Understanding bankruptcy can be a strategic move for long-term financial planning. Though it takes time, the bankruptcy process will generally resolve your debt crisis and help you start over financially.
Understanding bankruptcy can be a strategic move for long-term financial planning. Though it takes time, the bankruptcy process will generally resolve your debt crisis and help you start over financially. This can help you achieve your financial goals and achieve stability. Financial setbacks may happen from time to time, but what matters most is how we navigate and learn from them.
Read on for an overview of bankruptcy filings and their benefits.
History of Bankruptcy in the United States
Several early attempts at creating universal bankruptcy laws in the U.S. were amended and repealed until the late 19th century.
After much disagreement, Congress passed the Bankruptcy Act of 1898, also known as the Nelson Act. Creditors lobbied for the Nelson Act to have uniform federal rules for bankruptcy. It largely set the stage for bankruptcy as we know it today. The 1938 Chandler Act significantly amended the Nelson Act.
Then, in 1978, Congress created the Bankruptcy Code. This superseded the Bankruptcy Act that came before the Code.
The Code provides several legal ways to eliminate debts through bankruptcy. These legal approaches are listed under the Code's chapters and referred to by their chapter number (such as "Chapter 7 bankruptcy"). They can be complicated. Many people find a bankruptcy attorney useful to avoid mistakes, pick the right plan for their debt, and avoid trouble with the courts.
The Code has been amended numerous times since being passed. It governs all U.S. bankruptcy cases.
The Federal Rules of Bankruptcy Procedure, created by the U.S. Supreme Court, governs the bankruptcy process. Each bankruptcy court also has its own local rules.
The Six Forms of Bankruptcy
There are six different types of bankruptcy in the U.S. Each form is designed for a specific purpose and has its own benefits and consequences.
- Chapter 7 enables liquidation and allows you to discharge most of your debt after sometimes liquidating some of your property to repay creditors. Those who also file Chapter 7 are businesses that must close their doors because of financial challenges.
- Chapter 9 bankruptcy covers cities, counties, school districts, and municipalities in debt.
- Chapter 11 is generally for businesses wishing to shed debt and cut costs through reorganization.
- Chapter 12 is for family farmers and fishing businesses facing debt.
- Chapter 13 is for individuals only. It allows you to keep your property while setting forth a repayment plan with more reasonable payments. It allows you to pay off as much debt as you can within three to five years.
- Chapter 15 is for foreign cases, such as U.S. citizens with assets in various countries.
Most people will decide between Chapter 7 and Chapter 13 bankruptcy, while businesses will choose between Chapter 7 and Chapter 11 bankruptcy.
The type of bankruptcy you can file will depend on your assets, means test results, total debt, and several other factors. The choice is not always yours, but your attorney can advise you.
Common Concerns About Bankruptcy
While bankruptcy can be essential in resolving your debt problems, it can still worry filers. It's critical to know all the possible effects before you file:
- Bankruptcy can lower your credit score
- Bankruptcy can stay on your credit report for up to 10 years
- Employers, landlords, and creditors may see that you've filed bankruptcy
- The filing cost is over $300, which would turn into thousands of dollars when you add attorney's fees
- Creditors can file disputes over the repayment of debts
- Bankruptcies are a matter of public record
- Anyone may contact the court to verify that you have filed for bankruptcy
- Money may continue to be taken from your paycheck despite bankruptcy (wage garnishment), depending on the kind of debt for which there is a garnishment. Child support, alimony, and taxes will most likely not be discharged
- Student loans aren't dischargeable unless you prove paying them will cause "undue hardship"
- Failing to list all your debts or assets can cause the court to deny your debt discharge, and you could also face fraud charges
A bankruptcy attorney will help you navigate any issues before they come up. They can stop debt lawsuits and harassment and save money by making the process go smoothly.
Benefits of Filing for Bankruptcy
Getting your debt discharged and stopping creditors from calling or suing you is a massive benefit of bankruptcy. There are additional benefits that can happen instantly or over time:
- Chapter 7 bankruptcy has many exemptions that might allow you to keep your home, car, and other items.
- Chapter 13 helps you develop a payment plan that ensures you exit bankruptcy within a few years.
- After the court approves your bankruptcy, it will shield you from lawsuits and other adverse legal problems while you work through the process.
- When you file for bankruptcy, the court issues a protective order called an "automatic stay." This stops most creditors from contacting you about your debts or making any collection efforts.
- Unsecured debt from credit cards and medical bills is forgiven in many cases.
- You generally can still buy a house with a bankruptcy on your credit history.
- If you avoid new debt, credit scores can improve in one to two years after filing.
- Filing bankruptcy will appear on your background check but should not prevent you from getting a new job.
You can improve your financial situation once you file the bankruptcy petition. Once approved, you get a court order to stop creditor calls and collection actions, and you can work towards a fresh start.
The Bankruptcy Process
First, consider whether other debt-relief options can help you or if bankruptcy is your best option. You can have a consultation with a bankruptcy attorney to help you decide, and the consultation may be free.
The bankruptcy process will generally require a good deal of paperwork, finding documents, and meeting with your trustee in court. It generally takes two to six months from the day you start the paperwork to the end of the bankruptcy case.
When you file for bankruptcy, the court issues a protective order called an "automatic stay." This stops most creditors from contacting you about your debts or making any collection efforts. Only the court has the authority to lift the automatic stay and allow creditors once again to seek repayment of debts.
Wiping Out Debts in Bankruptcy
Bankruptcy can help you get rid of some kinds of debt. Unsecured debt, such as debt from credit cards and hospital bills, may be eliminated in many cases. But you cannot discharge child support, alimony, and most taxes.
Student loans are not dischargeable unless you prove that repayment would cause an undue hardship. Also, creditors may argue that a given debt should not be discharged, subject to the bankruptcy judge's approval.
Keeping Your Property in Bankruptcy
If you have a steady income that exceeds Chapter 7's limitations but you face unmanageable debts, Chapter 13 may be the best (if not the only) option.
One of the upsides of a Chapter 13 bankruptcy is that you often retain much of your property. Under Chapter 7 or liquidation bankruptcy, various property types may be subject to sale to repay creditors. State laws differ on the types of property considered eligible (nonexempt assets) or ineligible (exempt assets) for sale in a Chapter 7 case.
Choosing Between the Types of Bankruptcy
You may choose which type of bankruptcy to file if you meet the eligibility requirements for both Chapter 7 and Chapter 13 bankruptcy. Otherwise, you may not have a choice.
Those with an income higher than the median income (for a similarly sized family) are not eligible for Chapter 7 if they can repay some unsecured debt within five years. To qualify to file a Chapter 13, you must not exceed a certain debt level (see Individual Debt Adjustment for current limits). If you don't meet these requirements, then Chapter 13 bankruptcy is not available to you.
Usually, those who have a choice go with Chapter 7 bankruptcy. This is often preferred since these debtors may have most, if not all, of their debts discharged. This includes the debts covered by the proceeds of any property required to be liquidated. Chapter 7 also can be a much faster process than Chapter 13. But Chapter 13 may be the best option for those with greater income or substantial assets.
Significant Differences in Consumer Bankruptcies
Significant differences can be found in Chapter 7 vs. Chapter 13 bankruptcy involving:
- Mortgages and car loans
- Debts tied to past crimes
- Debts owed for child support, alimony, or student loans
- Some debts owed in a divorce, property settlement, or agreement (excluding alimony)
- Co-debtors on personal loans
- Nonexempt valuable property
- Secured property
- A prior bankruptcy
Depending on your priorities or unique situation, these areas may limit the type of bankruptcy for which you can file. Consider if any of these apply to you. Talk to an attorney about your bankruptcy options.
Bankruptcy Courts and Bankruptcy Judges
While most court cases are heard in either civil or criminal court, bankruptcy has a dedicated system of courts throughout the country. Each judicial district in the U.S. has its own bankruptcy court, while each state has at least one district (90 districts total).
United States bankruptcy judges have substantial authority to make binding decisions in bankruptcy cases. This includes eligibility issues or whether to grant a debt discharge. But most aspects of the bankruptcy process generally occur outside of court. For example, an appointed trustee carries out the administrative duties of Chapter 7, Chapter 13, and other types of bankruptcy cases.
You'll usually have very little interaction with the bankruptcy judge. Most Chapter 7 debtors don't even set foot in court, except for their date with the trustee at the First Meeting of Creditors. They generally only see the judge if there are objections to the bankruptcy plan. Chapter 13 debtors typically appear in court just once after the First Meeting of Creditors, at the bankruptcy plan confirmation hearing.
Filing for Bankruptcy? Contact a Local Attorney
For more information about bankruptcy, speak with a skilled bankruptcy attorney near you. An attorney can help you determine which form of bankruptcy is the best choice to resolve your debt crisis. They can guide you through filing for bankruptcy.