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What is Bankruptcy?
A. Bankruptcy
Bankruptcy is a federal court process designed
to help consumers and businesses eliminate their debts or
repay them under the protection of the bankruptcy court.
Bankruptcies can generally be described as "liquidations"
or "reorganizations." Chapter 7 bankruptcy is
the liquidation variety -- property is sold (liquidated)
to pay off as much of the debtor’s debt as possible, while
leaving them with enough property to make a fresh start.
Chapter 13 is the most common type of "reorganization"
bankruptcy for consumers – the debtor repays his or her
debts over three to five years. Both kinds of bankruptcy
have numerous rules -- and exceptions to those rules --
about what kinds of debts are covered, who can file, and
what property the debtor can and cannot keep.
1. Chapter 7 Bankruptcy
Liquidation bankruptcy is called Chapter
7, and it can be filed by individuals (a "consumer"
Chapter 7 bankruptcy) or businesses (a "business"
Chapter 7 bankruptcy). A Chapter 7 bankruptcy typically
lasts three to six months.
In a liquidation bankruptcy, some of the
debtor’s property may be sold to pay down his or her debt.
In return, most or all of the debtor’s unsecured debts (that
is, debts for which collateral has not been pledged) will
be erased. The debtor may get to keep any property that
is classified as "exempt" under the state or federal
laws available to them (such as your clothes, car, and household
furnishings). If the debtor doesn’t own much, chances are
that all of their property is exempt and they have what
is known as a "no asset" case.
If the debtor owes money on a secured debt
(for example, a car loan, where the car is pledged as a
guarantee of payment or a home mortgage), they have a choice
of allowing the creditor to repossess the property; continuing
the payments on the property under the contract (if the
lender agrees); or paying the creditor a lump sum amount
equal to the current replacement value of the property.
Some types of secured debts can be eliminated in Chapter
7 bankruptcy.
Not everyone can file for Chapter 7 bankruptcy.
For example, if the debtor’s disposable income is sufficient,
after subtracting certain allowed expenses and monthly payments
for certain debts (including child support and debts that
secure property), to fund a Chapter 13 repayment plan, they
won't be allowed to use Chapter 7.
Bankruptcy doesn't work on some kinds of
debts. Though bankruptcy can eliminate many kinds of debts,
such as credit card debt, medical bills, and unsecured loans,
there are many types of debts, including child support and
spousal support obligations and most tax debts, that cannot
be wiped out in bankruptcy.
B. An Overview of Chapter 7 Bankruptcy
1. An Overview of Chapter 7 Bankruptcy
Chapter 7 bankruptcy is sometimes called "liquidation"
bankruptcy -- it cancels your debts, but you might have
to let the bankruptcy court liquidate (sell) some of your
property for the benefit of your creditors. Chapter 7 bankruptcy
refers to the chapter of the federal statutes (the Bankruptcy
Code) that contains the bankruptcy law.
2. Bankruptcy Costs in Time and Money
The whole Chapter 7 bankruptcy process takes about four
to six months, costs $274 in filing and administrative fees,
and commonly requires only one trip to the courthouse.
3. Who Can File
Chapter 7 can be a powerful remedy for debt problems, but
it isn't available to everyone. For example, you won't be
able to use Chapter 7 if you already received a bankruptcy
discharge in the last six to eight years (depending which
type of bankruptcy you filed) or if, based on your income,
expenses, and debt burden, you could feasibly complete a
Chapter 13 repayment plan.
4. Bankruptcy Forms
To file for bankruptcy, you fill out a two-page petition
and a number of other forms. Then you file the petition
and forms with the bankruptcy court in your area. Basically,
the forms ask you to describe:
• your property
• your current income and its sources
• your current monthly living expenses
• your debts
• property you claim the law allows you to keep through
the bankruptcy process (called "exempt property")
-- most states let you keep some equity in your home, clothing,
household furnishings, Social Security payments you haven't
spent, and other necessities such as a car and the tools
of your trade.
• property you owned and money you spent during the previous
two years, and
• property you sold or gave away during the previous two
years.
You must also file a certificate showing
that you have completed credit counseling with an agency
approved by the United States Trustee. (For a list of approved
agencies in each state, go to the Trustee's website, www.usdoj.gov/ust,
and click "Credit Counseling and Debtor Education.")
If you're facing an emergency, like a foreclosure
or repossession in the next few days, you can file just
the two-page petition, but you must file the rest of the
forms within 15 days.
5. Bankruptcy's Magic Wand -- The Automatic
Stay
Filing for bankruptcy puts into effect an
"Order for Relief" -- known informally as the
"automatic stay." The automatic stay immediately
stops most creditors from trying to collect what you owe
them. So, at least temporarily, creditors cannot legally
grab ("garnish") your wages, empty your bank account,
go after your car, house, or other property, or cut off
your utility service or welfare benefits.
6. Bankruptcy Court's Control Over Your
Financial Affairs
By filing for bankruptcy, you are technically placing the
property you own and the debts you owe in the hands of the
bankruptcy court. You can't sell or give away any of the
property you own when you file, or pay off your pre-filing
debts, without the court's consent. However, with a few
exceptions, you can do what you wish with property you acquire
and income you earn after you file for bankruptcy.
7.The Bankruptcy Trustee
The court exercises its control through
a court-appointed person called a "bankruptcy trustee."
The trustee's primary duty is to see that your creditors
are paid as much as possible on what you owe them. And the
more assets the trustee recovers for creditors, the more
the trustee is paid.The trustee (or the trustee's staff)
will examine your papers to make sure they are complete
and to look for nonexempt property to sell for the benefit
of creditors. The trustee will also look at your financial
transactions during the previous year to see if any can
be undone to free up assets to distribute to your creditors.
In most Chapter 7 cases, the trustee finds nothing of value
to sell.
8.The Creditors Meeting
A week or two after you file, you (and all the creditors
you list in your bankruptcy papers) will receive a notice
that a "creditors meeting" has been scheduled.
The trustee runs the meeting and, after swearing you in,
may ask you questions about your bankruptcy and the papers
you filed. The trustee will ask you whether the information
in your papers is 100% true. Creditors rarely attend this
meeting, but if they do, they may question you under oath
about where collateral is located or about information you
gave them to obtain the loan. This meeting, which takes
place somewhere in the courthouse, rarely lasts more than
a minute or two. In the vast majority of Chapter 7 bankruptcies,
this is the debtor's only visit to the courthouse.
9.What Happens to Your Property
If, after the creditors meeting, the trustee determines
that you have some nonexempt property, you may be required
to either surrender that property or provide the trustee
with its equivalent value in cash. If the property isn't
worth very much or would be cumbersome for the trustee to
sell, the trustee may "abandon" the property --
which means that you get to keep it, even though it is nonexempt.
As it turns out, any property owned by most Chapter 7 debtors
is either exempt or is essentially worthless for purposes
of raising money for the creditors. As a result, few debtors
end up having to surrender any property, unless it is collateral
for a secured debt. There are exemptions provided under
Federal and State Law. These exemptions vary on a state
by state basis.
10. How Your Secured Debts Are Treated
If the debtor has pledged property as collateral
for a loan, the loan is called a secured debt. The most
common examples of collateral are houses and automobiles.
If the payments are in default, the creditor can ask to
have the automatic stay lifted in order to repossess or
foreclose on the property. However, if the debtor is current
on his or her payments, he or she can keep the property
and keep making payments as before -- unless there is enough
equity in the property to justify its sale by the trustee.
If a creditor has recorded a lien against
the debtor’s property without your consent (for example,
because the creditor obtained a court judgment against you),
that debt is also secured. The debtor may be able to wipe
out the lien in bankruptcy.
The Bankruptcy Discharge
At the end of the bankruptcy process, all of the debtor’s
debts are wiped out (discharged) by the court, except:
• debts that automatically survive bankruptcy, unless the
court rules otherwise (for example, child support, most
tax debts, and student loans), and
• debts that the court has declared non-dischargeable because
the creditor objected (for example, debts incurred by your
fraud or malicious acts).
After Bankruptcy
Once the debtor receives a bankruptcy discharge, the debtor
no longer legally owes their creditors for any discharged
debts. The debtor can resume his or her economic life without
court supervision, except that the debtor must tell the
court if they receive (or become eligible to receive) an
inheritance, insurance proceeds, or proceeds from a divorce
settlement within 180 days of the date they originally filed
the petition.
The debtor can start rebuilding his or her
credit. The debtor can't file for Chapter 7 bankruptcy again
for another eight years from the date of your filing.
