What is bankruptcy?Bankruptcy put simply, is a legal proceeding. It involves an individual or a business that is in a financial predicament, preventing them from paying their outstanding debts. At the start of the bankruptcy process, a debtor files a petition for bankruptcy. There are some uncommon cases where creditors can file a petition as well, but we’ll focus on the debtor in this article. Once the petition is filed, the assets of the debtor are evaluated. This is done to determine if any of the debtor’s assets could be used to repay some of the outstanding debt. Bankruptcy provides a person or business with an opportunity to have a fresh financial start by removing debts that cannot be paid. Further, bankruptcy offers creditors an opportunity to acquire a portion of the amount they are owed through the sale and liquidation of the debtor’s assets. To many people, the opportunity to petition for bankruptcy benefits the economy from a macro perspective in that it gives an individual or business a second chance to responsibly use credit. It also helps creditors who might have never collected anything on an outstanding debt the opportunity to recover a portion of the amount owed. With the completion of the bankruptcy, the debtor is relieved of the impossible financial debt obligations built up before the petition.
How does bankruptcy work?Bankruptcy is more than just paperwork; it is a court proceeding that involves a judge and, many times, a court trustee. These officials examine the debts, liabilities, and assets of the person or business who are unable to pay their debts. They then make an official decision on whether to discharge the financial obligations. If the debts are discharged, the creditors can no longer legally require the debtor to pay them. Bankruptcy laws are not trivial by anyone’s standards. These laws were written to give people and businesses whose finances are out of control a chance for a fresh start. There are many reasons that someone’s financial situation collapsed. Ranking near the top is bad decision-making, but there are as many reasons for the need for debt relief as people who are petitioning for bankruptcy. Lawmakers, economists, and others identified that our economy would benefit by giving individuals and businesses who failed a second chance financially. Interestingly, nearly every person or business who petitions for bankruptcy is granted debt relief. In a 2016 study conducted by The American Bankruptcy Institute (ABI) of public court records, nearly 96% of the half-million petitions for Chapter 7 bankruptcy were awarded debt discharge. This means that those individuals were no longer legally required to pay their debt. This means that only about 4% or about 20,000 bankruptcy cases were dismissed, meaning the court felt as though the individual had the ability and resources to pay their debts. The study looked at other types of bankruptcy as well and found different percentages of discharge versus dismissed. Still, the message here is that for a majority of people who file for Chapter 7 bankruptcy are awarded debt relief.
What happens when you file bankruptcy?As we mentioned earlier, bankruptcy is not a trivial event. Most of the time, bankruptcy should be thought of as a last resort for individuals and businesses who are facing insurmountable financial situations. There are reasons bankruptcy should not be taken lightly. By being awarded a discharge of debt through bankruptcy, you get a second chance to get your financial situation under control. But, as many learn, there can be negative outcomes as well. Your assets and possessions can be effected by liquidation, and the bankruptcy will appear on your credit report for years. Getting approved for credit will be vastly more difficult because of the bankruptcy on your credit report. For those who are struggling financially, petitioning for bankruptcy provides the chance to reorganize debts to allow for more successful repayment. Other debts could be entirely eliminated. Regardless of the situation, petitioning for bankruptcy grants what is known as an “automatic stay.” At its core, an automatic stay blocks creditors from collecting on the debts. It essentially “freezes” your financial situation while the court examines all aspects of your case. The automatic stay prevents creditors or collection agencies from deducting money from your bank account, garnishing your wages, or going after your possessions or assets. The automatic stay allows you and the court time to work on your case with your creditors.
What is Chapter 7 Bankruptcy?In a Chapter 7 bankruptcy, a debtor liquidates his/her debt. In this situation, the debtor lists out all debts, assets, and income. The Trustee looks to see if the debtor has any assets that can be sold to pay off their unsecured debt to creditors. Unsecured debt includes credit cards and medical bills, for example. Debt that is known as “secured debt” includes home mortgages and car loans. So, in a Chapter 7 bankruptcy, the debtor lists all secured debt and either reaffirm the debt, surrenders the property, or redeems the debt. When a debtor reaffirms the debt, the debtor intends to keep making payments and keeps the assets. If the debtor decides to surrender the assets, then the debtor gives back the property. In the case where the asset is property or a house, the debtor might decide that they no longer want to keep their house because the home is worth less than the mortgage balance. If the owner can no longer afford the payment, then they can give the property back and will no longer be responsible for the mortgage payments. You can read our complete description of Chapter 7 bankruptcy here.
What is Chapter 11 Bankruptcy?When a business has a tremendous amount of debt that they are unable to pay, they have an option to file Chapter 11 bankruptcy. Chapter 11 is commonly known to be related to large corporations, but Chapter 11 is something that even small businesses can petition for. There are a few, extremely rare instances where an individual has filed for Chapter 11, but for the sake of this article, we’ll refer to Chapter 11 as a business-only bankruptcy. Chapter 11 is unique in that it allows the business or debtor to put the creditors in a holding position. When the creditors are, essentially, paused from collecting their debts, the business owner has the opportunity to create a business plan to increase revenue and profitability after the bankruptcy is complete. This plan might include new marketing efforts, adding new sources of revenue, cutting costs, and other efforts that could make the business more profitable. Chapter 11 differs from Chapter 7. In Chapter 7, the debtor liquidates their assets and often closes the business to repay their creditors. Chapter 11, on the other hand, is a time-consuming process that allows a business to reorganize so that they can continue to operate and ultimately pay their debtors.
What is Chapter 13 Bankruptcy?Chapter 13 bankruptcy is the second most common type of bankruptcy for individuals. In Chapter 13 bankruptcy, the focus is less about the removal of debt and more about reorganizing a person’s finances to make the payment of debt more manageable. Chapter 13 enables debtors with regular income to create a plan to repay all or part of their debts to creditors over a three to five year period. The plan will pay back secured creditors, and unsecured creditors will receive a portion of disposable income. Unsecured creditors must receive at least as much as they would have received in a Chapter 7 bankruptcy. If a debtor’s current monthly income is less than the applicable state median income, the plan is only for three years, generally. If a debtor’s current monthly income is higher than the applicable state median income, the plan is typically five years. In no case may a plan be longer than five years. A debtor must have a regular income to fund the plan. For individuals to be eligible to file under Chapter 13, the debt limits for unsecured debts must be less than $360,475 and $1,081,400 for secured debts. So, if a debtor has multiple houses, that debtor may not be eligible for a Chapter 13 bankruptcy.
How long does bankruptcy stay on your credit report?Chapter 7 bankruptcy For those who file Chapter 7 bankruptcy, they will likely have to wait 10 years for the bankruptcy to fall off their credit reports. For the debts that are included in the bankruptcy, they too will appear on a credit report. Those debts will be listed as “discharged” or “included in bankruptcy” and will reflect a balance of $0. These marks on the credit report will stay for about 7 years. Now, they could drop off sooner if they were delinquent prior to petitioning for bankruptcy. Chapter 13 bankruptcy Remember that in a Chapter 13 bankruptcy, you agree to try to repay at least a portion of the debt. This repayment or partial repayment can take place over three to five years. Once you finish the repayment plan, any remaining debts or fulfilled debts will be discharged. A Chapter 13 bankruptcy this is complete should vanish from credit reports in 7 years from the date the bankruptcy was filed. Some debts may be removed sooner if they were delinquent prior to the petition for bankruptcy. While this is not a definitive rule, it’s interesting to note that some lenders might consider a Chapter 13 bankruptcy slightly more favorable than a Chapter 7 bankruptcy. This is because, in Chapter 13, you agree to pay at least a portion of the debt over a period of time.
Can you file bankruptcy on student loans?Student loan debt and bankruptcy is an evolving area of law. Where just a few years ago, there was little or no opportunity to discharge student loans in bankruptcy, we are starting to see cases where it is possible. Additionally there are non-bankruptcyoptions for student loan debt that could result in a discharge or forgiveness of all or a portion of your loan. It is important to have your specific situation evaluated by a Student Loan Lawyer. Additionally, there are many options available to debtors with student loans that do not involve discharging the loans in bankruptcy. These include restructuring payment plans, deferring payments, income-based payment plans, etc. The best option a debtor could explore is to speak to a Student Loan Lawyer.
How much does it cost to file bankruptcy?Like many things that involve a lot of factors, the cost to file bankruptcy varies. It can be as low as a few thousand dollars to much, much more than that. The dependencies include the type of bankruptcy filed, the amount of work required to get things organized, and other factors. While an individual could go at it alone and file without an attorney, we advise against that practice. What could start as an effort to save money could end up costing vastly more if a mistake is made during the petition.
How often can you file bankruptcy?The simple answer here is that an individual can file more than one bankruptcy in their life. Here are some general guidelines on the times that must elapse between petitions. If one were to file Chapter 7 bankruptcy and wanted to file Chapter 7 again, they must wait eight years from the. previous filing. If someone petitions for Chapter 7 bankruptcy and then wants to file a Chapter 13, the waiting period is four years from when the Chapter 7 was filed. FIling subsequent Chapter 13 bankruptcies require a two-year waiting period. And, if someone files a Chapter 13 and then wants to file a Chapter 7, they must wait a period of six years from the initial filing.
Should I file bankruptcy?We will start by saying that every situation is unique and whether or not you should file for bankruptcy depends on many variables. If you find yourself facing debt that you know, beyond a doubt, that you will not be able to repay, bankruptcy is a consideration. Your first move should be to speak to a bankruptcy lawyer or consumer attorney. They can help you determine which bankruptcy options exist for you. If you are facing unpayable student loan debt, you should speak to a Student Loan lawyer who is knowledgeable about the current state of student loan law. These professionals can examine your situation and help you decide if you should file for bankruptcy.
Wrapping upPlease remember that the information provided here is for informational purposes only and is not legal advice. Bankruptcy is a complex area of law. If there is any light of hope it is that with the help of a skilled lawyer, an individual or business can get a fresh start and learn the responsibilities needed to successfully handle life and business finances.
Discuss your case with us
or call us