Know the Facts About Bankruptcy

You’re looking for options and bankruptcy is something you want to know more about. You’re wondering what kind of option if any, bankruptcy is.  The facts about bankruptcy are always useful to know in case you need a way out of debt. Most financial advisors will not suggest bankruptcy as an option to debt relief.  The adverse effects of bankruptcy are detrimental to your credit score and affect your ability to grow financially in a credit-based economy backed up by credit history and reliability.

You may not know it, but the Founding Fathers believed everyone had the right to a fresh start and guaranteed the right to declare bankruptcy in the US Constitution.  The US Bankruptcy code provides a detailed description of the various ways in which one can do this when burdened with more debt than one can handle. In 1934, the law was expanded and amended for the benefit of those admittedly declared unable to meet financial obligations of debt incurred with creditors.  After which, people could rebuild their status and try again without being impeded by debt.

Getting the code on bankruptcy – the basics

Today, the U.S. Bankruptcy code of law contains six different chapters or parts. The most recent change to the law was made in 2005 when people in debt were reacting to the economic pressures of the recession.  This change was made to make adjustments and protect both creditors and debtors.

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    The way bankruptcy court works is simple.  Each one of the US 50 states has one or more bankruptcy districts out of the total number of bankruptcy districts in the country which is 90.  A bankruptcy judge presides and makes the final decision in each case under her jurisdiction. Judges not only decide if debtors should be discharged of their debt, but they are also the ones that determine what chapter of bankruptcy applies to the case.  Most often, debtors don’t even see the judge. They only time debtors and judges can meet is during a session called the 341 meeting held in connection with each case. In this meeting, debtors are allowed to question the judge. However, in practice, these meetings are rarely conducted.

    The following are the Bankruptcy Code’s six chapters or parts by which individuals, organizations, or groups may choose to adopt.

    Chapter 11 – Reorganization

    When the goal of an individual, a company, or other organization is to reorganize with a plan that is approved by the bankruptcy court, this is the type of filing most commonly made. In this chapter, debtors are given time to reorganize their finances but are still held accountable for paying creditors.  Debtors are afforded the right to continue paying for their living expenses and operate their businesses but only for a certain amount of time. It’s like putting things on freeze control. However, the plan must be approved by the creditors and the judge within 120 days after initial filing has taken place.  In cases when the entity applying for bankruptcy is an individual, a disclosure statement must be provided to creditors who will analyze and agree on it. Chapter 11 bankruptcy allows repayment of only a percentage of the original balances and discharges certain debts. The bankruptcy trustee assigned to the case will distribute payment to creditors according to this plan.

    In this chapter, the debtor provides a debt repayment plan and schedule that will start no later than after a period of three years.  The court may increase this term to 5 years under certain circumstances. The goal is to allow the business o individual to continue operating while repaying the debt.

    Chapter 9 –  Municipal Adjustment of Debts

    Chapter 9 of the Bankruptcy code applies only to cities and towns o any other municipality.  It also consists of or a reorganization plan that must be approved by the court. As in the above chapter 11 case, the obligation to pay creditors is lessened to only a portion of the balance.

    Chapter 15 – Ancillary and Cross-Border

    The goal of this chapter is to make the US laws of bankruptcy and the laws of bankruptcy of other countries applicable to a business beyond the US border.   In other words, companies may take advantage of either the US or another country’s bankruptcy law as deemed most favorable to the business entity.

    Bankruptcy laws most likely to affect you

    The bankruptcy laws and chapters most likely to affect people and businesses in the United States are Chapters 7 and 13.

    Chapter 7 – Liquidation

    Like the title implies, this chapter applies to the act of liquidating a person’s assets to pay off debt. A bankruptcy trustee will be assigned by the court of bankruptcy in its district to help the debtor liquidate all qualifying assets following the necessary legal procedures provided by the law. The assets that can be liquidated first are those that were secured using types of collateral such as the equity in a home or automobile. However, most people do not have assets that can be liquidated.  There are two types of assets in this chapter, those that are exempt and those that aren’t.

    Not exempt assets

    In this group are included coin collections, stamps, and other valuable collectibles.  Musical instruments are not exempt unless the debtor is a musician. Cash in bank, bonds, stocks and different types of securities are not exempt, neither is a vacation home or a second truck.

    Exempt assets that cannot be liquidated

    The exempt assets that cannot be liquidated include some of the equity in a home, motor vehicles valued at a certain amount, clothing, pensions, valuable jewelry, unpaid but earned wages, tools of the debtor’s trade, public benefits, and personal injury damages awards.

    After all the personal assets are excluded, there is not much left to liquidate for the vast majority of individuals. When this is the case, and there aren’t enough assets to pay off the lenders the court will most likely discharge all the debts that fall into the category of dischargeable. There are certain debts that cannot be discharged, these are child support, alimony, student loans,  government-mandated restitution and penalties, court fees, personal injury damages debt, certain condominium dues and fees, and debts that were not discharged previously due to fraud, debts owed to individual pension plans, and recent federal, state, and local taxes.

    The “mean test”

    Because chapter 7 has been abused, certain amendments have been created including one known as the “mean test.” It involves the investigation of the debtor’s income to determine whether the individual earns more than the qualifying benchmarks require. In which case, the person or entity would be able to qualify for chapter 7.

    When this occurs, the person will automatically be considered for chapter 13 bankruptcy.   Those who qualify for chapter 7 will be required to undergo credit counseling by an approved agency within 80 days and be able to submit a certificate of completion 15 days after filing for bankruptcy.  If a repayment plan has been agreed upon between the debtor and the creditor, a copy of this plan must be submitted and approved by the trustee and the judge.