Frequently asked questions
The idea behind bankruptcy laws is to provide a tool to those debtors who due to their economic situation do not have the money to pay their debts and give them a new opportunity (“fresh start”).
The objective of the debtor is to obtain a discharge or exoneration of all those debts that are exonerable. The discharge or exoneration, also known as rehabilitation, is an order of the court by means of which a federal bankruptcy judge declares that the debtor is not legally responsible for those debts that are dischargeable, thus eliminating the legal resources that may have their creditors for the collection of said debts.
There are generally two types of bankruptcy that help protect people who are experiencing financial situations that do not allow them to pay their creditors: Chapter 7 and Chapter 13 of the Bankruptcy Code, explained later.
Then there are the Chapter 11 processes that generally apply to people who have assets above the debt limits established for Chapter 13 and want to protect those assets against collections from their creditors.
Generally, filing a bankruptcy petition sets in motion a legal mechanism called an “automatic stay”. This mechanism stops all legal collection processes against the person and also forces creditors to stop all contact with the person who declares bankruptcy. Because of this, property eviction or eviction processes, property auctions, vehicle repossessions, wage garnishments, and bank accounts are stopped.
The goal of Chapter 7, also called direct bankruptcy or liquidation, is to give the debtor a fresh start. Chapter 7 seeks to eliminate all those dischargeable debts, which are the majority of debts. In these types of cases, the court appoints an administrator or trustee to determine if there are nonexempt assets that can be sold or liquidated to pay creditors. However, in most of these cases all or nearly all of the debtors’ assets can be exempted, and generally the debtors end up keeping all of their assets.
Among the top reasons people do not file for protection under Chapter 7 bankruptcy laws:
- Your current monthly income is above the median income for a family the size of yours set for your state. Your current monthly income is calculated by taking the average of the income that you have had during the last six months.
- Your current monthly income is below the median income for a family the size of yours set for your state, but after paying all your regular expenses you still have money available to pay your creditors.
- You filed a Chapter 7 bankruptcy within the past eight years.
If this is the case for you, you could explore filing for Chapter 13 Bankruptcy. Also, there are situations in which even though you may qualify for Chapter 7, it would be more favorable for you to file Chapter 13.
Chapter 13 of the Bankruptcy Code is a process that takes three to five years. The person files a petition to the bankruptcy court requesting protection since he cannot pay all of his debts. The person presents a debt payment plan to the court.
The court appoints an administrator who checks your monthly income and expenses, and manages the plan’s payments. One of the main advantages of Chapter 13 is that the person deals with his creditors in the same process.
The monthly payment varies depending on the type of debts that the person has. Certain debts must be paid in full as “priority debts” (such as certain state or federal taxes, alimony obligations, etc.); arrears in the payment of your mortgage or vehicle loan; and liens on his assets, among others. On the other hand, most debts with unsecured creditors are partially paid according to the possibilities of the person. Generally, unsecured debt balances are discharged at the end of Chapter 13.
Among the main reasons people request Chapter 13 protection are:
- The person does not qualify for Chapter 7.
- The person wants to pay his creditors without incurring the payment of more interest and having a fixed monthly amount.
- The person is behind on their mortgage payment, the creditor wants to auction off the property, and the person wants to stop the auction and catch up on the mortgage payment.
- The person has two home loans on her residence, the value of her residence is less than what she owed on the second loan, and the person wants to eliminate the second loan.
- The person is behind with the payment of his vehicle, the creditor intends to regain possession of the vehicle and auction it, and the person wants to stop the repossession and catch up on the payments on the vehicle.
- The person owes a lot of money to the treasury for non-dischargeable taxes and needs protection against wage or bank account garnishments.
- The person has assets with high capital gains (what they owe on those assets is less than the asset is worth and can be auctioned off and paid to creditors with the profit), has exhausted their exemptions, and wants to keep those assets.
Chapter 13 offers you the same protections as Chapter 7, in addition to protecting assets that could not be exempted and allowing you to make payments that are generally much lower than the payments you would have to make if you did not file for protection under Chapter 13.
Some debts are considered nondischargable and therefore, even if the person receives a discharge, the debt survives the bankruptcy and the creditor can collect the debt once the person has filed for bankruptcy. The following are examples of debts that are not dischargeable and usually survive bankruptcy:
- Certain debts due to state or federal taxes owed.
- Debts due to past due alimony.
- Debts acquired in divorce or separation proceedings in favor of the former spouse or a child.
- Debts for fines and penalties in favor of a government entity.
- Student loans.
Among the main benefits people generally get from filing bankruptcy are the following:
- Temporarily stops foreclosure, eviction or eviction processes, giving the person more time to make a reasoned decision and, depending on the type of bankruptcy, gives the person the ability to catch up on mortgage payments or It gives you time to find where to relocate.
- Stops harassment, calls at inappropriate times, calls to your employer’s office, collection letters, among others, from your creditors.
- Stops garnishments on bank accounts and wages.
- It gives the person the peace of mind that comes from knowing that you are coping with their situation and are on the way to finding a solution.
- Once you get the discharge, they usually help you improve the person’s credit.
The benefits and peace of mind that a bankruptcy case can provide are many. Bankruptcy laws are complex and that is why you need a professional with experience in this area of law to help you navigate them. Contact us today and let our experience work for you.