Basic Bankruptcy
by: Micronesian Legal Services Corporation
BASIC BANKRUPTCY
QUESTIONS AND ANSWERS
What is Bankruptcy?
Bankruptcy is a legal procedure designed to help poor debtors. A debtor is a person or business who owes money to creditors.
The bankruptcy law is a U.S. federal law that protects both debtors that cannot meet financial obligations and the creditors involved. To begin the process, the debtor files a complaint in bankruptcy court. Debtors must get credit counseling from an approved agency before filing for bankruptcy.
There are specific chapters of the federal bankruptcy law.
Proceedings under Chapter Seven (sometimes known as straight bankruptcy) involve taking most of the property of the person filing bankruptcy. In exchange, the debtor is relieved of all responsibility to pay on the debts ever again. This is called a discharge.
The court appoints a trustee to sell off the assets and distribute the cash among the creditors. Some debts cannot be discharged.
Proceedings under Chapter Thirteen (known as wage earner's bankruptcy) involve the debtor proposing a plan for repaying a portion of the debt in installments from the debtor's income. This is especially helpful if the debtor wants to avoid foreclosure of a mortgage on property.
Proceedings under Chapter Eleven are generally used by corporations and not by consumer debtors. Its proceedings are expensive and complex. Consumer debtors normally use Chapter Seven or Chapter Thirteen.
Once the court enters a discharge order in a Chapter Seven case or the debtor has paid the debts due to the creditors according to a plan in a Chapter Eleven or a Chapter Thirteen case, the debtor is no longer liable on the debts. The debtor then starts over again with a clean financial slate, but the record of the bankruptcy will remain on the debtor's credit record for up to ten years.
Bankruptcy may be the best, or only, solution for extreme financial hardship. However, it should be used as a last resort, since it always has long-lasting consequences. Be sure to consult a financial expert before resorting to bankruptcy as a means of solving your economic troubles.
Can Bankruptcy help with tax problems?
Taxes are debts to a government agency much like debts you might have to individuals and companies. They are different from other debts, however, because the government agencies collecting these taxes have greater power over you and your property than other creditors have.
Since the Bankruptcy Code provides for protection to anyone filing bankruptcy, these taxing authorities may have less ability to affect you and your property while you are under bankruptcy protection. The filing of a bankruptcy case may stop collection activity of governmental agencies for the collection of taxes owed.
A Chapter 13 bankruptcy can provide for monthly payments of your tax obligation without additional interest or penalties. Chapter 7 and Chapter 13 can reduce or eliminate certain tax obligations that have been due and payable for more than three years.
Can Bankruptcy protect co-signers?
If you file Chapter Seven bankruptcy, the creditor can proceed against your co-signers according to the terms of the debt agreement. However, if you file a Chapter Thirteen debt adjustment, a co-signer is protected if the following conditions are met:
The debt must be a consumer, and not a business debt;
The debt may not be incurred in the ordinary course of business; and
The co-signer cannot benefit from the proceeds of the debt.
As long as the debtor is making the required payments under the Chapter Thirteen plan, the creditor cannot act to collect from the co-signer. The purpose of this provision of Chapter Thirteen is to allow a debtor to repay the debt without the creditor approaching the co-signer for repayment.
In conclusion, if you file a Chapter Seven bankruptcy, your creditors have the right to immediately demand payment from your co-signers. If, on the other hand, you file a bankruptcy petition and a proposed payment plan under Chapter Thirteen, your creditors cannot collect from your co-signers unless it becomes clear that the Chapter Thirteen plan will not pay the entire amount owed.
It is important to choose a qualified lawyer or financial adviser to set up your repayment plan. If you are unable to make your payments under Chapter Thirteen, you may still file for Chapter Seven bankruptcy. However, your creditors would then have the right to immediately demand payment from your co-signers.
Can Bankruptcy stop creditor harassment?
There are several strategies for dealing with creditor harassment. First, be as honest as possible. If you explain why your account is in default, you may be able to persuade the creditor to allow you more time for payment or to make other arrangements for payment. This does not always work. Some creditors and collection agents are reasonable. Others may rely on threats and intimidation.
A second method for stopping creditor harassment may be to file a claim under the Fair Debt Collection Practices Act. This act limits what collection agents and attorneys can do in collecting a debt.
A final method for stopping creditor harassment is to file for bankruptcy. Though bankruptcy can have long-lasting consequences, it may be the best solution in certain cases. Filing for either Chapter Seven or Chapter Thirteen bankruptcy will immediately stop creditor harassment.
Can Bankruptcy prevent foreclosure of your home?
If a person gets behind on his or her house payments, the creditor may call the loan in default, accelerate the debt, and begin foreclosure proceedings. When a debt is accelerated, the full balance of the note, not just the monthly payments, is due, in full, immediately. The creditor may refuse to accept the monthly payments.
If a creditor files a foreclosure action, you will receive a summons from court. Some creditors will agree to refinance. Some will accept payments to reinstate the loan. Sometimes creditors will agree to stop foreclosure while these agencies review your file.
If you cannot work out a settlement based on your rights and the lender's willingness to agree, you can file bankruptcy for protection to stop the foreclosure. However, you have to have income and be able to make a Chapter Thirteen plan.
Filing a bankruptcy case anytime before the foreclosure sale will stop the foreclosure sale from taking place. Under a Chapter Thirteen plan, you can make monthly payments and be given a reasonable period of time (up to five years) to bring your loan payments up to date to save your property.
Bankruptcy may be your best solution for extreme financial hardship. However, it should be used as a last resort, since it can have long-lasting consequences on your credit rating.
For more information on foreclosure or bankruptcy, consult an attorney.
Can Bankruptcy lower monthly debt payments?
If you have unmanageable debt and file a Chapter Seven straight bankruptcy, you will not be required to repay your debts. This affords you a clean slate with which to approach future obligations.
Those with income can choose to file under Chapter Thirteen. Debtors must first determine their expected future monthly income or take-home pay. All types of income can be considered, such as wages, commissions, child support, social security, workers compensation, unemployment, disability benefits, retirement, and dividends, so long as they constitute regular income.
After determining income, an amount should be set aside to provide for normal living expenses. The amount of income remaining after providing for living expenses is the maximum amount available for debt payments. If you cannot repay your debts in full over three to five years, you may be eligible for a partial repayment plan, or a "best efforts" plan. According to the "best efforts" plan, the idea is to repay as much as you can afford. At the end of the plan, any unpaid plan debts will be discharged.
Chapter Thirteen almost always reduces your payments to an amount you can afford.
How will bankruptcy effect my credit?
The answer depends on your particular situation. If your credit is perfect, bankruptcy will have a negative effect on your credit. If your credit is bad, filing bankruptcy may be one of the best things you can do to improve your credit. There are two main reasons for this:
After filing bankruptcy you are debt free, making your ability to repay any new creditor better after bankruptcy than before, simply because you have no other debts to pay after declaring bankruptcy; and
You can file Chapter Seven bankruptcy only once every six years. There are limits on filing and dismissing bankruptcy, too. So creditors may feel more confident about lending to newly bankrupted consumers.
What if there are already lawsuits and judgments
The filing of either a Chapter Seven straight bankruptcy or Chapter Thirteen debt adjustment immediately stops any lawsuits from being filed or judgments being taken against you. If a lawsuit is pending at the time of such filing, it can go no further. If a judgment has been taken, the creditor must stop enforcement. If a creditor has a judgment and is garnishing your wages, the garnishment can be stopped. Certain obligations, like child support and alimony, are not stopped, though.
Filing for Chapter Seven straight bankruptcy may relieve you of the obligation to pay a judgment. In a Chapter Thirteen debt adjustment, you may be able to satisfy the judgment over a period not to exceed five years. If the judgment has placed a lien on your home, that lien can be removed if it interferes with your homestead. If you are feeling harassed by debt lawsuits and judgments, bankruptcy may be a good solution for you.
How can you protect property from repossession?
Repossession is the power of the creditor to take back goods because of the buyer's failure to meet the loan payments.
There are two types of loans: secured and unsecured. A secured loan is one that requires you to pledge something as collateral. For example, if you purchase a car, the creditor will usually require you to put up the car as collateral. On the other hand, an unsecured debt does not require collateral. Using a credit card is usually an unsecured loan.
If you default on an unsecured loan, the creditor's only recourse, after the demand letters and the collection agency efforts fail, is to sue. But if you default on a secured loan, the creditor can repossess the collateral and sell it. If the money from the sale is not enough to pay off the loan, the creditor, in most instances, can sue you for the balance of the loan.
If you fall behind on your loan, you should contact your creditors as quickly as possible and attempt to work out a voluntary repayment plan. You can do this yourself or with the assistance of a non-profit credit counseling service.
Bankruptcy may be able to cancel the debt, or it may give the opportunity to stop the repossession and get an affordable payment plan.
Can you get credit after bankruptcy?
You will be required to get credit counseling before you file for bankruptcy. One of the goals is to help you figure out how your debts got to be too much and to help you from making the same mistakes again. It is important that you know how much income you have and how much your reasonable living expenses are. You will be coached about the need to avoid high-interest, "easy" credit. Trying to live within your budget will be the hardest part of a successful bankruptcy. But if your debts are discharged by the bankruptcy, you will not have to worry about the past.
Good luck.
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