Filing for Bankruptcy; Chapter 7, 13
Bankruptcy is set in place for individuals or businesses to obtain relief from debts that they can no longer pay. While we don't advocate filing bankruptcy unless it is a last resort, this page will answer some questions to possibly help you decide if it is right for you.
You should be aware that bankruptcy is often abused. The most common types of bankruptcy are chapter 7 and chapter 13. Chapter 7 discharges all obligations while a chapter 13 is a scheduled payback of debts.
People file as a way to escape debts when it may not be necessary. Always consider all of your options such as debt negotiations & debt management plans. Bankruptcy is final and will remain on your credit for 7 to 10 years depending on chapter filed.
You can consider negotiating your debts which will have less impact on your credit - if done correctly. You should not attempt debt negotiations if you do not have adequate funds to pay a settlement or reduced payoff. If you have no income and you can not qualify for a debt management program, filing for bankruptcy may be a good option at that point.
The Bankruptcy Process
Federal courts have exclusive jurisdiction over bankruptcy cases. Bankruptcy cases cannot be filed in state court. Each of the 94 federal judicial districts handles bankruptcy matters. The primary purposes of the law of bankruptcy are: (1) to give an honest debtor a "fresh start" in life by relieving the debtor of most debts, and (2) to repay creditors in an orderly manner to the extent that the debtor has property available for payment.
What is the automatic stay
Code 362 of the Bankruptcy code. It is an enforcement to disallow creditors at the attempt to collect certain debts (pre petition or possibly post petition debts) included in the bankruptcy. Basically it means any attempt to collect a debt involved in a bankruptcy can be a violation of the automatic stay or discharge injunction.
The automatic stay prohibits:
(1) Creditors can not attempt to collect debts listed in a bankruptcy or they risk violating the automatic stay. Even an attempt to collect post petition debts may be prohibited while the debtor is in bankruptcy. Judgments that are pre-petition (filed before BK) are uncollectable No repossession or selling of property is allowed until the automatic stay is lifted or the BK is discharged.
(2) The starting or continuing of any administrative or Judicial actions against the debtor that was started before the BK was petition was filed. All action must cease the second the petition is filed with the courts.
(3) Enforcing a pre-petition judgment against the debtor or anything that is considered property of the estate is prohibited. (11 USC Section 362 (a) (2).
(4) Any action to obtain possession or to try an exercise control is prohibited.
(5) Any act to attempt to perfect a lien or enforce a lien against the property of the estate. The purpose of the automatic stay is to give the debtor breathing room to liquidate or protect his assets under a chapter 7 or to set up a plan under a 13,12, or 11.
The automatic stay is in effect at the beginning of filing a Bankruptcy petition and lasts until discharge is granted, a dismissal occurs or if a motion for relief is granted. A creditor may try to obtain relief from the stay if the debtor has no equity in the property involved and the property is not necessary for a successful reorganization of the debtor's finances or if there is lack of adequate protection for the creditor.
Lack of adequate protection can be several things. No insurance on a vehicle or inadequate insurance such as comp and collision, then the creditor may ask for relief because his security interest is unprotected. No equity in property. The property you are trying to protect has no equity and the creditor can seek relief on that basis.
Delinquency. This can be a car or secured loan that is delinquent which is causing a depreciation plus no payments being made. This can be a valid reason for asking for relief from the stay. No registration or driver's license for the vehicle. If a creditor violates the automatic stay, a judge can award attorneys fees and actual damages along with punitive damages.
If a creditor gets a notice of a bankruptcy they can send a reaffirmation request to your attorney. If the attorney does not acknowledge the request then the creditor can show up at the 341 hearing and ask then. Many times creditors will ask a debtor to reaffirm with them.
This is allowed if approved by the courts. Creditors cannot enforce a reaffirmation that has not been approved by the courts. That would be considered attempting to collect a BK debt. If you take out a debt for the sole purpose of paying taxes, That debt may be nondischargeable.
Debts that may not be dischargeable in a Bankruptcy:
-Child support or alimony.
-Student Loans unless court agrees it will cause undue hardship to the debtor or his family. This is rare see more about This topic here.
-Taxes unless they are over 3 years old or more.
-Fraud. You lied on an application or some type of fraud was involved. False financial statement etc.
-Debts not listed may not be dischargeable if the debtor was fully aware of them and did not list or notify creditor.
-Debts incurred to pay federal taxes.
-Credit cards used within 60 days for anything other then absolute necessities. This is a common mistake consumers make.
-Debts that were included in a previous bankruptcy that was dismissed within the preceding 180 days.
-Unexplained or disappearance of assets.
-Abuse of the bankruptcy process.
-Other creditors can try to have your bankruptcy dismissed if they find you showed preference to other creditors over them.
Debts that are nondischargeable generally fall into the following categories:
-Individual income taxes that are assessed within three years of the filing but remain unpaid.
-Debts that have been incurred by the use of false financial statements or by the use of other false pretenses.
-Unscheduled debts in other words, debts that the debtor failed to schedule as required at the start of the bankruptcy case.
Debts that arise from fraud or embezzlement, or from the misuse of funds when the debtor was acting as a fiduciary. For example, embezzling money from a relative's trust fund over which the debtor had control.
-Alimony maintenance and child support.
-Any debt incurred from willful or malicious injury are generally Nondischargeable.
-Fines and penalties are Nondischargeable.
-Most educational loans cannot be discharged although a hardship exception allows a debtor to avoid certain educational loans.
-Debts for luxury goods or services over $1,000 incurred within 60 days of the court's order of relief.
-Debts for cash advances in excess of $1,000 on Credit cards incurred within 60 days of the court's order of relief.
- Debts arising from a judgment incurred from drunk driving.
The three R's are actions you take in regards to a particular debt.
- Redeem: you pay balance in one lump sum to creditor
- Rescind: you give back the property to the creditor
- Reaffirm: make a new court approved contract and repay
You can make a voluntary repayment plan with a creditor without the courts approval as long as it is not considered preference. This may be beneficial to you because unlike the reaffirmation, you can stop paying at any time and the creditor cannot attempt to collect. That is because it was solely voluntary and not a court approved reaffirmation.
If you plan on reaffirming, make sure you want this. Once the court approves it, it is considered a new debt! Creditors risk a lot by doing reaffirmation not approved by the courts. Sears was sued for 400 million over a 300.00 debt. All because they did not get court approved reaffirmation and then proceeded to collect when the debtor stopped paying.
Although most debts can be discharged in a bankruptcy, certain debts are not dischargeable by individuals in a chapter 7 liquidation. Other debts that are normally dischargeable may be denied a discharge, generally because of the actions of the debtor.
Cross Collateral Clauses
Many banks and credit unions have enacted the CCC- Cross Collateral Clause. If you are subject to one it must be in your contract terms and disclosures; and be obviously displayed. A CCC is a clause that allows the creditor to secure your unsecured debts with other secured loans that the creditor may hold for you. A common use of this is if you have an auto loan and a line of credit or visa.
While it does not stand up well against visa's because of regulation Z, it does stand up against most unsecured debts. That means if you file bankruptcy and think you are going to reaffirm the car, the creditor can also demand that you reaffirm the visa or they can literally hold your title hostage. This method however, can not be used with mortgages or the creditor will lose all future rights to offset the mortgage should they attempt to offset payments by enforcing the CC clause.
What if I filed Bankruptcy and it was dismissed?
A dismissed bankruptcy means that you will be once again liable for your debts.
There is a big difference between your debts being discharged and a bankruptcy dismissal. If a bankruptcy is dismissed, all bets are off. You'll have to figure out at that point how you're going to pay your creditors or if you will re-file your bankruptcy.
Dismissal can happen for a number of reasons but typically it's because the court found problems with the filing or the debtor violated the terms. Once the bankruptcy is dismissed that information will be reported to the credit bureaus as well.
Some contributed material by James R. Vann VANN & SHERIDAN, LLP Attorneys at Law