“I Declare Bankruptcy!”
When television’s Michael Scott (main character of the popular series, “The Office”) yelled “I declare bankruptcy!” to his co-workers, his public outburst did nothing to eliminate any of his debts. But it did bring to the forefront his financial woes—mountain credit card debts and other bills in a reduced income household. Sound relatable?
Of course you know that merely advising the public you’re financially strapped won’t bring you any financial relief. And you probably already have a general idea of what bankruptcy is – reducing or eliminating your debts to get a fresh start.
But you probably have many questions. And we’ve got answers. Some of the topics this blog will explore are:
What types of bankruptcy are there?
Should I file? Will I qualify?
Can I file bankruptcy myself?
Is it unethical to file?
Should an attorney declare bankruptcy?
What if my friends and family find out?
How much will it cost me?
How do I fund a bankruptcy attorney?
How do I get creditors to stop calling me?
How do I deal with debt collectors?
And many more.
Week by week, this blog will address those questions. Address new ones. And take a look at what bankruptcy is. And isn’t.
What is Bankruptcy?
Bankruptcy is the legal process by which individual consumers (general public) or businesses can eliminate, reduce, and/or repay their debts.
There are many types of bankruptcy out there, but the two most common forms are Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
A Chapter 7 Bankruptcy gives you rebirth of sorts in the credit world. It allows overburdened consumers like yourself to eliminate their existing debts—such as credit card, consumer loans, and medical bills—and begin anew, with a fresh start.
Not all types of debts (i.e. child support, student loans, taxes) are eliminated through filing a Chapter 7. Some types of debts, such as child support or alimony, cannot be discharged through bankruptcy.
However, if you are facing garnishment, mounting bills, or other threats to financial stability, Chapter 7 may be an option you’ll want to explore with an attorney. No one should feel overburdened and alone, threatened by creditor calls or foreclosure notices.
When undergoing Chapter 7, your non-exempt assets are liquidated or sold by the courts. The proceeds get divided up amongst your creditors.
“Non-exempt” assets means assets that are not exempt such as jewelry (but not your wedding bands) and luxury goods. These assets would be sold, under court supervision, with proceeds allocated to creditors.
While this may sound scary, you, like most individuals filing Chapter 7, probably do not have any non-exempt assets. Which means none of your personal belongings would be seized or sold.
That’s because most individuals have only what’s called “exempt” assets, things that would include your household goods, personal belongings, and home and car—up to a reasonable dollar amount.
Eligibility to file a Chapter 7 bankruptcy is primarily determined by a means test (income), but other criteria is involved.
To determine whether or not you qualify, you would need to speak with an attorney for a free legal consultation to discuss your case.
Chapter 13 Bankruptcy
While a Chapter 7 bankruptcy liquidates all of a your non-exempt assets, a Chapter 13 bankruptcy is a about reorganization and payment of your outstanding bills.
Under court supervision, you would repay a certain amount of your outstanding debts (the courts determine what is reasonable), with the amount of the monthly payments determined by a means test. At the end of the repayment period, any outstanding balance would be discharged or eliminated.
You may be thinking, this sounds like a payment plan. Why can’t I do that with a debt consolidation agency?
Depending on your situation, working with a consolidation agency may provide the fresh start you are looking for and be a viable alternative to filing bankruptcy.
Keep in mind, however, creditors are under no obligation to participate in any debt relief program. They can refuse any or all terms proposed, sticking you to your original terms of interest and repayment as outlined in your contract.
Basically, a Chapter 13 is a court-enforced, court-protected repayment plan. Unless they file a court objection (and show up for a hearing), creditors are forced to accept the modified repayment terms. They are also required to stop assessing you interest, late fees, and other penalties.
Furthermore, while you are under the court’s supervision and protection, all collection activity against you must cease. This includes wage garnishment, creditor calls, or other forms of threats and intimidation.
Individuals who opt for a Chapter 13 bankruptcy over a Chapter 7 typically do so when they have regular income that greatly exceeds their living expenses and/or they have non-exempt assets that they wish to keep.
It’s important to know that how a Chapter 13 bankruptcy plays out may vary greatly from jurisdiction to jurisdictions. Different bankruptcy trustees (court supervisors) and different judges are involved, which means a diverse range of views on what “fairness” to creditors means, or what a “reasonable” repayment amount would be.
Should I file a Chapter 7 or Chapter 13? Should I even file at all?
A means test (instituted) by Congress is a formula that determines whether or not businesses and individuals are eligible to file. Formulaic, it looks at a broad range of factors including your income, property ownership, total owed in debts (secured versus unsecured) and total worth of your assets (exempt versus nonexempt.)
Nevertheless, a means test alone cannot tell you whether or not you should file bankruptcy, or even if you are 100% eligible. Other variety of other factors come into play, most importantly your unique, personal situation.
To see whether or not you qualify for bankruptcy, or which Chapter would be right for you, you would need to seek the qualified advice of an attorney in a personal consultation.