Bankruptcy is the process where an individual debtor or business seeks relief through the Federal Court System when they unable to repay their debts. Bankruptcy proceedings are supervised by the United States Bankruptcy Courts and a Trustee is assigned to divide the debtor’s non-exempt assets among his creditors to resolve his outstanding debt. Once the court orders the bankruptcy discharge, the debtor is released from any future liability for the discharged debts and his creditors are prohibited from attempting to collect those debts in the future.
Filing a Bankruptcy Petition places an automatic stay on collection or enforcement of debts and temporarily prevents lenders from initiating or completing foreclosure proceedings against the debtor's home. The automatic stay also stops wage and bank account garnishments.
Automatic Stay The automatic stay is one of the most powerful tools of Bankruptcy. Once the debtor’s Bankruptcy has been filed with the court, the automatic stay immediately goes into effect and prevents creditors from making direct contact with the debtor. It also prevents lawsuits from being filed against the debtor, stops wage garnishments and prevents vehicle repossession and puts foreclosure proceedings on hold.
If a creditor contacts a debtor while the automatic stay is in place, the creditor may be subject to sanctions for violating the automatic stay. The creditor may apply to the court for relief from the automatic stay in order to get permission to move forward with foreclosure proceedings.
The Bankruptcy Trustee
A Bankruptcy trustee is appointed by the court to administer the debtor's Bankruptcy estate. In a Chapter 7 Bankruptcy, the trustee’s job is to locate and collect the debtor’s non-exempt assets and to sell and distribute these assets to the creditors. In a Chapter 13 Bankruptcy, the trustee’s role is to supervise the debtor’s preparation and approval of his Chapter 13 Repayment Plan. After a Bankruptcy plan is approved by the court, the trustee collects the debtor’s plan payments and distributes the money among the debtor’s creditor pursuant to the terms of the Bankruptcy plan.
Chapter 7 Bankruptcy Basics
The most common type of consumer Bankruptcy filing is a Chapter 7 Bankruptcy. A Chapter 7 Bankruptcy enables consumers to discharge or eliminate unsecured debt, such as credit card debt, medical bills, payday loans, personal loans and balances owed on reposed vehicles or foreclosed property. A Chapter 7 discharge releases the individual debtor from liability for debts and as soon as the Chapter 7 Bankruptcy petition is filed, the automatic stay becomes immediately effective and bars creditors from taking collection action, stops wage garnishment and puts foreclosure and repossessions on hold.
In a Chapter 7 Bankruptcy, the trustee collects and sells the debtor’s non-exempt assets and distributes the proceeds to the creditors. The debtor may be able to exempt some of the assets, which may include certain pensions and Public benefits, such as Social Security, Unemployment, Worker’s Compensation and Veteran’s Benefits, Annuitys, Disbality benefits, Life Insurnace Cash Value, certain Death Benefits and a portion of the debtor’s interest in their home, vehicles and major appliances.
Not all debtors qualify to file a Chapter 7 Bankruptcy. In order to file a Chapter 7 Bankruptcy, the debtor must qualify under the “means test.” If a debtor’s household income is less than the median income for their family size, the debtor will likely qualify to file a Chapter 7 Bankruptcy.
Chapter 7 Bankruptcy Discharge
The Chapter 7 discharge is a court order permanently releasing the debtor from all dischargeable debts incurred prior to the Bankruptcy filing. Creditors are prohibited from contacting the debtor or taking any further collection action on the debts discharged in the Chapter 7. If a creditor violates this court order and tries to collect the discharged debt, they may be sanctioned by the court. If a debtor completes all of the Chapter 7 Bankruptcy requirements and there are no objections to the discharge, the debtor will be discharged from all dischargeable debt and will receive a Notice of Discharge within 4-6 weeks of the discharge order.
The types of debt that are typically dischargeable under a Chapter 7 Bankruptcy are credit card bills, Medical bills, Personal loans, Payday loans, Certain judgments, Bank lines of credit and Certain mortgage notes.
Although a Chapter 7 Bankruptcy can eliminate most debt, certain debts cannot be discharged in a Chapter 7 Bankruptcy, such as alimony, child support, fraudulent debts, certain taxes and student loans.
Chapter 7 Bankruptcy also does not eliminate secured debts, such as automobile loans or mortgages, unless the debtor surrenders the property. However, the automatic stay will temporarily bar lenders from foreclosing on the mortgage or repossessing the vehicle.
Chapter 13 Bankruptcy Basics
Chapter 13 Bankruptcy is often referred to as the “wage earner plan,” because it is intended for use by individuals who are gainfully employed or have a steady stream of income. Chapter 13 Bankruptcy allows the debtor to obtain debt relief without having to liquidate assets. Chapter 13 Bankruptcy provides relief to debtors by enabling the debtor repay their debt over a period of time through a court-supervised repayment plan. The debtor’s attorney submits a repayment plan with the Bankruptcy petition for court approval. The repayment plan sets a fixed payment amount to be paid regularly to the Bankruptcy trustee, based on the debtor’s income. The Chapter 13 plan will be paid over a three to five year time period, which is determined based on the circumstances. Under a Chapter 13 Bankruptcy, the debtor makes the plan payments to a chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under chapter 13 protection. Once a debtor has filed a Chapter 13 Bankruptcy Petition, he or she must begin making plan payments within 30 days.
Once the debtor has completed the requirements of the repayment plan, the court will grant a Chapter 13 discharge, which will release the debtor from all dischargeable debts. Similar to a Chapter 7 Bankruptcy, creditors may not contact the debtor or attempt to collect debts that were discharged under the Chapter 13 Bankruptcy.
In general, Filing a Bankruptcy Petition will place an automatic stay on debts and will temporarily prevent your lender from initiating or completing foreclosure proceedings against your home. This is a popular method of stalling a foreclosure sale and will provide you and your attorney with time to determine how to save your home from foreclosure.
The Co-debtor Stay
In a Chapter 13 Bankruptcy, the Co-Debtor stay extends the protections of automatic stay to co-debtors in certain circumstances, even if the co-debtor did not file Bankruptcy. The Co-Debtor Stay prevents creditors from pursuing the Co-Debtor for the duration of the Bankruptcy proceeding. The Co-Debtor stay does not apply in a Chapter 7 Bankruptcy and only applies to individuals and consumer debts.
The Lien Strip
One popular use of the Chapter 13 Bankruptcy is to strip away (eliminate) a second or junior mortgage. Depending on the jurisdictional requirements, debtors can accomplish a lien strip by filing a bankruptcy adversary proceeding or by filing a motion in the bankruptcy proceeding. In order to successfully strip a junior mortgage, debtors must produce evidence that the balance on the senior mortgage exceeds the value of the property. In Florida, homeowners may also be able to strip a second or junior mortgage through a Chapter 7, however, most United States jurisdictions do not allow homeowners to strip mortgages through Chapter 7 Bankruptcy.
If a debtor is behind on their mortgage payments, they may also be able to cure the mortgage deficiency by paying the arrearages over the life of the plan.
Chapter 13 Discharge
The Chapter 13 discharge is a court order permanently releasing the debtor from all dischargeable debts incurred prior to the Bankruptcy filing. In order to obtain the Chapter 13 discharge, the debtor must complete the Chapter 13 plan, which will take 3-5 years. Once the Chapter 13 discharge has been granted, creditors are prohibited from contacting the debtor or taking any further collection action on the debts discharged in the Chapter 13. If a creditor violates this court order and tries to collect the discharged debt, they may be sanctioned by the court.