Bankruptcy For Debtors

 

Debt Relief May Be Available Through the Right Form of Bankruptcy

Federal bankruptcy law can provide a financial fresh start for people and businesses so deep in debt they cannot pay it. Debt relief can take three forms.

Chapter 7 – also called “liquidation,” releases a debtor from most kinds of debts. This includes credit card, medical, most law suit debts and many others. Even some income tax debts can be erased. Other kinds of debts cannot be eliminated, such as student loans and child support. As long as you make your mortgage payments, you will keep your house. The same goes for cars and trucks. If you have any property that is not protected by law, it may be sold to pay creditors.

Chapter 13 – requires that you pay some of the debt you owe, but may save your home from foreclosure. It involves a payment plan. If you have stable income sufficient for living expenses plus the missed mortgage payments (spread out over 3 to 5 years), plus certain other debts and other costs, a Ch. 13 plan may be the best way forward. In Ch. 13 debts without collateral, such as credit cards, are paid off at a fraction of what was owed and the balance is eliminated.

Chapter 11 – is the bankruptcy mechanism available to large businesses, under certain conditions, that allows them to get relief from some debt and reorganize their business, rather than close its doors. If the debts with collateral are $1,149,525 or less and if the other debts are less than $383,175 (effective April 1, 2013), then in some cases the business may file a less expensive Ch. 13 case.

An attorney can help you figure out which form of bankruptcy would work for you.  

Creditors should know that bankruptcy can be contested for fraud or other reasons.

Related Legal Terms

Full Disclosure – Bankruptcy law requires full disclosure of all debts and all property. Filing a bankruptcy case containing false information is a federal crime  punishable with fines and imprisonment.

Equal Treatment of Creditors – Legally required equal treatment of creditors. A person may not “play favorites” by paying a creditor more this its fair share. This is called a “preference.” That money can be collected and paid out evenly to all creditors.

Credit Counseling – A brief credit counseling session, available at no cost to low income persons, which must be taken before filing a bankruptcy case. It can be by phone, online, or in person and takes about one hour. After filing the case, the person must take a second brief session called financial management.

Means Test – The financial criteria that determine whether a person with income over a certain level (called “median income”) can qualify for Ch. 7 debt relief. The means test does not apply when income is below the median. For example, it does not apply to a family of four with income of $78,310 per year or less (effective November 1, 2012 ). The means test is a complex series of computations that take into account a number of different factors. If a higher income person does not meet the test, she may still be able to get debt relief but with a Ch. 13 case instead. Businesses don’t have to meet the means test.

Automatic Stay – The legal requirement that all collection, foreclosure and repossession actions must stop once a bankruptcy case is filed. A creditor who wants to continue foreclosure or other collection activity must get permission from a bankruptcy judge.

Relief From Stay – Permission given by the judge to some creditors to continue collections after bankruptcy has been filed. Mortgage and child support payments may qualify for relief from stay. 

Redemption – If your car is worth less than what you owe on it, then in a Ch. 7 case you have the legal right to pay what it is worth and get rid of the loan.

Discharge – The final order by the court that eliminates – finally and forever – all the debts that can be eliminated. Student loans, child support orders and certain other debts typically are not eliminated. A creditor who tries to collect a debt that was discharged can be sued for damages and attorneys’ fees.

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This is for general information only. It is not intended as legal advice.