Bankruptcy 101

To file or not to file, that is the question. If you are considering bankruptcy, you may not know your options or what debts will be discharged. This short guide will help you understand the basics of bankruptcy and the bankruptcy options available.

What is Chapter 7 Bankruptcy?

A Chapter 7 bankruptcy, also called “straight” or “liquidation” bankruptcy, is one of the most common types of bankruptcy. A Chapter 7 bankruptcy wipes out most, or perhaps even all, of a debtor’s obligations with one declaration through the court. Filing a Chapter 7 bankruptcy requires passing a “means test” that will determine if a debtor’s income threshold is low enough to file. Filing for Chapter 7 bankruptcy will immediately stop any and all creditor calls. It is important to note that a Chapter 7 bankruptcy can only be filed only once every six to eight years. If a debtor qualifies for a Chapter 7 bankruptcy, it can provide a fresh start to a new financial future.

What is Chapter 13 Bankruptcy?

A Chapter 13 bankruptcy, also called “reorganization” bankruptcy, is an option even if a Chapter 7 bankruptcy was filed within the past eight years.  A Chapter 13 bankruptcy creates a court-approved debt repayment plan.  Debts are consolidated into one monthly payment plan by the courts and typically last between three to five years.  While the monthly payment plan allows debtors to pay back less than 100% of what they originally owed, they must have a stable and reliable income that will qualify to meet the monthly payment created by the court.

Additionally, only individuals and sole proprietors can file for Chapter 13 bankruptcy.  Filing for Chapter 13 will also immediately stop any and all creditor calls.  A Chapter 13 bankruptcy can create some fiscal breathing room that a debtor needs to reset his or her financial future.

What about Debt Consolidation? 

Debt consolidation is a process that does not go through the courts.  Typically, a debtor will hire a debt consolidation company that will create a consolidated plan including all debt owed.  The debt consolidation company will then take a monthly payment from the debtor in exchange for paying all of the creditors owed.  This process may or may not stop creditor calls, and is not guaranteed by the courts.

The Bankruptcy Process

Whether someone files for a Chapter 7 or Chapter 13 bankruptcy, the process can be overwhelming and intimidating.  While bankruptcy can affect a credit rating score, ultimately, bankruptcy can also be a tool to assist someone through a serious financial difficulty.  Bankruptcy can create a path to financial freedom, and credit scores can be rebuilt.

What are the First Steps in Filing for Bankruptcy?

The first step is to make a serious examination of debts owed, and to whom they are owed.  Determining not only how much is owed, but also the interest rates, create a foundation and landscape to determine how to proceed, and which type of bankruptcy, if any, is available or appropriate for the debtor.  Disclosure of financial information will be required on the bankruptcy petition that includes current income, all property, all assets, all debt, current expenses, and property owned, sold, or gifted in the past two years.

After a determination is made regarding which type of bankruptcy is appropriate, a filing needs to be made with the court, after which a bankruptcy trustee will be assigned to the case.  Bankruptcy cases are very form-driven proceedings, requiring a great deal of paperwork that needs to be completed not only correctly, but in a timely manner. Property exemptions are available to debtors in both types of bankruptcies, however, it is important to research this carefully so that a debtor does not inadvertently lose valuable property due to the failure to file proper documents.

Ultimately, after all documentation is received by the courts, a determination will be made by the bankruptcy trustee regarding how much property must be sold to pay creditors.

What Debt Stays, What Debt is Removed? 

In Chapter 7 bankruptcy, almost all unsecured debt is wiped clean.  However, it is important to note that certain types of debt is never discharged under the law.  These types of debts include student loans, child support payments, court judgments, and federal/state income taxes. Additionally, a Chapter 7 bankruptcy does not automatically guarantee that a home will not be foreclosed, or that a car will not be repossessed.  This type of debt is considered “secured” debt, and secured creditors still have a right to that property if payments are not made.

In a Chapter 13 bankruptcy, as previously indicated, debts are not erased, but rather consolidated into a court-approved payment plan for three to five years.  Typically, this process will prevent a home foreclosure due to the fact that the debt repayment plan will allow the debtor to resume monthly payments.

Reach Out to Us Today for Help

Filing for bankruptcy can give you a financial fresh start.  Skilled Jupiter bankruptcy lawyer Julianne Frank would be happy to visit with you regarding whether or not you should declare bankruptcy, and which type would be right for you. If you are interested in learning more about what options are available, please contact us at (561) 220-2528 today.


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