Bankruptcy is a process under federal law that helps both consumers and businesses either wipe away their debts or restructure debts so that they can be paid off under an affordable repayment plan.  The two basic forms of bankruptcy available to consumers and corporate clients are “liquidation” bankruptcy (Chapter 7, occasionally Chapter 11) and “reorganization” bankruptcy (Chapter 11 or Chapter 13).
Corporations cannot take advantage of Chapter 13. Individuals may file Chapter 7, Chapter 13, or Chapter 11, depending on circumstances.

Under a Chapter 7 liquidation plan, property of the debtor is turned over to the trustee who utilizes those assets to the extent possible to pay off debts outstanding to creditors. However, debtors are not left penniless as a result of liquidation, but often receive thousands of dollars in legal “exemptions” to assist them in taking advantage of their fresh start. Once the debtor is discharged, most past debts are wiped out and the debtor can start over, largely debt-free. Under a Chapter 13 reorganization, the debtor files a payment plan with the court proposing how he or she intends to pay down some of the debt. Not all debts will need to be paid in full, providing a convenient method for debtors to keep assets while alleviating the pressure of some of the debt.

Once a bankruptcy is filed, the court will issue what is called the “automatic stay.” This stay prevents creditors from taking independent action, such as repossession or foreclosure, to satisfy outstanding debts that the client may owe. This stay remains in effect until or unless the court directs the stay to be completely or partially lifted.

Finally, please bear in mind that some debts cannot be discharged in bankruptcy, and will still remain due and payable regardless of the outcome of your bankruptcy case. Some of these generally non-dischargeable debts include: student loans, various tax obligations, back child support, and alimony, to name a few. Moreover, a court may deny a discharge of one or all debts in certain circumstances, such as when the debtor took action to defraud creditors.

What Bankruptcy Can Do

Some benefits of filing for bankruptcy include:

  1. Stop creditor collection actions with the automatic stay. Creditors will not be able to confiscate your assets or harass you without court permission.

  2. Remove specific liens on property. Call us to see if this applies to your specific case.

  3. Discharge unsecured debts, including credit card debt. Most credit card debt qualifies as unsecured, afforded credit card companies little protection in bankruptcy. In other words, you owe the credit card company a specified amount of money, but that company has no lien or security interest in any of your property. Without a security interest, the credit card company cannot confiscate your assets without court permission. While you may have to pay a portion of your unsecured debts, bankruptcy law is effective at wiping out any outstanding balances following the bankruptcy discharge.

What Bankruptcy Cannot Do

Some debts are protected and often cannot be discharged in bankruptcy, such as:

  1. Student loans are often protected and generally cannot be discharged without a showing of “undue hardhip” if forced to repay. This generally requires not only a showing that you cannot afford your student loan payments at present, but that you likely will not be able to afford the payments going forward.

  2. Child support and alimony are not dischargeable. Regardless of whether you file a Chapter 7 liquidation plan or a Chapter 13 payment plan, child support and alimony support obligations remain in full force and effect. Both in bankruptcy or outside of bankruptcy, these obligations must be paid in full.

  3. Tax debts are also generally not dischargeable in bankruptcy. However, assuming you meet certain requirements, the possibility exists to eliminate older tax burdens.

  4. Traffic tickets, criminal restitution and other fines imposed for violations of the law are often not dischargeable.

  5. Personal injury claims caused by driving while intoxicated are also not dischargeable.

  6. Debts that you do not disclose to the court are also not dischargeable. For a debt to be discharged, your creditors are entitled to notice. Therefore, it is extremely important that you honestly list every creditor to whom a debt is owed.

Finally, the court may deny a discharge as to specific debts or all debts in certain circumstances, such as if the debtor takes actions to defraud creditors, for example.

Benefits of a Chapter 13 Bankruptcy

The following are certain benefits of a Chapter 13 bankruptcy that do not apply to a Chapter 7 bankruptcy:

  1. Debtors can generally keep nonexempt property in a Chapter 13 plan because property of the estate is not liquidated.
  2. Subject to certain limitations, you may be able to reduce your payment to the “replacement value” of collateral, such as with a car payment. If your car is worth less than the payoff amount, you can generally reduce your Chapter 13 payments to only the replacement value.
  3. Debtors can also prevent mortgage foreclosures under certain circumstances.
  4. Certain debts that are not dischargeable in Chapter 7 can be discharged in Chapter 13.

If you are interested in pursuing any of the above bankruptcy options, please Contact Us for more information.

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