Bankruptcy Law Facts: An In-depth Guide

Businesses and individuals can file for bankruptcy to get relief from creditors’ debts. The United States Constitution allows Congress to adopt uniform bankruptcy laws. Since the 1800s, laws governing bankruptcy exist. The 1978 Bankruptcy Code (Title 11 United States Code) was enacted. It has been amended numerous times, most recently by the Bankruptcy Abuse Prevention and Consumer Protection Act 2005. Although there is no right under the Constitution to receive relief from debts it is possible to obtain relief through the bankruptcy courts in the limited circumstances that Congress allows.

The Bankruptcy Code allows for debt relief through liquidation (Chapter 7), or reorganization. This booklet discusses the important issues you should consider before filing bankruptcy. It also explains the differences between a liquidation or a reorganization case. A qualified bankruptcy lawyer is recommended before making a decision about whether or not to file for bankruptcy protection.

How Many Chapters Of Bankruptcy Are There?

Individuals can file bankruptcy under Chapter 7, Chapter 11, Chapter 12, and Chapter 13 of the Bankruptcy Code.

Chapter 7 bankruptcy is also known as the liquidation or “fresh start”. A trustee may liquidate or sell the non-exempt assets of the debtor in a Chapter 7 bankruptcy case. This is done by the U.S. Trustee’s Office or the creditors. You, the debtor, can usually protect all your assets by using federal or state exemptions. Many Chapter 7 trustees discover that over 80 percent of their cases can be resolved as “no assets” cases. This means that all assets are exempted from liens or are exempt from them.

You are protected by state law and some federal laws. These properties are “exempt” from bankruptcy liquidation and can include equity in a home or vehicle, furniture, clothes, retirement accounts, life insurance policies, and other items.

A bankruptcy trustee will usually subtract your exemption from the property’s “fair value”. This is the price a buyer would pay to purchase the property “as-is.” The trustee will also subtract any liens or mortgages you may have on your property.

Only assets that can be liquidated by the trustee are eligible to be paid to your creditors. The trustee must also deduct fees and expenses paid by professionals such as realtors or auctioneers who assisted in liquidating your property. Any debts that the trustee fails to pay (with some exceptions), will be released (eliminated) and creditors won’t be able to force you to pay any remaining amounts.

Chapter 13 bankruptcy (or individual reorganization) is an alternative to Chapter 7. It allows you to keep your property. A Chapter 13 bankruptcy, unlike a Chapter 7 bankruptcy, requires you to pay back a portion of your debt. Chapter 13 bankruptcy filings require that you have the ability to pay back debts and assets and be able to fund a repayment plan. A Chapter 13 bankruptcy can be used to pay off your taxes and mortgage arrears.

The Bankruptcy Abuse Prevention Prevention Act of 2005 (October 17, 2005) states that if your income is higher than the median income (based upon family size) in the state you reside in before filing bankruptcy, you will likely not be eligible for Chapter 7 relief. The median income test determines whether you are above the median income. The median income test averages your last six months’ income and subtracts certain forms. It then multiplies that number twelve times. If that calculation yields a result higher than the applicable median income rate, it is possible to not be eligible for Chapter 7 bankruptcy. Sometimes, a deduction of certain monthly expenses and standard expenses can help a debtor above the median to be eligible for Chapter 7.

Chapter 13 debtors are required to repay all or part of their creditors through a Chapter 13 plan. You would need to submit a Chapter 13 plan that details how your debts will pay over the next five years from your disposable monthly income (income after paying for normal living expenses). A Chapter 13 trustee oversees the plan and supervises it. After the plan is completed, the bankruptcy court issues a discharge order. You must pay creditors as Chapter 13 debtors at least the amount they would get if assets were liquidated under Chapter 7.

Chapter 13 bankruptcy is usually voluntary. You can choose to either dismiss the case or convert it into Chapter 7. To convert, you must be otherwise eligible for Chapter 7 bankruptcy.

Chapter 11 “reorganization”, which is often used by businesses or individuals with debts exceeding Chapter 13 debt limits, is an alternative to Chapter 7 Liquidation. Individuals are not likely to use Chapter 11 reorganization because it can be very costly. As in Chapter 13 reorganizations, the business debtor retains business assets and must pay creditors future earnings as per a reorganization plan.

Chapter 12 is a special restructuring for family farmers. A family farmer must make the majority of their income from family farming to be eligible.

“File a bankruptcy petition doesn’t guarantee that your debts are discharged.”

Is it appropriate to file for bankruptcy?

Each debtor’s individual situation will determine whether or not to file bankruptcy. An experienced bankruptcy lawyer can help you determine if bankruptcy is right for you, and when you should file. It is generally acceptable to file Chapter 7 bankruptcy if you cannot pay your debts or regular living expenses and if all your property is exempt. A Chapter 13 bankruptcy might be more appropriate depending on your income and assets.

Consider these things before you file:

  • You can change the terms of your loan (duration and balance due), but you should be aware of the possible impact that forgiveness of debt could have on your taxes or credit score.
  • You can surrender your property to satisfy the debt. This is called a “short sale”; however, you should consider the possible impact on your taxes as well as your credit score.
  • How to determine if you are eligible for certain entitlements that could exempt your property from seizure
  • Talking to an accountant about the financial implications of your decisions;
  • You can either enter a state court trusteeship or consult with a respected debt relief advisor. Before signing any agreement, do your research.

How Do I File For Bankruptcy Relief?

You will need to file a petition with a bankruptcy court in order to initiate bankruptcy proceedings. The court may waive the filing fee in certain cases. The court may allow you to pay the filing fee in installments. Schedules are included in the petition that provides detailed information about your income, liabilities, assets, and assets. The petition schedules contain a complete list of your assets, liabilities, and income. Personal information such as your employment history, and whether or not you have made any property or money transfers before you file for bankruptcy.

Once these documents have been filed, you will meet with a trustee. This is the 341 hearing. The meeting is open to creditors and the public. The trustee will verify the accuracy of the schedules and petition. The trustee will also ask questions about your financial situation, assets, and debtors.

Can a spouse and a husband file together?

Yes, it is possible but not necessary. If both spouses need to be free from creditors, they can file a joint petition. Depending on the circumstances, either spouse can file for relief under Chapter 713 or 13, while the other spouse could choose to not file or file a separate bankruptcy case. The bankruptcy court will consider the assets and liabilities of each spouse separately if they file separate petitions. To determine whether a Chapter 7 bankruptcy is possible, the court will look at both total household income and total household expenses.

Is it possible for the bankruptcy court to refuse to discharge my bankruptcy debts?

Yes.  However, filing a bankruptcy petition doesn’t guarantee your debts will be forgiven.

A bankruptcy court can deny a general discharge if you are found guilty of certain misconduct prior to or after filing the bankruptcy petition. This includes destroying, concealing or removing assets that could otherwise be used by creditors. If you destroy or conceal records showing what assets are available for creditors, a discharge of debts could be denied. A bankruptcy court can deny a general discharge if the debtor has lied or refused to answer questions during bankruptcy proceedings.

Based on the actions taken by your creditor, certain debts might not be discharged. A creditor can file an adversary proceeding against you if you have incurred a debt in the three months following filing bankruptcy. This is to prevent the court from releasing that debt. Your creditor may claim that you made a “luxury purchase” (such as buying a new TV set) or that you incurred debt with the intent of not repaying it. This legal action can be brought in Chapter 7 to make you pay the entire debt back. A Chapter 13 would allow a creditor to bring the action to forbid you from paying any portion of that debt.

Even if you are denied a discharge of debts, your assets may still be liquidated in Chapter 7 cases. After you file a Chapter 7, there are some limitations on your ability to convert your case into a Chapter 13. You are still responsible for your obligations under the Bankruptcy Code even if a discharge is denied.

Is it possible to file bankruptcy multiple times?

However, you may not be eligible for a Chapter 7 bankruptcy filing or the discharge of your debts. To file a Chapter 7 case, you must wait eight years after Chapter 7 was filed. After having filed a Chapter 13 that was dismissed, you can file a Chapter 7 case and get a discharge.

Although you can file a Chapter 13 bankruptcy case at any time after the end of the previous bankruptcy filings, you may not be eligible to receive a discharge. A Chapter 13 case can be filed and you will receive a discharge four years after the discharge of Chapter 7. A Chapter 13 discharge can be obtained two years after you have filed a Chapter 13 that was dismissed.

Will I have to continue paying any debts even if a general discharge is granted?

Yes. The type of bankruptcy also affects the number of debts that can be discharged.

Taxes assessed within 240 days of the bankruptcy filing are not eligible for bankruptcy discharge. Student loans, taxes arising out of a divorce court order, criminal penalties, debts arising out of a DUI, and any debt that a debtor has incurred as a result of fraud, breaching a fiduciary obligation as a trustee, or a “willful” act causing injury. These types of debts will ultimately be decided by the bankruptcy court.

This post was written by Trey Wright, a lawyer with extensive experience as bankruptcy attorneys in Panama City Florida! Trey is one of the founding partners of Bruner Wright, P.A. Attorneys at Law, which specializes in areas related to bankruptcy law, estate planning, and business litigation.

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