcy, visions of losing everything that you own or large corporation going under, is what most of us would think, but that couldn’t be further from the truth; bankruptcy is not an inevitable outcome, in fact it’s actually a solution to many people and companies financial distress. Depending on your particular financial situation, will determine if bankruptcy is the right choice for you or your business.
In this blog we will be focusing on Chapter 7 Bankruptcy and Chapter 13 Bankruptcy, otherwise known as consumer bankruptcy. These should not be confused with Chapter 11 Bankruptcy or Chapter 12 Bankruptcy, which are to be utilized when a business needs to be reorganized in order to remain operating.
What questions you should be asking to determine if bankruptcy is in your future:
- Are you only making the minimum monthly payments on your credit cards?
- Are debt collectors calling you on a regular basis?
- Are you in constant fear when dealing with your finances?
- Are you forced to use credit to pay for daily necessities?
- Have you tried or considering some form of debt consolidation?
- Have you lost track of how much money you owe creditors?
If you answered yes to one or more of these questions, it’s time to take a closer look at your financial situation. At this point you must make account of all of your income and all of your debts, while paying very close attention to your usual monthly expenses. If you find yourself only being able to make your minimum monthly payments on your credit obligations or barely breaking even every month, bankruptcy may be the right solution for you.
Chapter 7 Bankruptcy
Chapter 7 Bankruptcy is known by many names; some call it “Fresh Start Bankruptcy”, while others call it “Liquidation Bankruptcy”. The reason it is known as “fresh start bankruptcy”, is because once you receive your Chapter 7 bankruptcy discharge, you get a fresh start on your financial situation. Alternatively, the term “liquidation bankruptcy”, refers to the fact that the bankruptcy trustee, will sell off all nonexempt property, in order to pay off a portion or all of your debt. But don’t let this scare you, depending on the state you live in, you can either choose from your states bankruptcy exemptions or the federal bankruptcy exemptions. These exemptions will allow you to keep most or probably all of your assets and/or property. You should always consult a knowledgeable bankruptcy attorney, in order to determine which exemptions would be the right choice for your particular situation. These bankruptcy exemptions allow you to keep the property that you need to be able to continue working and maintaining your primary residence, such things as your clothes, furniture and a certain amount of the equity in your vehicle. But as I stated before, the majority of people get to keep all of their property, but this does depend on which state you live in in your particular debt and assets.
To begin the bankruptcy process, you will need to take a credit counseling course, which is usually online or over the phone. The certificate for this course is only good for 180 days, so do not take this course until you are ready to file Chapter 7 bankruptcy. After you file your bankruptcy petition, within one months time you will be going to a 341 meeting of creditors. This is essentially where you get to meet the bankruptcy trustee, go over your bankruptcy petitions and this will be when you’re informed if the bankruptcy trustee requires any additional documentation. This additional documentation usually consists of up-to-date bank account statements, tax returns, pay stubs, or anything you missed, when you file your bankruptcy petition. The 341 meeting, usually only last between 5 to 15 minutes, depending on your particular situation. After you’ve gone to the 341 meeting, the next thing you must do is take your second bankruptcy credit counseling course, which is about the same length as the one you took before you file bankruptcy. The first course is essentially “this is how you got yourself into bankruptcy” and the second course is essentially “this is how you keep yourself from going back into bankruptcy in the future”.
After you taken both of your credit counseling courses and have appeared at your 341 meeting of the creditors, there is nothing to do for you except to sit back and wait for your bankruptcy discharge to be mailed to you. The entire process from filing the bankruptcy petition to receiving your discharge is usually between 4 to 5 months, but if you require more time to get the bankruptcy trustee additional documentation the process may take a little bit longer.
Chapter 7 bankruptcy will not allow you to wipe out all your debt, some debts are what is considered nondischargeable debts. Some examples of nondischargeable debts would be child support orders from Family Court, income tax obligations to the federal government and state government which are three years old or less (some older tax obligations may be discharged, but that subjects for complete other blog), any debt that revolves around you committing fraud or if you had a judgment awarded against you for injury or death due to the fact you were drunk driving and someone was either injured or killed. Besides for those particular circumstances, the vast majority of your unsecured debt will be discharged in bankruptcy. You may discharge secured debt, such as a mortgage or a car loan, but you will lose the collateral or the property which secures that debt. In the example of a mortgage, that would mean you would lose the house or in the situation of a car loan, that would mean you would lose the car. You cannot remove the obligation of debt on a secured debt and still keep the collateral which secures that debt.
Chapter 13 Bankruptcy
Chapter 13 Bankruptcy is for people who do not qualify for Chapter 7 bankruptcy or people who do qualify for Chapter 7 bankruptcy, but have assets that would be seized by the bankruptcy trustee and sold to pay those debts. Chapter 13 bankruptcy is very similar to chapter 7 bankruptcy, with some very important distinctions. People who cannot pass the means test for Chapter 7 bankruptcy, meaning that they make more than the median family income for their household size, thus precluded from filing Chapter 7 bankruptcy, may employ the use of chapter 13 bankruptcy. Although, the most useful reason to file chapter 13 bankruptcy is to help those who have fallen behind on their monthly payments of the secured debt, such as a mortgage, loan or car loan.
Chapter 13 bankruptcy allows you to formulate what is called chapter 13 repayment plan, which gives you either three or five years to repay the amount of payment you have in arrears, while making your usual monthly payments. So basically, if you’re six months behind on your mortgage, due to a medical reason or the temporary loss of income, chapter 13 bankruptcy can help you solve this problem. As long as you can make the usual monthly payments, chapter 13 bankruptcy will allow you to pay off the monthly payments that are in arrears in either a three-year plan or a five-year plan. Basically, if you are using a three year plan you take how much money you are in arrears or all, divides that by how many months are in three years or five years, add 15% for the bankruptcy trustee and this is your monthly trustee payment. If you also have unsecured debt, a portion of this must also be paid back in a chapter 13 bankruptcy, although not all of your unsecured debt such as credit cards needs to be paid off in a chapter 13 bankruptcy. The amount that needs to be paid off, is a mathematical equation that is formulated by your income and expenses and the amount of debt you have.
Many of the other processes of a chapter 13 bankruptcy, are exactly the same as a chapter 7 bankruptcy, except for some minor differences. The requirements of taking a pre-filing bankruptcy credit counseling course, the 341 meeting, and taking the second bankruptcy filing course are essentially the same. Also, the bankruptcy petition are basically the exact same documents between the chapter 7 bankruptcy and Chapter 13 bankruptcy, the major difference being that the chapter 13 bankruptcy also includes the filing of a three year or five-year repayment plan. Another major difference in chapter 13 bankruptcy, is that you do not lose your assets or property, as long as you can make the required payments on those pieces of property that are secured. There are exceptions and limitations, but for most people you will be able to keep all of your property and still receive a bankruptcy discharge.
Once you receive your bankruptcy discharge, either in a chapter 7 or Chapter 13, you are then free to go on with your life. At this point the major drawback will be that bankruptcy will be listed on your credit report for the next 10 years. Do not worry, this is not the end of the world. Many people with bankruptcy on their records have purchased a new home or new car within a few years of receiving a bankruptcy discharge. Your credit report will soon start repairing itself, after it takes its initial hit due to filing for bankruptcy and receiving a bankruptcy discharge. But there are many things you can do or services you can employ, which can drastically shorten the time in which you can increase your credit score across all the credit reporting agencies (more on that topic in a future blog).
Depending on your situation, chapter 7 or Chapter 13 bankruptcy, can give your financial well-being a new lease on life. Always employ the services of an experienced bankruptcy attorney in determining which chapter of the bankruptcy code you should file under and preparing your bankruptcy petition, required document and if you’re filing a chapter 13 bankruptcy your bankruptcy repayment plan.
Joseph F. Botelho, Esq.
BOTELHO LAW GROUP
Attorneys At Law
901 Eastern Ave.
Fall River, MA 02723