What is Bankruptcy?
Bankruptcy is a legal proceeding in which a person who cannot pay his or her bills petitions the court to get legal protection from creditors and to obtain a fresh financial start. Although a bankruptcy filing is a court proceeding and all documents are signed under oath – in most bankruptcy cases you do not need to go before a judge.
The decision to file bankruptcy should only be made after determining that bankruptcy is the best way to deal with your financial problems. Bankruptcy is only one of many different options available. Before deciding if Bankruptcy is the right option for you, you should meet with one of our bankruptcy/debt management attorneys who can explain the positive and negative effects of bankruptcy and can contrast those with your other options.
What is the Automatic Stay?
The Automatic Stay is the legal protection a person filing bankruptcy receives from the court. At the moment your bankruptcy is filed, the automatic stay goes into effect. The automatic stay immediately stops your creditors from attempting to collect any debts from you in any way, including phone calls, letters and pending court proceedings.
Is Bankruptcy the Right Choice for Me?
Bankruptcy is very often one of the best options for someone who does not have the means to pay the for the debt they have ncurred. Typically a person filing bankruptcy only pays pennies on the dollar, and often nothing at all to their creditors. However, there are many reasons, such as employment requirements or low debt amounts, where filing bankruptcy could be a great financial mistake.
Types of Bankruptcy
There are many different types of bankruptcy. However, the vast majority of people fall into one of two types, or Chapters, of Bankruptcy – Chapter 7 Liquidations and Chapter 13 Reorganizations.
Chapter 7 (Liquidation)
Chapter 7 is what most people are thinking of when the term “bankruptcy” is used. In a bankruptcy case under chapter 7, you file a petition listing all of your assets and all of your debts/liabilities. Even though you are filing bankruptcy, the law allows you to protect certain types of property through “exemptions.” If you have property that is not exempt, it may be sold and the proceeds will be distributed to creditors. Often, the you will have a chance to “redeem” the property and keep it. Although every case is different, most cases are “no asset” cases meaning that all of your property is exempt or protected from the claims of creditors. If you have a “secured loan”, such as an automobile loan, you may “reaffirm” the debt. When you reaffirm a debt, it passes through the bankruptcy unaffected. If however, you are behind on your mortgage or the value of your automobile is significantly lower than the outstanding principal on your car loan, a chapter 7 may not be the best option for you and you should consider a chapter 13.
Chapter 13 (Reorganization)
In a chapter 13 case you file a petition and a “plan” showing how you will pay off some of your past-due and current debts over three to five years. Importantly, the bankruptcy plan is based on your available income not the amount of the outstanding debt. The most important thing about a chapter 13 case is that it will allow you to keep valuable property—especially your home and car, as long as you are able to make the payments which the bankruptcy law requires to be made to your creditors. In most cases, you will be required to make your regular monthly payments on your mortgage or car loan, plus an extra payment to get caught up on the amount you have fallen behind. These extra payments are made monthly to a Bankruptcy Trustee as part of a “plan”. You should consider filing a chapter13 if you:
- Own your home and are in danger of losing it because you are behind on your mortgage;
- Are behind on debt payments, but can catch up if given some time;
- Have valuable property that is not exempt, but you can afford to pay creditors from your income over time.
- Have income which is above median as determined by the “means test”. You will need to have enough income in chapter 13 to pay for your necessities and to keep up with the required payments as they come due, as well as to make payments under the plan.