Some people today find themselves far behind on their bills with limited means to pay them back. Instead of battling with their creditors for years and making little progress, people now have the option of filing for bankruptcy. This is a process in which a debtor applies for a discharge of his debts or agrees to a repayment plan. Since it can be a rather daunting task filing all the required paperwork with the government, most people find it best to hire an attorney to aid them in the process.
Chapter 7 and Chapter 13 bankruptcies are available for both consumers and businesses who find themselves burdened by too much debt. Consumers can file a Chapter 7 bankruptcy and get a discharge from unsecured debts like credit cards and medical bills. Businesses can file a Chapter 7 and have a trustee sell off most of their assets to pay creditors. Meanwhile, a Chapter 13 bankruptcy is available for people who can pay back all or part of their debts according to a repayment plan of not more than five years. Businesses cannot do so, although a business owner can file a personal Chapter 13 to reorganize personal and business debts.
A consumer would pay an attorney, including filing fee, to file a Complaint with the federal government to begin a Chapter 7 case. He will need to take an approved credit counseling class before filing the case. He is likely struggling with paying his unsecured consumer debt including personal loans, credit cards, and medical bills that are in excess of $25,000. This is intended for lower and moderate income people with little assets to discharge their debts while keeping their house and car.
The debtor and his attorney go to a 341 meeting of creditors with the Department of Justice to give those he owes money to a chance to object to the bankruptcy. After all, they want their money! Usually none show up and the trustee from the government grants the bankruptcy after selling much of the debtor’s minor assets. The trustee does ask about whether the debtor forgot to disclose that he is coming into any substantial money in the near future. This could be a lottery winning, sizable inheritance, or proceeds from a life insurance policy. He needs to complete another credit counseling course and finally gets a letter to mail to creditors to stop any lawsuits or wage garnishments. However, collection actions are supposed to stop when the attorney initially files the case.
A Chapter 7 bankruptcy does not discharge all consumer debts and will stay on your credit history for up to 10 years. Student loans, alimony, child support, and some tax debts are not dischargeable. However, it does give debt relief and a fresh start to a problem that hopefully will not be repeated.
When a business files a Chapter 7 bankruptcy, the company effectively goes completely out of business and sells its assets to pay its debts. A trustee is appointed to sell the company’s assets and pay its creditors. This can be done for sole proprietorships, partnerships, and corporations who do not have any substantial assets. Those investors who took the least risk are paid first because their investments were backed by collateral. Bankruptcy laws determine the order of payment.
Those people and businesses who filed a Chapter 7 bankruptcy are usually glad they did. They got protection from their debts while still keeping their major assets. There would be very little remedy for them otherwise. Businesses are able to able to gracefully go out of business with the help of a trustee who sells the assets while paying creditors.
A Chapter 13 bankruptcy gives individuals with more income and assets a chance to reorganize their finances and set-up a plan to payback their debts. This is done over a three-to-five year period after which some of the remaining debt may be discharged. Those families with more income are required to pay over the five-year period.
In order to be eligible to file a Chapter 13 bankruptcy, one must have a regular income, unsecured debts under $394,725, and debts secured by collateral of under $1,184,200. This is a bankruptcy option for those with more income and assets than those filing for Chapter 7.
With the help of your attorney, you must file a petition in U.S. Bankruptcy Court along with a proposal for repaying your debts. The court trustee will review the documents and contact your creditors before approving a final repayment plan.
Like a Chapter 7, medical bills and credit cards are eligible for discharge under a Chapter 13. Student loans, alimony, and child support are not available for discharge. However, student loans can be discharged if one endures a severe hardship or injury.
A Chapter 13 is favorable for preventing the foreclosure of a home. Once a bankruptcy is filed, a lender must stop with foreclosure proceedings. Upon the approval of the repayment plan, the mortgage lender must allow you to make repayment according to the payment plan. This is a great way to avoid foreclosure because it allows the homeowner to repay past due and current mortgage payments.
While keeping your home and getting current with a payment plan make filing a Chapter 13 favorable, it does stay on ones credit report for seven years. However, it may help ones credit score since keeping current with a payment plan is what best helps improve a credit score.
Businesses are not eligible to file for Chapter 13 bankruptcy, but there are ways around this. An owner of a sole proprietorship could find herself personally liable for business debt and might consider a Chapter 13 to discharge it. Some creditors require owners to guarantee debt with personal assets if the business is not profitable. She could create a repayment plan that includes both business and personal debts. She could pay minimums on unsecured debts, and after discharge, creditors could not come after her personally.
Debt is very much part of life in the modern world and with it comes great responsibility. Some lack self-control and make frivolous purchases. Others fail to pay-off their credit card balances every month. Others fail at a business venture only to find themselves personally liable for business debt. Be very careful with credit, it has the ability to saddle you with years of payments. Thankfully, bankruptcy is there to shine the light of hope on a dark situation. Bankruptcy may be a new beginning for you.
The above is for information purposes only and not intended and as legal advice. The attorneys at The Choi Law Group, LLC will be happy to discuss your legal needs with you.
Written by Christopher Pollard, Esq.