INTRODUCTION
Financial difficulties can arise for many reasons, such as loss of a
job, death of a breadwinner or too many credit card purchases. Money
problems can be emotionally wrenching and seriously damage family
relations.
However disturbing the idea of bankruptcy might initially seem, in
fact, bankruptcy laws are there to help those who are unable to pay
their bills. This pamphlet reviews your alternatives under the
bankruptcy laws. Your lawyer can advise you about your options so
that you can get the maximum advantage of the bankruptcy laws.
ALTERNATIVES TO BANKRUPTCY
Ask your lawyer about the alternatives to seeking relief under the
bankruptcy laws. One option is to contact your creditors to request
a discount or additional time to pay. Another way is to seek the
help of a credit counseling service. These organizations, whether
public or private, can help you manage your bills and work out an
arrangement with your creditors. A third choice is to borrow money
to pay off your debts, replacing them with a single loan and one
monthly payment. Such refinancing can make sense if the repayment
period is extended at a lower interest rate.
Each of these alternatives has benefits and disadvantages that your
lawyer can explain. Or, you may find that bankruptcy is your best
option.
CHOOSING A BANKRUPTCY OPTION
There are two options under the bankruptcy laws: a liquidation or a
repayment plan.
In a liquidation, also called a Chapter 7 bankruptcy, you sell your
property and use whatever cash is generated to fully satisfy
creditor claims. You will be allowed to keep certain kinds of
property under the exemptions allowed by federal and state
bankruptcy laws. The definition of “exempt property” differs in
each state, and it can include clothing, furniture, household
appliances, tools of your trade and perhaps your home or car. To
file under Chapter 7, you must also qualify under a Means Test which evaluates
your assets and income. Otherwise, you must look to a Chapter 13
filing. Individuals must also take a credit counseling course if
they file under either chapter.
In a repayment plan, sometimes called a Chapter 13 bankruptcy, you
pay a portion of your monthly income to a trustee for distribution
to your creditors. A repayment plan is useful when you are behind on
your home or car loan. The repayment plan can be used to extend, for
three to five years, the time period for paying your bills and might
allow you to pay less than you owe. The extended payment period has
the advantage of allowing you to make smaller payments. You will be
allowed to keep part of your monthly income to pay for living
expenses, such as food, clothing, rent and medicine.
To qualify for a Chapter 13 repayment plan, you must have regular
income and your debts, both secured and unsecured, must not exceed
specific amounts. If your debts do exceed the limits for a Chapter
13 plan, you may be able to qualify for a repayment plan under
Chapter 11. Bankruptcy proceedings under Chapter 11 are more
complicated than those available under Chapter 13. Your lawyer can
advise you on current limits and on the best option for you.
After you begin bankruptcy liquidation, you may not start another
Chapter 7 bankruptcy for eight years. You cannot file another
Chapter 13 case within two years of filing a prior Chapter 13 or
four years after filing under Chapter 7.
Your lawyer can study your situation and advise whether to seek a
liquidation or repayment plan. The best bankruptcy alternative for
you depends on a number of things, including the source of your
income, the amount and types of your bills, your desire to protect
any cosigners or guarantors, and the importance to you of
maintaining your record of paying your debts.
STARTING BANKRUPTCY PROCEEDINGS
Bankruptcy proceedings begin with the filing of bankruptcy forms at
the federal courthouse. The forms are comprehensive and include
thorough lists of your income sources, property, debts and living
expenses.
About a month after your bankruptcy forms have been filed, a meeting
of your creditors will take place. You will be required to appear at
this meeting with your records. Although most creditors do not
attend the meeting, those who do can question you about your income,
property and debts. The main purpose of this questioning is to
confirm that the information in your bankruptcy forms is correct and
complete.
A lawyer can help you prepare the bankruptcy forms, attend the
meeting with creditors and serve as your advocate with the judge,
trustee and creditors.
DEALING WITH CREDITORS
Your lawyer can help you deal with your creditors before, during and
after bankruptcy proceedings. Before starting bankruptcy
proceedings, you are protected by laws that prohibit creditors from
harassing you to collect money. Bill collectors may not contact you
at unreasonable times at home, and they may not embarrass you by
telling your friends, relatives or employers about your debt. Bill
collectors may not contact you at work if they know your employer
disapproves. If you have a lawyer, bill collectors may only contact
your lawyer.
During bankruptcy proceedings, you will receive additional
protection from bill collectors. At the beginning of the
proceedings, the court will order your creditors to stop their
collection activities, including lawsuits, wage garnishments,
repossessions and telephone calls demanding payment. It is unlawful
for your employer to fire you for seeking bankruptcy protection.
After the bankruptcy proceedings have been completed, you must take
care when dealing with creditors. Some creditors may try to collect
debts that were discharged by the bankruptcy proceedings. These
creditors may ask you to renew the debt by signing an agreement to
pay it. Consult your lawyer when you are contacted by creditors so
that you do not inadvertently obligate yourself to pay an old bill
that has already been discharged by your bankruptcy.
WORKING WITH YOUR TRUSTEE
The bankruptcy court will appoint a trustee for your case shortly
after bankruptcy forms are filed. In a liquidation proceeding, the
role of the trustee is to sell your property and distribute the
proceeds to your creditors. The trustee can also set aside
fraudulent transfers and preferential transfers
made to creditors within the 90 days prior to the bankruptcy
proceedings. The trustee will also determine which items of your
property are exempt from sale to pay your debts.
In a repayment plan proceeding, the trustee coordinates the
arrangements between you and your creditors. The trustee will
collect payments from you and distribute them to your creditors. The
trustee is also responsible for approving any new credit obligations
that you undertake before the completion of your repayment plan.
KEEPING YOUR PROPERTY
Your lawyer will advise you how a bankruptcy proceeding can protect
your property. For example, in a liquidation proceeding, the
bankruptcy laws allow you to keep your exempt property.
Prior to beginning bankruptcy proceedings, your lawyer may advise
that you sell some of your nonexempt property and use the cash to
purchase exempt property. Although you may convert your nonexempt
property into exempt property, you will be subject to severe
penalties if you try to hide your property.
In a liquidation proceeding, you may be able to keep mortgaged
property like a home or a car if you “reaffirm” your loan with
your lender. Reaffirming the loan means that you agree to pay it in
full. The “reaffirmed” loan will not be affected by the
discharge that you receive at the completion of the bankruptcy
proceedings. Any property that you receive after 180 days from the
start of the bankruptcy proceedings is yours to keep, including
inheritances, gifts, and life insurance. Your lawyer may recommend
that you speed up your bankruptcy filing if you expect to receive a
substantial amount of property in the near future.
EFFECTS OF BANKRUPTCY
The end of your bankruptcy proceedings can provide you with a fresh
start. The court order will end your responsibility for
dischargeable debts. The order will not affect non-dischargeable
debts such as alimony, child support, educational loans, taxes or
debts that you incurred by deliberately injuring someone. After the
bankruptcy, your creditors may no longer try to collect the
discharged debts.
Your bankruptcy proceedings will be noted on credit records for up
to ten years after your bankruptcy filing. During that time,
lenders, stores or finance companies may consider your bankruptcy
among the many factors they review when you apply for a loan or
credit. Surprisingly, since you cannot file again for Chapter 7 for
eight years, it may be easier for you to obtain a mortgage loan or
installment credit for an auto or other purchase. An application for
such credit is generally easier if you wait at least a year before
applying for credit and can show you have paid your bills on time
since the bankruptcy.
FEES AND EXPENSES
The bankruptcy courts currently charge a filing fee to cover court
costs. The fee is paid to the clerk when you file your bankruptcy
forms at the courthouse. Additionally, the trustee will receive a
fee of about 10% of the amounts paid to your creditors if you choose
a repayment plan.
The fee charged by your lawyer will depend on the complexity of your
case. In bankruptcy matters, a lawyer’s expertise usually results
in savings that far outweigh the amount of legal fees.
CONCLUSION
You may need the protection of the bankruptcy laws if you are unable
to pay your bills on time. Bankruptcy proceedings can help protect
you against aggressive bill collectors and preserve as much of your
property for you as possible.
A lawyer can advise you about your bankruptcy options and help you
make the best of the situation. If you cannot manage your bills,
call your lawyer immediately to find out your rights—and take
advantage of them.
