Bankruptcy is often the last refuge for an individual who finds himself deep in consumer debt, or a farmer who can't service his debt load, or for a business that needs to reorganize its debt structure so it can continue to do business.
Bankruptcy is not something that should be entered into without first consulting an attorney. The immediate effect it can have on your property as well as the long-term effect on your credit rating is something that should be discussed in detail with an attorney.
Glossary of Terms
The following is a glossary of terms that are often used in bankruptcy proceedings. Collateral - property pledged as security for the satisfaction of a debt. If the debtor cannot pay the debt, the creditor can then take the property pledged as collateral.
Debts secured by particular pieces of property are called secured debts, while debts not secured by any particular piece of property are called unsecured debts. A credit card balance is an example of unsecured debt.
Creditor - a person, business or other entity to whom a debt is owed.
Debt - an obligation to pay money or some other thing of value to a creditor.
Debtor - individual who owes a debt.
Discharge - the extinguishing of a debt by the bankruptcy court. Some kinds of debts are dischargeable, but others kinds, listed specifically in the Bankruptcy Act, are non-dischargeable and cannot be forgiven.
Liquidation - when a piece of property is reduced to cash to pay and settle an account.
Property - anything that has exchangeable value and can be used to satisfy debt. In bankruptcy, property is either exempt or non-exempt. Exempt property is protected by state law from forced liquidation as part of a bankruptcy. Nonexempt property can be liquidated by a creditor or a bankruptcy trustee as part of a bankruptcy.
Trustee - an officer of the United States Bankruptcy Court. The trustee is the administrator or the overseer of the bankruptcy estate of any potential bankruptcy.
What exactly is bankruptcy and are there different types?
Bankruptcy is the extinguishing of a person's debts or a reorganization and repayment of a certain amount of the debt to creditors.
Bankruptcy law is controlled by the Federal Bankruptcy Act. Different chapters of the Act relate to different types of bankruptcy. The most frequently used chapters in the Bankruptcy Act are Chapter 7, Chapter 11, Chapter 12 and Chapter 13.
Chapter 7 is the most common form of bankruptcy. Typically a debtor will seek to have all his or her unsecured debt discharged. Unsecured debt refers to debt that is not secured with collateral, such as medical bills and credit card debt. Any nonexempt assets a debtor has can be collected by an officer appointed by the court known as a trustee, who will sell the property and distribute the proceeds to various creditors.
Certain assets are exempt from this process, which means property cannot be liquidated by the trustee and creditors have no right to force a sale or liquidation of that asset. Since these exemptions are determined by state law it is important to consult with an attorney in your state to determine what is and is not exempt. In some states, your home or homestead (your house and the land around it) is considered exempt and you cannot be forced to sell or liquidate. In other states there may be a set amount that is considered exempt, such as $10,000.
This means, in that state, the property could be sold on the courthouse steps, the mortgage paid off, and any remaining equity up to $10,000 would be kept by the debtor. In other states, there is no exemption for a home. Because of these variations in state law, it is vitally important that you discuss bankruptcy with an attorney before bankruptcy proceedings are begun to determine what exemptions exist in your state.
Chapter 11 is a form of bankruptcy used by businesses. This chapter allows for the restructuring of a business's debt. During the time that this restructuring or renegotiation of debt and contractual obligations is taking place, the business cannot be forced to cease operation, and its assets, if any, cannot be liquidated by the business's creditors.
The court will appoint a trustee who will attempt to put into place a reorganization plan that takes into account the competing interests of the company, creditors and shareholders. The formulation of this plan often involves intense negotiations between all parties. Once there is agreement on the plan, the trustee can submit the reorganization plan to the bankruptcy court for its approval. Depending on the number of parties and the amount of money involved, the process can take as long as several years.
Businesses will often contact their creditors and agree to a reorganization plan in anticipation of filing for bankruptcy under Chapter 11. This allows the company to avoid the time and expense of bankruptcy court and instead expend its time and energy on becoming profitable. It also gives creditors some certainty as to how much of the debt will be paid and when.
Chapter 12 provides relief for family farmers. Under Chapter 12 the farmer-debtor proposes a payment plan to the bankruptcy court to repay his or her debts over a designated period of time. As in a Chapter 11 bankruptcy, which allows for a business to continue operations while the bankruptcy is pending, the farmer in a Chapter 12 bankruptcy can continue to run the family farm without fear of being forced into liquidation.
Chapter 13 bankruptcy allows a consumer or a wage earner to enter into a payment plan that allows him or her to pay off creditors at a discounted rate over a designated period of time.
In jurisdictions where a home is not considered exempt property or the exemption is for a particular dollar amount and the residence can be sold on the courthouse steps, Chapter 13 allows the debtor to remain in his home while servicing the debt. If the debtor misses payments or doesn't otherwise comply with the plan, the trustee, either on his own or by motion to the court by one of the creditors, can convert the plan from a Chapter 13 plan to a Chapter 7 liquidation.
Where are bankruptcy cases filed?
Bankruptcy cases are based on federal law and as such are filed in United States Bankruptcy Courts.
Can my creditors continue to contact me at home and at work after I have filed for bankruptcy?
When a bankruptcy is filed, no matter if it's a Chapter 7, 11, 12 or 13, all collection efforts by creditors must immediately cease. When a bankruptcy is filed, an automatic stay or injunction takes place, which stops all creditors from contacting or harassing the debtor about his or her debt obligations.
Typically, a list of all the creditors of the debtor is filed with the initial bankruptcy petition along with their addresses so that notice can be sent to each creditor. If a creditor disregards the notice and continues to contact the debtor, that creditor can be held in contempt by the bankruptcy court and any efforts made to collect on the debt can be rendered void at the request of the bankruptcy trustee or the debtor. If the debtor is injured by a willful violation of the automatic stay, he may be entitled to actual damages including his attorney's fees and costs
After the bankruptcy is filed in the United States Bankruptcy Court, what happens next?
After a petition for Chapter 7, 11 or 13 has been filed, the trustee has what is known as the first meeting of creditors. This is an opportunity for creditors who may have an objection to the bankruptcy to appear. This first meeting also gives creditors who have an interest in secured property such as car loans and mortgages an opportunity to learn whether insurance is in place to cover the secured property and whether the debtor plans on reaffirming the debt if the property is exempt.
What does it mean to reaffirm the debt?
A creditor who has an interest in an asset that still has a debt obligation can request whether or not the debtor intends to pay the balance of the debt on that asset. In other words, if an individual has an automobile, and in that state an automobile is considered an exempt asset, and the debtor still owes $4,000 on the car note, the bank or lending institution holding the paper on the car note can request from the debtor a reaffirmation agreement wherein the debtor reaffirms or reacknowledges his debt obligation on the automobile. If the debtor chooses not to reaffirm or if he does not provide the necessary insurance to protect the collateral in question, the creditor can file a motion with the trustee to take the necessary steps to protect its interest in the collateral.
Are all debts dischargeable in bankruptcy?
The Bankruptcy Act provides that certain debts are not dischargeable. In Chapter 7 bankruptcies the following are considered non-dischargeable debts:
tax debts (However, "older" income taxes may be dischargeable if: (i) a return was actually filed by the taxpayer; (ii) the return was filed with IRS more than 2 years prior to the date of the bankruptcy; (iii) the return was "due" more than 3 years (including extensions for time to file) prior to the date of the bankruptcy; (iv) there was no "fraud" on the return; and (v) the assessment of the tax liability was made more than 240 days prior to the date of the bankruptcy (such as when an audit occurred resulting in a later assessment of unpaid taxes). This is a very complex area of law and it is suggested that one consult with a tax and/or bankruptcy attorney professing knowledge and experience in this area.);
debts for obtaining money, property, services, or an extension, renewal, or refinance of credit by using some form of fraud with respect to the debtor's financial condition or the use of a written statement with respect to the financial condition of the debtor that is materially false, on which the creditor reasonably relied and which was used by the debtor with the intent to deceive;
debts that are not properly listed nor scheduled in the debtor's bankruptcy petition;
debts for embezzlement, larceny or fraud;
debts to a spouse, former spouse, or a child of the debtor for alimony, maintenance or support in connection with a separation agreement, a divorce decree or other court order or property settlement agreement;
debts for willful and malicious injury by the debtor to another or to the property of another;
debts for fines, penalties or forfeitures payable to and for the benefit of a governmental unit;
debts associated with student loans;
debts for death or personal injury caused by the debtor's operation of a motor vehicle if such operation was unlawful because the debtor was intoxicated or under the influence of a drug or another substance;
debts associated with payments of restitution in a federal criminal case;
debts incurred to pay non-dischargeable federal tax
Can a creditor object to a debtor taking bankruptcy?
Whether or not a creditor can object to a debtor's securing relief from the bankruptcy court depends on the type of bankruptcy and the type of debt.
A creditor, after receiving notice of the bankruptcy, can file a proof of claim against the debtor's bankruptcy estate. The creditor can also file an adversarial proceeding, which is a lawsuit that will be heard by the bankruptcy judge to determine dischargeability of the debt. If the creditor is not successful in his objection to a debtor's seeking bankruptcy in an adversarial proceeding, the creditor may have to pay for any additional attorney's fees and costs the debtor has incurred to defend the claim.
After the bankruptcy has been filed, there's been a first meeting of creditors and a reorganization plan has been approved, what happens next?
The bankruptcy court will conclude the bankruptcy proceedings by granting the debtor a discharge of all dischargeable debts. The debts are forgiven and the debtor no longer has the obligation to repay them. The discharge of debt occurs after the bankruptcy is filed, the creditors have been put on notice of the debtor's intention to seek relief, any plans for repayment or reorganization of debt have been made, and there are no outstanding adversarial proceedings.
The debtor then has a fresh start on his or her personal life, farming operations or business enterprise.