There’s no magic formula for deciding when bankruptcy is the right choice. It’s an option you might consider if you are paying only minimum amounts on your bills, can’t budget yourself out of debt within five years or are getting notices that your mortgage or loans are being foreclosed. It’s an alternative when you’ve had a severe financial setback, such as losing your job or a major client, a divorce or a costly illness.
The Basics
Bankruptcy is a federal law, which means you’ll find the same rules in all states, with a few exceptions.
If you’re an individual or a sole proprietor, you can file a Chapter 13 bankruptcy to pay off all or part of your debts over three to five years. Rather than wiping out debts immediately, this option allows you to reorganize them so you have time to pay.
Many people who file Chapter 13 bankruptcies have mortgages or other loans they would like to bring current, so they don’t lose their homes or other property. Others have taxes, child support or student loans that can’t be wiped out by Chapter 7 bankruptcy, or have moral convictions that all debts should be paid no matter how long it takes. You’ll need a stable income with disposable income (income left over after you pay the bare necessities of life such as shelter, food and utilities) to file a Chapter 13 bankruptcy. You must have no more than $807,750 in secured debt (debt involving property that your creditor might take if you don’t make your payments) and $269,250 in unsecured debt. The court filing fee is $160.
With minor exceptions, anyone can file a Chapter 11 bankruptcy. Typically, it’s filed by business owners who want to keep the business running and catch up on their debts. Individuals with very complex financial situations also file Chapter 11. The filing fee is $800, plus a quarterly fee based on the amount of debt.
Chapter 7 bankruptcies are filed most often by individuals or small, mom and pop business owners who have too much debt to file Chapter 13, or want to wipe their financial slate clean. The filing fee is $175. In exchange for canceling most debts, you give up certain kinds of property to be sold for your creditors. If you’re an individual, some property, such as portions of equity in your car or home, is exempt from creditors; exemptions vary by state. Entities are not entitled to these exemptions. Debts for individuals are wiped out in not more than six months.
Family farmers can file a Chapter 12 bankruptcy, called a “reorganization for family farmers,” if your debts aren’t higher than $1.5 million and at least 80 percent of the debt and 50 percent of their income comes from farm operations. The family must own at least 50 percent of the farm operations and 80 percent of the farm assets, and there cannot be any publicly traded stock.
Alternatives to bankruptcy include trying to negotiate with creditors to reduce monthly payments or to skip some payments, or to get help from a nonprofit credit counseling group.
Bankruptcy is reported on your credit for up to 10 years, and you’ll have difficulty getting credit right after a bankruptcy. It usually takes at least three years to reestablish your credit rating.
Bankruptcy doesn’t get rid of all debts. Among those excluded are alimony, child support, recent back taxes, student loans, recent large purchases, fines or penalties of government agencies, and fraudulent debts.
Getting Help
Bankruptcy Lawyers can be a big help in giving you the important information you need when deciding whether to file bankruptcy, so you probably want to at least talk to a lawyer before filing. A lawyer can advise you on what bills to pay or not to pay (and when), and how to maximize the amount of property you can keep after the bankruptcy is finished.
The best way to find a good bankruptcy lawyer is by asking for referrals from people you know who have been through a bankruptcy and were happy with their lawyer. You can also check with legal clinics run by bar associations, law schools or legal aid offices. There is also a National Association of Consumer Bankruptcy Attorneys, but membership doesn’t guarantee user-friendliness or competence.
Keep in mind that lawyers tend to specialize in either consumer (individual) or business bankruptcy as well as in either creditor or debtor work — make sure you find one whose experience fits your needs.
Some questions about lawyer fees you may want to ask include whether there is a flat fee or whether you’ll be charged by the hour, whether office expenses are included in the fee, and whether you can make payments over time (if you are considering a Chapter 13 bankruptcy).
If you’re undecided about whether you should file bankruptcy, set aside at least $3,000 in a place your creditors can’t access (like a cashier’s check in your desk drawer), so you know you’ll be able to afford a lawyer no matter what happens.
What’s Next?
While most people find the decision on whether or not to file bankruptcy very difficult, many who’ve gone through with it discover the process itself is relatively easy.
Any individual, corporation or partnership can file in the United States Bankruptcy Court in your state nearest your residence or main place of business.
You have to fill out forms detailing all your income, property and debts, and provide the court with the names and addresses of all your creditors. Within a few days of filing the bankruptcy, the court sends a notice of the filing to all the creditors, which prevents them from continuing with any kind of collection, including garnishing your wages (except after a default judgment against you), foreclosing on or repossessing your property, or suing you.
You will be assigned a trustee, who calls a meeting of all the creditors. At that meeting, you’ll be put under oath and asked questions about your property, debts and income.
In a Chapter 7 bankruptcy, the purpose is to find assets that can be sold by the trustee to pay your creditors. In Chapter 13 bankruptcy, the trustee will be trying to figure out whether your plan to pay back your creditors is fair and realistic. Any creditors who show up also have the right to ask you questions or voice any objections they might have to your payback plan. If you’re under criminal investigation, you’ll want to have a criminal defense lawyer with you so you don’t say anything that could harm you in a criminal case.
In a Chapter 13 bankruptcy, the judge will approve or reject your proposed payback plan in a confirmation hearing. The trustee or a creditor may object, saying that the plan is not submitted in good faith and you’re just stalling. They may claim the plan isn’t feasible because you won’t be able to make the payments, or that the plan favors one creditor over another. Even if the judge doesn’t approve your payback plan, you’ll probably be allowed to propose another plan. If your plan is approved, the trustee collects monthly amounts from you and passes those out to your creditors. Once the plan’s complete, most types of debts will be discharged.
Chapter 13 bankruptcies involve payback plans spread out over three to five years, which are processed by court-appointed trustees.
In a Chapter 11 bankruptcy, you keep operating your business and act as your own “trustee.” You must file monthly financial statements and cooperate with creditors, who form a “creditor’s committee” to keep tabs on how you’re doing. If you mismanage things or are dishonest with your creditors, the judge can appoint a trustee to oversee your business. With certain exceptions, a Chapter 11 bankruptcy payback plan must be approved by one-half of each type of creditor and the holders of two-thirds of the number of claims affected by the plan. In order for the judge to confirm the payback plan, any creditor affected by the plan who does not approve must be paid at least as much as if your property was being liquidated under a Chapter 7 bankruptcy.
Chapter 13 bankruptcies involve “payback” plans spread out over three to five years, which are processed by court-appointed trustees.
Attorneys’ fees tend to be higher with Chapter 11 bankruptcies, because many of the steps require court approval.
In a Chapter 7 bankruptcy, the trustee will sell the property that you are not able to keep at auction and use the money to pay your creditors according to how much is owed to each of them. Trustee administration and attorneys’ fees will be among those paid first, then any taxes owed, then wages up to $4,300 and contributions owing to employee benefit plans, then alimony or child support, then federal, state and local taxes. You can enter into an agreement with a debtor to “reaffirm” a debt by agreeing to continue making the payments owed and meet other requirements of the bankruptcy laws. But you will continue to owe the entire debt, you can lose the property if you don’t make the payments, and the creditor can sue you after you have “reaffirmed” the debt if you don’t live up to your agreement. In short, these agreements can be complicated and difficult to satisfy and should be discussed carefully with an attorney.
No one looks forward to filing a bankruptcy, but the legal process itself doesn’t have to be drawn out or confusing. A little information and planning can go a long way.
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About the Author:
Bryan Sanchez is a Rancho Cucamonga bankruptcy attorney that provides useful resources online for those that suffer from bankruptcy. Along with bankruptcy Bryan is a Rancho Cucamonga Divorce lawyer as well.
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