BANKRUPTCY OPTIONS FOR INDIVIDUALS
The purpose of this article is to inform the lay person regarding their options under the federal Bankruptcy Code. The bankruptcy laws are complicated and not easily described due to the fact that the application of the law is different from State to State. Specifically, one of the primary concerns of most people when they are considering filing bankruptcy is the question of what property they will be allowed to keep after they have filed for bankruptcy relief. The answer to this question lies in the law of the State in which you reside. The property you will be allowed to keep is controlled by a list of exemptions that may be under either federal or state exemption laws. Knowing which exemptions list is going to apply to you and which do not is dependent upon the State in which you reside. Therefore, you should seek the advice of an attorney in your State to learn your particular rights in your State.
While the filing for relief under the Bankruptcy Code is available to individuals, partnerships, corporations and municipalities alike; this article will be limited to the relief the Code provides to individual consumers. There are five “Chapters” providing different kinds of relief in the Bankruptcy Code. Of these five, there are principally two types of relief available to individual consumers: Liquidation under Chapter 7; and Rehabilitation, under Chapter 13. The remaining three Chapters under the Bankruptcy Code provide relief to municipalities under Chapter 9; to the family farmer, under Chapter 12; and relief to the business debtor under Chapter 11.
A CONSUMER DEBTOR
A “debtor” is defined under the Bankruptcy Code to include persons and corporations. The word “individual” is not statutorily defined. However it is understood to mean a real, honest-to-goodness, living, breathing, warm-blooded person. It is easy to draw a distinction between the individual consumer debtor and the business or corporate debtor. The Bankruptcy Code does define a “Consumer Debt” as one “incurred by an individual primarily for a personal, family or household purpose.” Thus and individual is not a consumer debtor unless the bulk of his or her debt is incurred in the course of domestic consumption. This kind of debt, for most people, is consistent of home mortgages, automobile loans, medical bills, credit cards from banks and department stores, income taxes, child support and/or alimony, and student loans. How these debts are dealt with and which debts may be “discharged” under the Bankruptcy Code depends, in part, upon whether your bankruptcy is a Chapter 7 or a Chapter 13.
DISCHARGE OF DEBTS
A “discharge” of a debt in bankruptcy means that the creditor may never try to collect the debt from you. Whether or not a debt is “dischargeable” depends upon whether or not it is a “Priority” debt, a “Secured” debt, or an “Unsecured” debt. Generally, debts which have “Priority” status are not discharged by bankruptcy. If the debt is not discharged, you will still have to pay the debt. Priority debts may include: attorney fees related to bankruptcy, certain taxes, student loans, child support, alimony, debts incurred by fraud, debts for willful and malicious injury to a person or property, and debts arising from a drunk driving judgment. There are some circumstances in which priority debts may loose their “priority” status, and thus discharged. The circumstances in which priority debts may lose their priority status should be obtained from your attorney. The exceptions are limited and may require a finding by the Bankruptcy Judge that require you to continue to pay the debt would pose undue hardship upon you.
A “Secured” debt is a debt in which your creditor has a lien on an identifiable piece of property they own to secure the debt. Examples of liens are home mortgages and automobile loans secured by a lien or mortgage on the automobile itself. An “Unsecured” debt is one in which there is no lien on a particular piece of your property which is securing the debt. Examples of unsecured debts are usually bank and department store credit cards.
The types of debts that you have, whether or not the debt is dischargeable, and your financial ability to continue to pay certain debts in the future are going to determine whether you should seek relief from either Chapter 7 or Chapter 13 of the Bankruptcy Code. Regardless of whether you seek relief from Chapter 7 or Chapter 13, the Bankruptcy Code can provide you with some immediate relief on the same day that your petition is filed by way of the Automatic Stay.
THE AUTOMATIC STAY
Immediately upon the filing of a bankruptcy petition, 11 U.S.C. Sec. 362, provides for an AUTOMATIC STAY, of the following:
1) The commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this Title, or to recover a claim against the debtor that arose before the commencement of the case under this Title;
2) The enforcement, against the debtor or against the property of the estate, of a judgment obtained before the commencement of the case under this Title;
3) Any act to obtain possession of property of the estate or property from the estate or to exercise control over property of the estate;
4) Any act to create, perfect, or enforce any lien against property of the estate;
5) Any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this Title;
6) Any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this Title;
7) The set off of any debt owing to the debtor that arose before the commencement of the case under this Title;
8) The commencement or continuation of a proceeding before the United States Tax Court concerning the debtor.
These eight sections are designed to prevent the continuation of collection efforts, harassment by creditors, and the like. The provisions are very broad and nearly all-encompassing. They are designed to stop either permanently or temporarily, your creditors from taking any further action to collect a debt from you. This means that collectors can not continue to call you. Collectors can not continue to send you letters. All lawsuits to collect debts against you are stayed. A foreclosure against your home would be stopped, if filed before the foreclosure sale. It permits the individual consumer time to either attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that can drive you into bankruptcy. The automatic stay is not necessarily permanent and does not apply to all debts.
An example of debts which are not covered by the automatic stay include commencement or continuation of a paternity, child support or alimony actions. It is important that you consult with your attorney regarding whether or not all of the debts that you have will be “stayed” by the filing of a bankruptcy petition.
CHAPTER 7: LIQUIDATION
Chapter 7 is designed for debtors who do not have the ability to pay their existing debts. Under Chapter 7, a trustee takes legal possession of all of your property. Some of your property may be exempt from seizure under either the existing laws of your state or under federal law, depending upon the State in which you reside. Federal law and the various states provide different exemptions for such items as cash, your savings, your homestead, automobiles and tools of your trade. It is important that you consult with your attorney to determine which items of property which you own may or may not be exempt under the laws of the State in which you reside.
The purpose of filing a Chapter 7 is to obtain a discharge of your existing debts in order to give you a fresh financial start. If you would be financially capable of paying your remaining bills after those dischargeable debts are eliminated under Chapter 7, then a Chapter 7 Bankruptcy might be the best option for you. However, if you have debts which are not dischargeable and/or secured by property which you wish to keep, you may need to consider the option of repaying some of your debts through a Chapter 13 Repayment Plan.
CHAPTER 13: REPAYMENT OF DEBTS
Chapter 13 is designed for those individuals with regular income who are temporarily unable to pay their debts, but would like to pay them in installments over a period of time. You are only eligible for Chapter 13 relief if your debts do not exceed certain dollar amounts set forth in the Bankruptcy Code. Under Chapter 13, you must file a plan with the court to repay your creditors all or part of the money that you owe them, using your future earnings. If you are not repaying 100% of you debts, the period of time which you must make plan payments is a minimum of three years, but no more than five years. Your plan must be approved by the court before it can take effect.
The advantage of a Chapter 13, unlike a Chapter 7, is that you may keep all of your property, both exempt and non-exempt, as long as you continue to make your payments on a timely basis under your Chapter 13 repayment plan. After you have completed all of your payments under the plan, any remaining unpaid debts are discharged, except those debts which have priority status.
The most common example of individuals who need the relief provided by a Chapter 13 bankruptcy, rather than a Chapter 7, are those individuals facing a foreclosure of the mortgage on their home. A Chapter 13 bankruptcy can stop the foreclosure of a home while a repayment plan for the mortgage arrears is provided in the individual debtors repayment plan. Under this circumstance, after a Chapter 13 bankruptcy is filed, a budget would be determined for the individual whereby the individual would repay the mortgage arrearage with monthly payments through the plan and possibly pay current monthly mortgage payments directly to the mortgage company.
Whether or not a Chapter 7 or a Chapter 13 bankruptcy will provide you with the fresh start you need, to have a more secure financial future, will depend upon the nature and type of your debt, the amount of debt you have acquired, and your ability to pay debts in the future. A knowledgeable bankruptcy attorney is necessary to help you make the decision that is right for you under the applicable bankruptcy laws.
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