Bankruptcy law is a federal law designed to assist individual consumers and businesses facing financial difficulties. With respect to consumer debtors, the goal of bankruptcy is to help individuals get beyond their financial turmoil and obtain a fresh start. It provides a mechanism to eliminate debt that is often overwhelming to the debtor and which severely and adversely impacts her or her quality of life and emotional well-being.
The bankruptcy process involves preparing a petition that is to be filed in federal court. The petition contains information concerning an individual’s assets, debts, creditors, monthly income, monthly expenses and financial information. The debtor must include all of its creditors in the petition. Upon the filing of a petition, the court immediately grants the debtor an “automatic stay.” The automatic stay prohibits creditors from attempting to collect money or obtain property, starting or continuing lawsuits or foreclosures, freezing bank accounts and garnishing a debtor’s wages. Indeed, the automatic stay is so severe, creditors are not even allowed to contact a debtor to discuss the debt, by phone, mail or other means, while the stay is in effect. The stay remains in effect until the end of the case when the final discharge order makes these prohibitions permanent.
For a debtor that is married, it is not required that their spouse file bankruptcy also. Rather, any decision concerning a potential joint bankruptcy filing should be evaluated on the circumstances of a particular case at issue.
An individual’s bankruptcy filing can be reflected on their credit report for up to ten years. That does not mean that an individual will not obtain credit again. Many lenders in the credit card and mortgage industry do not automatically disqualify an applicant because they previously filed bankruptcy. In addition, it is important to note, that if someone is behind on their bills their credit rating is typically already be and getting worse. A bankruptcy filing allows the debtor to begin improving his credit.
In a bankruptcy petition filed under Chapter 7 of the Bankruptcy Code, a debtor seeks to obtain a discharge of outstanding debt. The discharge is a court order which absolves the debtor from having to pay debt classified by the bankruptcy law as “dischargeable.” The discharge serves as a permanent injunction against otherwise potential collection action for debt incurred prior to the bankruptcy.
In essence, a Chapter 7 bankruptcy discharge allows a debtor to proceed forward without financial turmoil, thereby providing the debtor with an opportunity for a fresh start.
Most debts are dischargeable, such as credit card balances, bank loans, court judgments and medical bills. Debt categorized by the bankruptcy law as “non-dischargeable” includes certain types of tax debt, most student loans, government fines, outstanding child and spousal support, and debts incurred from criminal or fraudulent conduct.
However, A Chapter 7 bankruptcy debtor filing technically results in the liquidation of a debtor’s assets designated as “nonexempt” by the bankruptcy law. Upon the filing of a Chapter 7 petition, a United States Bankruptcy Court Trustee is assigned to evaluate and sell a debtor’s nonexempt assets. The proceeds of any such sale are used to pay off creditors. A Chapter 7 bankruptcy debtor is able to retain all property categorized as “exempt.” In most cases, nearly all – if not all – of a debtor’s assets are exempt and, therefore, may be kept by the debtor.
Chapter 13 of the U.S. Bankruptcy Code provides a debtor with an opportunity to pay off his or her debts through a court-approved payment plan which is proposed by the debtor or his attorney. The plan provides for repayment of a percentage of the debtor’s debts over a 3-5 year period, from the future earnings of the debtor. A trustee is appointed to receive payments from the debtor and disburse them to creditors. The debtor remains in possession of all of his property, exempt and non-exempt. Upon completion of payments under the plan, the debtor typically receives a discharge, even if he has paid less than 100% of the debt.
A common scenario in which a debtor will utilize the Chapter 13 option is when the debtor is behind on its mortgage payments. Chapter 13 bankruptcy will stop a foreclosure proceeding and give the debtor the right to pay back the past due payments over a period of up to sixty (60) months. As part of the payment plan, a debtor is required to pay back a percentage (or all) of the unsecured debt.