In bankruptcy

Sometimes debts mount to a level that a debtor may not have proportionate assets to represent them. Income may also be inadequate to pay the monthly installments of some mortgages, credit card dues, and taxes. In such situations, the creditors? call debtor and debtor tries to evade them. This is when he or she is said to be at the brink of bankruptcy. Bankruptcy filings allow the debtors a chance to resurface from the financial imbroglio that he has landed himself in. Debtors in United States, whether they be individuals, firms, family farmers, family fisherman, business enterprises, or municipalities, are entitled to file for bankruptcy with United States Bankruptcy Courts.

Salient aspects to be considered before filing for bankruptcy :-

  • Filing for bankruptcy is not mandatory.
  • Alternatively the debtor may choose nothing about the debts. This is an effective measure when debtor is confident that he or she is virtually a broke, and even if the creditors approached courts for any remedy, they would not get anything. If, however, there were some assets that can be salvaged, then resorting to this method would be a dreadful mistake. This is the reason most people opt to file for bankruptcy.
  • Sometimes debt management helps in avoiding bankruptcy. Debtor can seek professional help. Repayment schedules can be revised, interest rates can be lowered, and debts can be refinanced. This is a measure that comes handy when the debtor first starts feeling the pressure of debts mounting on him and observes his inability to repay the regular dues after some period.
  • Similar to debt management is the possibility of negotiating with the creditors. By admitting facts to creditors, debtors give creditors a chance to come up with a counter offer that may be beneficial to both. Creditors generally agree to revise the interest rates down, and/or extend the period for repayment, and/or forego some installments. They agree to absorb some losses because under bankruptcy proceedings they may get little or nothing.
  • The debtor may take the help of The Consumer Credit Counseling Service. It is a debit and credit counseling service that is affiliated to National Foundation for Consumer Credit. CCCS helps its clients obtain revised repayment schedules from their creditors. It collects a nominal fee for the services.
    • In fact, under new Bankruptcy laws that were promulgated in 2005, a debtor must undergo a credit counseling session before contemplating the filing.

    Advantages and disadvantages of filing for bankruptcy

    Advantages:

  • Unsecured debts, like credit card debts and utility payments, are discharged completely under Chapter 7 bankruptcy filing. These discharges are, however, subject to certain conditions.
  • Creditors stop harassing for repayment of debt due to automatic stay in built in bankruptcy filing
  • In case of Chapter 13 bankruptcy filing, a trustee manages all the repayments, including prolonging the repayment schedules, if necessary. A moratorium may thus be available for repayment of debts.

    • Disadvantages:

  • The credit report of the person holds the adverse remark for a long period ? 10 years for Chapter 7 filing, and 7 years for Chapter 13 filing. Even after the expiry of this period, the public records continue to indicate the bad credit profile of the person. A bad credit record means the debtor will not find any banker or standard financial institution willing to lend him some money. Therefore, he may have to incur higher interest costs on loans from private lenders.
  • The credit report being a public document becomes a source of embarrassment.
  • Bankruptcy filing, trustee and advocate charges are additional expenses that need to be considered.
  • The debtor cannot decide which debts should be discharged first. Debts are discharged as per pre-defined sequence.
  • Chapter 7 bankruptcies entail liquidation of all or most of the assets of the debtor by the trustee appointed by the court. The proceeds from such liquidation are distributed amongst the creditors, and eventually, debtor may be left with nothing.
    • Types of bankruptcy filings

    A. Chapter 7 bankruptcy filing

    Eligibility criterion

  • New bankruptcy law in United States do not allow rich to take refuge under this type of filing. In other words, if the family income is equal to or above the median income in the state, then a means test will be performed to check whether it is possible for the debtor to repay the debts.
  • Means test means deducting the following from family income
    • i. expenses towards necessities as per IRS standards, and

    ii. secured debts

    iii. other expenses like alimony, child support, etc.

    to arrive at disposable income.

  • If the disposable income is above $166, then the debtor will not be able to file for bankruptcy under this chapter. If it is between $100 and $166, a new type of chapter 7 bankruptcy proceeding will be applicable. If it is below $100, then conventional chapter 7 proceeding will be initiated.

    • Debts not eligible for discharge under Chapter 7

  • Secured loans
  • Debts exceeding $1,150 to a single creditor, for goods or services taken less than 60 days prior to filing for bankruptcy
  • Cash advances of $1,150 or more that are received recently
  • Debts secured by fraudulent representations
  • Debts secured for fraudulent intentions
  • Alimony
  • Student loan
  • Child support
  • Tax liabilities
  • Debts not mentioned in the bankruptcy filing papers

    • Chapter 7 filing procedure

  • On filing for bankruptcy under Chapter 7 with court, the court assigns a trustee to examine the case
  • A mandatory meeting of creditors is called within a month of filing for bankruptcy, duly mentioning the reasons and other facts.
  • The scheme of distribution receives creditors approval
  • Assets as necessitated, are liquidated and proceeds are distributed amongst the creditors as per predefined method
  • In one to three months time, the unsecured debts other than the ones mentioned above, stand discharged. The trustee appointed by the court forwards a letter to that effect to the debtor filing for bankruptcy.

    • Other salient points of Chapter 7 bankruptcy proceedings :

  • Chapter 7-bankruptcy remark will remain on credit report of a debtor for 10 years from the date of discharge of all the debts.
  • Any small business, married couple, or an Individual can file for bankruptcy under Chapter 7
  • Chapter 7 bankruptcy can only be filed once in 6 years
  • If the court dismissed a previous bankruptcy filing not less than 180 days before the present filing, then the debtor is not eligible to file for bankruptcy.
    • B. Chapter 13 bankruptcy filing

    Eligibility criteria

  • Debtors secured loans should be less than $870,000
  • Debtors unsecured loans should be less than $290,000
  • Steady income
    • Basically, the filing reschedules repayment of debts over a three to five year time frame.

    All debts as listed in the bankruptcy filing forms are eligible for the rescheduling other than

  • Tax liability
  • Child support
  • Alimony
  • Student loan
  • Debts secured by fraudulent representations
  • Debts secured for fraudulent intentions

    • Chapter 13 bankruptcy filing procedure

  • On filing for bankruptcy under Chapter 13 with court, the court assigns a trustee to examine the case
  • A mandatory meeting of creditors is called within a month from the date of filing, duly mentioning the reasons and other facts.
  • Repayment schedule for loans covering 3 to 5 year period will be negotiated

    • . Under the new bankruptcy law, if unsecured creditors do not cooperate with the consumer credit counseling agencies within stipulated time, they can be penalized.

  • Monthly incomes will be surrendered to the trustee, who will appropriate the funds, duly leaving funds for necessities. According to the new bankruptcy law, IRS standards would be applicable for determining the amount for necessities.
  • Trustee will set the priorities for clearance of debts, with unsecured loans ranking the last.
  • At the end of the period, the debtor may still be left with some loans to clear

    • Other salient points of Chapter 13 bankruptcy proceedings

  • The Chapter 13 bankruptcy filing will appear on the credit report of debtor for 7 years
    • .
  • Any small business, married couple, or an individual can file for bankruptcy under Chapter 13
  • Super discharge is the discharge letter received by the debtor after all his debts other than debts like alimony, tax liabilities and student loan, are cleared. The debtor continues to remain liable for the listed debts, even after receiving the super discharge letter.
    • C. Chapter 11 bankruptcy filing

    This is a bankruptcy-filing scheme that is generally used by business enterprises. It is equivalent to Chapter 13 bankruptcy. It also involves restructuring and rescheduling of debts. There is, however, no discharge letter associated with this filing.

    Other Articles

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  • Wisconsin Bankruptcy Law
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