Bankruptcy is something most people might not know much about. It is perhaps because in the normal course of life, no one really anticipates the prospect of bankruptcy. But sadly, after the economic crisis, many people are looking to get their questions answered.
Bankruptcy Question 1: What is Bankruptcy?
Bankruptcy is the inability of an individual or an organization to repay its debt. You are said to be bankrupt if on the maturity of all your debts, you do not have enough resources to repay all your creditors. The two most common types of bankruptcy are Chapter 7 and Chapter 13. Bankruptcy needs to be filed with the United States Bankruptcy Court.
Why Would Someone File for Bankruptcy?
Bankruptcy is a situation where the individual or the business entity is overwhelmed with debt. Usually what happens is that an expensive investment decision goes bust and the bankrupt person does not get the returns expected on the investment. Let me take a simple example. Suppose you buy a house on loan, with the intention to rent it out. The rent will help you pay the monthly installments on the loan. But you do not find a person to rent the house or the person living on rent refuses to pay up. Then you end up defaulting on loan payments and have a big debt against your name which you are unable to pay off. Now you have the option to sell the house and pay off your loan, but suddenly there are no takers for the home and the price of the house falls drastically. Thus, your assets are lower than your liabilities and you are deemed bankrupt.
What are the Laws Governing Bankruptcy?
In the United States, bankruptcy is governed by the Bankruptcy Code, which is a part of the Title 11 of the United States Code. The bankruptcy law is placed under Federal Jurisdiction as per the United States Constitution.
Who can File for Bankruptcy?
In the United States, individuals and business entities can file for bankruptcy.
What are the Types of Bankruptcy?
In the Bankruptcy Code, there are 6 Chapters which govern filing for bankruptcy. The most commonly known are Chapters 7 and 13. There are other Chapters under which bankruptcy may be filed by only such individuals as are prescribed in the respective Chapters. These Chapters are 9, 11, 12 and 15.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is one of the commonest types of bankruptcy. Chapter 7 of the Bankruptcy Code deals with Liquidation. When a person files for bankruptcy under Chapter 7, all the non-exempt assets are seized by the Bankruptcy Trustee. They are then sold off and the proceeds are distributed among the bankrupt person's creditors. The creditors receive this amount as a full and final settlement.
What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy gives the bankrupt person an option to keep his property on the condition that he will fully discharge all his debts within the next 3 years. This repayment period can be extended up to an upper limit of 5 years. Chapter 13 is known as reorganization of debts. This option is made available to the bankrupt person when he can prove to the Court that he has a steady source of income and a proper debt management plan in place to pay off his debts.
How Often can You File for Bankruptcy?
Bankruptcy rules state the following stipulations.
- Chapter 7: Chapter 7 bankruptcy can be filed 8 years after any previous Chapter 7 bankruptcy filing or 6 years after any previous Chapter 13 bankruptcy filing.
- Chapter 13: Chapter 13 bankruptcy can be filed 4 years after any previous Chapter 7 bankruptcy filing or 2 years from any previous Chapter 13 filing.
How Do I Begin the Bankruptcy Process?
To file for bankruptcy, you need to compile a list of past and present debts along with a statement of your assets and liabilities. You will have to fill out the various bankruptcy forms. The total cost of filing for bankruptcy includes the filing fee and the fees payable to the bankruptcy lawyers.
Will Bankruptcy Affect my Spouse?
The answer to this question depends on whether your spouse is a co-debtor on your debts. If your spouse is not a co-debtor, it is not necessary for the spouse to file for bankruptcy. When your spouse chooses not to file for bankruptcy, the spouse could still be responsible for some part of the debt depending upon the marital property laws in the state.
Can All Types of Debt be Discharged?
The list of debts which can be discharged on bankruptcy filing vary based on the chapter under which the person is filing for bankruptcy. But the debts that usually remain undischarged are
- Debts for unpaid taxes
- Debts for money, property, services, or an extension, renewal, or refinancing of credit, that was obtained fraudulently.
- Debts for government-sponsored educational loans, unless the bankrupt person can show that repayment will cause an undue hardship.
- Debts incurred after filing for bankruptcy.
- Debts arising out of any legal judgment, such as due to divorce or personal injury caused to another person.
Generally, a person who has filed for bankruptcy does NOT lose retirement accounts or payments from social security. Social security benefits are also exempt from debt garnishment. Retirement accounts too are exempt and are not considered as property or assets in case of bankruptcy.
Can I Transfer My Assets in Someone Else's Name Before Filing for Bankruptcy?
You can, but such a transfer will not be able to protect your assets. The law states that unless the bankrupt person got a reasonable equivalent value for the transfer of assets (which he would have in the normal course of business), it will be treated as a way to minimize asset loss due to bankruptcy, and will be seized by the bankruptcy trustee. The trustee looks back at the property transactions for a year, or even more if he thinks that the bankrupt person has made any such dealings that would reduce loss of assets during liquidation.
Will I Lose My Home If I File for Bankruptcy?
This is one of the most commonly asked bankruptcy questions. You may not lose your home if you file for bankruptcy under Chapter 13. The state laws also play a part in whether or not your home is seized.
Can My Boss Fire Me if I File for Bankruptcy?
No. Under U.S. Laws, your employer is not allowed to discriminate against you on the grounds of bankruptcy.
When Do I Get Relief from Creditor Harassment?
As soon as you file for bankruptcy, there is a stay on all your debts. Creditors can no longer call you asking for their money. If the petition for bankruptcy is rejected by the court, then the creditors may call you. In case the court accepts your petition, then the creditors have to go to the court to make their claims.
Will Bankruptcy Stop Wage Garnishment?
Yes. Once you have filed for bankruptcy, you can no longer be harassed by creditors in any which way, including wage garnishment. On filing for bankruptcy, there is an automatic stay on all your debts.
How Long Does a Bankruptcy Stay on My Record?
A bankruptcy stays on your record for 7 to 10 years from the date of filing for bankruptcy.
Can I Do Anything to Remove a Bankruptcy from My Credit Report?
Unfortunately, an instance of bankruptcy cannot be removed from your credit report. The only thing you can do after bankruptcy is to make an honest effort at improving your credit score so that you become eligible for financing in the future.
Will I Get Credit After Bankruptcy?
An instance of bankruptcy does not make you unsuitable for credit. You can avail credit, but you will have to opt for credit repair immediately, as bankruptcy adversely affects your credit score. Once your credit score is up to the mark, you will get credit again. But there are certain companies offering specialized after bankruptcy personal loans.
Can I File for Bankruptcy Without a Lawyer
Yes, you can. But bankruptcy is a very complicated and psychologically debilitating procedure so it is advisable to have an experienced bankruptcy lawyer who will be able to ease out the procedure for you.
Bankruptcy is a mentally draining procedure and one which nobody would want to experience. I hope I was able to help you with this compilation of bankruptcy questions and answers to help reduce a bit of the burden that bankruptcy has put on you.
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