Most clients choose to file bankruptcy to discharge consumer debt such as credit card bills. Clients also utilize bankruptcy to discharge significant medical bills. However, it is important to note that some debts, such as student loan debt, child support payments and judgments, past due taxes and criminal fines and judgments, CANNOT be discharged under a bankruptcy.
In October 2005, the federal laws governing bankruptcy changed significantly with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The passage of this law created more requirements for individuals seeking to file for bankruptcy. However, the basic structure of the bankruptcy system did not change. A debtor must still choose to file for one of several types or “chapters” of bankruptcy as described as follows:
Chapter 7: Liquidation
- Chapter 7 is designed for debtors in financial difficulty who can no longer pay their pay existing debts.
- Under Chapter 7, a trustee takes possession of all property and the debtor may claim and retain certain property the law considers exempt. The trustee will liquidate all non-exempt property and use the proceeds to pay creditors according to their priority.
- The purpose of filing a Chapter 7 case is to obtain a discharge of a debtor’s existing debts. If a debtor is found to have acted improperly under the Bankruptcy Code (for example: hidden assets, undeclared assets, undeclared income), a discharge may be denied.
- There are some debts that may not be discharged under law. These debts include many taxes, student loans, child support, alimony, criminal restitution and debts from personal injury or wrongful death claims caused by driving while intoxicated.
- Following the receipt of a Chapter 7 discharge, a debtor is freed from the obligation of his or her debts without repaying those debts under a payment plan.
Chapter 11: Reorganization
- Chapter 11 is designed primarily for the reorganization of a business, but is also available to some consumer debtors.
- The Chapter 11 debtor has a 120 day period in which the debtor can prepare and file a reorganization plan with the Bankruptcy Court.
- The Chapter 11 debtor must provide all creditors with a disclosure statement providing enough information so that the creditor can adequately evaluate the plan.
- Under a confirmed plan, a debtor can reduce debts by repaying a portion of its obligation while discharging others. Also, the debtor can rescale operations to return to profitability.
- After a Chapter 11 Bankruptcy, a debtor usually emerges with a reduced debt load and a reorganized business.
Chapter 12: Family Farmer
- Chapter 12 is designed to permit family farmers to repay their debts over a period of time.
- A Chapter 12 bankruptcy is similar to a Chapter 13 bankruptcy in that the trustee collects the debtor’s payment and disburses the funds to creditors as established by the approved payment plan.
- The eligibility requirements for a Chapter 12 bankruptcy are restrictive, allowing only debtors who receive income primarily from a family-owned farm.
Chapter 13: Repayment of all or a part of the debts of an individual with regular income
- Chapter 13 is designed for individuals with regular income who cannot pay their debts but who wish to pay them in installments over a period of time.
- Under Chapter 13, a debtor must file a plan to repay creditors using future earnings. The usual repayment period allowed by the court is three years and not more than five years.
- The repayment plan must be approved by the Bankruptcy Court before it can take effect.
- Under a Chapter 13, a debtor may keep all exempt and non-exempt property as long as the debtor continues to make payments in accordance with the repayment plan.
- After completion of payments under the plan, the debts in question will be discharged.
Obtaining Credit Counseling
Under the new 2005 legislation, debtors are now required to complete credit counseling before they can file for bankruptcy. A debtor must contact a Bankruptcy Court-approved credit counseling agency to determine if his or her financial situation merits the filing of bankruptcy. If the credit counseling agency deems that the client is a candidate for bankruptcy, the agency will issue the client a certificate which must be filed along with the client’s bankruptcy petition. Many credit counseling agencies have counseling services available by telephone or by using the Internet.
The link below gives a list of approved credit counseling agencies
Running a Credit Report
Prior to filing a bankruptcy, it is a good idea to run a credit report to make sure that you, the debtor, are aware of all outstanding debts in your name.