What is a Bankruptcy?
Introduction to Bankruptcy
The United States Code has established a procedure that enables debtors to manage debt by seeking relief in the federal court system. The Federal Bankruptcy Act contemplates several different ways to manage this debt and in some cases to pay some or all of your creditors. Because the federal statutes and procedures change with each new Congress, this discussion is intended only to serve as a source of background information leaving it to each Plan Member to consult with a Bankruptcy specialist in the event bankruptcy seems to be an option.
Chapter 7 is the traditional means of declaring bankruptcy, and enables one to clear ones debt, with some exceptions, and to begin ones financial slate anew.
Discharge of your Debts
Chapter 7 is not really reorganization, but rather a complete discharge of all of the debt you may have at the time, with certain statutory exceptions.
How Does It Work?
Here, when you file a Petition in Chapter 7, you turn over all of your assets to the Court, except those exempt by the current law. Typically, the following assets may be exempt, but only up to certain amounts set forth in the Bankruptcy Code:
- Your home
- Your personal property
- Your car
- Your household possessions
- Your jewelry
- Cash Value of any insurance policy
- Certain professional tools of a trade
- Items related to health care
It is important to remember that not all of these assets will be exempt, only up to the amounts set forth by statute.
Additionally, most traditional forms of income are exempt. Samples of income that are exempt include:
- Social Security benefits
- Disability benefits
- Unemployment benefits
- Pension fund payments
- Profit-sharing plan payments
- Life insurance benefits
- Support maintenance payments
- Veterans benefits
All future income is considered by the Court and often found to be exempt.
State Law Exceptions
It is important to emphasize that many states have set their own lists of exemptions which may be applicable if you are a resident of the state and you file for Chapter 7. It is important to realize that your state laws may apply to limit one or more of the above-referenced exemptions, and as such, it is critical to have legal assistance in this filing.
Filing for Chapter 7
Much like the procedures in Chapter 13, Chapter 7 starts with the filing of a Petition, in which all of the assets of the party are listed, along with all of the debts and obligations owed. You must also list your present income and your interpretation of all of the exemptions to which you may believe you are entitled.
Once you file your Petition, the following protections are afforded:
- Your creditors cannot contact your employers in any way;
- Late charges, service charges, and often interest charges are halted;
- Any legal action brought against you will be halted, so long as it relates to your debts;
- Any new legal action related to your debts being brought is prohibited;
- All collection action, including phone calls, letters, and any other attempts to collect must be stopped;
- Your wages cannot be garnished, and any garnishments in effect must be terminated;
- Any repossessions in progress must be stopped; and
- All action to collect against co-signers, guarantors or co-debtors must be stopped, although your bankruptcy may not wipe out the debt as to them.
How Does This Proceeding Work Once I File?
The court procedures are a bit different from Chapter 13, in that there are some creditors who can put up a bit of a “fight” to ask the Court to keep their debt from being discharged.
One of the ways they can do so is to attempt to allege, and bring proof to Court, of a case of fraud on the part of the debtor. Thus, there are procedural hearings in this process that require the debtor be prepared to explain his financial woes and to demonstrate, if necessary, that all of the debt was obtained without any intention to defraud any creditor.
Creditors can, if they choose and few do, petition the court to object to the discharge of their debt. A hearing is held, after paperwork is filed in which the creditor sets forth his case for objection, usually fraud, and the debtor then must file a response with the Court. At the hearing, a Judge renders a decision as to the discharge of the debt. Debtors should know that the Bankruptcy proceedings, like many other legal proceedings, have serious time limitations and requirements, and that the failure to comply with these may result in penalties from the Court, including, in some instances, dismissal of the Petition without discharge of debts.
During the legal process, the trustee collects all of your non-exempt assets, and liquidates them. The trustee also collects any non-exempt cash and then creates a plan for the distribution of the money to your creditors in some share that is determined to be fair.
Once this process is completed and the creditors have received something, or in some cases nothing, and the statutory time limits have passed, the discharge is filed by the Court. All of the debts listed on your Petition will then be considered to have been paid, and no attempts to collect these will be allowed by any creditor. You should note that if the debt was not listed on your Petition or in a subsequent amendment with the Court, this debt may not be discharged, and creditors may still attempt to collect it.
Concern Area: A Bankruptcy is placed on your credit report and remains there for up to 20 years under the current statutory scheme. You should know that if you were to do this, you would be “plagued” by this note during this time, if you ever applied for credit. Interestingly, many creditors actually are inclined to offer credit with a Bankruptcy on your record, since there are limitations on when a debtor can file a second Bankruptcy and wipe out the new debt.
Certain Debts Cannot Be Discharged: Subject to any amendments to the Bankruptcy Code, the following is a list of debts which cannot be discharged under Chapter 7 [Note: This list is not complete and is not intended to be relied on at the time you file. You should consult with an attorney at the time of filing to obtain the most accurate list of non-dischargeable debts]:
- Taxes due in the past three years [there are some exceptions];
- Debts from false financial credit information;
- Alimony, child support and other maintenance obligations;
- Fines and penalties assessed by the government;
- Student loans [there are some exceptions];
- Other debts as ordered by the Court; and
- Debts affirmed by the debtor
There are many means of managing debt, of which bankruptcy is only one. If you decide to utilize the Bankruptcy Court, do so with great care and, if possible, in consultation with experienced legal counsel. Should you choose Bankruptcy, be sure to further consider your options before filing your Petition.
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