CAN BANKRUPTCY HELP ME?
Economic hardships from a variety of sources can cause financial distress for many; Individuals, families as well as corporate entities who are searching for options may find that consulting with a lawyer familiar with debt relief can help you navigate the best option for you which may, or may not, include relief under the United States Bankruptcy Code. The primary benefit of filing for bankruptcy relief is the protections afforded by the provisions of the automatic stay. The automatic stay is a “breathing spell” for debtors that provide protections from most collections efforts of their creditors including phone calls, written collection letters, civil suits, garnishments and/or foreclosure proceedings. There are certain exceptions to the automatic stay including, but not limited to, child support/alimony enforcement.
The two most common chapters of bankruptcy include Chapters 7 and 13. A petition filed under Chapter 7 of the United States Bankruptcy Code is the most filed chapter in the United States Bankruptcy Court. The benefit of a Chapter 7 discharge is that most debts can be discharged upon successful completion of the case. While unsecured nonpriority debts such as credit cards and medical debts can be discharged, there are certain types of debts that are not dischargeable including, but not limited to, child support/alimony, debts derived from a crime (i.e. criminal fines, court costs, probation costs, etc.), debts for willful and malicious injury to another person or property. IRS tax debt can sometimes be discharged in Chapter 7 or can be restructured in in Chapter 13 as further discussed below; discussing your tax liability with an experienced attorney can determine whether your tax debt is subject to Chapter 7 discharge or whether a Chapter 13 reorganization is better suited. Secured debts such as car loans and mortgages generally can either be reaffirmed whereby the Chapter 7 debtor(s) continue payments directly to the creditor per the contract or the collateral can be surrendered to the creditor whereby the debt is discharged.
A common myth with is that a Chapter 7 debtor will lose all their assets. When a Chapter 7 case is filed, a Chapter 7 Trustee is appointed to the case to determine if assets can be liquidated to pay creditors. With that said, most Chapter 7 cases are “no-asset” cases meaning the debtor(s)’ assets are exempt by statute or encumbered by liens. Tennessee’s personal property exemption statute protects household goods, bank accounts and a litany of various other personal assets up to $10,000 per debtor. Assets exceeding the personal property threshold can also be exempt from Chapter 7 liquidation if there is no equity in the asset. For example, if a person owns a house valued at $100,000 and has a mortgage balance of $100,000, then a Chapter 7 Trustee would not pursue liquidation of the house as there is no equity in the house to pay into the bankruptcy estate.
Not everyone is eligible to file a petition under Chapter 7. With certain exceptions, most individuals must show there is not a presumption of abuse of the Chapter 7 system whereby their sources of income are less than the average median income for their household size in the previous six months from the file date. In addition, more than eight years must pass from the filing of a previous Chapter 7 discharge case to be eligible for file for a subsequent Chapter 7 case. If a debtor has assets at risk from Chapter 7 liquidation or is not eligible for Chapter 7, that debtor may consider filing for relief under Chapter 13.
Chapter 13 of the bankruptcy code allows individuals to reorganize and pay back their debt over a three to five year period. With the protections of the automatic stay, a Chapter 13 debtor can stop a foreclosure if filed before the foreclosure sale. A repossessed vehicle can be returned to the Chapter 13 debtor if the case is filed before the creditor liquidates the repossessed vehicle and the debtor has proof of insurance for the vehicle. The amount of the Chapter 13 plan payment is determined by disposable income while also in relation to the amount needed to pay secured creditors. There are other factors in calculating a Chapter 13 plan payment including the “best interest rule” which requires unsecured creditors be paid an amount equal to the amount they would be paid in a Chapter 7 liquidation. By providing an experienced lawyer the information needed, the lawyer can calculate the appropriate plan payment prior to filing a Chapter 13 case. A portion or even all of the debtor(s)’ attorney fees can be incorporated into the Chapter 13 plan payment depending on the case.
A debt which has become increasingly problematic is student loans. Generally speaking, student loans are not discharged in Chapter 7 or 13. A separate complaint can be filed in the bankruptcy case (called an “adversary proceeding”) whereby the debtor must petition the bankruptcy court to declare the student loans to be an undue hardship; having said that, the burden of proof to be successful in discharging student loans is difficult and rarely successful. Chapter 13 may include payment to student loans within the reorganization but any amount of the student loan not paid in the Chapter 13 will survive discharge and interest can also accrue during the time in Chapter 13.
After an initial consultation with a lawyer and you decide to file a bankruptcy petition, the next step is to take a credit counseling course with a provider approved by the United States Trustee. After the credit counseling course has been complete and then the bankruptcy petition has been filed, the next step is to appear at a meeting of creditors. This gives the bankruptcy trustee as well as any creditors an opportunity to examine the debtor(s). A second credit counseling course is required to obtain a discharge.
A bankruptcy petition filed under any chapter is done so under the penalty of perjury. It is of the utmost importance to make a full disclosure of all assets, creditors, income and transfers/gifts. Concealing assets, material omissions or misstatements/false information can have serious consequences including not receiving a discharge as well as bankruptcy fraud which is a federal criminal offense. Bankruptcy trustees and/or creditors also have recourse in a bankruptcy case whereby they can oppose discharge if the debt was incurred by fraudulent pretenses or a petition has not been filed in good faith.
A bankruptcy filing may provide the relief needed but it is important to provide the lawyer all information related to your situation to be advised of all the issues related to your specific case. The information provided here is to provide general information as the nuances of the bankruptcy code is too voluminous and wide-reaching to articulate every possible debt or situation. An initial consultation with an experienced attorney is recommended whereby the lawyer can properly advise of your options. In many instances, there is not a “perfect” solution to an individual or entity in financial distress but the first step in taking control of your situation is having the knowledge of all options available and making an informed decision as to how to best proceed in your specific case.
The Knoxville Bar Association provides the public with a Lawyer Referral and Information service which can refer you to a qualified bankruptcy attorney for a free consultation. Contact them at www.knoxbar.org or at 865-522-7501 for more information.
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