Over the past 10 years the concept of bankruptcy has evolved from stigmatic mark of personal failure to socially acceptable way to restructure and reduce your debts and to obtain a financial "fresh start." Although it is not necessary to seek legal help before filing for personal bankruptcy, it is certainly recommended that you do so because bankruptcy is a highly complex area of the law involving state and federal statutory code as well as issues in tax, real estate, decedent estate, commercial, family and elder law. Additionally, there are very specific procedural guidelines that must be followed to ensure that your case will not get dismissed. Majority of personal bankruptcies proceed under either Chapter 7 or Chapter 13 of Title 11 of the United States Bankruptcy Code. Although personal bankruptcies may also be filed under Chapter 11 and Chapter 12 of the code, they are seldom utilized and are generally reserved for farmers or those who do not qualify to file under Chapter 7 or Chapter 13.
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy is a "liquidation" type of bankruptcy generally suited for people who are indebted to unsecure creditors such as credit card companies, doctors or hospitals. Assuming no complications arise, the entire process from start to finish usually takes between 3 - 4 months. As such, it is usually a much faster solution to get rid of unsecured debt compare4ed to Chapter 13. The myth associated with Chapter 7 bankruptcy is that after you file bankruptcy petition the sheriff shows up at your door, takes everything and leaves you with nothing but a knapsack filled with a few personal belongings. Rest assured, Chapter 7 bankruptcy does not work like this. The state and federal law allows you to protect your assets up to a certain dollar amount by using exemptions found in the U.S. Bankruptcy Code. If, however, the value of your assets exceed the amount that you are able to exempt, then a court appointed officer of the court, called a trustee, may sell the unprotected asset and use the proceeds to pay your creditors. This generally does not happen, and 90% of all people who file for bankruptcy get to keep 100% of their belongings. In order to qualify for a Chapter 7 bankruptcy filing, you must demonstrate to the court that the filing is in "good faith." The way for individuals to demonstrate good faith is to pass the so-called "means test." You will pass the "means test" if your gross household income is less than the average median income for a similarly situated household in the geographic area where you reside. Although this "means test" may seem complicated at first, a seasoned bankruptcy attorney will have no problem determining if you qualify to file for personal bankruptcy.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is a more complicated and longer process than a Chapter 7 bankruptcy. Those who do not qualify for a Chapter 7 bankruptcy should consider filing under Chapter 13 of the U.S. Bankruptcy Code. A Chapter 13 bankruptcy is most helpful if you are behind in payments on a house, car or other property that is subject to foreclosure or repossession. In a Chapter 13 proceeding, you propose a payment plan for a period of 3 to 5 years under which you agree to make monthly payments in order to pay a portion of your debt. These payments are made directly to the court appointed Chapter 13 trustee who will hold that money and disburse it to your creditors in accordance with the terms of the plan. In order to qualify for a Chapter 13 bankruptcy, you must have regular monthly income from your job, business, rent, etc. The amount that you will be required to pay and the length of time of your plan is determined by the "means test" result and your disposable income. Disposable income is calculated by subtracting your expenses from your monthly gross income. If results yield minimal disposable income, then it is likely that you will not be able to fund your plan and make the proposed monthly payments. Additionally, your disposable income must be sufficient enough to satisfy all past due payments owed to secured creditors for the collateral you wish to keep (i.e., mortgage arrears, car payments, etc.). Another benefit of filing for bankruptcy under Chapter 13 is the benefit of "mortgage stripping." If your house is encumbered by two or more mortgages and the value of your house is less than the amount owed on the first mortgage, then you are able to strip all the other mortgages that encumber your property upon completion of your plan. For example, let's say that you purchased a house 5 years ago for $350,000. In today's market, the fair market value of your home has depreciated to $300,000. Although you've made all your payments over the past 5 years, you still owe $340,000 to the Bank. In layman's terms, your property is "underwater" because you owe more to the bank than the actual value of your house. Now, suppose during those past 5 years you also took out a $50,000 home equity loan from another lender. Now your property is encumbered by over $390,000 yet the fair market value of the house remains at $300,000. How does Chapter 13 bankruptcy help? In this scenario, you will be able to remove (or strip) the $50,000 home equity loan completely! This means that you will immediately be able to reduce the principal amount owed from $390,000 to $340,000. Although this is attractive to most people, it is important to point out that you only get this benefit after completing your court approved payment plan. Once all payments have been made, your debts will be discharged.
Chapters 11 and 12
We will not be discussing these bankruptcy options in too much detail because they are seldom used at consumer level. Chapter 11 is commonly used with business reorganizations, but is available for individual consumers with large amount of debt. Chapter 12 is very similar to Chapter 13 but is reserved for "family farmers" with regular income from farming operation. Should you wish to discuss these options, we'll be happy to sit down with you and discuss your eligibility for these proceedings.
Credit Counseling and Debtor Education Requirements
Individuals filing for bankruptcy are required to participate in pre-bankruptcy consumer counseling service to obtain a certificate confirming they completed their review. This certificate must be attached to the bankruptcy petition and submitted to the court at the time of the filing. The certificate can be obtained after completing the review over the phone, the internet, or in person. This counseling session will last approximately one hour. Next, after a bankruptcy petition is filed, you will also be required to complete a Financial Management Education Course. Again, the course may be completed by phone, over the internet, or in person. This education course will take approximately 2 hours to complete.
The Automatic Stay
The moment that your bankruptcy petition is filed, you are instantly protected by the "automatic stay" - a rule that prohibits your creditors from taking legal action against you. As a result, your creditors are not allowed to garnish your wages, continue with foreclosure or the sheriff sale, continue with repossession of property, or continue with eviction unless they are able to obtain permission from the court. However, it is important to point out that the automatic stay does grant the same type of protection against any criminal proceedings or enforcement of domestic support obligations.
Court Appearance and Meeting of the Creditors
The most common question we get from our clients is whether they will need to make an appearance in court once their bankruptcy petition is filed. The short answer is - it depends. In Chapter 7 proceedings, short of objections to the discharge from your creditors or the trustee, it is likely that you will not need to go to court. However, in Chapter 13 proceedings you will need to make a brief court appearance during your plan confirmation hearing. The plan confirmation hearing is held in front of a federal judge for the sole purpose of determining feasibility of your proposed plan. Notwithstanding the forgoing, if you file bankruptcy under Chapter 7 or 13, you will be required to attend a "meeting of the creditors" - also known as the 341 meeting. This meeting is conducted by the court appointed trustee who will ask you questions about the information listed in your bankruptcy petition. For this meeting, you will need to bring with you a form of photo identification (i.e., Driver's License, Passport, etc.) and original social security card. To ease the anxiety of our client's we always provide them with a list of sample questions that the trustee may ask them during this meeting. Generally, the meeting itself takes about 15 - 20 minutes.
Although the great majority of people who file for bankruptcy get a full discharge of their debt, there are certain categories of debt that are not dischargeable. The following is a list of the most common debt that is not dischargeable in bankruptcy: 1. Income taxes. Generally, income taxes are nondischargeable in bankruptcy. However, certain exceptions to this rule exist, which allow for dischargeability of old income taxes which have been assessed over 4 years ago. 2. Debt incurred by fraud. This rule prevents people from going on a shopping spree with intent to file for bankruptcy in the near future. 3. Child support, alimony or other domestic support obligations. Debts that arise from divorce cases are generally not dischargeable. However, attorney fees owed for the legal work in divorce cases are dischargeable. 4. Student loans. This is a big one. Both public and private student loans are not discharged in bankruptcy. Although there is a limited exception to this rule, which allows for discharge of student loans if the debtor is able to pass a VERY strict "undue hardship" test. 5. Fines payable to a government agency. Neither speeding tickets nor parking tickets will go away if you file for bankruptcy. 6. Debts arising from driving under the influence. Although most debt arising from auto accidents is dischargeable, debt such as restitution that arise from an arrest related to driving under the influence is not dischargeable. 7. Debts arising from a willful or malicious injury to a person or property. If you think that bankruptcy will discharge the debt you owe after you key your ex-fiance's car - think again. Although this is not the exhaustive list, they are the most common. It there is ever a doubt about whether your debt is dischargeable, it is important to discuss this matter with your attorney.
Organizing Your Information
When you meet with your attorney for the first time, please bring with you the following documents: 1. Picture identification card. 2. A copy of your credit report (if you have it). 3. Copies of your tax returns for the past two years. 4. Last 6 months of paystubs or other proof of income from all sources including government benefits. 5. If you own real estate, provide a copy of your last statement. 6. Copies of bank statements for the past 2 months. 7. Copies of any legal papers, such as lawsuits, eviction notices, etc. If you have this information available with you at the time of your initial meeting, it will be a lot easier for your attorney to properly advise you on which chapter bankruptcy you need to file.
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