Bankruptcy comes from the Latin words “bancus” meaning bench and “ruptus” meaning to rupture or break. In ancient times bankruptcy was a tool of creditors used to enforce debts which were owed to them. If a merchant could not pay his debts, the bench upon which he sat to sell his wares or services was broken. There are still “involuntary bankruptcies” today, but they are very uncommon and certainly not what we think of as the norm. Most people involved in bankruptcies these days are seeking relief from debts which they either cannot pay or would otherwise take a daunting amount of time to pay due to the interest accruing.
There are four types of bankruptcy available to individuals in the United States. At a consultation you will receive more information about each and it’s actually mandated by Federal Law that you are informed of each option before choosing to file any one of them. They are:
Chapter 7 – This is a liquidation bankruptcy. More than half of all bankruptcy filings are under Chapter 7 and this is what most people think of when they think of bankruptcy. This chapter is described in greater detail below.
Chapter 11 – This is a reorganization bankruptcy which is available to both individuals and businesses. People often associate it with movie stars, famous athletes and businesses. In this kind of bankruptcy, you propose a repayment plan for secured and unsecured creditors. Your creditors get to vote on whether or not to approve that plan. This is typically the most expensive form of bankruptcy available to individuals in terms of attorney’s fees and costs.
Chapter 12 – This is a reorganization bankruptcy especially created for family farmers and fishermen. If one’s income is substantially resulting from farming or fishing, Chapter 12 may be available. There is a limitation to the amount of unsecured debt you can owe under Chapters 12 and 13. Chapter 12 permits a much larger amount of unsecured debt to be discharged than in Chapter 13.
Chapter 13 – This is a reorganization bankruptcy which is the second most common type of bankruptcy. It almost always requires repayment of some unsecured debt. About sixty-six percent of these bankruptcies end with a discharge. This chapter is described in greater detail below.
Chapter 7 – The “Clean Slate” bankruptcy
The most common form of bankruptcy in America today is filed under
Chapter 7. This is a liquidation form of bankruptcy wherein the person in debt files a petition with the Federal Court in Tampa and sends notice to all their known creditors. Upon the filing of a petition, all the property of the debtor (the person filing), becomes the property of the bankruptcy estate. This means that they cannot sell property, encumber it with liens, give it as gifts, etc. until the bankruptcy is over or, in rare cases, until the bankruptcy court grants them permission to do so. When you file a bankruptcy, you are only permitted to keep a certain amount of property. This property is referred to as your “exempt property”. What is properly considered “exempt” is governed by state law rather than federal law. The differences state by state in their exemption laws is why filing a bankruptcy in Maine can be different than filing bankruptcy in Florida.
The idea behind exemptions is that a person filing for bankruptcy should not be put into a position where they still cannot pay their bills as this would result in them getting back into debt and would not serve the purpose of the bankruptcy.
Any property acquired after the date of filing a bankruptcy remains the property of the debtor, except for inheritances received within 180 days of filing and a few other similar windfalls.
A Chapter 7 bankruptcy typically takes approximately five (5) months from filing to completion, however in rare circumstances they may remain open for much longer period of time. Once an order of discharge and an order closing the case are entered, the debtor’s bankruptcy case is over.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCA) instituted the “means test” as a precursor to filing bankruptcy under Chapter 7. A debtor’s “means” are tested prior to filing to determine whether or not they have the means to pay their debts. In simple terms, we look at the income of the debtor’s household and compare it to the Internal Revenue Service’s “median income” statistics for that family size. If the debtor makes less than the median income for their family size, they qualify for Chapter 7 bankruptcy protection. If their income is greater, then they may still qualify, but they’ll need to fall into one of the few narrow exceptions.
The second most common form of bankruptcy is typically filed because Chapter 7 isn’t an option for the debtor due to their income. That being said, Chapter 13 bankruptcies have options which aren’t available under Chapter 7. For example, if you want to keep your house but aren’t current on your mortgage, you can file a Chapter 13 bankruptcy and force the bank to accept your late payments. Furthermore, these late payments are rearomatized over a sixty (60) month period, making them much more manageable. In a Chapter 13 bankruptcy the debtor proposes a repayment plan for their debts which the Court must confirm. In this plan, the debtor must commit 100% of their disposable income toward paying their debts. Disposable income is calculated using a computer with Internal Revenue Service guidelines. The individual’s debts are paid in order according to their class, the highest class is referred to as “Priority” these include things like taxes, alimony and child support, next are the “Secured” debts, such as mortgage and car payments. The lowest class of debts are the “Unsecured”. Unsecured debts get paid whatever is left after priority and secured get paid. The unsecured may only get a few dollars to split amongst themselves, depending on how much disposable income the debtor has. The debtor makes payments based upon that repayment plan until either the sixty (60) month period ends or their creditors who filed claims are paid in full at which point a discharge is entered and the case is closed.
Generally speaking, Florida’s exemptions permit the person filing to keep $1,000.00 in personal property, $1,000.00 in vehicle equity and then either a homestead (must have been owned for 1215 days) or an additional $4,000.00 in personal property. Employee Retirement Income Security Act (ERISA) plans are also exempt.
There are, of course, exceptions to this rule and a very wide variety of other small or uncommon exemptions which should be explored before you file.
Secured Assets, “What about my car?”
There are three (3) available to debtors when it comes to secured debts in bankruptcy.
⦁ Surrender – Give up the asset.
⦁ Reafffirm – Enter into an agreement to continue paying for the asset throughout and after the bankruptcy case is closed.
⦁ Redeem – Immediately pay the full value of the asset.
Most people want to keep their vehicles after filing a bankruptcy case and the best way to do so is by Reaffirming the debt. They must be current on their payments for the vehicle for this to work. Yes, the creditor has the option of not accepting the reaffirmation agreement, however I have never had a creditor say “no” to a reaffirmation when the person requesting it was current on their debt. It’s important to remember that banks are not in the business of selling used cars, they’re in the business of financing them- they want you to pay on your car and they don’t want to repossess it.
The moment when someone files their first bankruptcy, an “Automatic Stay” goes into place. The “Automatic Stay” is a legal stop to the collection of any debt. It means that foreclosures, repossessions and telephone calls must stop, otherwise the creditor risks being liable for substantial fines and penalties. If a foreclosure sale is set for 10:15 am and a bankruptcy is filed at 10:10 am, then that sale can later be set aside by virtue of the automatic stay.
Affect on Credit
One of the common misconceptions about bankruptcy is that by filing bankruptcy you no longer owe your debts. It may seem like a semantic issue but filing for bankruptcy protection doesn’t actually eliminate your debts, it actually sets up a wall which prevents your creditors from collecting on those debts. The debts are still there, and they will still show up on your credit report, typically listed as “Discharged in bankruptcy”. Bankruptcies will affect your credit for up to seven (7) to ten (10) years. That being said, I know a couple who qualified for a mortgage two (2) years after filing.
If you have questions about bankruptcy and want to learn more, then contact our office. We will give you an idea as to which chapters you qualify for, the likely consequences of filing under each and our opinion of the whether bankruptcy or some other option might be best for you.