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Scura, Wigfield, Heyer, Stevens & Cammarota Blog

Bankruptcy May be the Best Option in Troubled Times

[fa icon="clock-o"] January 5, 2010 [fa icon="user"] Scura Law Firm [fa icon="folder-open'] Bankruptcy, Chapter 13, Chapter 7

economic downturn graph2009 is the third consecutive year that bankruptcy filings rose across the country. More than 1.3 million people filed for bankruptcy during the 2009 fiscal year, marking a 35 percent increase in filings from 2008. While the majority of these filings were individuals seeking protection under the bankruptcy code, business filings also increased by 63 percent since last year.

Even as national commentators declare the worst of the economic downturn over, the number of bankruptcy filings will likely continue to rise: the national unemployment rate recently topped 10 percent for the first time since 1983 and another batch of adjustable rate mortgages are scheduled to reset in 2010.

People often view bankruptcy negatively, believing it to be a black mark on their record or a sign of financial irresponsibility. Far from a black mark, bankruptcy offers the opportunity to both get out of debt and start fresh.

Chapter 7 Bankruptcy- Liquidation

Chapter 7 bankruptcies, also known as a "liquidation" or "debt discharge" bankruptcies, are generally good for individuals or families with heavy consumer debt they are unable to repay, such as credit cards and car loans.

Once an individual files for a Chapter 7 bankruptcy, the court will issue an automatic stay. The automatic stay prevents creditors from taking any further action to try to collect the money owed to them, including garnishing wages.

During a Chapter 7 bankruptcy, the bankruptcy court will appoint a trustee to determine whether the debtor owns any property that can be sold to repay some or all of the debt owed to the creditors. Some types of property, however, are exempt from liquidation, including the family home and car, reasonably necessary household goods and furniture, depending upon the value of the asset.

Other types of property, like a second home or car, may be subject to liquidation. If the debtor owns property that is not exempt from liquidation, the debtor must either turn the property over to the trustee for sale, pay the trustee the fair market value for the property, or convert their Chapter 7 case to a Chapter 13 and propose a payment plan to cover the value of the non-exempt property. Secured property that is still under a loan, like a house or car, also may have to be returned to the creditor. The majority of people who file for Chapter 7 do not own any property that may be liquidated.

At the end of a Chapter 7 bankruptcy, the bankruptcy court will discharge any remaining debts owed by the debtor that have not been paid off during liquidation, giving the debtor a clean slate to start over. Some types of debt, however, cannot be discharged through bankruptcy, including certain tax debts, student loan debt, unpaid child support and, in some cases, spousal support.

Chapter 13 Bankruptcy- Individual Reorganization

Chapter 13 bankruptcies also are referred to as "reorganizations" because this type of bankruptcy allows the debtor to reorganize their debts and pay them off during a 3-5 year repayment period. Chapter 13 bankruptcies are most frequently used by an individual trying to save a home from foreclosure. Where an individual is behind on mortgage payments, a Chapter 13 can be used to take the amount they have fallen behind and restructure the back due amount over a 60 month or 5 year plan. Chapter 13 bankruptcies may also be used by individuals who have enough disposable income that they will be able to pay off some or all of their debts within this period of time. In a Chapter 13 bankruptcy, the debtor may design his or her own repayment plan, subject to court approval. The plan must include a proposal for how the debtor will pay off priority debts, secured debts and unsecured debts.

  • Priority debts include items like child and spousal support and back taxes. These debts must be paid in full, including any unpaid back amounts (arrears) that are owed.
  • Secured debts include items like car and house loans where the debtor gave the creditor a property interest in exchange for the loan. The repayment plan must include regular payments on secured debts.
  • Unsecured debts include items like credit card bills and hospital bills. The debtor should include payments for these items with any remaining disposable income after paying the priority debts and secured debts. Unsecured debts, however, do not have to be paid in full by the end of the repayment plan. In most cases, unsecured creditors receive a lower percentage then they are actually owed and interest is not paid.

At the end of the repayment plan period, the court will discharge any remaining debts owed by the debtor. These may include all or some of the debtor's unsecured debts.

If the debtor cannot finish out the terms of the repayment plan, the court may dismiss the Chapter 13 petition and the debtor will be back where he or she started. If the debtor cannot finish the plan for a reasonable cause, such as a sudden job loss or illness, then the court may allow the debtor to amend the current repayment plan, discharge some of the debts owed by the debtor due to hardship or allow the debtor to convert the bankruptcy filing to a Chapter 7.

Unlike those who file under Chapter 7, debtors who file under Chapter 13 usually do not lose any property. In fact, Chapter 13 debtors may keep their assets and, if they are behind on such obligations as mortgage payments, may be able to prevent foreclosure.

Chapter 11 Bankruptcy - Business Reorganization

Chapter 11 bankruptcies also are referred to as "reorganizations." Businesses seeking to reorganize their debts generally file under Chapter 11, but it may benefit some individuals as well. The greatest advantage offered by Chapter 11 over Chapter 13 bankruptcies is that there is no cap on the amount of debt a debtor may have to qualify for the bankruptcy.

In a Chapter 11, the debtor - also known as the "debtor in possession" - normally remains in control of business operations while the court retains oversight and jurisdiction over the business. The debtor in possession is required to operate the business in the best interests of the creditors. Any reorganization plan submitted by the business must be approved by the business's creditors. However, in some cases, the business may be able to override the creditors' objections and still have the plan approved by the court.

Like other bankruptcy petitions, businesses that file for Chapter 11 protection are granted an automatic stay. The automatic stay prevents anyone from filing new lawsuits against the business and also stops any pending litigation until the outcome of the bankruptcy. Filing for a Chapter 11 bankruptcy also allows the business to cancel certain contractual agreements, such as real estate leases and supply contracts, if it is in the business' and creditors' best interests to do so.

If the debts owed by the business are greater than the assets owned by the business, then the creditors will become the new owners of the business when the restructuring is complete and it emerges from bankruptcy.

Conclusion

You do not have to feel ashamed or irresponsible if you have fallen behind on your bills and cannot repay all of the debts you owe. The bankruptcy laws were designed to help people who find themselves in this position, especially in difficult economic times. For more information on your bankruptcy options, contact an experienced bankruptcy lawyer today. The attorney can explain the different types of bankruptcy, their advantages and disadvantages and help you determine the best course of action for you.

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