What is Bankruptcy?

Bankruptcy is a federal law that allows individuals and businesses to re-adjust their relationships with their creditors. Bankruptcy can eliminate a portion of an individual's debt through the grant of a "discharge" of debts. A Discharge is an order of the Bankruptcy court mandating that the affected creditors must cease all collection efforts against the debtor, forever. Although some debts may not be discharged (child support, for example), most can. Medical bills, credit card debt, and other unsecured debts are generally subject to discharge; secured debts, such as car payments and house payments, may only be discharged if the collateral securing the debt is returned to the creditor. However, most secured debt may be restructured in a Chapter 13 Plan of Reorganization.

A husband and wife may file a single bankruptcy case together as joint debtors, or one spouse may file individually. Wherever the term "Debtor" is used on this site, a husband and wife should consider the information as applying to them either jointly or individually, depending on whether they file a case together.

How can bankruptcy help me?

The help provided by bankruptcy is as varied as the numerous types of relations between debtors and creditors. Generally speaking, bankruptcy can resolve most problems incurred by debtors who are unable to pay their creditors. To begin with, when a person files for bankruptcy, all creditors must cease all collection activities against the debtor. Creditors may not continue to call an individual that has filed for bankruptcy, and any pending lawsuits or repossession activity must be halted when a bankruptcy is filed. Even the Internal Revenue Service is prohibited from continuing collection activity against a bankrupt debtor. Of course, the particular avenue required for complete relief (liquidation or reorganization) varies depending on the individual's circumstances.

Liquidation or Reorganization?

Individuals and most small businesses are eligible for bankruptcy relief under Chapter 7, Liquidation, or Chapter 13, Reorganization. The primary difference between these two types of bankruptcy assistance is defined by the effect on the debtor's secured creditors.

In a Chapter 7 Liquidation case, the debtor must continue to maintain contractual payments to any secured creditor whose collateral the debtor intends to retain. For example, if the debtor wishes to keep a car, he must generally continue to make all regular payments even after his Chapter 7 case is filed.

In contrast, a Chapter 13 case may reorganize or restructure all payments except mortgage payments on a primary residence. The debtor will continue regular payments on his mortgage, while all other debts (car payment, furniture payment, IRS, unsecured debt) are paid through the Chapter 13 repayment plan. The Chapter 13 plan may be used to cure arrearages on a mortgage, however, and by using this cure and reinstatement option a debtor may prevent a foreclosure action.

Can I keep my property?

The broad general answer to this question is "yes", any property you wish to keep can be kept if certain conditions are met. First, if the property has a lien against it, the lien must be paid either under the terms of the contract or under a restructured payment in a Chapter 13 plan. Second, any property which is fully owned and has no lien may be protected by State exemption laws. Florida has a generous homestead exemption but its protection of personal property is sharply limited; the opposite is true in Georgia, where most personal property is protected but equity in real estate is more vulnerable. Property which cannot be protected must be surrendered to the Trustee for liquidation. Non-exempt equity in real or personal property may be retained by paying a dividend to unsecured creditors in a Chapter 13 plan or by repurchasing the property from the Chapter 7 trustee.

Does bankruptcy hurt my credit?

Yes, of course. Filing a bankruptcy of any description is a serious decision with potentially long-lasting repercussions on one's credit. However, this impact must be viewed in relation to the alternatives: foreclosure, repossession, lawsuits, garnishments, IRS levies, and harassment from creditors. Anything other than full repayment on the creditor's terms may damage one's credit as much or more than a bankruptcy filing. Non-bankruptcy credit relief agencies also reflect negatively on a credit report and may provide less complete relief than a bankruptcy filing.

Simply not paying one's debts will also damage credit ratings, as do referrals to collection agencies. In addition, the simple stress of continual calls from creditors can harm one's health and well being. Thus, the damage done to credit ratings must be put into perspective. While bankruptcy is unlikely to be anyone's first choice, it can provide a useful and necessary alternative to more destructive collection mechanisms.

What about my small business?

If a small business is a sole proprietorship, such as an unincorporated trade name or d/b/a assets and liabilities of the business are treated as the personal property of the debtor. A debtor may continue to operate a business after filing a Chapter 13 but may have reporting and credit restrictions to deal with. When the owner of a sole proprietorship files a Chapter 7 bankruptcy, the business must generally cease operation in order to prevent the dissipation of assets. The Trustee is free to review the assets for liquidation or surrender. Corporations and partnerships are not eligible for Chapter 13 relief and business entities other than sole proprietors seeking to reorganize must do so under Chapter 11 of the Bankruptcy Code.

What is Bankruptcy Reform?

Congress enacted a significant change in the bankruptcy laws that took effect in October 2005. These changes do not mean that bankruptcy has been abolished. Rather, Congress has imposed an additional requirement, called a "Means Test", on debtors who seek bankruptcy relief.

For most people, the Means Test will not change the result of their bankruptcy. The Means Test simply requires that individuals who are able to pay back a significant portion of their unsecured debts do so through a Chapter 13 Plan, rather than discharging their debts through a Chapter 7 petition. While this principle does seem fair, the mechanism imposed by Congress is clumsy at best. So far, reports suggest that the Means Test only applies in about 15% of all bankruptcy cases filed. Even when the Means Test is applied, in the vast majority of cases the Debtors are still able to attain all of their aims through the bankruptcy court.

The long and short of bankruptcy reform is that bankruptcy relief is still available. For most people who find themselves in financial distress, the recent changes in the Bankruptcy Code do not alter the results they will attain through the bankruptcy court. Debtors can still prevent foreclosures and repossessions, block lawsuits and judgments, and stop creditors' noxious collection activities while protecting their income and property.

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