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Bankruptcy

The Important Facts

You are here for a reason. There are financial issues brewing, and you want a solution. The debt is stacking up. You are most likely in the market for answers. Maybe you have been contemplating bankruptcy. While many so called “financial professionals” will suggest bankruptcy as the best option, they are wrong. Bankruptcy is the easy solution. It can also be the most damaging. The long-term consequences of filing bankruptcy can be fatal to your credit and further derail your from your route to financial freedom. Bankruptcy is as American as apple pie, and has been around for just as long. Bankruptcy is even guaranteed in the US Constitution. In the past, it was strongly believed that every American should be entitled to a fresh start. For nearly a century debtors have been protected from the burden of financial obligations. This is all enumerated in the incredibly complicated and voluminous US Bankruptcy Code. Today, there are six different Chapters (options) of the code which individuals or corporations can use to protect themselves from debt. However, despite this history, bankruptcy codes and judges have become a great deal more stringent when it comes to such matters, making it difficult to undertake the process successfully.

Bankruptcy 101

There are 90 different bankruptcy districts throughout the US. Some small states have only one district, and some larger states have two or three. Each district is ruled over by a US bankruptcy judge. When an individual or corporation files for bankruptcy these judges ultimately decide the fate of their debt. The two sides can meet in what is called a “341 meeting.” These meetings allow the creditor to ask questions of the debtor. 341 meetings almost never take place. At the end of each specific case, the judges decide whether a debtor's debt is discharged, and which of the six Chapters is used to declare the bankruptcy. Only two of the six are focused exclusively on individual debtors: Chapters 7 and 13.

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Chapter 11 | Reorganization

This plan is ideal for individuals or corporations whose goal is to get more time to reorganize their finances while continuing their daily lives or business operations. As a result, they file for Chapter 11 bankruptcy which is sanctioned by the appropriate bankruptcy court. A Chapter 11 bankruptcy allows both the creditor and debtor to come together and agree on time schedules and finances. A debtor is given 120 days to provide a reorganization plan to the court judge. If approved, the judge will grant a partial repayment of the original balance, discharging the remaining balance. Many consider this Chapter favorable to more debilitating bankruptcies, as it allows both sides to continue to achieve the ultimate goal of debt resolution.

Chapter 9 | Adjustment of Debts for a Municipality

Chapter 9 bankruptcy is unique to municipalities. Even cities and towns get into debt trouble. When a city, town, or village becomes financially overwhelmed, they will approach their district court and seek relief from their creditors. This will buy them time to get their finances in order, and arrange alternative methods to cover the debt. Traditionally municipalities will find a way to make good on their debt through refinancing, new loans, or by reducing the amount of the interest on the principal.

Chapter 7 | Liquidation

These lists above show that normally, an individual filing for a Chapter 7 bankruptcy would have a large portion of his/her assets protected. They would be able to remain in their home, continue to work, and continue to live their lives. At the end of the day, there may not actually be that much for the bankruptcy trustee to liquidate. If there are not enough assets sold to meet the debt obligations, the court will then discharge those debts. This means that the court will deem those debts unrecoverable, and free the debtor from them. However, some debts will not be discharged.

Chapter 7 | The Good & The Bad

These lists above show that a normal individual filing for a chapter 7 bankruptcy would have a large portion of his/her assets protected. They would be able to remain in their home, continue to work, and continue to live their lives. At the end of the day, there may not actually be that much for the bankruptcy trustee to liquidate. If there are not enough assets sold to meet the debt obligations, then the court will discharge those debts. This means that the court will deem those debts unrecoverable, and free the debtor from them. However, some debts will not be discharged.

Chapter 7 | Debts That Will Not Be Discharged

  • Child support payments
  • Alimony payments
  • Most student loans, unless the overall financial burden adversely impacts lifestyle
  • Fines, penalties and restitution ordered by a state or federal institution
  • Fees assigned by a state or federal court
  • Court ordered damages stemming from a personal injury or wrongful death decision
  • Prior bankruptcy debts that were not discharged
  • Some homeowner-related fees and dues
  • Some state and federal taxes
  • Some pension plan debts

Chapter 13 | Adjustment of Debts for an Individual

Like we touched on in the above paragraphs, if someone is denied Chapter 7 bankruptcy, they may be offered Chapter 13 protection. Chapter 13 bankruptcy is also known as the wage earner's plan. It's exactly what it sounds like. Wage earners, or people still making a living, can take advantage of Chapter 13 bankruptcy and continue to earn as they pay down their debts. This lets the individual have a court-approved payment plan, and retain their assets. Aside from paying down the debt, the biggest benefit of this Chapter is that creditors are not allowed to harass the debtor during the agreed upon repayment period.

Chapter 12 | Adjustment of Debts for a Family Farmer or Fisherman

Chapter 12 is exclusively for "family farmers" or "family fishermen" that earn income from those trades. It was designed to protect farmer and fisherman who get into financial trouble. Chapter 12 is a bit like Chapter 11, with one difference: time. A Chapter 12 bankruptcy involves a plan agreed upon by creditor, debtor, and the court. Additionally, the debtor is required to fulfill all debt obligations in no more than three years.

Chapter 15 | Ancillary and Other Cross-Border Cases

This is the only Chapter that deals with foreign debt and international law. Chapter 15 is also the newest Chapter, having been added to the US Bankruptcy Code in 2005. It was added as an adoption of existing international law called the Model Law on Cross-Border Insolvency. Chapter 15 deals exclusively with debts that occur across US borders. It is a way for whatever private or public entity that exploits this Chapter to enjoy a combination of US bankruptcy laws and the counter-party countries' bankruptcy laws.

Chapter 7 | Non-Exempt Assets

Assets that could be liquidated:

  • Some jewelry
  • Collectibles, coins, stamps, heirlooms, etc
  • Musical instruments
  • Cash, stock, bonds, securities, investments of any kind
  • Real property, homes, lands, timeshares, etc
  • Non-primary vehicles or any kind, cars, planes, motorcycles, water craft, etc.

Chapter 7 | Exempt Assets

Assets that will not be liquidated:

  • The remaining equity in a home
  • Primary vehicles
  • Clothing
  • Pensions
  • Some jewelry
  • Household appliances
  • Wages
  • Items (like a computer or instrument) necessary for the debtor’s trade or profession
  • Government benefits such as unemployment insurance, social security, welfare, etc.
  • Court awarded damages from a lawsuit
  • Others may apply

Chapter 7 | Protecting Against Fraud

Some read the above and think that Chapter 7 will be an easy way to protect what they own, and not really have to pay off all of the debt they owe. Not so fast. There are multiple abuse prevention controls in place. One in particular is what's called a “means test.” This can be a rigorous examination of the conditions surrounding a debtor filing for a Chapter 7 bankruptcy. The means test can include a thorough exam of one's income. If certain criteria are not met, the debtor could be disqualified from Chapter 7 protection. In some cases, the debtor that is denied Chapter 7 is offered a Chapter 13 bankruptcy option. Chapter 13 can involve some credit counseling and a 3-5 year payment plan.

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