Personal Bankruptcy

“Courage is what it takes to stand up and speak; courage is also what it takes to sit down and listen.”

–Winston Churchill

There are generally three types of bankruptcies you may generally consider.  These are chapter 7, chapter 13, and in limited circumstances, chapter 11.

A chapter 7 bankruptcy generally may be considered if you do not have a great deal of money, personal belongings or real estate of significant value.  Then, in order to qualify for chapter 7, your personal finances are applied to a “means test” to determine whether your income is low enough or your household expenses high enough to allow you to file.  Generally speaking, you can qualify for chapter 7 if either your household income is less than the median income in the state, or you have a lot of expenses such as child care, support payments, mortgage payments or taxes relative to your income.  Once you qualify under the means test, as long as you have been honest with his creditors and the court, you may be finished with the bankruptcy after as little as three months and receive a “discharge,” or legal forgiveness most of much of your debt.

A person eligible for a chapter 7 but who has assets that exceed the exemptions allowed under bankruptcy law may still be able to file chapter 7, but may have those assets taken away by the trustee who administers the bankruptcy.

A chapter 13 bankruptcy is available to those people making too much money to qualify for a chapter 7 bankruptcy, or who want to keep the property or personal belongings which would be taken by the trustee were they to file chapter 7.  Unlike a chapter 7, a chapter 13 requires a person to make payments to the trustee for a period of 3 to 5 years.  After that time, the balance of what would be owed to many of the creditors may be “discharged.”

However, a chapter 13 generally allows people to file only if they have unsecured debt of less than $360,475 or secured debt (such as mortgages and car loans) of less than $1,081,400).  When the debt exceeds that amount and chapter 7 is not an option, a chapter 11 would need to be filed.  A chapter 11 bankruptcy is more complex than a chapter 13 and likewise, more costly.

The Automatic Stay - The First Step to a Fresh Start

One of the main reasons for our consumer bankruptcy laws as noted by both Congress and the courts is to provide people with a “fresh start.”  What exactly does that mean?

The first thing that a bankruptcy does is to provide immediate relief once the bankruptcy petition is filed.  That means once you file, the door slams shut on your creditors and you are given immediate protection.  In most cases, the creditors cannot call you or write to you.  Any lawsuits filed against you must stop.  Foreclosures and wage garnishments are suspended.  Financially, you are allowed to breath again!

This period of relief is called the “automatic stay” which in essence is a court order that automatically is entered upon the filing of the petition.  The filing  “stays” or prevents any creditor from going after you, your money or your property.  Any creditor who ignores this law can be held in contempt of court and can be liable for fines, penalties and damages.

(The automatic stay does not apply to all creditors.  For example, it does not prevent the collection of child support or alimony obligations against monies that you received or property you acquired after you filed.)

There are situations where the creditor, particularly a mortgage company, can ask the bankruptcy court permission to continue with its foreclosure action.  This happens when the mortgage company files a motion seeking “relief” from the automatic stay.  In such circumstances, if the mortgage company shows the court that you have stopped making your mortgage payments and that your home has little equity, the court may permit the mortgage company to go ahead with its foreclosure, even though you are in bankruptcy.

What happens after you file bankruptcy depends upon whether you file a chapter 7 or chapter 13.

Bankruptcy Act of 2005

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