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On October 17, 2005, wide ranging changes were made to U.S. bankruptcy law. Two major changes that affect everyone considering bankruptcy protection:
A discharge releases the debtor from all personal liability for “dischargeable debts” as defined in the bankruptcy code. It also permanently prohibits creditors from taking any collection activity to recover balances still open after liquidation distribution. No debts are “erased” until the debtor is discharged. If the bankruptcy is a Chapter 13, some debts cannot be discharged. Longer-term secured debts (home mortgage, auto loan, etc.), alimony, child support, taxes, and government funded or guaranteed student loans are not dischargeable. A discharge may be received in six months or less in a Chapter 7 bankruptcy. A Chapter 13 bankruptcy discharge is much more complex since the process takes three to five years to complete.
Here are some bankruptcy definitions and bankruptcy terminology that should be helpful: Liquidation : In a Chapter 7 bankruptcy, substantially all assets of the individual or company are sold or otherwise turned into cash, which is then divided among the listed creditors of the debtor.
Reorganization : Used in a Chapter 13 or Chapter 11 bankruptcy, the reorganization provision allows the debtor to recalculate, restate or reallocate resources to continue “operating” while providing creditors with cash or a repayment plan that will give them some or all of their money due as of the date of the bankruptcy filing.
Exemption : Property or some equity in property owned by the debtor which can be exempted or removed from the bankruptcy process and kept by the debtor. There are both federal exemptions and state exemptions from which the debtor may choose to use.
Trustee : Appointed by the court to represent the interests of both the creditor and debtor, the trustee has a variety of duties. In a Chapter 7 bankruptcy, the trustee compiles and reviews all files for truth, propriety, and completion. They also act as chairperson for all creditor meetings and sell or convert all non-exempt debtor assets to cash. A trustee's duties expand in a Chapter 13 filing as he/she must monitor all payments made to creditors as part of the bankruptcy agreement.
Automatic Stay : Very important to most debtors, the “stay” is an injunction that stops lawsuits, foreclosures, garnishments, and all collection activity against the debtor as soon as a bankruptcy petition is filed.
Certain property (or the equity therein) may be exempt from forced inclusion in a petition for bankruptcy. Federal laws specify some assets that may be protected. However, most states also have a list of real and personal property that may be exempt from forced liquidation. In most jurisdictions, the petitioner may choose which exemptions he/she wants to use (state or federal). Some examples of exempted property: qualified pension plans, unemployment compensation, some equity in your personal home (homestead), some equity in your automobiles, “tools of the trade” a debtor needs to work, social security, cash value of insurance policies, and often most personal property and household goods.
Q. If I file for bankruptcy, am I protected from my creditors and their collection action?
A. As soon as you file a valid petition, your creditors are prohibited from continuing their collection action. An “automatic stay” feature in the law takes effect, which prohibits further collection action. The court can lift the stay if fraud is discovered or you fail to follow the rules of the bankruptcy.
Q. Which type of bankruptcy should I use?
A. It depends on your situation. Most people choose Chapter 7, which mandates that your assets must be liquidated, with the resulting cash given to your creditors to satisfy some of the monies owed them. Chapter 13 is often a better choice if you want to keep your home or other assets since liquidation is not a requirement. You will be required to pay as much as you can afford to your creditors, but your important assets should be safe.
Q. Can I choose between Chapter 7 and Chapter 13 bankruptcy?
A. For the most part, yes. There are two primary things you should know. First, if you have secured debts of more than $922,975 and unsecured debts of more than $307,675, you cannot use Chapter 13. Second, under the new bankruptcy law, if your income is higher than the “median income” for a family of your size in your state, you may not be allowed to file a Chapter 7 action. You may be required to file Chapter 13, which mandates that you will pay your creditors at least some of the monies owed them. Q. What property could I lose if I file for bankruptcy?
A. If you choose to file Chapter 13, you should lose none of your assets. Chapter 7 bankruptcy will result in the loss of some or all of your assets but no further payments to creditors will be required after liquidation. Therefore, the amount of assets you own combined with your current income will help you determine the best choice for you.