BankruptcyEach of the 50 U.S. states has its own Bankruptcy law and 94 federal judicial districts handle bankruptcy matters. In almost all districts, bankruptcy cases are filed in the bankruptcy court and not state court. Bankruptcy laws help people who can no longer pay their creditors get a fresh start by liquidating their assets to pay their debts. The 2005 amendments to the Bankruptcy Code require that individual debtors undergo credit counseling within 180 days before filing for bankruptcy relief and complete a financial management instructional course after filing bankruptcy.
Individuals can file Chapter 7 or Chapter 13 bankruptcy. Chapter 7 bankruptcy is the most popular form of bankruptcy because it allows the debtor to "wipe the slate clean" and start all over. Discharge normally occurs within 4-6 months after filing. Non-exempt assets will go under the care of a trustee who liquidates them to satisfy creditors in order of their secured interests. Any wages a debtor earns is off limits to creditors who had a vested interest on the date of filing.
Chapter 7 is generally used by those who lack sufficient income to cover outstanding debts after taking care of basic necessities, and who have no hope of ever repaying their creditors.
There are certain obligations that are not dischargeable, for example:
- Alimony and child support
- Back taxes less than 3 years old and student loans
- Recently made purchases for substantial amounts
- Property executed contracts involving titles or liens
Chapter 13 bankruptcy is the reorganization of an individual consumer's debt with a new payment schedule. If you have too much disposable income to qualify for chapter 7 or have assets you want to protect, you may want to consider this code. Your debts must be below a certain level and you must have steady income.
With Chapter 13 the debtor reaffirms to pay all or a part of their debt. The amount of repayment can range from 10% to 100% depending on the debtor’s income and the composition of amount owed. This code allows the debtor to restructure their payments and set up a new payment schedule (usually 3-5 years) that is more manageable. For an individual to qualify under this code unsecured debt may not exceed $250,000 and secured debts $750,000. Payments are made to secure creditors first to the extent of their secured interest and priority. Non priority creditors may be partially paid- credit cards and some taxes etc. In general, creditor approval is not required. This form of bankruptcy is used when the petitioner has property they want to keep like a mortgage that is about to be foreclosed on and other non-exempt assets that would be liquidated under chapter 7. Filing under this code will also halt all collection and foreclosure proceedings (including IRS) and allow the debtor to catch up on their payments and reinstate their original agreement. Your payments will be made to a Trustee who will disburse them in a manner called for in the court-approved plan. During this time the Trustee will have control over your (personal) finances and any credit-related matters will have to be cleared through him.