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Bankruptcy is a commonly misunderstood area of law. While no person or business ever plans on having to file for bankruptcy, these protections exist in order to allow a debtor the opportunity to reorganize or eliminate their existing debts and receive a fresh start.
Bankruptcy is not merely for those who have acted irresponsibly in handling their finances. In fact, most individuals and businesses find themselves considering bankruptcy due to circumstances outside of their control, including:
- death of a spouse,
- medical emergencies,
- economic recession.
In this regard, bankruptcy serves as a safety net for debtors of all types that find themselves in a variety of dire circumstances.
There are different chapters in the United States Bankruptcy Code which allow for different types of debt relief for individuals, businesses and other entities. The chapter of the bankruptcy code defines what can and cannot occur and be accomplished within the bankruptcy proceeding. Here is an overview:
For individuals and businesses that are liquidating. Upon successful completion, individuals are usually entitled to a discharge of their debts (if they are dischargeable). A discharge means the debtor’s personal liability associated with a debt no longer exists. It is as if they never owed the debt in the first place.
In a Chapter 7 bankruptcy, repayment of unsecured debts (e.g. credit cards, medical debts, personal loans) depends upon whether the debtor owns “non-exempt” (unprotected) property that can be liquidated (sold). The sale proceeds are used to pay off creditors to the extent possible. Anything not repaid that can be discharged, is discharged.
Chapter 7 allows debtors to maintain their mortgage and car payments, to the extent that they are reasonable, necessary, and affordable. It also allows for the removal and avoidance of certain liens on exempt (protected) property, such as homesteads.
For individuals who are reorganizing and repaying debt. If individuals earn too much money to qualify for Chapter 7 relief, Chapter 13 is another viable option. Chapter 13 allows debtors to repay a portion of their debts over a 3 to 5 year period. Whatever debt is not repayed by the end of the Chapter 13 is discharged.
Chapter 13 is a powerful tool for those trying to save a home from foreclosure or a car from repossession. It is also useful if a debtor owes significant non-dischargeable debts (e.g. tax liabilities, child support, etc.) by allowing them to be paid over a reasonable time period. In Chapter 13, you may also keep your non-exempt assets, remove certain judgments and liens, and restructure certain secured debts, such as car loans.
This chapter is designed primarily for businesses that want to remain in business, but sometimes is also used by individuals who do not qualify for Chapter 7 and have too much debt for Chapter 13. Chapter 11 offers greater flexibility and options than other chapters and, in the hands of an experienced bankruptcy reorganization attorney, can be extremely useful even in lower debt cases. The purpose of a Chapter 11 Bankruptcy is to confirm a Plan of Reorganization with the Bankruptcy Court. In order for the plan to be approved, different creditors have the right to vote in favor or against a Plan. This requires careful, time-consuming planning by both the business owner and experienced bankruptcy attorney.
Chapter 12 Bankruptcy is similar to Chapters 13 and 11; however, it is exclusively reserved for family farmers and fishermen.
If you are dealing with mounting personal or business debt, contact The Law Office of Kathleen M. Toombs for a free bankruptcy consultation in order to discuss what option would work best for you or your business.