What is Bankruptcy?
Although the legal definition of bankruptcy varies with the type of bankruptcy being filed, a general definition of bankruptcy essentially boils down to an individual or group of individuals filing for legal and financial protections because of credit and debt problems. Although an individual can file for bankruptcy, it’s also possible for legal entities such as companies and corporations to file for similar protections.
The causes of filing for bankruptcy can also vary. The inability to pay for medical expenses, a mortgage or make other routine payments on debt are generally the reasons people file for bankruptcy. From a legal perspective, a bankruptcy can provide an individual or even a company with a “fresh start;” however, financial and credit issues can sometimes linger.
What are the potential consequences of filing for Bankruptcy?
There are both positive and negative consequences of filing for bankruptcy. The positive consequences are mostly legal, since they address an individual or business’ need to have some sort of protection from creditors seeking payment on debt. The negative consequences typically range from a damaged credit rating to more abstract consequences such as a damaged business reputation.
What does Bankruptcy protect me from?
Each type of bankruptcy comes with its own protections, but generally it may be wise to consider filing for bankruptcy if you have noticed some of the following problems:
- Wage Garnishment: Protection of your job wages will typically come with, for example, a declaration of Chapter 7 Bankruptcy.
- Unsecured Debt: Many credit card and medical bills fall under the umbrella of “unsecured debt” and much of this debt can be wiped out with a “fresh start” bankruptcy filing. (Note: “secured” debt usually refers to debt that is secured by a piece of property or collateral; in the event if lack of payment, these creditors may be able to claim that property. For example, a mortgage would be considered secured debt).
- Property Repossession: In the case of secured debt, repossession is sometimes unavoidable. However, some types of bankruptcy may allow for greater flexibility in paying off secured debt and therefore allow you to keep the property that secured the debt.
What are the common “chapters” of Bankruptcy?
Three of the most common ways to file bankruptcy are Chapter 7, Chapter 11 and Chapter 13.
Chapter 7 Bankruptcy, the most common type, generally applies best to individuals without a lot of assets to protect under bankruptcy. Because so much debt (usually unsecured) is wiped out with a declaration of Chapter 7 Bankruptcy, individuals who are really in dire circumstances financially will typically gravitate toward Chapter 7.
In Chapter 13 Bankruptcy, another common type filed by individuals (or “consumers”), there is still an aim at repaying your creditors so debt is not totally wiped out. However, the protections granted here may allow for more flexibility in repaying these debts. It is not quite the “fresh start” of Chapter 7, but can ultimately be less damaging to your future finances. Additionally, you will be able to keep many of your assets, though portions of income you generate in the coming years might go to your creditors.
Chapter 11 Bankruptcy best applies to businesses; however it can sometimes be used by individuals with considerable assets to protect. It is often used by corporations as a way of restructuring in financially difficult times.
What will I need to file for Bankruptcy?
It’s best to start generating a list of all of your assets and debts. You’ll also need to put a lot of thought into the decision, as you likely won’t be able to file bankruptcy again for many years and even then, to do so could do a lot of damage to your long-term credit prospects.
There is no “minimum” amount of debt required to file for bankruptcy. This is one of the reasons it’s important to pursue other options before filing for bankruptcy. There is a chance your debt problems can be solved through different means, such as directly contacting your creditors and arranging new payment plans.
How much do Bankruptcy laws vary from state to state?
Many of the bankruptcy laws that apply to individuals and corporations are actually federal laws. For this reason, there is not as much variance in state-to-state filings for bankruptcy as you might expect for other documents and written contracts. Even so, it pays to know how to go about filing for bankruptcy in the state you live in and understanding any potential local laws that might apply to you that don’t apply to people filing for bankruptcy elsewhere.
What kind of information should I keep track of when filing for Bankruptcy?
Generally, there are four measurable items you’ll want to keep track of:
- Assets: Anything that you own property-wise, as well as any income-generation property that you might own (such as rental property);
- Debts: Information about your mortgage(s), credit card debt, etc.;
- Monthly Income: Both wage and non-wage income should be included;
- Monthly Expenses: Be sure to include total expenses, not just expenses that you pay on debt that has accrued.
The more accurate a picture you have of your own financial situation, the better you’ll be able to judge whether or not bankruptcy is right for you. If you still decide to file for bankruptcy, you will need to have this information available.
What kinds of debts remain after filing for Bankruptcy?
It depends on the type of bankruptcy you file. But it’s important to remember that many debts cannot be extinguished by bankruptcy, including student loan and tax payment debts. Additionally, legal judgment debts will still exist even after bankruptcy has been filed.
What are the requirements for a Bankruptcy filing to be valid?
Once you’ve made the decision to file for bankruptcy, it’s important to give an accurate picture of your financial situation in your filing. The validity of the filing will be assumed once you’ve signed the filing and all of the information has been freely and accurately volunteered.
Understanding Chapter 7 Personal Bankruptcy
One of the mistakes people make is believing that bankruptcy is a solution to all of their financial problems. “If I’m ever in a jam with all this debt, at least I have bankruptcy.” And while bankruptcy can be a valid financial option for many people who are overloaded in their financial lives, that doesn’t mean it’s an end-all, be-all for anyone’s finances, even if they’d rather go back to square one than deal with their current situation. Understanding Chapter 7 personal bankruptcy will be key to understanding not only what it can do to help you, but also why it should be avoided if you can.
But what’s the best way to understand Chapter 7 bankruptcy? Let’s handle it from two angles: why you would want to avoid bankruptcy, and then in what situations you would want to file Chapter 7.
Why You Would Want to Avoid Chapter 7 Personal Bankruptcy
Naturally, there are some dangers to personal bankruptcy that you’ll want to be aware of, particularly in the case of Chapter 7 personal bankruptcy. Though these are the simplest bankruptcies for both individuals and businesses, they don’t provide comprehensive coverage from all debts (for example, student loan debts always have to be repaid, no matter what happens to you in bankruptcy). Naturally, filing bankruptcy will also negatively affect your credit, meaning that when creditors look up your report in the future, they will see that you once filed bankruptcy and had some debts wiped away. This will affect the credit you receive for the rest of your life.
Understanding credit is essential to understanding the downsides to personal bankruptcy, because credit will affect how much money you pay for loans, whether or not you’re even able to receive loans, and generally affect the options you have for mortgages, rental agreements, and business loans. Even if you are granted loans, a bankruptcy can drive your credit rating low enough that you will have to pay a lot more in interest than you would have otherwise had to pay.
When Chapter 7 Personal Bankruptcy is the Right Option
There are some times, however, when Chapter 7 bankruptcy might be right for you. It is, after all, the most common form of bankruptcy in the United States for a reason.
When Chapter 7 bankruptcy occurs, a person or business will essentially “cease operations” (although the phrase better applies to businesses). In the case of businesses, the assets of the company are sold off to the creditors in order to make payments as best as possible even if these payments are not the amount of total money owed. The benefit to this is that the person or company in bankruptcy does not have to pay the total amount of owed money and receives certain legal protections from having to do so.
Naturally, a bankruptcy should only be sought in dire financial circumstances, as the results of them can have wide-ranging effects whether it’s a personal or a business bankruptcy. A business going bankrupt can affect the jobs of a lot of people, while personal bankruptcy can affect almost every area of a person’s life.
Annuity: An insurance contract that pays the insured person during his or her life, rather than paying a beneficiary after the insured person’s death. An annuity is a type of retirement plan.
Asset: Anything of value. May be real estate or personal property. Personal property can be tangible or intangible property.
Attachment: The seizure or repossession of property by a governmental agent. Generally, attachment is carried out by a county sheriff or the Internal Revenue Service.
Automatic stay: An court order from the bankruptcy court that goes into effect automatically upon filing for bankruptcy. It orders creditors to stop taking any further action to collect on any debts owed by the debtor filing for bankruptcy including lawsuits, garnishments, foreclosures, and collections.
Bankruptcy Code: The U.S. Bankruptcy Code is the set of United States laws relating to bankruptcy. The laws are contained in Title 11, Sections 101-1330 of the United States Code.
Bankruptcy Court Rules: In addition to the Bankruptcy Code, there are three further sets of rules that govern the procedures in Bankruptcy Courts: the Federal Rules of Bankruptcy Procedure; the Federal Rules of Civil Procedure; and Local Bankruptcy Court Rules. Local bankruptcy court rules may not conflict with any of the federal rules.
Bankruptcy Courts: The United States is divided into various bankruptcy court districts. All bankruptcy court districts are referenced by the name of the state (Federal Bankruptcy Court, Idaho District). Many districts are also referenced geographically, if there is more than one district within the state (i.e., Southern District of Illinois).
Bankruptcy estate: All of the property, whether real estate or personal property, that is owned by a debtor who files for bankruptcy. Control over the bankruptcy estate is given to the court by filing for bankruptcy.
Bankruptcy petition: A formal request of the court for the protection of the federal bankruptcy laws.
Bankruptcy petition preparer: A private non-lawyer paralegal who can assist persons in preparing the legal papers necessary for bankruptcy. He or she cannot, however, provide any legal advice. Preparers are now authorized and regulated by the Bankruptcy Code.
Bankruptcy trustee: A person who is appointed by the bankruptcy court to handle the bankruptcy estate of a debtor. The trustee will examine the papers, handle the creditors’ meeting, collect and sell any non-exempt property, and pay off the creditors.
Chapter 7: The chapter of the Bankruptcy Code that provides for “liquidation” (the sale of the debtor’s non-exempt property and distribution of the proceed to the creditors).
Chapter 11: The chapter of the Bankruptcy Code that provides for reorganization (usually of a corporation or partnership).
Chapter 12: The chapter of the Bankruptcy Code that provides for an adjustment of the debts of a family farmer.
Chapter 13: The chapter of the Bankruptcy Code that provides for an adjustment of the debts of an individual with a regular income.
Claim: A creditor’s assertion of a right to payment from a debtor.
Codebtor: A person who is jointly liable on a particular debt, either because of co-signing on the debt, acting as a guarantor on the debt, or by virtue of being a spouse or partner of the debtor.
Common-law property: Property in those states that follow common-law property rules. In general, the ownership of common-law property is determined by the name on the title document for the property. This is true for married couples also, with the exception of gifts or inheritances that are received jointly and thus held jointly. See also community property.
Community property: Property held by a husband and wife in those states that follow community-property law rules (Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin). Generally, all property that either spouse receives during their marriage is owned jointly by both spouses and is referred to as community property. See also common law property.
Creditor: A creditor is a person or entity (corporation, partnership, etc.) who is owed a debt of some type. Creditors may be secured creditors who hold the title or a lien or some form of collateral for the debt. Creditors may also be unsecured creditors who have no security for the debt.
Creditors’ meeting: This meeting is held in all Chapter 7 bankruptcies approximately one month after filing. It is attended by the bankruptcy trustee and the debtor(s). It may also be attended by any of the creditors. At this meeting, the bankruptcy papers will be examined, priority claims determined, and the property that is exempt will be resolved.
Debtor: A debtor is a person (or entity) who owes a debt of some kind. The persons or entities who file for bankruptcy are referred to as “debtors” in the court papers.
Disability benefits: Payments made to a person under a disability insurance plan because of injury, disability, or sickness.
Discharge: The total elimination of all dischargeable debts. This is the final result of a Chapter 7 bankruptcy. A discharge also prohibits creditors from communicating in any way with the debtor regarding the discharged debts.
Dischargeable debts: Those debts that may, by bankruptcy law, be discharged (eliminated) by a bankruptcy action. See also non-dischargeable debts.
Disputed debts: Those debts that a debtor claims are in error, either in part or in whole.
Equity: The value of a debtor’s interest in property that remains after all liens or creditor’s interests (such as a mortgage) are deducted.
ERISA benefits: Payments made to a person under a pension or retirement plan that qualifies under the Federal Employees Retirement Income Security Act. IRAs, KEOGHs, and many other pensions are ERISA plans. Ask your retirement plan administrator.
Execution: The process of seizing and selling property under a court order or judgment for a money judgment against a per- son or entity.
Exempt property: Property that may not be seized, repossessed by a private creditor, or executed against by a government agent because of debts that the owner has incurred. Property may be exempt either based on state or federal law.
Family farm bankruptcy: A Chapter 12 bankruptcy. Similar to a Chapter 13 bankruptcy, but which is only available to those debtors who fit the description of a “family farmer.”
Group Insurance: A single insurance policy under which a group of persons is covered. Often, employee insurance plans are based on group insurance policies.
Insider: Any relative of an individual debtor.
Health aids: Items or material that a person uses to maintain his or her own health, such as a wheelchair.
Health benefits: Payments made to a person under a health insurance policy.
Homestead declaration: A document that is placed on county property records which asserts your homestead exemption. Filing such a declaration is a requirement in certain states in order to take advantage of your homestead exemption. Check your state’s listing in the Appendix.
Homestead exemption: A state or federal exemption that protects a personal residence from being seized to pay for the owner’s debts. Is often limited to only a certain dollar value.
Household goods: Non-disposable items that are used to maintain a household, such as dishes, utensils, pots and pans, lamps, radios, etc.
Joint petition: A single bankruptcy petition filed by a husband and wife together.
Judgment lien: A real estate lien that has been established by a court order or judgment. The lien is recorded on official re- cords and generally must be satisfied before the property is sold.
Judgment: The final determination by a court of the matter before it.
Liquidate: To sell a debtor’s property and pay off any debts. To finally settle all debts.
Liquidation bankruptcy: A Chapter 7 bankruptcy. A bankruptcy in which all non-exempt property is sold to pay off all debts.
Lost future earnings: The amount of money awarded in a personal injury lawsuit to cover the amount of future income that the plaintiff is determined to have lost because of the injury.
Mailing label matrix: A particular column and row arrangement of mailing addresses. It is required by many bankruptcy courts in order to make duplicate mailing labels for notification of creditors and other parties to a bankruptcy.
Necessities: Items that are necessary to sustain life. Generally, food, clothing, and medical care are considered necessities.
Non-dischargeable debts: Those debts that cannot be eliminated in a bankruptcy proceeding. Certain taxes, student loans, alimony, child support, and other debts are non-dischargeable. See also dischargeable debts.
Non-purchase money debt: A debt that is incurred other than to purchase the collateral for the debt, such as a home equity loan.
Pain and suffering payments: The amount of money awarded in a personal injury lawsuit to cover the amount of pain and suffering that the plaintiff is determined to have suffered because of the injury.
Pension benefits: Benefits that a person receives or will receive upon retirement. Generally received from some type of pension fund.
Personal injury causes of action: The right to file a suit and claim a right to compensation for personal injuries that may have occurred.
Possessory lien: A right to seize and sell property that attaches to the property by law, such as a moving company’s right to sell property which it has moved and which has not been paid for.
Possessory no-purchase money debt: A debt that is incurred other than to purchase the collateral for the debt, and for which the creditor obtains possession of the collateral, such as a loan by a pawnshop for a pawned item.
Priority claims: Those claims for unsecured debts that, by law, are to be paid off in a bankruptcy before any other unsecured debts are paid. The most common priority claim is for the payment of taxes.
Proof of Claim: A written statement describing why a debtor owes a creditor money. There is an official form for this.
Proof of Service: An official statement under oath that a person has delivered to (served) another a specific legal document.
Reaffirmation of a debt: An agreement by a debtor to pay off a debt, regardless of bankruptcy. Must be approved by both the creditor and the bankruptcy court. A reaffirmed debt is not eliminated by bankruptcy, even if the debt was dischargeable. Generally done for the purpose of keeping collateral or mortgaged property that would otherwise be subject to repossession.
Redemption of property: In bankruptcy, a debtor may purchase personal property that is subject to a creditor’s lien by payment of the market value of the property.
Reorganization bankruptcy: A Chapter 11 bankruptcy under which a business attempts to reorganize its affairs in order to satisfy its debt obligations.
Repossession: The taking, by a creditor of a defaulted-upon loan, of the collateral for the loan.
Retirement benefits: Those benefits that are paid to persons by reason of their retirement from a job or by virtue of their employment for a certain number of years.
Tools: Those items that are necessary to perform a certain type of work. For bankruptcy, any items that are used in a trade or business may generally qualify as a tool, including computers, motor vehicles, etc.
Unsecured nonpriority debts: Those debts that have no collateral pledged and which are not priority debts by law.
Unsecured priority debts: See priority claims.
Voluntary bankruptcy: A bankruptcy that is voluntarily filed by the debtor in an effort to obtain relief from debts.
Wages: The amount of money paid on a regular basis for work.
Wrongful death benefits: The amount of money awarded in a wrongful death lawsuit to compensate the plaintiff for having to live without the deceased person.