Advice & Consultation During Difficult Times

Bankruptcy is a legal procedure designed to protect an individual or business that cannot pay their debts, and seeks to have debts discharged or re-organized by the bankruptcy court.

Important Terms to Know:

The party who has filed bankruptcy. The debtor could be an individual, couple, or a business.

The party to whom a debt is owed.

The debtor’s obligation for repayment.

A debt shared with another person or entity. In a bankruptcy case, you must list all assets and debts, including your co-debts. If your co-debtor stops paying, you will be liable for the payments. Because of this, it is often recommended that bankruptcy debtors surrender their interest in a secured co-debt. In a chapter 13 bankruptcy, a co-debtor may be protected by the automatic stay.

Debts with a security agreement. This means the lender can repossess the property if the debt is not paid. Houses and cars are secured debts.

Debts that can be discharged in a bankruptcy case. Dischargeable debts include, but are not limited to, credit cards, payday loans, medical bills, collections, repossessions, and certain judgments. Non-dischargeable debts include, but are not limited to, student loans, court ordered domestic support and certain tax debts.

The party to whom a debt is owed.

The pre-filing class required to file a consumer bankruptcy. The class is offered by agencies approved by the United States Trustee and can be taken online or over the phone.

Exemptions protect a debtor’s assets from creditors. When an asset is not exempt, the bankruptcy trustee may sell the asset for the benefit of creditors, or the debtor may pay the value of the non-exempt asset through their bankruptcy plan. Most consumers’ assets are fully exempt.

The automatic stay protects a debtor and the debtor’s assets from creditors. From the moment a bankruptcy case is filed, creditors are stayed, or barred, from acting against the debtor without court permission. This means a creditor may not continue foreclosure proceedings, repossession efforts, garnishments, court proceedings or other collection measures unless the stay is lifted by court order.

To ensure you obtain the maximum protections of the automatic stay, you should file your bankruptcy case prior to your creditors taking possession of your property. Recently, in City of Chicago, Illinois v. Fulton, the Supreme Court ruled that mere retention of estate property does not violate the automatic stay.

The automatic stay is a powerful and legal means to protect your property from your creditors. For many consumers, the automatic stay is a top benefit of filing a bankruptcy case.

The bankruptcy estate is all legal or equitable interests the debtor owns at the time of filing. As an analogy, think of a decedent’s estate when a will is probated. However, in a bankruptcy proceeding, there are other parties involved, such as the bankruptcy trustee, the United States Trustee, and the bankruptcy judge.

The means test is used to determine a consumer debtor’s chapter 7 eligibility. A debtor whose income is higher than their county’s median income and who does not have sufficient deductions, will not be eligible for chapter 7 under the Bankruptcy Abuse Prevention and Consumer Protection Act.

A bankruptcy trustee administers the bankruptcy estate by distributing funds to creditors and making recommendations to the bankruptcy court.

A chapter 7 bankruptcy is more commonly known as a liquidation bankruptcy. This means non-exempt assets will be sold for the benefit of the creditors. Most consumers are not required to sell any assets because most consumers are able to fully exempt their property. Since debtors may obtain a chapter 7 discharge without repaying any creditors, a debtor must prove their eligibility to file chapter 7 bankruptcy by passing the means test.

An agreement by a chapter 7 debtor to continue paying a dischargeable debt after the bankruptcy, usually for the purpose of keeping collateral or mortgaged property that would otherwise be subject to repossession.

A chapter 13 bankruptcy is a consumer reorganization bankruptcy. In a chapter 13, debtors file a plan to repay their debts. In essence, a chapter 13 plan is the debtor’s new contract with their creditors and lasts three to five years. A chapter 13 is most often used when a consumer debtor falls behind on secured or priority debts, or when a chapter 7 is inappropriate. Many consumers choose chapter 13 bankruptcy when they have fallen behind on their home or vehicle payments. A consumer must prove their eligibility to file chapter 13 by meeting the debt limit. The debt limit is generous and increases regularly.

A business that wishes to reorganize would choose a chapter 11 bankruptcy. A consumer may be forced to file a chapter 11 bankruptcy if their debts exceed the chapter 13 debt limit. Like a chapter 13, a chapter 11 includes a bankruptcy plan of reorganization. However, unlike a chapter 13, creditors have a large and active role in a chapter 11 case. Most chapter 11 bankruptcy cases do not have a trustee. Instead, the United States Trustee makes recommendations to the bankruptcy court. A chapter 11 bankruptcy is significantly more expensive than a chapter 13 bankruptcy or a Subchapter V bankruptcy.

Subchapter V (known as subchapter five) bankruptcies became available in 2020. A subchapter v bankruptcy is beneficial to small businesses because it is less expensive than a chapter 11 bankruptcy, and because the creditors’ role is more limited. Under the CARES Act, the debt limit was increased to $7,500,000.00.

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