Basic Bankruptcy
What is bankruptcy?
Bankruptcy law is a federal statute. It is implemented under Article I of the United States Constitution. It is a federal law so that bankruptcy proceedings will be uniform throughout the United States. Generally speaking, bankruptcy is a method by which a person who owes money (known as a Debtor under the bankruptcy code) can submit all of his or her debts and assets to the supervision of the Bankruptcy Court so that the debt may either be eliminated completely (discharged) or to allow for restructuring of the terms of the debt (reorganization) so that payment can be made (for example, by extending the time for payment or through other means allowed by the law).
Who may file bankruptcy?
Any person, a married couple filing together, a partnership, a corporation, or even a governmental unit may file bankruptcy.
What types of bankruptcies are available?
There are basically two types of bankruptcy actions available to individuals or families. The first is what is commonly known as a "straight bankruptcy" or a Chapter 7. The other type of bankruptcy is a Chapter 13, formerly known as a "wage-earner plan." The Chapter 13 allows the debtor to file a plan of reorganization for the purpose of adjusting or reducing the debt obligation. Businesses may file under Chapter 11, or in some instances, small businesses may qualify for Chapter 13.
What is a Chapter 7 or "straight bankruptcy"?
In a straight bankruptcy, any "nonexempt" property or assets will be sold by the Bankruptcy Trustee, with the money derived from the sale of property to be used to pay the creditors' claims. However, most property owned by individuals is "exempt property." This means that the property is exempt from attachment by the creditors, and cannot be sold or utilized to pay creditor debts. In Kansas, a person's residence, automobile, household goods and furnishings, wages, and personal effects are generally all exempt and cannot be taken by the creditors or by the Bankruptcy Trustee. However, even though bankruptcy is a federal law, it incorporates the exemption laws of the 50 states, which means that what a person may exempt in one state will differ from what a person may exempt or keep in another state. Kansas (like other states such as Florida) happens to have one of the most liberal exemption laws of any of the states.
In a straight bankruptcy, most debts are discharged within approximately four months after the filing. However, this type of bankruptcy may not be appropriate in certain situations. For example, some debts are not dischargeable, which means these debts continue to exist after the bankruptcy is over. Certain tax obligations are ordinarily not dischargeable, nor are student loans that have been incurred within the last seven years, nor are child support obligations. Second, if a creditor has a security interest - a lien or a mortgage on property - this security interest survives the bankruptcy. The underlying debt is discharged, but if the property is not paid for, the creditor gets the property back. As a result, many people still end up owing money after the filing of a straight bankruptcy, in the form of tax obligations, student loans and payments on secured property.
What is a Chapter 13?
Under the Chapter 13, formerly known as a "wage earner plan," the purpose is to attempt repayment of bills, rather than simply canceling them out. Under present law, a debtor must have regular income from some source, and usually must pay a minimum of $50.00 per month for a period of three years to be eligible for this type of bankruptcy. However, since the facts of each case vary, oftentimes the payment will be considerably more than the $50.00 per month. The reason for this is that any creditors to be paid, including secured creditors such as on car payments or other secured loans, are included in the one payment that is made to the Bankruptcy Trustee. The only exceptions to this are home mortgages on a person's residence, which continue to be paid directly to the mortgage holder, and child support or alimony obligations, which are paid directly to the recipient. Other considerations in determining the amount of the Chapter 13 payment include the value of any secured property, and any tax obligations, and any nondischargeable debts, such as student loans. In order to complete a Chapter 13 and to keep secured property, a person must pay at least the value of that property back to the secured creditor. For example, if the debtor has a car loan balance of $10,000.00, with the car being worth $8,000.00, then the requirement under Chapter 13 is that the debtor pay at least $8,000.00 to the secured creditor in order to keep that automobile. A debtor has up to five years to pay creditors under Chapter 13. If a creditor does not agree with the value placed on the property, the Bankruptcy Judge decides what the property is worth.
In addition, there are other significant differences between the Chapter 13 and Chapter 7 bankruptcy. Under the Chapter 13, some debts can be discharged or eliminated, which might not be dischargeable in a Chapter 7. The Chapter 13 can act to reduce payments on debts in three ways, as follows:
a) Interest on any unsecured claim, such as credit cards, stops running, and the debtor simply pays back the principal due and owing to that creditor.
b) Most consumer debts have a repayment cycle of one to three years, but under the Chapter 13, the debtor may take up to five years to pay back any obligation. This type of extension would reduce the payment owed to any creditor.
c) The debtor can, in certain circumstances, pay less than the total amount of the debt due and owing under certain rules established by the Bankruptcy Court, which will also reduce the amount which must be paid.
What is a Chapter 11?
This type of bankruptcy is available for business, to allow troubled companies (or even individuals in business) to reorganization or restructure debt so that the business can continue to function. The idea is that a going business will probably be better able to pay debts, that liquidating a defunct business. A detailed plan or reorganization if submitted by the debtor to all creditors approximable four months after the case is filed. Creditors are allowed to vote for or against the plan. If a majority of creditors fail to vote for the plan, the Bankruptcy Court may still approve the plan in certain circumstances.
What effect does bankruptcy filing have on creditors?
Under any type of bankruptcy, creditors are prohibited by the Bankruptcy Court from any type of collection activity, whether it be phone calls, letters, referral to a collection agency, filing of lawsuits, garnishment of wages, or repossession of property. The effect of the filing of any type of bankruptcy will be the immediate cessation of these types of collection activities. However, in the case of a Chapter 7 "straight bankruptcy," any creditor having a nondischargeable debt (student loans, tax debts, etc.) may again start collecting the debt after the bankruptcy is over.