WHAT IS BANKRUPTCY?



Bankruptcy is relief from debt.
Its a very old idea that if someone is truly not able to pay their debts, they should be given a another chance instead of being harassed by creditors for the rest of their of lives. In the Bible, the Old Testament provides that debts are to be forgiven in the seventh year. When the United States Constitution was written, our founding fathers thought the right to file for Bankruptcy Relief was so important, they established Bankruptcy before even considering the freedom of speech or religion.

Bankruptcy is also protection.
From the moment a Bankruptcy petition is clocked in at the courthouse there is an automatic injunction or "Stay" that goes into effect. From that moment, creditors must stop all attempts to collect from you. The Court will send out notices to all the creditors. Once a creditor is on notice that a bankruptcy has been filed, they must stop. They cannot sue you; if they have already filed suit, they must stop it. They cannot foreclose against your house, garnish wages, repossess cars, or even call you on the phone at home or at work. If they do, they are in contempt of Court.

There are several kinds of Bankruptcy.

Chapter 7 Liquidation of debt.
Chapter 11 Business Reorganization
Chapter 12 Family Farmer's Reorganization
Chapter 13 Personal Reorganization of debt

By far the two most popular are Chapter 7 and Chapter 13.

Chapter 7 is designed for individuals and businesses that find themselves unable to pay their bills and wish to make a fresh start. If you don't have much money left after food, shelter and basic necessities, Chapter 7 was designed for you. Most who file find that because of a change of employment or a change of health, they simply can't make ends meet. A Husband and Wife can file jointly.

Chapter 7 bankruptcy liquidates or wipes out debt. That means at the end of a chapter 7, you are no longer legally obligated to pay the debts.

You may have heard that you loose all of your property in a Chapter 7 but that is simply not true. You are permitted to keep certain property classified as Exempt. Any property that is not exempt can be sold by a court appointed trustee and used to pay creditors. In the great majority of cases, most people don't loose a thing.

At the end of the case, the Judge signs a discharge which is a formal order declaring all "dischargeable" debts null and void.
From that point it becomes illegal for any of the creditors to try to collect the debt.

Chapter 13 is a reorganization of debt. You have heard on the news how big companies will occasionally file for "protection from their creditors" with a chapter 11 bankruptcy. Chapter 13 is basically the same thing designed for people rather than companies.

Chapter 13 was designed for people who do have regular income but are still not able to pay their debts. This sometimes happens when people change jobs or are out of work long enough to get behind on their bills. Sometimes unexpected expenses such as an illness in the family or having to move are enough to get you seriously behind. After people are back on the job and a have a regular income, creditors sometimes don't cooperate by trying to workout a repayment plan. That's were chapter 13 comes in.

By filing a chapter 13, your creditors are forced to work with you. A payback plan lasting from three to five years is set up. During that time, the creditors can't take any collection action against you outside the bankruptcy. It is basically illegal for them to call, write, contact or harass you or anyone else trying to collect the debt from you. They loose the right to sue you, foreclose on your home and repossess your car without the express written permission from the bankruptcy Court. If they are already suing you, the law suit will stop. Even the mighty IRS can't collect back taxes without cooperating with the bankruptcy court.

One attractive aspect of chapter 13 is that, as long as you live up to your part of the bankruptcy, you don't have to worry about loosing any property.

Most people file a Chapter 7 bankruptcy.

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