Bankruptcy Law – What You Should Know

Bankruptcy law offers individuals and businesses a chance to start fresh by forgiving debts that they can’t pay. It also gives creditors a way to recoup some portion of their debts.

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Debtors must take a briefing from an approved credit counseling agency before filing under any chapter of the bankruptcy code. They must also attend a hearing known as a 341 meeting.

Debts

When you file bankruptcy, some of the debts you owe are discharged. The specifics of which debts are discharged depends on the type of bankruptcy you choose. There are a few exceptions, such as some tax debts, domestic support obligations like child support and alimony, debts incurred through fraudulent acts and student loans.

A debtor’s bankruptcy case may be filed under Chapter 7 or Chapter 13. The main difference between the two options is whether you can keep your property. In Chapter 7, the court appoints a trustee who takes over your assets and turns them into money to pay creditors. Most of the time, you get to keep personal items and some real estate.

In Chapter 13, you get to keep your property, but you must agree to pay part of your income toward your debts through a court-approved plan based on your budget. The judge oversees your case to ensure that you live up to your commitments.

Creditors have 28 days to object to the confirmation of your plan at a hearing before a judge. Objections typically center on whether the payments offered are less than what creditors would receive in liquidation or whether your plan is too long to be approved within the three-to-five-year period allowed for Chapter 13 cases. The court will also consider whether your plan includes adequate protection payments for secured lenders or lessors (typically home and auto loan creditors). This protects them from having to repossess or foreclose on the secured property.

Exemptions

The basic idea behind bankruptcy law is that a person filing for bankruptcy should not be left completely destitute. Exemptions are designed to prevent this by protecting property that a debtor needs for survival and to be able to function as a productive member of society. Exemptions typically apply to personal property, such as a car or household furnishings. They also apply to a certain amount of equity in a debtor’s home, depending on the state where the case is filed.

In some states, a debtor may choose to use federal exemption laws in addition to the exemptions available under state law. However, in most states a debtor is required to use the exemptions provided under the law of the state where he or she is domiciled. This is the state where a debtor spends most of the time in his or her life and usually is the same as the place of residence on his or her driver’s license or voter registration card.

Bankruptcy exemptions protect a wide range of property including health aids, retirement assets (including IRAs and 401(k)s), certain vehicles, tools of the trade used for a profession (such as auto tools for an auto mechanic or dental tools for a dentist), some clothing, some income and a variety of other items. The exemption amounts vary widely from state to state, so the debtor must carefully review the exemptions in the particular jurisdiction in which he or she is filing for bankruptcy.

Liquidation

Liquidation is the process of turning company assets into cash, which will then be used to pay creditors. Companies may choose to liquidate assets voluntarily or be forced into this more drastic procedure by unpaid creditors or the courts. This is often the result of insolvency, which occurs when a company cannot make enough money to meet its long-term debts and financial obligations. Other reasons for liquidation include the retirement of a company owner or departures of investors.

Individuals in personal financial distress who want to avoid liquidation should consider filing for bankruptcy under chapter 7. However, this option may not be appropriate for small businesses or sole proprietorships. The chapter 7 liquidation process involves the sale of all nonexempt property and the distribution of the proceeds to creditors.

During the liquidation process, a trustee will be appointed to oversee the sale of assets and payment of debts and commitments. The trustee will also undertake an asset valuation to assess the value of each of the company’s assets. The value of each asset determines how much can be obtained from the sale. The law in each jurisdiction sets out a schedule of priority for the repayment of debts and commitments. This schedule includes secured creditors, who have a lien or commitment on an asset, and unsecured creditors, which are those without a secured claim.

Reaffirmation

While reaffirming a debt is an option for some debtors, it should be considered carefully. If a debtor defaults on a reaffirmed debt after bankruptcy, the creditor could repossess the property and sue for the remaining balance of the loan. In addition, reaffirming a debt can negatively affect the debtor’s credit score.

There are a few situations where reaffirmation may be appropriate, such as when a debtor wishes to keep a specific property (usually a car or home) and is able to afford the ongoing payments. Debtors should also carefully consider whether reaffirming a debt will result in an undue hardship for them and their family. A bankruptcy judge will review the reaffirmation agreement to make sure it is in the debtor’s best interests and does not create an undue hardship, taking into account the debtor’s income and expenses as presented on their bankruptcy forms.

In the past, creditors would often solicit reaffirmation agreements from their debtors, despite the fact that this is prohibited under the Bankruptcy Code. In an effort to avoid this type of activity, the 1994 Bankruptcy Reform Act created a process by which attorneys for debtors in reaffirmation negotiations would need to submit affidavits stating that the debtor was fully advised of the reaffirmation agreement’s legal effects and consequences.