An Overview of Bankruptcy

With the unemployment and foreclosure rates soaring, and our economy in a recession, many Americans are taking advantage of our federal bankruptcy courts as a solution for overwhelming debt. Bankruptcy is a viable legal option that gives a debtor in trouble the ability to reorganize or begin a new life by completely eliminating debt. Bankruptcy is a federal (country-wide) system of civil laws, rules, and procedures enacted to afford legal residents of the United States a solution to deal with unmanageable debts, when, for whatever reason, individuals or businesses are unable to pay as they come due. Besides the federal Bankruptcy Code, consumer protection laws, and state insolvency or exemption laws as they apply to individuals and business, all affect the options available for overwhelming debt. Most bankruptcies are for people, and called consumer bankruptcies.

Bankruptcy can accomplish a large number of goals, depending on what chapter is filed, and what is possible in each specific situation. Depending on your circumstances, bankruptcy can possibly help you: save your home by stopping foreclosure immediately, rebuild your credit by discharging or restructuring your debt, keep your home, car, and personal property, lower your car payments, stop wage garnishment, end harassing creditor calls, and stop all collection efforts, including lawsuits and license suspension.

Bankruptcy is in effect a lawsuit that is filed in federal court against creditors. The court administers the estate, or assets, of a debtor (a person or business who owes money to others) for the gain of his creditors (persons or businesses that are owed money). Usually people or businesses file for bankruptcy voluntarily, but sometimes they may be forced by a creditor into an involuntary bankruptcy proceeding.

Bankruptcies basically operate in one of two basic ways. Either all of the dischargeable debt is eliminated with no payments made through the case (Chapter 7 of the Bankruptcy Code), or else repayment plans are put into place for different categories of debts (Chapters 9, 11, 12, and 13). An attorney looks at a number of factors, such as income, expenses, assets, types of debts, prior filings, and long-term goals, to decide the proper solution. We at Spalding Law Center can help you accurately assess whether a payment plan is best for you, and which chapter best suits your needs.

The vast majority of individuals filing for personal bankruptcy choose to file under Chapter 7 or Chapter 13 (for individuals, couples, or people with businesses in their name). Corporations and other business entities usually file under Chapter 7 or Chapter 11. The following is a brief description of the four types of bankruptcy. The Chapter number refers to the section of the bankruptcy law, called Title 11 of the U.S. Bankruptcy Code.

Chapter 7 Bankruptcy is sometimes called a “liquidation,” or debt-elimination. It is the most common type of bankruptcy filed, and is what most people think of when they think about bankruptcy. Most people in Chapter 7 keep most of their property and wipe out, or discharge, most of their debt within a short period of time. Debt that is not eliminated includes student loans, domestic support obligations, divorce debt, government fines, and most tax debt. There are many exceptions and factors regarding qualifying, so it is best to talk to a lawyer to see if this is a viable option for you.

Chapter 13 bankruptcy is sometimes called a “wage-earner reorganization” bankruptcy. it is a repayment of debt over a three to five year time period. all bills are consolidated into one monthly payment. most people only have to pay back what they can afford to pay, rather than all of the debt. calculating the repayment amount is complicated, best suited for a trained attorney, and is based on monthly disposable income, un-exempt equity in assets, and income as calculated by the “means test.” People who are advised to file a Chapter 13 include: those behind in their mortgage or car notes that they can afford to keep, those who could lose property in a Chapter 7, wage earners who have the ability to repay some, but not all of their debts, recent Chapter 7 filers, or those with unbearable tax obligations.

Chapter 11 Bankruptcy is a corporate reorganization bankruptcy for companies trying to stay in business. Some individuals with extremely large amounts of debt who do not qualify for Chapter 13 must file Chapter 11. It is a very complex and expensive type of bankruptcy, so most individuals try to avoid this chapter. Business entities have the option of filing for liquidation under Chapter 7, but those that seek protection while they continue to carry on routine operations while reorganizing their business debt, file under Chapter 11. Corporations, partnerships and sole proprietorships are all the types of businesses that file, as personal assets of the business shareholders are not involved. But both the personal and business assets of a sole proprietor are at risk since a sole proprietorship does not have a separate legal identity from its owner.

Chapter 12 Bankruptcy is solely for family farmers. This chapter is very uncommon in urban areas since it helps a small class of rural people.

The “New” Bankruptcy Law

You may have heard that there are new bankruptcy laws making it difficult to file bankruptcy now. Well the new law is not that new anymore. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, or BAPCPA, was enacted in 2005. It is not necessarily true that it is “harder” to file bankruptcy now. Even though the new bankruptcy law stipulated new requirements for filing, Chapter 7 and Chapter 13 is still an option for most people. Now debtors are required to complete a court approved credit counseling class before filing a case (these are specific classes required by the federal government intended for bankruptcy qualification, and NOT your run of the mill credit counseling firm services), a debtor education course after filing, and complete a means test to determine eligibility to file for Chapter 7, or a minimum that must be paid to unsecured creditors in a Chapter 13 case. There are definitely more hurdles to filing now, but for the most part it just means that attorneys need to do more work in each case, and there is a greater premium now on the knowledge and experience of the attorney. We at Spalding Law Center have that experience and knowledge to obtain the best possible relief for you under the new law. We have staff that practiced bankruptcy long before the law changed, and during the law change, when many practitioners abandoned the practice of bankruptcy after it became much more complicated for firms to handle. If you are wondering if you can file for bankruptcy under the new law, call our office today. You will be glad you did.