Filing for bankruptcy can offer relief to individuals struggling to pay their debts, whether it be from loss of employment, illness, divorce or any other financially stressful circumstance. Bankruptcy allows individuals to put a stop to harassing collection efforts, avoid foreclosure in certain circumstances and get a fresh start. However, bankruptcy is not the right answer for everyone facing financial difficulty. The information provided below is a summary of a complex area of law, if you are considering filing for bankruptcy it is important to consult an attorney who specializes in bankruptcy.
One of the most compelling benefits of bankruptcy for an individual debtor is the automatic stay against enforcement actions of creditors. An automatic stay prevents creditors from bringing, or continuing lawsuits, filing liens against property, or foreclosing on property. Creditors who wish to take any action to enforce their claims must first seek relief from the bankruptcy court. However, it should be noted that this is also one of the aspects of bankruptcy most abused by individuals or scam artists unknowingly hired to represent individuals – something debtors should be aware of when searching for the right attorney.
Certain assets can be identified as exempt from a bankruptcy estate, such as clothing, home furnishings, a vehicle, or family home. Exempt assets may be retained by debtors and are not considered to be part of the bankruptcy estate available for liquidation. However, be aware that all exemptions have dollar limits set by either federal or state law.
It is incredibly rare for creditors to recover all debts in full, so individual debtors are generally entitled to receive a discharge from any debts that cannot be paid through their bankruptcy. Certain debts such as student loans, alimony and taxes are non-dischargeable. If a debt is non-dischargeable, it means that the debtor will still be liable for that debt even after a successful bankruptcy filing. In addition, an individual debtor can only receive one discharge within seven years.
The Bankruptcy Code is divided into several chapters of which four are available for individuals – Chapter 7, Chapter 11, Chapter 12 and Chapter 13. Chapter 12 is seldom used as it is limited to family farmers and fisherman, so the other more common chapters are addressed below:
Chapter 7
Chapter 7 allows a debtor to liquidate assets to pay off debts. Only individuals who satisfy the means test are eligible to file under this chapter. The Chapter 7 estate, or the assets to be liquidated, includes only those assets owned by the debtor at the time of filing, excluding assets subject to the debtor’s exemptions. This means that any income made after filing for Chapter 7 is not subject to the bankruptcy and can be used for the individual’s ongoing living expenses.
Unlike other chapters, a Chapter 7 debtor does not remain in control of the estate, instead, a Chapter 7 trustee is appointed to collect and liquidate the debtor’s assets. The trustee is able to investigate and recover assets not turned over to the trustee (e.g., assets held by a court appointed receiver or on consignment by a third party).
Once the trustee recovers and then liquidates the Chapter 7 estate, he or she will assess the validity of the claims filed by creditors and exemptions filed by the debtor, and distribute the proceeds in order of priority.
Chapter 11
Chapter 11 is generally only used for businesses, however, it may be the only option available to an individual debtor with income greater than that allowed by the Chapter 7 means test and secured debt in excess of that allowed by Chapter 13. This is often the case where an individual owns large amounts of real property, but does not have sufficient liquidity to pay his or her debts as they come due. The major benefit of Chapter 11 for individuals is the ability to keep assets beyond just the statutory exemptions available under Chapter 7 and Chapter 13.
In Chapter 11, a debtor generally remains in control of the estate. A Chapter 11 debtor will draft a plan of reorganization as part of the bankruptcy process. The plan is then voted on by creditors and must either be approved by the creditors or meet the criteria required for the debtor to cram down the plan on creditors. If a debtor is unable to confirm a plan of reorganization, the case may be dismissed. After the confirmation of a plan, the debtor’s bankruptcy is essentially over, however, the bankruptcy court generally retains jurisdiction over the case at least until the last payment has been made.
Chapter 13
Chapter 13 is available exclusively for individuals with income or debt within certain guidelines established annually. Similar to Chapter 11, a Chapter 13 debtor remains in control of the estate and proposes a plan for payment of creditors. Unlike Chapter 11, a Chapter 13 plan does not need to be approved by creditors provided it meets certain criteria. A Chapter 13 plan generally allows for creditors to receive payments derived from a percentage of the debtor’s income over a period of three to five years. A Chapter 13 debtor does not receive a discharge until all of his or her plan payments have been made, and will generally receive a slightly broader discharge than in a Chapter 7 filing. Most notably, a Chapter 13 can provide discharge of damages resulting from willful or malicious injury to property and/or debts arising from divorce settlements.
Bankruptcy is a complex area of law that can be incredibly beneficial to individuals when used correctly, but can also be incredibly costly if mismanaged or represented by inadequate counsel. In order to maximize the success and efficiency of your bankruptcy the services of an experienced and capable attorney is essential. Not every attorney has experience with bankruptcy filings, so make sure to inquire regarding an attorney’s areas of expertise. Paralegals may have exposure to bankruptcy law, but are not licensed to provide and should not be relied on for legal advice. Be wary of scams intended to prey on individuals facing financial difficulty. If a solution sounds too quick and easy to be true, check with a professional.