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Top Reasons For Bankruptcy - Part 1

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What Happens When You File Bankruptcy?

Most consumers file either a Chatper 7 or Chapter 13 bankruptcy. The biggest difference between the two is time. In a Chatper 7, the process takes a couple months. In a Chapter 13, the process could take up to 5 years depending on the plan you submit. Most of what is written presumes filing a Chapter 7 liquidation. Chapter 13 is discussed but only briefly.

The two types of bankruptcies are different. One threshold difference should be discussed at the outset and that deals with the Means Test for Chapter 7 bankruptcy. To be eligible for filing a Chapter 7 bankruptcy, a person must pass the Means Test which is a test to ensure that you fall within the income limits for being eligible for filing Chapter 7. If you do not fall under the limits, your option is to file a Chapter 13 bankruptcy instead.

When you file bankruptcy (specifically a Chapter 7), all collection activity on your debt stops. This is called the automatic stay. Next, the court will appoint a trustee to handle your case and schedule a meeting of creditors.

Additionally, your assets are transferred into the bankruptcy estate. This estate will liquidate your assets unless those assets are exempt from the estate. One of the schedules filed with your bankruptcy petition will be a list of each asset in your possession (both real and personal). Another schedule will be a list of each asset that you claim should be exempt from liquidation. Those assets that are not exempt are then sold and the proceeds from that sale are used to satisfy your debts.

Finally, after a meeting of the creditors and the trustee in the case, your debts are extinguished or discharged after a month or so, and you no longer legally owe those debts. The entire process from filing the petition to receiving a discharge is around 90 to 120 days.

Does Bankruptcy Clear Debt?

As mentioned in the previous section, after you meet with your creditors and the trustee for your bankruptcy, the bankruptcy judge assigned to your case will order that the debts be discharged. This will essentially clear the debts owed if the debts was created before you filed the bankruptcy petition. There are some debts that are not automatically cleared, however. Those include child or spousal support and certain taxes. Additionally, student loans are typically not discharge unless you show undue hardship. A judge in New York recently bucked the trend of finding undue hardship for a debtor owing $221,000 in student loans; however, the lender is appealing that decision and will likely win. In a Chapter 13 plan, most of your unsecured debts are cleared after your plan term (3-5 years) ends.

What are the benefits of declaring bankruptcy?

The immediate benefit of declaring bankruptcy is to have all collection activity ceased at the time of filing the bankruptcy petition. Another benefit of bankruptcy is that you are required to take courses that will teach important skills. The first course is the consumer counseling class that will teach you about bankruptcy and other options. This course is mandated before you may file a bankruptcy petition. The second course relates to debt education and that course must be taken prior to you receiving a discharge order from the bankruptcy judge. The main benefit of bankruptcy is having your debts discharged.

In a Chapter 13 bankruptcy, your secured property (home and vehicle) is able to be protected from foreclosure and repossession. The Chapter 13 bankruptcy is a three to five year payment plan where your debts are paid according to the plan that is submitted by you and approved by the court. The trustee will take your income and make the necessary payments to your creditors in accordance with the set forth plan.

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To speak with a Bankruptcy Attorney, Harry C Kaufman
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