Debtors often turn to personal bankruptcy when they lose control of personal finances. Many people are facing bankruptcy due to unemployment, medical debts, or loss of a spouse. Others use bankruptcy to obtain financial relief from overwhelming credit card debt.
Two types of personal bankruptcy chapters exist; Chapter 7 and Chapter 13. Chapter 7 is referred to a ‘fresh start’ bankruptcy because outstanding debts are discharged. Debtors have a clean financial slate, but will encounter credit damage.
Chapter 13 requires debtors to repay a portion of their debts using a court-ordered payment plan. The amount of debts repaid is determined by the ‘means’ test and calculated using state median income levels. Debtors earning less than median levels may be allowed to file Chapter 7. Debtors earning equal to or greater than median income levels are required to file Chapter 13.
In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) passed through Congress. The new bankruptcy laws require debtors to undergo credit counseling through a U.S. Trustee approved agency.
Debtors may want to consider entering into credit counseling prior to submitting a bankruptcy petition. Oftentimes, credit counselors can help debtors negotiate with creditors and work out a payment plan. It is recommended to avoid bankruptcy when possible because of the lingering credit damage it causes.
BAPCPA requirements are complex and include strict deadlines. Debtors may find it beneficial to consult with three or more bankruptcy attorneys to determine which best suits their needs. Personal bankruptcy can feel a bit invasive and if often embarrassing. Working with a lawyer whose personality is compatible can make the process more bearable.
During the initial meeting lawyers review debtors’ financial records to determine which bankruptcy chapter they qualify for. Debtors who qualify for Chapter 7 will be required to liquidate all non-exempt assets. They must relinquish assets to the bankruptcy Trustee who either returns property to creditors or sells the property to repay outstanding debts. Remaining balances are written-off.
Debtors required to obtain personal bankruptcy under Chapter 13 must submit a payment plan proposal to the judge. Upon approval, Chapter 13 payments are established. In most cases, debtors submit payments on their own, but in some instances courts will engage in wage garnishment.
Chapter 13 payments typically last for 2 to 3 years. These payments are made in addition to normal monthly expenses and debtors frequently find it difficult to comply. When debtors do not adhere to payment schedules, creditors can petition the court and request dismissal. If the petition is dismissed, debtors fail out of bankruptcy and no longer have court protection against creditors.
This can be devastating to those who file bankruptcy to stop foreclosure. Creditors can commence with collection activity once bankruptcy petitions are dismissed. If mortgage lenders would have foreclosed on the property 10 days prior to the borrower obtaining bankruptcy protection, they can foreclose within 10 days of bankruptcy dismissal.
The stigma of personal bankruptcy can be difficult to overcome. Bankruptcy remains on credit reports for 7 to 10 years and can affect employment and housing opportunities. If possible, research bankruptcy alternatives to see if they can offer the same result without the severe financial ramifications.
Bankruptcy Abuse Prevention and Consumer Protection Act