Basic Information about Bankruptcy
Basic Information about Bankruptcy Deciding whether to file bankruptcy is a very serious decision. The majority of bankruptcies are precipitated by circumstances outside a person’s control — loss of a job, divorce, or significant illness. A recent study published in the American Journal of Medicine concluded that 62.1 percent of the bankruptcies were medically related because the individuals either had more than $5,000 or 10 percent of their pretax income in medical bills, mortgaged their home to pay for medical bills, or lost significant income due to an illness. On average, medically bankrupt families had $17,943 in out-of-pocket expenses, including $26,971 for those who lacked insurance and $17,749 who had insurance at some point. The stress of these events is compounded by collection letters and calls, and the fear of losing a home to foreclosure. What is Bankruptcy? When a person or business is mired under inescapable debt, they can petition for bankruptcy. Once the initial petition is filed, all collection efforts, including lawsuits, foreclosures, and garnishments must cease. After the bankruptcy judge hears the case, an order is entered which discharges most debts, or in the alternative creates a repayment plan. The most common types of bankruptcy for individuals are Chapter 7 and Chapter 13 of the Bankruptcy Code. The majority of consumer bankruptcy filings are Chapter 7 cases, and many cases that are filed as Chapter 13 bankruptcies are later converted into Chapter 7 cases. In Chapter 7, a debtor surrenders his or her non-exempt property to a bankruptcy trustee who then liquidates the property and distributes the proceeds to the debtor’s unsecured creditors. In exchange, the debtor is entitled to a discharge of most of their debt. Certain debts, such as spousal and child support, student loans, some taxes, will not be discharged even though the debtor is generally discharged from his or her debt. It is possible to reaffirm some debts, such a home mortgage or an auto loan. In Chapter 13, the debtor retains ownership and possession of all of his or her assets, such as their home and automobile, but must devote some portion of his or her future income to repaying creditors, generally over a period of three to five years. The amount of payment and the period of the repayment plan depend upon a variety of factors, including the value of the debtor’s property and the amount of a debtor’s income and expenses. Secured creditors may be entitled to greater payment than unsecured creditors. Benefits of Bankruptcy The primary benefit of filing for bankruptcy is the ability of a consumer to get a fresh start from past debt. In addition, once a petition is filed, it will stop any collection activity, including any bills currently due for credit cards, medical bills, or other bills. It will stop debt collector calls and collection letters. It will temporarily stop a home foreclosure. Depending on whether the debtor files under Chapter 7 or Chapter 13, the final bankruptcy order can either discharge most of a person’s debts, or create a repayment plan to repay some or all of the consumer’s debts over a three to five year period. Should You Hire a Bankruptcy Attorney? Any individual can file for bankruptcy on his or her own behalf without a lawyer. However, hiring a bankruptcy lawyer may be beneficial. First, the lawyer can advise you on what type of bankruptcy you qualify for, and which types of bankruptcy are better in your case. An attorney can also help you plan for bankruptcy to help you retain the maximum amount of your property and assets, and claim the maximum amounts of exemptions from your creditors. Finally, an attorney can help you negotiate or litigate against your creditors if they dispute parts of your petition.
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