Although most people have a basic understanding of bankruptcy, most do not understand the process, especially since new laws were enacted in 2005 to tighten restrictions on who and who cannot file. It is important to understand that the concept and details of bankruptcy, which are covered in this article. With this information, you would [...]
Although most people have a basic understanding of bankruptcy, most do not understand the process, especially since new laws were enacted in 2005 to tighten restrictions on who and who cannot file. It is important to understand that the concept and details of bankruptcy, which are covered in this article. With this information, you would have a much better idea if bankruptcy would be a viable option to help you out of a difficult financial situation.
What is Bankruptcy?
In basic terms, bankruptcy is a process that allows consumers, as well as business owners to completely eliminate or restructure debt under protection offered by the federal bankruptcy court. Although several types of bankruptcy options exist, they are all broken down into two specific categories to include liquidation and reorganization.
What are the different types of Bankruptcy available?
The two primary types of bankruptcy filings include a Chapter 7 and Chapter 13. However, other types of bankruptcies exist such as a Chapter 11 and Chapter 12. While all of these options are designed as programs under the federal government to help people facing some kind of financial crisis, the different bankruptcy options are also unique.
What constitutes a Chapter 7 Bankruptcy?
Of the two primary types of bankruptcy, a Chapter 7 filing would be under the category for liquidation. With this, a trustee appointed by the court would have the option of taking and selling some of the person’s property as a way of paying back a portion of debt owed to creditors. However, as a part of a Chapter 7 bankruptcy, any property considered “exempt” would be protected according to law.
What is a Chapter 13 Bankruptcy?
A Chapter 13 Bankruptcy falls under the second category of reorganization. In this case, a person would hold onto all personal property but in exchange, monthly payments over the course of three to five years would need to be made so some or all of debt to creditors could be repaid.
What are the basics of a Chapter 11 Bankruptcy?
Although Chapter 7 and Chapter 13 are the two more common options, a Chapter 11 Bankruptcy is also available which is used to reorganize finances for business owners who are struggling financially. However, a Chapter 11 Bankruptcy is also available for individuals.
Unfortunately, this type of filing is very expensive and it requires a significant amount of time so in most cases, this type of bankruptcy would only be used when the amount owed to creditors exceeds the acceptable amount accepted for a Chapter 13 Bankruptcy or for people with extraordinarily high non-exempt assets. A Chapter 11 Bankruptcy is rarely used but when it is, it would be essential to work with a bankruptcy attorney.
How is a Chapter 12 bankruptcy set up?
Like that Chapter 11, a Chapter 12 bankruptcy is seldom used but when it is, the person would need to have a minimum of 80% of debt coming from operations of a family farm. Since debt levels would be much higher in this case, the ceiling is also higher as a way of accommodation the significant level of debt. With this, an individual would have options for eliminating certain liens against the family farm to help. This option is also expensive and time-consuming, which is why it is so important to work with a qualified bankruptcy attorney who has full understanding of a Chapter 12 bankruptcy.
What are the different types of protection for a Chapter 7 bankruptcy?
As mentioned, each type of bankruptcy is designed to help with financial struggles but each is also unique. The following are the various components associated with Chapter 7:
• Personal Property – Some personal property might be sold to help pay down debt with most or all unsecured debt being completely erased. Any property deemed “exempt” according to federal law would be maintained by the individual. Most property associated with a Chapter 7 bankruptcy is in fact exempt.
• Secured Debt – Money owed on secured debt could be handled in several ways. The individual could continue making payments according to the original contract, pay the creditor a lump sum that would be equal to the current value of the property and then keep it, or surrender the property back to the creditor.
What are the specifics for a Chapter 13 bankruptcy?
• Repayment Plan – Under the new 2005 laws for bankruptcy, anyone filing a Chapter 13 is required to file a repayment plan, which would provide details on how debt to creditors would be paid back over the following three to five years. The minimum payment would be based on amount of income, total due on debt, and the amount of money creditors would have received if a Chapter 7 bankruptcy had been filed instead of a Chapter 13.
• Debt Limits – For a Chapter 13 bankruptcy, the federal government has specific limits regarding debt. With the new laws, it means that a person could not have more than $1,010,650 in secured debt and $336, 900 specific to secured debt to file this type of bankruptcy.
• Secured Debt – For someone with secured debt, this particular type of bankruptcy makes it possible for missed payments to be brought current as a means of avoiding personal property from being reposed or a home from being foreclosed on. As a part of the repayment plan, the past due amounts would be covered, something that could be paid over time.
How does a person know if bankruptcy is a good option?
For each type of bankruptcy, certain criteria would need to be met. For instance, with a Chapter 7 filing, if an individual had enough disposable income to support a repayment plan under a Chapter 13 bankruptcy after all allowed expenses and monthly payments for approved debt, filing for Chapter 7 would not be allowed. The following are some of the issues that need to be understood and analyzed to know when bankruptcy is a viable option, as well as the type of bankruptcy that would be considered the most appropriate.
• People need to understand what each type of bankruptcy filing is and what it entails. As an example, a Chapter 7 means that most, if not all of outstanding debt would be eliminated, which takes up to six months to complete whereas a Chapter 13 involves paying some or all debt back to creditors over a period of three to six months. Then a Chapter 11 involves debt exceeding the allowable maximum for Chapter 13 opposed to a Chapter 12 bankruptcy that is designed only to help people and family farms.
• Of course, an individual would need to understand the different types of bankruptcy to know what, if any filing would be a viable solution.
• Alternative Solutions – Because bankruptcy has a negative impact on the credit score, it should always be used as a last resort. Therefore, it would be worth for people to consider alternative solutions such as:
o Negotiation with creditors
o Repayment plan outside of bankruptcy
o Debt counseling
• A person would also need to learn about debts that would not be covered in the bankruptcy.
• Consequences should also be understood in that depending on the person’s situation and type of bankruptcy filed could have a negative impact on the home, car, boat, or other personal property being saved or lost. However, one of the best debts to include in a bankruptcy is credit cards.
Who should consider filing for bankruptcy?
Anyone who is facing a dire financial situation and has considered all alternatives without success could be a good candidate for bankruptcy. The goal would be for an individual to determine if bankruptcy of any type would get the situation under control but without doing significant damage to credit or resulting in all personal property being lost.
How does someone know whether Chapter 7 or Chapter 13 is the best bankruptcy to file?
Part of knowing the right type of bankruptcy to file is determined for the person. For instance, to file for Chapter 7, an individual would be required to pass a “Means Test.”, which calculates the gross income and personal assets, as well as deductions for liabilities and expenses over the past six months. From there, the numbers would be compared with the average median income in the same state. If the person’s income is less, then filing for Chapter 7 would be permitted but if the same or higher, the option may be to file for Chapter 13.
Because a Chapter 13 bankruptcy is a repayment option, the individual’s income versus debt ratio would be looked at, as well as job security to see if paying creditors back what is owed is even possible. If approved, the court would appoint a trustee to oversee the repayment of debt as outlined in the plan. Regardless, the new laws passed in 2005 have made filing for any type of bankruptcy far more difficult so for many people, working with a qualified attorney is the best way to go. With this, the attorney would be able to provide pros and cons of both options so the right decision is made.
How long does bankruptcy appear on a person’s credit history?
The actual time a bankruptcy stays on a person’s credit report would depend on the type of bankruptcy filed. However, most would remain a part of the credit history up to 10 years. As you will discover below, during this period a number of things would be affected negatively so bankruptcy of any kind should be taken serious.
Would debt to the Internal Revenue Department (IRS) be discharged with bankruptcy?
For some income tax debt, both Chapter 7 and Chapter 13 would discharge it. For Chapter 7 bankruptcy, Internal Revenue Debt would be fully discharged whereas for a Chapter 13 filing, some debt would be discharged with the rest being paid back according to the accepted repayment plan. It depends on how old the debt is.
Are there any special considerations for including tax debt in a bankruptcy filing?
Yes, five specific rules would apply to having tax debt discharged whether as a part of a Chapter 7 or Chapter 13 bankruptcy, which include:
1. Your tax returns must have been due three years or more before the petition was filed;
2. The person would need to have filed a tax return within the past two years
3. Any tax assessment could not be older than 240 days
4. The tax return could not have been fraudulent
5. The person wanting to include tax debt in a bankruptcy could not have ever been convicted of tax evasion
Additionally, the person would need to provide proof that four prior tax returns had been filed with the Internal Revenue Service, filed no later than the due date of the first creditor’s meeting for the bankruptcy case. The individual would also be required to offer a copy of the most recent tax return and if creditors want a copy, they would need to make a formal request after which time the person would be required to provide one.
If someone has retirement accounts, what happens to these when filing for bankruptcy?
For the person filing bankruptcy, regardless of type, any retirement accounts would be excluded. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the federal government put clauses in place whereby all tax exempt retirement assets would be protected to include an IRA and 401K. Even though some IRA accounts have a limit of more than $1 million, the individual would have complete peace of mind. Obviously, retirement accounts are a sensitive subject and something that people work hard for so anyone with concerns could always work closely with a bankruptcy attorney to understand the details specific to retirement accounts.
Can a husband and wife file separate bankruptcy cases?
Even under the new bankruptcy laws, a married couple is not required to file bankruptcy jointly although they could if wanted. This means that filing separately is an option and in fact, several possible benefits of doing so should be considered which would depend on a number of factors to include.
• The way in which personal property is held
• Who is responsible for the incurred debts
• Whether bankruptcy would have a negative impact on just one person and not both
One of the main benefits of a married couple filing bankruptcy separately is that in most cases, only one person was responsible for the financial mess. Therefore, filing as individuals would not affect the innocent party. In other words, if filed separately, a husband or wife’s case would have zero negative effect on the other person’s credit. However, if bankruptcy were filed jointly, then credit for both people would be affected.
What role does the bankruptcy trustee play?
The trustee is appointed by the court in bankruptcy cases to oversee the individual’s estate, which would include all assets and liabilities. In addition, if any assets were found to be exempt from bankruptcy, it would be the trustee’s responsibility to liquefy them to help pay debt to creditors.
The bankruptcy trustee would also make sure the individual is not hiding or concealing any assets that should be included in the filing. During the hearing, the trustee would ask the individual if any assets had been excluded in the bankruptcy petition. The trustee has a job that is to protect creditors and help them recover as much debt possible but also to provide needed guidance to the person filing bankruptcy.
What are the steps for starting the bankruptcy process?
Whether for an individual or business owner, or the type of bankruptcy being filed, a petition must be filed with the United States Bankruptcy Court in which a declaration is made. This request is for the federal court system to provide both relief and protection under the Bankruptcy Code.
In addition to the petition, filing would involve providing an array of documentation about assets, liability, income, expenses, etc. Depending on the complexity of the case, some people will hire a bankruptcy attorney to file the petition and assist with other steps for filing bankruptcy.
How much does it cost to file bankruptcy?
Although the purpose of bankruptcy is to help people in the middle of a financial crisis, it still costs money to file a case. For instance, the cost to file a Chapter 7 bankruptcy is $299 while a Chapter 13 is $274. In addition to this, there would be the cost of an attorney if one were hired, which could range anywhere from hundreds to thousands of dollars.
While the incidentals do not add up to much, people would also have the expense of copying required documentation and in some cases, paying to get hold of certain paperwork.
Once a person files for bankruptcy, how many years would it be before bankruptcy could be filed again and how many times can someone file?
When it comes to filing bankruptcy, the number of times filed is not so much the focus but more the type of bankruptcy, as well as the number of years between filings. Many people think the answer is based on a state-by-state case but they need to remember that bankruptcy falls under the law of the federal government and actually goes through a specific federal bankruptcy court system therefore states have no say in these cases.
Now, to answer the question, since the new laws were enacted in 2005, a Chapter 7 bankruptcy cannot be filed unless the person owning the debt had been discharged from an earlier Chapter 7 bankruptcy or this type of bankruptcy had been filed more than eight years prior. For Chapter 13, the person would not be allowed to file unless a discharged had been received under Chapters 7, 11, or 12 more than four years prior or the person had received a discharger under a Chapter 13 bankruptcy more than two years prior.
Now, for corporations, which usually file Chapter 11 bankruptcy, no restraints exist as to the number of times a case could be filed or the length between each filing specific to this type of bankruptcy. However, the bankruptcy court system would have to agree that benefit of reorganization exists and that reorganization is possible.
Finally, people need to know the difference between a “discharged” and “dismissed” case. The rules for how many times and the length in between filings for bankruptcy are allowed for discharge are as outlined above. However, if a case was dismissed, it means that for some reason, the bankruptcy was not completed. In this case, the person would be required to wait 180 days from the dismissal date of the earlier filing to file the case again.
Once bankruptcy has been filed, are creditors allowed to contact the person or company?
The answer to this question is no, which is one of the benefits of filing for bankruptcy. After the case has been filed with the bankruptcy court, creditors are not allowed to call, email, or mail requesting money and they cannot continue charging late fees and other penalties. With bankruptcy being federal law, it has very strict rules that prevent creditors from even discussing debt with the person or company that filed.
That means all annoying and threatening contacts are eliminated. The only exception is that if a creditor named in a bankruptcy case had other debt not listed in the case, then discussions about that debt could still take place with the person or company.
What are some of the top misconceptions about bankruptcy?
In truth, many misconceptions surround bankruptcy, especially since the new law went into effect. The following are some of those that keep floating around we would like to clear up.
• Most people believe that after filing bankruptcy, credit is forever ruined but in truth, it is not. In fact, after filing, people are often inundated with unsecured credit card offers because creditors know that the person is free from the burden of debt. Other than this, it is true that it takes some time to recover from a perspective of credit after filing bankruptcy but it is possible. The goal is to learn from past mistakes so falling into a financial mess could be avoided in the future.
• Another misconception is that the new 2005 laws have made it nearly impossible to file for bankruptcy. While it is more challenging, it is not necessarily difficult. The laws that were enacted in 2005 were needed because unfortunately, too many people were using bankruptcy to defraud the federal government. Therefore, while additional steps may be needed and more restrictions apply when filing bankruptcy, everything has been done to protect both creditors and consumers.
• One of the most annoy misconceptions is that only irresponsible people file for bankruptcy. While financial irresponsibility is one reason, bankruptcy could be the result of a death in the family, job loss, business going under, serious illness, and so on.
• Finally, prior to filing the petition for bankruptcy, a person has the opportunity to max out credit cards. Well, this is a very dangerous thing to do and actually illegal. To a bankruptcy judge, maxing out credit cards prior to filing for any type of bankruptcy is fraud!
Leave Your Response