Bankruptcy is not a decision that anyone comes to lightly. It is essential that you receive the proper information and advice before you file. Our staff is highly qualified in advising clients with regard to their options, including avoiding bankruptcy all together. We seek to serve our clients with compassion and reduce the feelings of embarrassment that many people feel. Bankruptcy shouldn’t ruin your life.
Many people have the same questions when considering bankruptcy, and you may be asking them too. Here are just a few questions we receive on a regular basis with some general answers to help you evaluate your situation. However, for a complete evaluation of your specific needs, call our office to schedule a confidential appointment.
What is Bankruptcy?
Bankruptcy is a federal law that allows individuals and businesses to re-adjust their relationships with their creditors. Bankruptcy can eliminate a portion of an individual’s debt through the grant of a “discharge” of debts. A Discharge is an order of the Bankruptcy court mandating that the affected creditors must cease all collection efforts against the debtor, forever, on the discharged debt. This discharge does not affect any future debt you may establish with these or other creditors.
Although some debts may not be discharged (child support, for example), most will be. Medical bills, credit card debts, and other unsecured debts are generally subject to discharge; secured debts, such as car payments and house payments, may only be discharged if the collateral securing the debt is returned to the creditor. However, most secured debt may be restructured in a Chapter 13 Plan of Reorganization.
How can bankruptcy help me?
The help provided by bankruptcy varies with each situation. Generally, bankruptcy can resolve most problems incurred by debtors who are unable to pay their creditors. First, when a person files bankruptcy, all creditors must cease all collection activities against the debtor. Creditors may not continue to call an individual that has filed a bankruptcy, and any pending lawsuits or repossession activity must be stopped when a bankruptcy is filed. Bankruptcy does not stop criminal proceedings, even if there is a payment component.
Even the Internal Revenue Service is prohibited from continuing collection activity against a bankrupt debtor. Of course, the particular avenue required for complete relief (liquidation or reorganization) varies depending on the individual’s circumstances.
Liquidation or Reorganization?
Individuals and many small businesses are eligible for bankruptcy relief under Chapter 7 (Liquidation) or Chapter 13 (Reorganization). The primary difference between these two types of bankruptcy assistance is defined by the effect on the debtor’s secured creditors. In a Chapter 7 Liquidation case, the debtor must continue to maintain contractual payments to any secured creditor whose collateral the debtor intends to retain. For example, if the debtor wishes to keep a car, he must generally continue to make all regular payments even after his Chapter 7 case is filed.
In contrast, a Chapter 13 case may reorganize or restructure all payments except mortgage payments on a primary residence. The debtor will continue to make regular payments on mortgage(s), while all other debts (car payment, furniture payment, IRS, unsecured debt) are paid through the Chapter 13 repayment plan. However, the Chapter 13 plan may be used to cure arrearages on mortgage(s), and by using this cure and reinstatement option, a debtor may prevent a foreclosure action.
Can I keep my property?
The general answer is “yes”. Any property you wish to keep can be kept if certain conditions are met. First, if the property has a lien against it, the lien must be paid either under the terms of the contract or under a restructured payment in a Chapter 13 plan. Second, property which is fully owned and has no lien may be protected by State exemption laws. Florida has a generous homestead exemption, but its protection of personal property is sharply limited. Property which cannot be protected must be surrendered to the Trustee for liquidation. Non-exempt equity in real or personal property may be retained by paying a dividend to unsecured creditors in a Chapter 13 plan or by repurchasing the property from the Chapter 7 Trustee.
Does bankruptcy hurt my credit?
Filing a bankruptcy of any description is a serious decision which has possible long-term effects on your credit. However, this impact must be viewed in relation to the alternatives: foreclosure, repossession, lawsuits, garnishments, IRS levies, and harassment from creditors. Anything other than full repayment on the creditor’s terms may damage one’s credit as much or more than a bankruptcy filing.
Simply not paying one’s debts will also damage credit ratings, as do referrals to collection agencies. In addition, the stress of continual calls from creditors can have an affect on your mental health and wellbeing. Therefore, the damage done to credit ratings must be put in perspective. While bankruptcy is not likely to be anyone’s first choice, it can provide a useful and necessary alternative to more destructive collection mechanisms.
What Different Types of Bankruptcy Should I Consider?
There are four common types of bankruptcy cases provided under the law:
Chapter 7 is known as “straight” bankruptcy or “liquidation.” It requires a debtor to give up property which exceeds certain limits, called “exemptions”, so the property can be sold to pay creditors.
Chapter 11, known as “reorganization”, is used by businesses and a few individual debtors either whose debts are very large or who are not regular wage earners.
Chapter 12 is reserved for family farmers and fisherman.
Chapter 13 is called “debt adjustment”. It requires a debtor to file a plan to pay debts (or parts of debts) from current income.
Most people filing bankruptcy will file under either Chapter 7 or Chapter 13. Either type of case may be filed individually or by a married couple filing jointly.