People facing financial hardship oftentimes view bankruptcy as an intimidating last resort. The reality is that filing for bankruptcy can be an incredibly useful tool to address outstanding debts and help people get a fresh start on their finances. While it is not a decision to be taken lightly, it is important to understand that bankruptcy laws were created to help individuals and businesses who are unable to pay their creditors and that they include protections for both the debtor and their assets. A strategic approach to filing bankruptcy can be tailored to a debtor’s specific case to best help get them back on track.
Filing bankruptcy works by either liquidating the debtor’s property to pay debts or reorganizing debts and creating a plan to repay creditors. Either way, filing in bankruptcy court automatically stops debt collection actions against the debtor and their property and prevents creditors from bringing lawsuits, garnishing wages, or calling the debtor for payment.
Personal bankruptcy falls under two main sections of law. Chapter 7 bankruptcy liquidates the debtor’s nonexempt assets to pay unsecured debt such as medical bills or credit cards. In this case, a Bankruptcy Trustee sells the debtor’s nonexempt assets and distributes the money to creditors. Bankruptcy laws can protect exempt assets up to a certain value from being sold to repay creditors, such as necessary clothing, household appliances, and the debtor’s house. Common nonexempt assets include artwork, jewelry, and property that is not the debtor’s primary home. When the entire liquidation process is complete, the debts will be discharged. Chapter 7 bankruptcy can be completed in 4 – 6 months, making it the fastest way to get rid of many types of debt. A Chapter 7 bankruptcy will remain on a credit report for 10 years from the filing date. However, Chapter 7 bankruptcy cases can be very different depending on the debtor’s financial situation. If the debtor is behind on mortgage or vehicle payments, their home or car may be in jeopardy, and they may want to consider Chapter 13 bankruptcy instead.
Chapter 13 bankruptcy can be used by debtors with regular income and debt that does not exceed certain limits. The main difference between Chapter 13 and Chapter 7 is that filing Chapter 13 bankruptcy reorganizes debt and creates a repayment plan instead of selling the debtor’s assets. That means the individual can keep their possessions while making monthly payments to the Trustee to pay off their debts over the course of 3 – 5 years. Debtors end up paying a fraction of the amount, sometimes as little as zero, to their unsecured creditors. An important aspect of Chapter 13 bankruptcy is that it can allow a debtor to stop repossession of their vehicle or foreclosure on their home by allowing them to catch up on payments. A Chapter 13 bankruptcy will affect credit reports and scores for 7 years.
Chapter 11 bankruptcy is designed for businesses and works similarly to a Chapter 13 bankruptcy in that it reorganizes the business and restructures its debts. Usually, the owners keep their business while ensuring it follows the plan to repay its debts. In some cases, the business may be able to continue operating.
Whether a debtor is eligible for a particular type of bankruptcy depends on multiple factors such as their income, their debt amount, the type of debt owed, and whether they have filed for bankruptcy in the past. By using a bankruptcy attorney, debtors considering bankruptcy can make sure they are making the right decision and maximizing the protections they may be eligible for. Bankruptcy attorneys can also negotiate with creditors to minimize outstanding debt and expertly navigate the procedures of bankruptcy court. Contact our office for a free consultation to learn whether you are eligible and learn more about how our attorneys can help you properly use bankruptcy to get back on your feet.