A bankruptcy procedure is a federally authorized procedure, allowing the debtor (individual, agency, corporation, etc), to relieve the total amount of debts they owe. This process begins by the debtor making court approved agreements with debtors, to set up a repayment plan, or to have certain debts completely written off.
A) Chapter 7 -
This form of bankruptcy is also known as liquidation bankruptcy. Individuals, married couples, and businesses can file for this form of bankruptcy. This is pretty much when the debtor is scrapping all their debts, and trying to start over from scratch. Once the proceedings begin, a trustee is appointed, to sell certain assets owed by the debtor; there are federal and state laws in place dictating what a debtor may keep, and what has to be sold (items like clothing, property, vehicles, and other items, can be retained by the debtor). Upon all the liquidated assets being sold, a trustee will pay the creditors , based on the order of the loans; this means that not all creditors will receive a payment; these are the financial obligations that are going to be forgiven or discharged. This form of liquidating allows you to get rid of the unsecured forms of credit; certain debts (such as government, alimony, child support, taxes, and student loan debts) can never be written off. The bankruptcy remains on file for 7 years, and if the individual ever chooses to file again, the debts that were initially written off, can't be written off again in the following bankruptcy proceeding.
B) Chapter 11 -
This form of bankruptcy is generally referred to as reorganization of debts, and usually refers to organizations and partnerships. It is typically when the business will come up with a plan, to reorganize and repay the debts they owe, in order to be able to remain in business, and still pay off certain creditors, over an extended period of time. The filing has to take place where the individual (or organization) resides, and can be voluntary (filed by petitioner) or involuntary (filed by creditors). This allows the debtor to remain in business, run operations, and set up a payment plan with the creditor, which is for less than what was originally owed on a monthly basis by the organization. A plan is set up, for repayment, and it may take months, in other cases might take years, for the business to reorganize, and repay the debts that are owed. A priority scheme is used in this plan, meaning that secured creditors generally get paid most up front, followed by unsecured creditors, in the order of the loan.
Bankruptcy is a legal process, which is governed by the federal rules and the procedures that are set forth in the Bankruptcy Code. The main purpose of bankruptcy is to give the individual or a company a fresh start, or to allow them to reorganize their debts, in order to be able to conduct business. This is done by eliminating certain debts completely, reorganizing certain debts, or restructuring certain debts, based on the form of bankruptcy that is filed. Bankruptcy provides a way for debtors to be treated fairly, to be able to retain certain necessary possessions, and only repay certain debts that are owed to their creditors.
The bankruptcy process begins when the debtor pays the filling fee, and file the petition to the bankruptcy court. Several pieces of financial information are required, including list of assets, debts, and liabilities all have to be included in the petition; all information has to be certified by the debtor under penalty and perjury. Debtors are required to participate in credit counseling in certain states, with an approved nonprofit, and this must be done only for certain forms of bankruptcy (chapter 7 is one). The trustee (lawyer) should be provided with copies of all taxes, and federal tax returns, prior to the proceeding's start date, and pay stubs, and other financial information might also be required. This information has to be given to the trustee several days prior to the counseling meetings that will take place.
Debtors are required to go to court, for counseling meetings, and to discuss their financial situation with creditors present, early on in the process. The answers, and all financials presented are sworn in under perjury, and the debtor must present all information of earnings, debts, and their inability to pay. Each court will have different time periods and number of meetings a debtor has to attend with a trustee, and creditors, to determine what debts are going to be forgiven, written off, or reorganized, based on the form of bankruptcy being filed.
Upon the petition being filed, an "automatic stay" is put in to effect; this basically stops a majority of the debt collections that creditors are trying to collect. Creditors can still collect in this period if the bankruptcy court gives them permission to do so. The bankruptcy court and the debtor's trustee will oversee the debtor’s financial activities, during the course of the proceedings.
When is it determined
Depending on the type of bankruptcy being filed, the time period will vary to how long it will take to complete, and determine whether debts will be discharged. With chapter 7, it takes a period of 3 to 4 months; with chapter 11, the reorganization might start right away, upon filing the petition.
What claims survive bankruptcy?
Although most debts can be written off, certain ones never will. Creditors can pursue certain collateral if the debt is not written off (such as repossessing a vehicle). Other debts that can't be discharged include: federal and state taxes, student loan payments, federal and government loans, DUI claims, child support, alimony, and other government based debts, generally are not discharged.
How to avoid bankruptcy
Bankruptcy should always be a last resort, and should only be undertaken when you see no other way out. Businesses and individuals that choose to file, should have first exhausted all other options available to them, and should have determined that there is no alternate to filing for bankruptcy. Before filing, certain alternates should be considered; some of these include:
- Credit counseling services.
- Out of court workout, trying to discharge or create a payment plan might be set up with creditors.
- Debt consolidation or debt restructuring; and,
- In certain states, assignment of a legal obligation can be passed on to another party, if they are willing to take on the debt, and can make the payment to the amount owed to the creditor.
In many instances, if debts are overdue, or haven't been paid on in several months, creditors might be willing to negotiate with certain debtors, especially if they were always on time with payments, prior to the recent troubles they have been having. If the debtor calls in to discuss possibly absolving, or offering a settlement of some kind, many creditors will accept it, in order to avoid a much bigger loss, or possibly not receiving any payment at all, once a bankruptcy proceeding takes place and gets underway.
It is important to look at all financials, and determine your current financial position, prior to deciding which of these alternatives to consider, when trying to avoid bankruptcy. In some cases you can negotiate with creditors, in others you may want to hire legal assistance to help you decide the best course of action, and creating a plan to repay, without the court's interference. Speaking to a lawyer, that has experience in these issues, is sometimes your best bet, and in many cases, can be a way for you to avoid bankruptcy altogether. In many cases, a lawyer can step in on the debtor's behalf, and try to set up arrangements with creditors; more often than not, creditors are willing to accept certain negotiations or settlements being offered to them. Especially when payments are a few months late or a creditor feels the individual or company might be contemplating bankruptcy, they will be more willing to listen to what the debtor's lawyer has to offer.
In some cases, individuals can take it in to their own hands, and might possibly consider selling some of their own assets. If you have a pricey collector item, or something that can provide a good flow of instant cash, it might be worth doing this, in order to get the cash you need, to pay off certain creditors. Another option, although not the ideal, is to ask family or friends for financial assistance. This should be a last resort kind of method to avoiding it, but in many cases, it is better than bankruptcy. It is best to set up a plan with the individual that agrees to loan you the money, or offer them some form of collateral, so that they know they will get the money back.
Why hire a lawyer/ Debtor's rights
When you do choose to undergo a bankruptcy proceeding, hiring a lawyer is important; some reasons to hire one include:
- They will speed the process along; meaning, they will push your filing through the court system, they will know exactly what is required to file, and this will shorten the period of time for meetings, and getting the process underway.
- Lawyers know how the system works, and what the court requires, meaning they will do all the work for the client.
- Lawyers know how to organize and file, and they can work as the client's trustee, meaning they will be in charge of the entire process; and,
- Lawyers know your rights. Many times, even when you are undergoing a bankruptcy proceeding, many creditors will not respect this, and will try to collect. Since most individuals don't fully know their rights, a lawyer can tell them their rights. They can contact creditors on the client's behalf, they can petition the court, and they will discuss the creditor's rights with them, so they know what they can do, and can avoid.
As a debtor, you also have certain rights, even when filing for bankruptcy. As far as retention of property, there are certain things you can retain, even during the liquidation phase with chapter 7. Although some items and collateral have to be sold, items like a car that is used for driving to work, your primary residence, clothing, money collected in IRAs or retirement accounts, and other property, can be retained. Each state determines what the debtor can keep, and what has to be sold, this is another reason to work with a lawyer, as they can guide you in the liquidation process. Under bankruptcy, debtors also have the right to get out of certain reoccurring payments under contracts, and may recover certain seized property, depending on which form they are filing in court.
What happens next
Following a bankruptcy, especially chapter 7, it is going to be extremely difficult for debtors to rebuild their credit. Chapter 7 will remain on their credit score for a period of 7 years, making it difficult to open new credit cards or lines of credit, apply for loans, take out a mortgage, or make any other big purchase. This does not mean it is impossible, but will be difficult. In order to start rebuilding your credit score after bankruptcy, one can:
- Take out unsecured credit cards, and make the monthly payments on time.
- After a few years might be able to get store credit cards, or unsecured credit cards from banks to help improve their ratings.
- Make payments on time, for any and all debts owed. Even if it is a small card, that has a low balance, paying it on time will help rebuild the score; and,
- Avoid situations where you are overpaying, or can't afford payments on the lines of credit you do have open.
After bankruptcy, it is very difficult to build your credit score back up, and it is going to take quite some time for it to be removed from the credit score. But, there are a few things that can be done, to speed the process along, and hopefully get things in order in a shorter period of time.
Bankruptcy should always be the "last resort." But, in some cases, when you can't avoid it, hiring the best lawyer to help you through the process, is the best option to ensure you know your rights, and go through the process as quickly, easily, and seamlessly as possible. Plus, with a lawyer, you will know your rights at all times, and will avoid making payments, or getting caught up with creditors, that are trying to force you to pay, even when you don't have to pay.