Bankruptcy

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About

About Bankruptcy

Bankruptcy is a legal process where a person declares they can't pay their debts. During a bankruptcy, a person filing may try to have outstanding debts discharged. They may also reorganize debts in a way that makes them easier to repay. A creditor may accept less payment on a secured debt when the creditor has demanded payment in full. Bankruptcy gives a person temporary relief from creditors and a fresh financial start. 

The Bankruptcy Code covers federal law about bankruptcy. The Code gives the rules and procedures you must follow when filing for bankruptcy. 

What You Need To Know

Chapter 7 and Chapter 13 are the two most common types of bankruptcy you can file. Each type is a legal tool to get debt relief if you can no longer keep up with your payments. Depending on your financial situation and goals for the future, one type may be better than the other.

Both Chapter 7 and Chapter 13 grant a court order that bans creditors from trying to collect money from you. Creditors cannot contact you to get money for your debts. The discharge is a court order that helps give you a fresh financial start.

In Chapter 7 bankruptcy, you can get the discharge within 3-4 months. In Chapter 13 bankruptcy, you take part in a payment plan. The payment plan discharges the debt in 3-5 years.

In Chapter 7 bankruptcy your assets may get sold and distributed. The nonexempt assets get brought into the bankruptcy estate and sold. The money collected by the sale is then used to repay the creditors. In Chapter 7 bankruptcy, you may lose all nonexempt assets through liquidation. You may have the opportunity to buy the assets from the trustee. 

In Chapter 13 bankruptcy your assets may not get sold. Chapter 13 bankruptcy is more of a reorganization or rehabilitation plan. Often, this works better for debtors with regular income. Chapter 13 bankruptcy works by paying debts through an approved repayment plan. A Chapter 13 debtor may keep the nonexempt property and assets as long as payments get made. A Chapter 13 debtor gets a discharge of remaining debts at the end of the repayment period.

Learn more about Chapter 13 Bankruptcy For People With Regular Income

Learn more about Chapter 7 Bankruptcy For People With Limited Income

When you file for bankruptcy then you get an automatic stay. This means all pending lawsuits such as collection action or garnishment must stop. For example, filing for bankruptcy may stop a foreclosure or a car repossession. 

The automatic stay is a temporary solution as a court order. The automatic stay ends when the bankruptcy discharge happens.

The stay is designed to put a stop to all collection activities, including harassing phone calls, letters, lawsuits, repossessions, and foreclosures. It does not, however, stop actions such as child support payments and other domestic support obligations. It also does not stop criminal proceedings or certain tax proceedings. The automatic stay only applies to actions taken against the debtor and does not apply to actions taken against co-debtors.

During a bankruptcy, you may discharge the debt. This means that you may not have to pay all or much of your debt. You are no longer obligated to pay debts when you discharge them through bankruptcy. 

Not all debts are dischargeable. Some debts survive bankruptcy and you may still need to pay them after an order of discharge. Some debts are not dischargeable as a matter of law. The court may also deny a debtor's discharge of some or all debts. This may be for reasons such as fraud, concealment of property, or misconduct. 

A debtor is not eligible for a Chapter 7 discharge if got granted a prior discharge or filed before. To file a debtor must wait 8 years. To be eligible for a Chapter 13 discharge the debtor must wait 6 years. 

A bankruptcy case filing creates a bankruptcy estate. The bankruptcy estate is all the legal or equitable interests of the debtor in the property when the debtor files. The debtor's property becomes part of the bankruptcy estate. The property is subject to the control of the bankruptcy trustee. The bankruptcy trustee administers the case in the best interest of all the parties.

Certain property is exempt from the bankruptcy estate, and the debtor is allowed to keep such property after the bankruptcy. This helps the debtor achieve a fresh start by leaving him with enough property to meet his needs after bankruptcy.

Louisiana is an “opt-out” state, which means its own state law governs what property is exempt. The purpose of the state exemption statute is to allow the debtor to support himself at a minimum level and independently fulfill his basic needs.

Some examples of exempt property include:

► 75% of disposable earnings
► Property necessary for one’s trade or profession (tools, instruments, books, one utility trailer)
► Family portraits
► Wedding and engagement rings that are less than $5,000 in value
► $7,500 in equity value for one motor vehicle

► $35,000 of equity in the principal residence

A Bankruptcy might not allow you to keep things you have that are pledged in a note (such as your home for a house note or car for your car note).

Steps To Filing Bankruptcy

About The Steps To Filing Bankruptcy

Chapter 7 and Chapter 13 start with the same 9 steps. But, once a Chapter 13 is filed, the filer has to propose and confirm a debt repayment plan, which is pretty complicated and will not be covered here. Instead, step 10 will provide an overview of how to handle your car loan in Chapter 7 bankruptcy. 

Eligible individuals can use Upsolve’s free web app to prepare their bankruptcy forms and file their Chapter 7 case without a lawyer. 

If you are filing for bankruptcy without an attorney (pro se), then you can visit this resource Filing For Bankruptcy Without An Attorney. 

Steps To Filing Bankruptcy

You’ll need to provide the bankruptcy court and the bankruptcy trustee with a lot of information. Some of the information you’ll have to put in your bankruptcy forms, and some documents have to be provided to the trustee in addition to the forms. 

Get a recent copy of your credit report and collect your paycheck stubs, tax returns, bank statements, and any other documents showing your income, your debts, your assets, and your expenses

Every person filing bankruptcy has to complete credit counseling from an approved credit counseling agency before their case can be filed. You can take this class anytime during the 6 months before filing bankruptcy.

This step involves the most work and time. Whether you’re working with a lawyer, legal aid, or are doing it yourself, there are a minimum of 23 different bankruptcy forms you’ll have to complete as part of your bankruptcy filing. If someone is helping you, you’ll likely provide the necessary information as part of a questionnaire. If you’re filing pro se (without a lawyer), you’ll have to fill out the forms yourself either by hand or through a program like Adobe. If you’re eligible, Upsolve’s free web app will guide you through the process of completing your forms.  

United States courts charge $313 for a Chapter 13 filing and $338 for a Chapter 7 filing. If you’re filing Chapter 7 bankruptcy and your household income is less than 150% of the federal poverty guidelines, you’re eligible to ask the court for a waiver of this fee. Otherwise, be ready to pay the full fee in the form of a cashier’s check or money order when you go to the court to file your case. If you have to file quickly, but don’t have the full amount, you can ask the court for permission to pay the fee in installments by filing this form along with your bankruptcy petition.

In most places, only bankruptcy attorneys are able to file cases electronically. For people filing without an attorney, most bankruptcy courts require that all bankruptcy forms be submitted in hardcopy. Print one copy to sign and submit to the court and if you can, print a copy for yourself at the same time.

Whether you go there in person, or send them in by mail, submit all of your bankruptcy forms and your court filing fee (or application for waiver/installments) to the court clerk’s office. This will officially start the case. Once done, you’re protected by the automatic stay. 

Once a trustee is assigned to your case, they’ll send you a request for certain supporting documents. At minimum, you will need to send your recent paycheck stubs and tax returns to the trustee.

Before you can get your bankruptcy discharge, you have to complete a debtor education course through an approved provider. You have up to 3 months from your bankruptcy filing date to complete this requirement, but it’s typically best to get it out of the way so you don’t forget later. Once done, submit your certificate of completion to the court to let the bankruptcy judge know that you’re ready for your discharge when the time comes.

About a month after filing your bankruptcy, your 341 meeting will take place. It’s one of the requirements to get your discharge. You’ll need your picture ID and social security card for this meeting. Even though they’re sometimes called the Meeting of Creditors, most 341 meetings involve only you and your trustee and take less than 5 minutes to complete.

If you have a car loan and want to keep the car, you can either reaffirm the debt or redeem the vehicle. Reaffirming the debt basically keeps everything the same with respect to your car loan, though sometimes lenders will make certain concessions as part of the reaffirmation process. Redemption is much less common as it requires you to pay the market value of your car to the lender in one lump sum to redeem it. 

Other Issues To Consider

Other Issues To Consider

These are some of the other issues to consider when deciding whether to file for bankruptcy. 

Other Issues To Consider

Bankruptcy will not allow you to get out of debts owed to some government agencies, like child support, alimony, most student loans, criminal fines, and most taxes.

While there are some debts that can’t be discharged whether with a Chapter 7 or Chapter 13 bankruptcy, it could still be to your advantage to file for Chapter 13.

For example, even though you can’t eliminate alimony and child support obligations by filing bankruptcy, if you’ve fallen behind on your child support and/or alimony payments, your ex-spouse can take you back to court to collect on the past due amount. With a Chapter 13, you can include the arrears in the repayment plan which will likely be a lower monthly amount than you would’ve paid in family court. However, you still need to keep your current monthly payments up to date.

Student loans can’t be discharged in a bankruptcy, but you may be able to reduce the monthly payment with the lender because of your Chapter 13, or delay making payments until you receive a discharge. However, interest will continue to accrue during this time. 

Recent income taxes aren’t dischargeable either, but a Chapter 13 will help extend the time period in which to make payments. This is important when you can’t reach an agreement with the Internal Revenue Service (IRS) and the taxes are due immediately or the IRS wants a monthly amount you can’t afford. The Chapter 13 will result in paying an amount you can afford through the bankruptcy plan. Also, any lawsuit filed by the government to collect taxes will stop because of the automatic stay.

The automatic stay will even protect a co-signer. In a Chapter 7, once the bankruptcy discharge is issued, a creditor can continue collection efforts against a co-signer. With a Chapter 13, the automatic stay protects the co-signer throughout the bankruptcy process which could last between 3 to 5 years.

Bankruptcy will not end any debts obtained through fraud or intentionally injuring someone.

Even though the Chapter 13 plan is between 3 to 5 years, there are some very limited circumstances in which you can receive a discharge before you completed your plan. This is known as a hardship discharge.

To qualify for a hardship discharge, you must prove to the bankruptcy court that due to circumstances beyond your control, you can’t complete the bankruptcy plan. That’s important because voluntary acts don’t count as “beyond your control.” However, prolonged illness, death of a family member that contributed to the bankruptcy plan, permanent disability, even a decrease in monthly income due to long periods of unemployment can be some of the circumstances that could qualify as a hardship discharge. However, showing a hardship is just step one. 

At the time of requesting a hardship discharge, creditors must have received at least as much as they would have in a Chapter 7. This is known as the “best interests of the creditor’s test.” For example, if there was $5,000 in nonexempt equity if you filed for Chapter 7, the creditors would’ve had to receive their portion of the same amount in Chapter 13. That’s to make sure that your creditors can’t be worse off than they would have been in a Chapter 7 simply because you filed Chapter 13. Also, if it’s possible to modify your plan by lowering the monthly payments, then you may not qualify for a hardship discharge. However, it’s still possible to convert from a Chapter 13 to a Chapter 7.

While a hardship discharge won’t get rid of all debts typically eliminated by a Chapter 13 discharge, it will discharge the same debts that could have been included in a Chapter 7. 

Bankruptcy may stop foreclosure proceedings on a home and allow you to catch up on payments. When you file for bankruptcy, an automatic stay is issued which stops all collection activities, including foreclosure proceedings. This gives you the time to reorganize your finances and make payment arrangements with the lender. Depending on the type of bankruptcy you file, you may be able to restructure your debt and make a plan to catch up on payments over time.

Bankruptcy will not protect co-signors when only the person who made the loan files for bankruptcy. Your co-signor still owes the full amount. Bankruptcy will only protect co-signors if both the person who made the loan and the co-signor file for bankruptcy.

Bankruptcy will usually have a negative impact on an individual’s credit score and credit report, and this can last for many years. Bankruptcy can remain on a credit report for up to 10 years. It is important to understand the long-term consequences of filing for bankruptcy before making a decision.

There may be other options available to help manage debt, such as credit counseling, debt consolidation, or a debt management program. It’s important to explore all available options before deciding to file for bankruptcy. 

Última revisión y actualización: Mar 10, 2023
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