What is a bankruptcy?
Bankruptcy is a right to file for protection from your creditors in Federal Court. This is a legal process by which you can eliminate or reduce your debts when you can no longer afford to pay what you owe creditors. Once the bankruptcy case is filed, creditors cannot collect debts from the bankruptcy debtor or sue the debtor to obtain a judgment. It is advisable to have a bankruptcy attorney assist you during this process, so you fully understand options available to you. People who represent themselves typically make mistakes that end up complicating the process.
Bankruptcy is not the only method of dealing with too much debt. In some situations, another method may be more advantageous to the debtor than filing bankruptcy. Such alternatives may include an out-of-court settlement with creditors, reduction of payments to creditors, attaining help from a consumer credit counseling agency or payment of debt by sale of assets or borrowing on assets. However, these methods require cooperation from creditors and the bottom line is, most of the time that cooperation is not given.
There are different types of bankruptcies for different kinds of situations. A bankruptcy attorney can help you determine what is in your best interest. These types of bankruptcies are referred to by their chapter number in the bankruptcy code. The two most common types of bankruptcies filed are Chapter 7 and Chapter 13.
Which bankruptcy do I need?
A Chapter 7 bankruptcy is designed for individuals in financial trouble, who no longer have the ability to pay their debts. By filing a Chapter 7, you can eliminate or discharge the following types of debts:
- Credit cards
- Signature loans
- Medical bills
- Most Court judgments
- Certain IRS debts
The purpose of a Chapter 7 bankruptcy is to give you a “fresh start” by discharging your obligation to pay the debts listed above, while at the same time allowing you, in most situations, to keep your home and other exempt property.
- Wage garnishments
- Creditor harassment
The filing of a Chapter 7 is a fairly simple process, if you follow the required guidelines. It is advisable to have a bankruptcy attorney assist you, so you fully understand the process and procedures. In order to qualify for a Chapter 7, your income must be below the median income in your state. Your assets must also be exempt. If you have assets that are not exempt, you have the choice of either turning the asset over to the assigned Chapter 7 Trustee for liquidation to pay your creditors, or arrange a “buy back” from the Trustee.
In most cases, the Trustee does not want to take your assets; they simply want you to pay the difference between what you own and what you are allowed to own in the Chapter 7 bankruptcy. If you cannot afford to buy the asset back in the Trustee’s time frame, you can elect to file a Chapter 13 bankruptcy and buy back the asset over a three (3) year period. In exchange for having your debts discharged, the debtor must turn over (or buy back) all property from their assigned Chapter 7 bankruptcy Trustee. The only assets or property the Debtor is allowed to keep will be the assets or property which Florida law deems exempt. A bankruptcy is designed to allow the debtor a fresh start. In most Chapter 7 cases, all assets and property is exempt, and so the debtor keeps all of his/her property.
The principal advantage of Chapter 7 is that the debtor emerges from bankruptcy without any future obligations on his or her discharged debt, except for certain debt that public policy dictates should not be wiped away. For example, debts incurred through fraud, student loans, income tax debt owed to the IRS (there may be an applicable exception to this rule) or debts for child support and alimony.
For more information on Chapter 7 bankruptcy, please visit our Chapter 7 bankruptcy page.
A Chapter 13 bankruptcy is a repayment plan for debtors with an ability to pay something to creditors, even if they cannot afford to pay the whole amount. What dollar amount the Debtor pays back depends on his/her specific situation. Chapter 13 bankruptcy allows relief from creditor collection, without liquidating the debtor’s assets. A Chapter 13 bankruptcy allows an individual or family with steady income to repay their debts over a period of time, according to a Court approved plan. Depending on your particular circumstances, you may only be required to payback a fraction of your debts in a Chapter 13 bankruptcy.
A Chapter 13 bankruptcy can also be used to stop a foreclosure action and allow you to either modify your current mortgage or catch-up any arrears owed to your mortgage lender, over a sixty (60) month time period.
- Immediately stop foreclosures or other lawsuits
- Modify your mortgage
- Catch-up missed or late house or car payments
- Immediately stop wage garnishments
- Prevent automobile repossessions
- Restructure auto loans
- Strip off and discharge second mortgages or home equity loans on your primary residence
- Stop penalties and interest on outstanding IRS debts
- Repay other debts at a fraction of their balance
If the filing of a Chapter 13 bankruptcy is appropriate under your particular circumstances, we will work with you to develop a plan, based upon your household budget, to have your creditors paid off within three to five years.
A Chapter 13 is the best option for someone that has a steady, reliable source of income and is able to pay back some of his/her debts. A Chapter 13 case is a debt reorganization bankruptcy most often used by individuals who want to try to modify their mortgage, or catch-up on a past due mortgage or car loan payments, and keep their assets. In some cases, an individual may qualify for a Chapter 7 due to their income, but because they have assets that are not exempt (which they wish to keep) or because they wish to modify their mortgage or catch-up on arrears to a secured creditor, they find themselves in a Chapter 13. In such cases, the debtor is only obligated to pay their unsecured creditors a small amount, over a three to five (3 to 5) year period. Many times the result is creditors only get pennies on the dollar.
Upon the successful completion of the Chapter 13 Plan, a debtor will obtain a discharge of the debt. A Chapter 13 repayment plan can be more advantageous than a liquidating bankruptcy for those who are behind on their home mortgage or car loans, and for other reasons. For instance, some of the debt that cannot be discharged in a Chapter 7 can be discharge in Chapter 13, once the Debtor completes the Chapter 13 Plan. Also the Debtor can pay some non-dischargeable federal taxes over the term of the Chapter 13 Plan, without penalty and interest accruing. However, Chapter 13 can only be filed by an individual debtor (not by a Corporation) and only if the total debts are less than certain limits for secured and unsecured debts. Currently, most of our clients who file for Chapter 13 bankruptcy do so as a vehicle for obtaining a mortgage modification to reduce the payment and/or the interest rate on their mortgage.
For more information on Chapter 13 bankruptcy, please visit our Chapter 13 bankruptcy page.
As I mentioned, debtors in bankruptcy get to keep certain property the law permits, in order to make a fresh start. What the exemption process means is that a Chapter 7 Trustee cannot sell your exempt property for the benefit of your creditors. Here are some of the most common examples of exempt property under Florida law and the bankruptcy code.
- Homestead (specific exceptions apply)
- $1,000. Equity in a vehicle
- Wages (head of a household)
- Retirement plans (IRS qualified plans)
- Disability/ social security income benefits
- Professionally prescribed health aid
- $1,000. Personal property
- $4,000. Wildcard personal property (if no homestead exemption).
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