Bankruptcy is the legal process where individuals or businesses, called Debtors, seek protection from their creditors because they are unable to keep up with the required payments on their outstanding debts.
Debtors declare bankruptcy to obtain relief from the debt payments they can no longer afford. The court allows them to either:
1. Discharge the debt altogether, or
2. Agree on an affordable program that will help them pay off their debt gradually and satisfy their creditors.
Each country has its own bankruptcy designations. In the US, Debtors can seek protection from their creditors under the Bankruptcy Code, located at Title 11 of the United States Code.
The courts provide the Debtors with a choice of six different types of bankruptcy, depending on their circumstances and their ultimate goal.
The Bankruptcy Code and Federal Rules of Bankruptcy Procedure determine which chapter the Debtor is eligible to file, which debts can be eliminated, which possessions can be kept, how long repayment must continue, etc.
What are the different Chapters a Debtor can file?
Chapter 7: Basic liquidation of assets for individuals and businesses. Also known as Straight Bankruptcy, it allows the individual or couple to discharge the majority of their debt in exchange for surrendering some of their assets. It is the simplest, quickest and most popular form of bankruptcy available.
Chapter 7 filing fee is $306.00.
Chapter 9: Municipal bankruptcy. This provides bankruptcy protection for municipalities that are overwhelmed with debt they are unable to repay.
Chapter 9 filing fee is $1046.00.
Chapter 11: Rehabilitation or reorganization. Also known as Corporate Bankruptcy, it is used primarily by business Debtors, but sometimes by individuals with substantial debts and assets. It allows corporations and partnerships to reorganize and continue to function while they follow court mandated debt repayment plans.
Chapter 11 filing fee is $1046.00.
Chapter 12: Rehabilitation for family farmers and fishermen.
Chapter 12 filing fee is $246.00.
Chapter 13: Rehabilitation with a payment plan. Also known as Wage Earner Bankruptcy, it allows for individuals with a regular source of income to develop an affordable plan to repay all or part of their debts. It allows them to keep their assets.
The other advantage to Chapter 13 filing is that it stays on your credit report for a shorter period of time and allows the consumers to rebuild their credit sooner.
Chapter 13 filing fee is $281.00.
Chapter 15: Ancillary and International cases. Based on the Model Law, it provide bankruptcy protection in insolvency cases involving foreign debtors, claimants and assets.
Chapter 15 filing fee is $1046.00.
For most individuals filing for bankruptcy protection, the Bankruptcy Code requires:
1. Credit counseling before the petition is filed.
2. Debtor education after the filing but before the discharge can be issued.
Credit counseling is required for all individuals filing Chapter 7, 11, 12 and 13 petitions. Before they are allowed to apply for bankruptcy they are required to have completed accredited credit counseling within 180 days of their bankruptcy filing. After they file their petition they may also be required to complete a financial management class to give them the tools to prevent a similar situation in the future.
The counseling can take place in person, over the phone or through the internet.
The counseling agency must be a nonprofit budget and credit couseling agency that has been approved by the United States Trustee Program.
For a list of approved agencies in your state go to the US Department of Justice website http://www.justice.gov/ust/eo/bapcpa/ccde/cc_approved.htm
In order to complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules, the Debtor must provide the following information:
A list of all creditors and the amount and nature of their claims.
The source, amount, and frequency of the debtor's income.
A list of all of the debtor's property.
A detailed list of the debtor's monthly living expenses, (i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.)
What happens when a bankruptcy petition is filed?
The filing of a bankruptcy case (petition) creates an “estate.” The estate technically becomes the temporary legal owner of all of the Debtor’s property.
After a case has been filed, creditors must stop all collection action against the Debtor unless they get permission from the bankruptcy court to continue. This protection from collection efforts is referred to as the "automatic stay".
Approximately 65% of all US consumer bankruptcies are filed under Chapter 7.
Under Chapter 7 Debtors can get the bulk of their debt wiped off in exchange for surrendering to the court whatever property they have left. It is converted to cash (liquidated) to pay the creditors whatever they can get, mostly a very small percentage of what is owed, often pennies on the dollar.
What kinds of debts can be discharged under Chapter 7?
Generally, all debts listed on the petition are dischargeable. However, certain types of debt are not dischargeable. The non-dischargeable debts include, but are not limited to:
Certain taxes, government and fines and penalties.
Debts arising from certain fraudulent conduct;
Alimony, child maintenance or support, and certain other related debts arising out of a divorce decree or separation agreement;
Debts caused by the debtor’s willful and malicious injury to other persons or property.
Government guaranteed student loans or benefit over-payments.
Debts caused by a death or personal injury by the debtor's operation of a motor vehicle while intoxicated.
Debts for certain condominium or cooperative owner’s association fees.
Debts not listed in the bankruptcy petition.
In order to qualify for Chapter 7 bankruptcy protection the Debtors must:
Reside, have a place of business, or own property in the United States or a municipality.
Pass a means test to prove they are unable to pay back their debts.
Debtors cannot file for Chapter 7 protection if they:
Have been granted a Chapter 7 discharge within the last 6 years or completed a Chapter 13 plan.
Have had a bankruptcy filing dismissed for cause within the last 180 days.
The court assigns a Trustee to oversee the liquidation of the Debtor's estate. Some of the property is exempt from liquidation and this depends on the state where the bankruptcy case is filed.
There are limitations to the types of assets and the amount of cash on hand that can be exempt. There is also a limit on the fair market value of the personal property the Debtor can keep, such as automobiles, household items (appliances, furniture, clothing, etc.), jewelry and heirlooms, collectibles, musical instruments and tools of the trade.
In Florida the following assets are exempt:
Homestead (the equity of your primary home)
Miscellaneous personal property (up to a limit)
Tax deferred retirement plans
Social Security income
Cash value of life insurance
College investment plans (including 529 Plans)
Health savings account
Hurricane savings accounts.
When the Trustee identifies the property that is subject to liquidation he is authorized by the court to see that it is sold. The proceeds are forwarded to the creditors who must accept whatever they get, no matter how small, as their final settlement of the debt.
When the bankruptcy is finalized the Debtor is then released forever from all dischargeable debts and can start over with a clean slate and no further payments to the creditors.
Corporations can also chose to file for Chapter 7 protection when their debt far exceeds their assets and business is no longer profitable enough for them to continue their operations. They go through the same process of liquidation of assets to settle their debts.
Do I need an attorney to represent me in a bankruptcy case?
Each Debtor filing an individual bankruptcy has a right to represent him or herself (Pro Se Debtor). The use of an attorney is recommended because bankruptcy is a very complicated process. Ignorance of the law may cost a lot more in the end than the money saved in attorney’s fees.
By law, corporations are required to be represented an attorney.
Only an attorney can give you legal advise concerning bankruptcy filing, preferable one that specializes in bankruptcy.
Bankruptcy is a legitimate way to give yourself the breathing room to start over. However, the laws governing bankruptcy have become more strict due to abuses. And it is very important to keep in mind that if you declare personal bankruptcy it will remain as a dark stain on your credit report for up to 10 years, depending on the state you file, and your credit rating will drop like a rock.
If you can avoid bankruptcy by taking advantange of credit counseling you should, by all means, make every effort to do so.