Filing for bankruptcy is sometimes a necessary step to protect assets or to obtain a fresh start after an unforeseen financial loss. Bankruptcies are filed in federal court rather than state courts. While there are rules specific to each type of bankruptcy, there are also some rules that apply to all classes.
Generally, debts for child support, alimony, delinquent taxes or student loans cannot be included in any bankruptcy filing. If the debtor has made substantial credit purchases shortly before filing, the court may also disallow these amounts. Court fines and debts resulting from a criminal act, such as restitution for theft or embezzlement, are ineligible for inclusion. Some settlements resulting from lawsuits, such as personal injury or wrongful death automobile accidents while the debtor was intoxicated, are normally disallowed as well.
Debtors must attend credit counseling, unless stated otherwise by the court. A minimum of 180 days must have elapsed since the debtor last filed a bankruptcy petition. Debtors will be required to furnish documentation disclosing all assets, income, and liabilities and may be required to confirm complete disclosure under oath.
Chapter 13
Chapter 13 allows those with a regular source of income to repay their debts over a three to five year period. The length of the repayment period is determined by the borrower’s monthly income. If income exceeds the median for the applicable state, the term must be five years. If not, the period is typically three years unless a longer term is approved by the court. During the repayment period, creditors cannot continue or initiate collections.
A Chapter 13 filing can halt foreclosure on the primary residence and may include the ability to cure delinquencies. However, current and mortgage payments must be made. Secured debts may also be included, allowing the filer to retain their automobiles and other such property by continuing to make the applicable payments.
In many ways, Chapter 13 resembles a debt consolidation. A repayment schedule is developed that allows the debts to be repaid over the term. A trustee receives the payments from the debtor and distributes the funds according to the schedule.
Chapter 13 filings are limited to individuals and are not available for partnerships or corporations. The secured debts cannot exceed $1,081,400 and unsecured debts may not exceed $360,475. These amounts are subject to periodic adjustments and are tied to the consumer price index.
Those seeking to file a Chapter 13 bankruptcy must provide proof of debts and assets, income and current expenditures, and proof they have received credit counseling. The plan developed by the counseling service must also be provided. The tax return for the most recent year is also required. The debtor may also need to furnish a statement regarding any expected increases in expenses or income and whether he has any interest in a qualified tuition or education account.
If married, the bankruptcy may be filed jointly or separately. However, if filing separately, the spouse’s information must be submitted even though he or she is not filing. This enables the court, creditors, and the trustee to properly evaluate the overall financial stability of the household. Should the debtor’s circumstances deteriorate during the term, a Chapter 13 plan can be converted to a Chapter 7 provided at least six months have passed since the Chapter 13 was filed.
Chapter 7
Although Chapter 7 is the most drastic type of bankruptcy, it is also the most common type filed in the United States. This form is also called a straight bankruptcy. The debtor’s assets are liquidated to pay as much as possible to creditors. Debts exceeding the value of the assets are then forgiven.
Chapter 7 can be selected by businesses as well as individuals. However, because it involves the liquidation of assets, debtors who wish to retain certain assets may fare better under a different category. This is especially true for businesses, who may have substantial investments in property and equipment.
Creditors may offer, or the debtor may choose, to enter into a reaffirmation agreement. The borrower may wish to retain certain assets, such as his home or car. If this is the case, an agreement is signed in which the borrower reaffirms the debt and agrees to repay the portion of the loan stated in the agreement, which may be payment in full.
Under the rules of a Chapter 7 bankruptcy, a trustee controls the borrower’s debts and assets. The trustee liquidates the assets and establishes a schedule defining the percentage of funds each debtor receives. A monthly payment plan is established for the debtor to remit to the trustee, usually in the form of a money order or cashier’s check. The trustee then disburses the funds based on the schedule. Creditors are prohibited from attempting collections from the debtor.
For both Chapter 7 and Chapter 13 bankruptcies, attendance at a credit counseling session is required prior to filing. If married and filing jointly, both parties must attend. You must also provide proof of income, debts, and assets as well as proof of your identity.
Chapter 11
A Chapter 11, or reorganization, allows a partnership, sole proprietor, or corporation to continue operations while protecting the assets of the business from creditors. While the assets of the shareholders of a corporation are protected and are not made a part of the bankruptcy. However, since a sole proprietorship does not have a life and identity that is separate from the owner, his personal assets must be included in the bankruptcy. With a partnership, the personal assets of the partners may be used to repay debts, but this is not always the case.
After filing, the business typically assumes the “debtor in possession” identity. This means that the company retains control of operations and assets during the term of the bankruptcy. A special trustee may be appointed, especially if there is reason to suspect fraud, illegal activities, or the company fails to provide required reports, such as monthly operating statements. Normally, however, the trustee merely monitors the operations, reporting, and submission of fees. The trustee may also limit the business’ ability to open additional bank accounts and verify that employee taxes are remitted.
The trustee may appoint a creditors’ committee, which may investigate the debtors’ operations and conduct and participate in establishing the plan. The committee is normally composed of those creditors with the seven largest claims that are unsecured by collateral.
