Bankruptcy Law

What is Bankruptcy?

A person may be in a financial situation caused by a health condition, loss of a job or some other type of circumstance which affects their ability to pay their bills. Many people will seek help from friends and family. Many will read about Debt Management and working with creditors to regain control of their financial situation. Some have heard about Bankruptcy and want to have an understanding of how that procedure works.

The Bankruptcy laws were designed to repay creditors in an orderly manner to the extent the Debtor has assets available for payment. For most consumers, there are two types of bankruptcies. These are referred to by their chapters -- Chapter 7 and Chapter 13. To better understand the two Chapters, one must first have an understanding of the different classes of creditors. “Secured” creditors include mortgage companies, car lenders and sometimes the IRS. Unsecured creditors include a loan with no collateral such as a credit card lender.

Chapter 7 bankruptcy is known as “liquidation”. In 2005, Congress amended the bankruptcy laws. One of the major changes was the creation of the “means test” to prevent wealthy debtors from “abusing” the bankruptcy laws. The “means test” is based on household size and income as compared to the state's median income. A person who does not qualify under the means test to file Chapter 7 may have to consider Chapter 13.

Assuming a person qualifies for Chapter 7 and is represented by an attorney, their attorney will ask them to list all their assets and all their debt. A person cannot pick and choose what they wish to disclose – they must disclose everything they own and everyone they owe money to. In most instances, the biggest asset is the home. The attorney will obtain an appraisal or a Comparative Market Analysis of the home to determine its value. The attorney will then perform a “liquidation analysis” of the home by deducting the mortgage payoffs and the value of any unpaid real estate tax liens from the value of the home. Then, he or she will apply the current Federal Exemption against any remaining net equity. In 2009, under 11 U.S.C. 522(d)(1), a husband and wife who are both named on the Deed can exempt up to $40,400 of net equity. This same analysis is then made for each asset a Debtor owns and a similar exemption, if available, is applied to save that asset. If there are any assets which are not exempt, the attorney will explain how such non-exempt assets will be treated in a Chapter 7. Based on the results, the attorney may advise the Debtor to file a 13. If a 7 is completed successfully, the Debtor will receive a discharge of all unsecured debt.

What if the Debtor is behind on their mortgage and a foreclosure is either pending or on the horizon? If the Debtor is unable to work out a modification of their loan or any type of agreement with their mortgage company, they cannot file a 7 and still keep their home. The Debtor then looks to Chapter 13, often referred to as “Repayment”. Under this Chapter, the Attorney will review the Debtor’s income and expense budgets to prepare a Chapter 13 “Plan” which will then be proposed to the Court for repayment to creditors. In the mortgage example, a Chapter 13 Plan will propose repayment of the Debtor’s mortgage and possibly a certain percentage to their unsecured creditors. Based on each Debtor’s particular facts, a Plan might propose repayment to secured creditors only with little or no dividends to unsecured creditors. The Chapter 13 Plan will be anywhere from 3 years to 5 years, depending on each Debtor’s particular situation, with monthly payments made to the Chapter 13 Trustee. At the end of that period, if the Debtor has successfully completed their Plan, they will receive a discharge.

Regardless of what Chapter a Debtor has filed, the decision to file bankruptcy is a serious choice. It is a remedy that may affect their credit and may affect their ability to use the bankruptcy code at a future time. A person who has considered a bankruptcy should be sure to discuss the advantages and disadvantages of bankruptcy with his or her attorney.

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