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What does it mean to file for Bankruptcy?

When you don’t have enough money to pay all your debts, you can petition the court to either reorganize your debt in a more affordable plan or to administer your property and assets to pay off your debts to people or organizations in a priority order. If you don’t have enough money to pay them all off, the court will direct whether you have to sell property/assets, who gets paid first, how much and how soon. After this court order has been carried out, all remaining debt is forgiven forever and you have a fresh start on your financial situation.

Mr. Eric Reed of Reed Law Firm, PA, can guide you through this difficult process with compassion, courtesy and professionalism. If keeping your property is a priority to you, Mr. Reed will help you with a plan to allow you to keep what is important to you.

Click below on any of the aspects of bankruptcy to learn more:

• Bankruptcy Law Basics
• Why File for Bankruptcy?
• Alternatives to Bankruptcy
• What Happens After Filing for Bankruptcy
• Different Kinds of Bankruptcy
  • Chapter 7
  • Chapter 13
• What Can I Keep After Filing for Bankruptcy?
• Some specific types of bankruptcy issues – how are they covered?
  • Foreclosure
  • Repossessions
  • Credit Card Debt
  • Bill Collectors
  • Credit Harassment
  • Lawsuits
  • Judgments
  • Mortgages
  • Medical Bills
  • Back Rent
  • Car Payments
  • Taxes
  • Loans
  • IRS
  • And More

Bankruptcy Law Basics

Bankruptcy provides a court-monitored and legally enforced way for you to resolve a hopeless financial solution or spread the collection of debts over a 3-5 year period to help get your finances in order.

As the person who owes money, you are called the debtor.

The person or company you owe money to is called a creditor. Their primary interest is to collect the money that you owe them.

Why File for Bankruptcy?

The United States Constitution was written to allow for “uniform laws” on bankruptcy for two goals:

• To make sure all creditors are treated fairly for collecting your debt.
• To provide you, as the debtor, a fresh start.

Federal bankruptcy law controls all bankruptcy proceedings except where Congress deferred to state law.

Bankruptcy is not a magic solution and should not be entered into lightly. It will impact your ability to obtain credit for several years after the filing, which may result in lending companies not providing credit at all or providing it at less than favorable terms.

You should only consider filing if any of the following circumstances apply to you:

• You’re only paying a minimum amount on your bills and the balance continues to grow
• You don’t see a way to budget yourself out of debt
• You get a notice that your mortgage or a loan are going to be foreclosed or a car is going to get repossessed
• You’ve had a major financial stumbling block, like losing your job, getting a divorce or a costly illness.

Alternatives to Bankruptcy

In order to protect your ability to get credit, you may consider the following options:

• Try to negotiate with creditors to reduce monthly payments or even to skip some payments for a period of time and resume them later
• Seeking help from a non-profit credit counseling group

The downside to these alternatives will be no protection from collection agencies and the creditor may decide to force you to pay immediately, instead of waiting.

What Happens After Filing for Bankruptcy

You can’t get fired from your job because you filed for bankruptcy. However, some creditors will look at your bankruptcy on whether to give you any future credit. You may be looked at as a very high risk person and they may either not provide credit at all or offer it at less than favorable terms. A bankruptcy filing will stay on your credit report seven to 10 years. It usually takes at two to three years to reestablish your credit rating, although this varies among different people.

Also, bankruptcy does not get rid of all debts. You will still be responsible for:

• Alimony
• Child support
• Recent back taxes
• Student loans
• Recent large purchases
• Fines or penalties of government agencies
• Fraudulent debts

Even though you are still responsible for these debts, sometimes bankruptcy reorganization can help you get caught up on arrearages or pay certain non-dischargeable debts over a longer period of time at lower payments.

Different Kinds of Bankruptcy

Different people and different organizations must be handled differently for bankruptcy proceedings. To aid in the proceedings, federal bankruptcy law provides different provisions for each group called “Chapters”. Reed Law Firm, PA, provides legal services only for Chapter 7 and Chapter 13 proceedings. Brief descriptions of all chapters are provided below:

• Chapter 7 is a straight bankruptcy. This chapter is the simplest, but sometimes requires the biggest sacrifice of the filer. All non-exempt assets associated with your estate will be liquidated to pay off your creditors in a pre-determined order. However, some assets are exempt and cannot be taken by the Court. Your lawyer will help you understand whether your property can be sold.
• Chapter 9 is for municipal governments.
• Chapter 11 is a reorganization for businesses or individuals with too much debt to qualify for a Chapter 13.
• Chapter 12 is for family farm bankruptcies.
• Chapter 13 is a wage earner bankruptcy reorganization. It provides for the repayment of the debts in a pre-determined order through a repayment plan over a period of time, between 3-5 years. Many times, you are not required to pay your debts in full.

Chapter 7

Chapter 7 filing is generally the simplest and quickest form of bankruptcy. Individuals, married couples, corporations and partnerships can file this petition. Once approved by the court, a trustee is appointed to sell some of your property if you have assets that are not exempt. The proceeds from any such sales are distributed to creditors according to federal law.

Under the Bankruptcy Abuse Prevention and Consumer Protection Act, a means test will determine whether you can file a Chapter 7 bankruptcy. In applying the means test, your average income over the past six months is used. Your necessary and allowable monthly expenses are deducted from your income. If you can afford to pay at least $6,000 to unsecured creditors (click here to learn about What Can I Keep After Filing for Bankruptcy?) over five years after all of the allowable expense deductions, you will not be allowed to file for Chapter 7 but must instead file for Chapter 13 bankruptcy.

We start a Chapter 7 bankruptcy filing with an official petition in bankruptcy court. This filing includes a lengthy document called a Statement of Financial Affairs and extensive schedules that detail your financial situation. Your schedules will contain, in part, a list of your creditors, including:

• All priority debts, including taxes
• All “secured” debts, including home mortgages and auto loans, basically debts that have property as “collateral”
• All unsecured debts of any kind

Other information needed:

• The names and addresses of all creditors
• A list of assets, including real estate and all forms of personal property
• A list of income and expenses

It is critical all debt and assets are listed in the forms. If not, when the bankruptcy proceedings are completed, any debt not listed, will not be discharged or “forgiven”. Also any assets not listed may be cause to deny your discharge or may even be considered bankruptcy fraud.

Once the petition is filed, all creditors are prevented from collecting from you (through an “automatic stay”) until the proceedings are complete and then they must follow court rulings.

During the bankruptcy process, anyone that wants to collect while the petition is being processed has to show the bankruptcy judge why there is cause to collect. Most of the time, creditors will not be able to show such cause and will not be allowed to collect their debt from you.

A trustee takes control of anything you don’t get to keep. From selling your property, the trustee pays for the administration of your case and then gives any remaining money to the creditors with allowed claims, “secured” claims paid first. Any income you earn after filing the case is yours, the creditors can’t claim any of it.

After filing the bankruptcy, you appear at the “first meeting of creditors”, also called the “341 meeting”. Here, primarily the trustee (sometimes creditors) asks you questions, under oath, about your property and debts. The best course of action is to cooperate and provide all the information requested.

After the 341 meeting, creditors have 60 days to convince the court that you shouldn’t be allowed to get rid of your debts to them. If they don’t convince the court, the debt is discharged forever. Sometimes, the trustee reviews your income and expenses to see if you have any money left from your current living expenses to pay something to the creditors.

Chapter 13

Chapter 13 provides a way to pay off all or part of your debts over a three to five year period with court protection from creditors, eliminating most remaining debt. It basically provides you an option to reorganize your debts so you have time to pay them.

Some common reasons to choose Chapter 13 bankruptcy filing:

• You want to keep mortgages or other loans current, so that you don’t lose your home or other property
• You can get rid of some taxes and tax liens that may not be eliminated under Chapter 7 Bankruptcy
• You need to get caught up on child support or alimony arrearage that would not be discharged in a Chapter 7
• You have property that would not be exempt in Chapter 7 and you would rather try to pay back some of your debt in order to keep that property
• You make too much money to qualify for Chapter 7
• You have moral convictions that debts should be paid, no matter how long it takes.

Some conditions for Chapter 13 bankruptcy are:

• A stable income with disposable income left after paying the bare necessities of life, such as shelter, food and utilities
• You must have no more than a certain dollar amount in unsecured and secured debt, though the amounts are sufficient to cover most individuals. The dollar amounts change regularly so you should speak to an attorney to get the most up-to-date figures
• Developing a proposed payment plan to complete the debt repayment within three to five years. The payment plan must cover payment of all “priority claims” in full, including taxes

What Can I Keep After Filing for Bankruptcy?

Under South Carolina bankruptcy laws, you may keep:

• Real property or personal property used as a residence with equity of up to a certain dollar amount and you should speak to an attorney about the specific exemptions (joint owners may double) - Keep in mind that a mortgage will be deducted from the value of the property before counting against your exemption amount
• Burial plot to a certain dollar amount and you should speak to an attorney about the specific exemptions (joint owners may double)
• Motor vehicle to a certain dollar amount and you should speak to an attorney about the specific exemptions
• Household furnishings, household goods, clothing, appliances, books, animals, crops and musical instruments to a certain dollar amount and you should speak to an attorney about the specific exemptions
• Jewelry to a certain dollar amount and you should speak to an attorney about the specific exemptions
• Cash and other liquid assets to a certain dollar amount and you should speak to an attorney about the specific exemptions
• Professional books and tools of the trade to a certain dollar amount and you should speak to an attorney about the specific exemptions
• Life insurance proceeds
• Health aids
• Personal injury recoveries
• Wrongful death recoveries
• Accident and disability benefits
• ERISA-qualified retirement benefits
• Crime victims' compensation
• Local public assistance
• Social security
• Unemployment compensation
• Veterans' benefits
• Workers' compensation
• Alimony and child support
• Property of business partnership
• Implements, books, and tools of trade to a certain dollar amount and you should speak to an attorney about the specific exemptions

A bankruptcy does not wipe out voluntary liens, like mortgages and deeds of trust, or tax liens. So the lender still has the right to foreclose if you do not pay. If you pay, everyone is happy. Remember, the lender usually does not want the property; it wants you to pay regularly on the loan. Foreclosure is a last resort for the lender if it concludes it can't get the owed money any other way. The lender is stuck with the asset, if foreclosure occurs.

If you still owe money on the car, you can choose to reaffirm the debt to the secured lender by continuing to make the agreed-upon payments. You can also "redeem" the car by buying it from the secured creditor in a single payment for its present value.

If you choose, you can surrender the car and be free of any obligation to pay for it.

Some specific types of bankruptcy issues – how are they covered?

Foreclosure

A Chapter 13 bankruptcy can stop the foreclosure of your house and reorganize the mortgage so that you will be able to keep your home. The important thing is that you do not waste time if you have received foreclosure papers. A bankruptcy must be filed before the foreclosure auction if you want to save the house.

In Chapter 7, a mortgage on a house or property can be excluded in the liquidation of your estate, if you continue making payments. This doesn’t necessarily mean the mortgage will be discharged, but it gives you some flexibility on keeping the house after a bankruptcy.

Repossessions

In Chapter 7, repossession on a car or other secured loan can be stopped, if you continue making payments towards the item in question. This doesn’t necessarily mean the loan will be discharged, but it gives you some flexibility on keeping the item after a bankruptcy.

In Chapter 13, the car loan will generally be re-amortized over the life of your plan which allows you to keep the car and often times pay less per month than what you are paying on it now.

Credit Card Debt

In Chapter 7 bankruptcy, if the number of other non-dischargeable debts exceeds the money collected from your liquidated estate, this debt will be discharged. Credit card companies may sometimes challenge the discharge in bankruptcy of debt owed to them, by claiming that the debt was fraudulently charged by:

• Submitting a fraudulent application
• Using the card without any intent to repay the debt

Although this is rare, a judge will determine whether fraud has occurred, if the credit card company seeks an order of non-dischargeability.

In Chapter 13, credit cards are still dischargeable but the debtor will generally pay some back. The amount can be anywhere from 1% to 100%, depending on your income and assets.

Bill Collectors

Bill collectors will be asked to stop attempting to collect from you the instant the bankruptcy is filed. Some of them may be repaid, but only through the trustee, so they are required to leave you alone.

Credit Harassment

As you may know, some collection agencies and creditor representatives can be very nasty in attempting to collect their debts. Bankruptcy will stop this immediately so the phone will stop ringing. Furthermore, any contact from the creditors will go through the court, the trustee, or your lawyer, so you do not have to deal with it anymore.

Lawsuits

No civil lawsuits may be filed against you regarding your previous debts once the bankruptcy petition has been approved by the court.

Lawsuits that are currently pending will be stopped immediately upon the filing of the bankruptcy.

Lawsuits that have already finished leaving a judgment against you, can often times be avoided and discharged, wiping your slate clean.

Judgments

Judgments are dischargeable in bankruptcy and the liens that attach with them can often times be reduced or completely eliminated. Their treatment will depend on individual factors mainly focused on the value of your assets.

Mortgages

Mortgages usually have to be paid even in bankruptcy if you keep the house or other real estate associated with it. However, bankruptcy can help you to get caught up on missed payments to avoid foreclosure. Also, sometimes junior mortgages (second or third mortgages) do not have to be paid in full and sometimes in limited circumstances even 1st mortgages can be re-amortized to allow for a more affordable payment.

Medical Bills

In Chapter 7 or Chapter 13 bankruptcy, medical bills are dischargeable debts meaning, often times, you will not have to pay anything on them at all.

Back Rent

Back rent is much like a mortgage, meaning a Chapter 13 can help you catch up on missed payments. Or, if you have already moved out, any remaining rent owed on a previous lease is a dischargeable debt and you may not have to pay any of it back at all.

Car Payments

Repossession on a car or other securable loan can be stopped . The debt may have to be paid if you keep the car or other collateral, but the loan can often times be reworked to allow a more affordable monthly payment for you.

Taxes

Recent taxes are not always dischargeable but can often times be paid back under a long term repayment plan. This will allow you to get out of trouble with the IRS in an affordable way and keep the IRS or other taxing authority from taking action against you such as wage garnishment and seizure of other assets. Tax liens can also be reduced and voided in many cases. Older taxes are often times dischargeable just like a credit card or medical bill would be.

Loans

Most unsecured loans and even loans with household items as collateral are dischargeable in bankruptcy. You can usually keep whatever collateral they may have while only paying a portion or none of the debt.

IRS

Recent taxes are not always dischargeable but can often times be paid back under a long term repayment plan. This will allow you to get out of trouble with the IRS in an affordable way and keep the IRS or other taxing authority from taking action against you such as wage garnishment and seizure of other assets. Tax liens can also be reduced and voided in many cases. Older taxes are often times dischargeable just like a credit card or medical bill would be.

And More

You may owe money under circumstances that we have not mentioned above. Just because we didn't mention it does not mean we can't help you. Feel free to contact us and see if we can help.