What is Bankruptcy?
Bankruptcy is relief from
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 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
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
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.
How Will My Credit Be Affected?
The first thing to keep in mind is that your credit report is a historical record of your financial past. One thing you can't do is change history. When you file bankruptcy your bad credit is not automatically erased from your credit report. It can stay on your report for up to 10 years. Frequently creditors will change their credit report listing to say "Account included in Bankruptcy" and will delete all other information.
Anyone who knows how to read credit reports will see when the bankruptcy took place and they will know that the old bad debts no longer count. That means you don't have a lot of outstanding debt. When you apply for credit, the first thing they ask you is how much you earn and how much you owe. This is your "debt to income ratio". This tells a future creditors if you can afford to pay for the debt you have.
Right now your debt to income ratio is very much against you. After the bankruptcy it will be much better because you have little or no debt at all. Not only that, you can't file chapter 7 again for at least 6 years which means you are a better credit risk after the bankruptcy.
This does not mean that everyone will want to give you credit again. Some companies just won't. You will have prove yourself again. You can do this by doing a good job of paying the creditors you decided to keep like your mortgage, your auto loan and maybe a department store credit card.
Many people find that filing bankruptcy can be the first step in cleaning up their finances and re establishing their credit.
How Long Does A Bankruptcy Take?
When people ask me this, they're really asking, "How quickly can I get the creditors off my back?" and "When will I be free of the debt?"
A Chapter 7 case usually lasts 4 to 6 months. You get legal protection from your creditors the moment the case is filed with the Court. Practically speaking, your creditors will usually back off once they know you've retained an attorney even if the case has not yet be filed.3 to 4 weeks after the case is filed, a hearing called a "Creditors Meeting" is held. At the meeting, a Court appointed Trustee will go over the Bankruptcy Petition and verify that it's true and correct. The trustee will also be checking to see if there are any unprotected assets that can be collected so creditors can be paid. Your creditors do have the right to show up, but this is rare. The whole thing lasts about five minutes. The creditors meeting is nothing to worry about as long your paperwork is in order and you're well prepared. Being unprepared can be very, very
costly. About 60 days after the Creditors meeting, a deadline called the "Dischargeability Date" passes. If a creditor has not filed a formal objection by that time, the debt will be declared null and void when the Judge signs the Discharge Order about two week later. Unless the trustee has collected some assets, the case is not ready to close.
A Chapter 13 is quite different. After the case is filed planned payments are made the Trustee. In addition to the Meeting with the Trustee, a Confirmation Hearing before the Judge is scheduled. If the Plan is approved by the Court, the case remains open for up to five years. At the end of a successful plan, a discharge order is signed removing all remaining debt.
Can Creditor Harassment Be Stopped?
When a person gets behind on his debts, creditors have the right to begin collection
action. It usually starts with phone calls at home or work and sometimes to family and neighbors. As you can imagine, this can very embarrassing especially when you have any co signers on the debts that are contacted.
While there is federal law that makes unfair collection practice illegal, collection agents will make your life miserable through legal and sometimes illegal
intimidation. Secured creditor can take whatever legal action needed to repossess their collateral which may be you car or other personal
property. If you owe income tax, the IRS can garnish your wages and clean out you bank account with very little
warning. Finally law suits resulting in judgments will be filed against you.
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.
The whole idea of bankruptcy in the American system to stop all collection action and allow the bankruptcy process to sort things out logically.
What Happens To My House And My Car?
Your house is protected by Homestead in Florida. That means that as long as you keep up on your mortgage payments, nothing will happen to your house. If your house is paid off, you have nothing to worry about. If you're behind on your mortgage, bankruptcy will prevent foreclosure and give you the chance to get caught up. With the rare exception of a construction lien or home equity loan, your home is very well protected in Florida.
Its similar with cars. Even though there is no special protection for cars in Florida, if your car is worth less than what you owe on it, its
really not an asset and as long as you keep up the payments, its safe. If your car is paid off, in a Chapter 7, arrangements can be made to "buy back" the car from the Court Appointed Bankruptcy Trustee. In a
Chapter 13, the value of your car is not important and it's very rare for someone to lose their house or car in a Bankruptcy.
Will I Have To Appear In Court?
In a Chapter 7, you usually have to go to court only once 3 to 4 weeks after the case is filed, a hearing called a "Creditors Meeting" is held. At the meeting, a Court appointed Trustee will go over the Bankruptcy Petition and verify that it's true and correct. The trustee will also be checking to see if there are any unprotected assets that can be collected so creditors can be paid. Your creditors do have the right to show up, but this is rare. The whole thing lasts about five minutes. The creditors meeting is nothing to worry about as long your paperwork is in order and you're well prepared. Being unprepared can be very, very costly.
A Chapter 13 is quite different. The first time you go to Court is for a Meeting with the Trustee. At the meeting, the trustee will review your Petition and determine whether or not your Payment Plan will work. If the Trustee recommends you Plan to be accepted, a Confirmation Hearing before the Judge is scheduled. If the Plan is approved by the Court, the case remains open for up to five years. At the end of a successful plan, a Discharge Hearing can be held where the judge signs an order removing all remaining debt.
Can I Choose Which Creditors To Bankrupt?
Yes and No.
According to the Bankruptcy Code, you have to list everyone you owe money to on the Bankruptcy Petition. In a Chapter 7, you can choose which creditors, if any, you want to continue doing business with. Depending on the creditors, it is common to be able to keep a credit card or department store card open and active even during the bankruptcy.
Chapter 13 may not give you that option. Everyone you owe money to is included in the bankruptcy payment plan. Creditors are often forced to accept payments that are much lower than normal. Most of the time, they don't leave the account open.
In both Chapter 7 and 13, if you want to keep your mortgage and auto loan, it's usually not a problem.
Can IRS Taxes be Discharged?
As the old saying goes, "The two things you can't avoid are death and taxes".
Under certain circumstances, taxes can be discharged. It's basically all a matter of timing. If the income taxes are for a tax year that's over three years ago and you filed your tax return for that year a least two years ago AND the taxes weren't assessed within the last 240 days, your in luck.
If you're reading this in 2012, the tax years you can get rid of are
2008 and earlier if you filed the return over two years ago
and haven't recently been assessed taxes for 2008.
This is a very tricky area and timing is everything.