Chapter 13 bankruptcy: the basics. If you are considering bankruptcy as a solution for your financial troubles, you may be wondering if there is an option which would allow you to be able to keep your assets and still be able to pay back debt and receive a discharge for unpaid debt. If this is […]
In my last article I went over for you the basics of bankruptcy and briefly described the two most common types of bankruptcy used by individuals. Now I am going to spend some time focusing on the number one most common type of bankruptcy; the Chapter 7, which is sometimes referred to as the Straight […]
The first, and by far, most common type of bankruptcy is liquidation under Chapter 7 of the Bankruptcy Code, also referred to as a straight bankruptcy. In this type of bankruptcy all of the debtor’s (or, the person filing the bankruptcy) assets which are nonexempt are sold and the proceeds of the sales are distributed amongst creditors (everyone who is owed money by the debtor.) After doing so, the remaining debt is wiped out giving the debtor what is known as a “fresh start.”
The second commonly used type of bankruptcy is known as a reorganization under Chapter 11 or 13 of the Bankruptcy Code. Chapter 11 is most commonly used by companies and Chapter 13 is most commonly used by individuals. In this reorganization, the debtor still pays some or all of his or her debt under a 3-5 year agreed-upon plan.
In a Chapter 11 bankruptcy, creditors have the right to vote on or approve of the companies proposed reorganization.
Under Chapter 13 bankruptcy, the companies or individuals you owe money to don’t vote on or approve your proposed plan for paying back some of what you owe. And unlike Chapter 11, only you propose the plan for some or all of your debts. In Chapter 11, your creditors can also propose plans.
If you consider that Chapter 11 is most often used by large companies, it makes sense that creditors have the right to propose or vote on the plan to repay debt. Because very large sums of money that impact multiple companies are usually involved, creditors have a much larger stake in what happens in the bankruptcy.
Just as in Chapter 7 bankruptcy, at the end of payment plan period under Chapter 13 you will receive a discharge.
The Bankruptcy Discharge
The bankruptcy discharge is the end goal of the bankruptcy case. Clients filing for bankruptcy are not only interested in stopping potential legal action such as repossession or foreclosure, but they are also interested in relieving themselves of the heavy burden of debt. When you receive a discharge at the end of your bankruptcy you are no longer legally responsible for repaying debts included in the discharge. The discharge is a court order that prohibits creditors from taking any action to collect debts that you owe them. It is permanent and can only be taken away by the court under certain circumstances such as fraud, which we will discuss later.
Before filing your bankruptcy case, it is important to decide if bankruptcy is your best option. Depending on the specifics of your financial problems, we will gather and discuss a great many facts in your case. We will want to know all aspects of your financial situation and what your desired outcomes are. It may be difficult to discuss all the circumstances you are facing in bankruptcy. However, if you are to take full advantage of the protections offered you under the United States and Arizona bankruptcy laws, we must know everything, including who and what you owe, whether or not you are behind on your payments, and any other financial information.
Reaffirming a Debt in Bankruptcy
There are times when clients who have filed chapter 7 or 13 bankruptcy will ask whether or not they should reaffirm a debt that would otherwise be discharged in their bankruptcy. Reaffirmation is an agreement made with a creditor to continue paying off a debt even after bankruptcy. There may be legitimate reasons for wanting to reaffirm a debt or loan. However, before the changes in bankruptcy law in 2005, it was not uncommon for creditors to use coercive methods to try and get debtors to reaffirm a loan. Reaffirming a debt means that you will be legally responsible for repaying the debt after your bankruptcy even though the bankruptcy would have released you of any legal responsibility to pay it back.
When you hear “meeting of creditors,” you might imagine yourself having to face a room of people representing the banks and credit card companies. The reality is that the meeting of creditors is used by the trustee to ask you questions about your financial situation. These questions and your answers will help him or her carry out the responsibilities of the trustee. Creditors will rarely show up at this meeting. Bankruptcy judges are not allowed to attend the meeting of creditors.
Because there is additional proof needed to show undue burden, the majority of those individuals who file bankruptcy do not file the additional adversary proceeding necessary to receive a discharge. This accounts for very low number of student loan discharges given to debtors by bankruptcy courts each year.
A common question that comes up when clients are considering chapter 7 bankruptcy is what impact bankruptcy will have on IRAs and other retirement accounts. When we file your chapter 7 bankruptcy, we have the opportunity to use what are termed “exemptions” under the U.S. and Arizona bankruptcy laws.
In this next post we will be discussing the issue surrounding dismissal or conversion of bankruptcy and the role and mechanism of the means test and presumption of abuse