In today’s current economy many people find themselves in large amounts of debt. This can happen through no fault of their own due to a life-changing event such as, job loss, a catastrophic accident causing large medical bills, death of a spouse, etc. Poor management of finances could also cause this debt. If someone is feeling like there is no possible way to repay all their debts, its possible bankruptcy could be their best option. This article will briefly cover the basics of the bankruptcy process.
Who can file Bankruptcy?
Any consumer who is insolvent (too much debt to pay back), may be eligible to file for relief under the U.S. Bankruptcy code subject to the following exceptions:
- You received a chapter 7 discharge in the past 8 years, or a chapter 13 discharge in the past 6 years.
- A bankruptcy court may also dismiss your case if there is an attempt by the debtor to defraud creditors. Such as transferring assets to friends or family in an attempt to hide them from creditors.
- You cannot file for bankruptcy if you had a chapter 7 or chapter 13 dismissed in the past 180 days for the following reasons:
- You violated a court order.
- The court ruled that your filing was fraudulent or was deemed an abuse of the bankruptcy system.
- Debtor requested the dismissal after a creditor asked for relief from the automatic stay.
Chapter 7 v. Chapter 13
There are two types of consumer Bankruptcy, Chapter 7 and Chapter 13. Chapter 7 is the most common Bankruptcy filed by consumers. Chapter 7 is an opportunity for a “fresh start.” If the debtor qualifies, all of their unsecured debt is wiped away and they are given the option to keep or surrender property that is secured by a lien or mortgage, as long as certain conditions are met.
Chapter 13 on the other hand is reorganization Bankruptcy, which essentially is a repayment plan. The debtor would propose to pay back all or a part of their debts over the course of 3 to 5 years, after the assigned term all debts eligible for discharge will be wiped away.
There are two main reasons people decide to file a chapter 13 over a chapter 7. 1) They simply do not qualify for chapter 7; or 2) The debtor has valuable assets.
There are set strict income limits by state, if the debtor’s income is above those limits you do not qualify for Chapter 7, unless you pass the means test. If your current annual income is higher than the limits set by your state, you must pass the means test to file chapter 7. The means test determines whether you have enough disposable income to repay your debts over the course of a 5 year plan. If you do not pass the means test you will not be eligible to file chapter 7; however, you still may be able to file ch. 13.
Debt education course and financial management course
For both chapters, the court requires that you complete two separate online courses, one pre-filing and one post-filing. You may complete these courses online and file the certificate with the court. If you do not complete these course within the time deadline, your case will be dismissed.
The Automatic Stay
Once you decide which chapter you want to file, next is the automatic stay. Being in a large amount of debt is often very stressful. Not only are you under the stress of attempting to repay the debt, but also you endure various collector’s phone calls and letters. A fundamental benefit of filing bankruptcy is the Automatic Stay. Under bankruptcy law the automatic stay is an automatic injunction that halts actions by creditors, with certain exceptions, to collect debts from a debtor who has declared bankruptcy. Under section 362 of the United States Bankruptcy Code, the stay begins at the moment the bankruptcy petition is filed. This provides instant peace of mind once the bankruptcy petition is filed with the court.
Meeting of Creditors
After a chapter 7 petition has been filed, the court will appoint a trustee to oversee your case and take control of the estate. The estate consists of all your assets that are not exempt. At that time, the court will schedule the 341 meeting; this meeting will be about 20-40 days after the initial filing of the petition. The debtor must be present. This is an informal meeting with the trustee where all the debtor’s creditors are allowed to be present. 99% of the time none of the debtor’s creditors actually appear. The meeting consists of the trustee placing the debtor under oath and asking questions about the debtor’s property and debts. The process for chapter 13 is slightly different, there is a meeting of creditors, and then there is a confirmation hearing in court where a bankruptcy judge will either approve or reject your proposed plan.
Discharge of debt
For chapter 7, creditors are allowed 60 days from the 341 meeting to convince the court that their debt should not be discharged. Once that time lapses, all of the debtor’s dischargeable debts will be discharged. For chapter 13, once the payment plan has concluded your case will be closed.
It is important to remember that everyone’s situation is different. For many people bankruptcy may not be the best option. After considering all factors, it’s possible that settling debts individually over time could be the best option for you. It is always smart to consult with an attorney that practices bankruptcy and debt settlement, allowing you to consider every factor in your situation without forcing you toward one or the other.