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The following article gives a summary of general bankruptcy provisions. Bankruptcy is very complicated, although it can be a simple procedure for most individuals. Please consult with an expert for information about your situation. This attempts to give a very general description of United States bankruptcy law.
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Bankruptcy is a federal court procedure which changes the legal relationship between a person and his creditors. If affects the debts a person owes. as well as the property that he owns.
This booklet provides information about debt collection, debt relief, and bankruptcy. Debt collection and bankruptcy law is very complex. The laws referred to in this booklet do not always apply, and in some cases, they may be directly the opposite. In addition, there are many laws which are not mentioned.
There is no substitute for discussing your financial situation with a lawyer. Do not rely on the information furnished in this booklet without consulting with a specialist. You should write down your questions when they occur to you, so you will not forget them. Remember that your own situation is unique to you, and that what is helpful to someone else may be harmful to you!
Return to top.In law, the word property refers not only real property (land and real estate), which is what we mean most often when we refer to property. It also refers to personal property. Personal property consists of tangible property, such as household goods, motor vehicles, clothing and jewelry, and intangible property, such as bank accounts, stocks and bonds, retirement plans, debts someone else may owe you, and any claim or lawsuit you may have against another person. Your property stands liable for your debts. If you owe a debt and cannot pay it, your creditor has the legal right to collect the debt out of the property you own. Even if you own the property jointly with another person (such as a house owned jointly with your spouse), your creditor may collect the debt from your share of the property!
Any property that you own is subject to attachment by your creditors. Property that is subject to a mortgage or purchase money debt may also be subject to attachment. Your property is also subject to seizure and sale - under certain conditions - by the bankruptcy court, if you file a bankruptcy case.
It is very common for a person to have a mortgage on property, especially a house or a motor vehicle. The law generally refers to mortgages and voluntary debts against property using the term security interest. If a creditor has a security interest in your property, he may repossess and sell the property if the debt is not paid. The term equity refers to the value of the property that is left over after subtraction of the amount of all security interests. For example, if you own a house worth $100,000, and it is subject to a first mortgage of $50,000 and a second mortgage of $30.000, your equity in the house is $20,000. You own this equity free and clear, and this equity is subject to attachment by your creditors. On the other hand, you may own property that is worth less that the amount of the security interest. If you own a car worth $2,000, and the loan balance is $4.000, your equity in the car or worth nothing. Even though you own the car, its value to you is zero!
The law also provides for involuntary security interests. These are called liens. Tax liens, judgment liens for judgments, and material men's liens for property improvements are all examples of liens. In general, liens are treated exactly like security interests. If the debt the lien secures is not paid, the creditor may seize and sell your property to satisfy the debt. The main difference between a security interest and a lien it that you must agree to put a security interest against your property, but a lien may be placed on your property without your permission.
Debts may be classified as either liquidated or unliquidated. A liquidated debt is a debt that is a fixed monetary amount, such as a balance on a promissory note or charge account. An unliquidated debt is a debt that has not been determined to be a particular amount, such as a claim against you for a car accident.
Debts may also be classified as contingent or non-contingent. A con-contingent debt is a debt you positively owe, such as a car loan or a charge account. A contingent debt is a debt that you may or may not owe, such as a disputed claim from a car accident, or that you may or may not have to pay, such as another person's debt that you have co-signed. (If the other person pays the debt you have co-signed, you do not have to pay it, although you may technically owe it.)
Debts may finally be classified as secured or unsecured. An unsecured debt is a debt that is not secured by collateral, such as a charge account, signature loan, or medical bill. A secured debt is a debt that is secured by collateral, such as a car loan, a house mortgage, or a furniture account. A debt may change from an unsecured debt to a secured debt if - for example - the creditor sues you and obtains a judgment lien against your property. A secured debt may also become an unsecured debt, if the collateral is lost or destroyed and there is no insurance coverage. If a secured creditor repossessed the collateral and sells it, the balance due to the creditor, if any, is also unsecured, because you no longer own the property which stood for repayment of the debt.
Return to top.If you owe a debt, and cannot pay it, a creditor may try to collect it involuntarily. Eventually, the creditor may file suit against you. A lawsuit can result in a judgment, and the judgment may result in a lien against your property. Once the creditor has a judgment and a lien, he may attach or levy on your property, that is, seize it and sell at an auction to the highest bidder for cash, and apply the cash proceeds to the debt.
He may also garnish your wages or bank accounts. A garnishment is an attachment of a debt that a third person owes you, and by the process of garnishment, the creditor forces the third party to pay him instead of you. A creditor may take the entire amount of a bank account or other debt that someone owes you. The amount of wages he can take is limited by law. although in some cases involving child support or alimony, he (or she) can take one-half or more of the wages due to you. Social security and veterans benefits are not subject to garnishment, and many retirement plans are not subject to garnishment.
Secured creditors my resort to self-help remedies. An example of a self-help remedy is a voluntary repossession, where the creditor will ask you to voluntarily let him repossess property. Another example is an involuntary repossession, where the creditor takes possession of your property without your permission. This may be done at night, or during a time that you are not at home. However, creditors may not involuntarily repossess property if it would result in a crime, such as criminal trespass, assault, or breach of the peace. Another example of a self-help remedy is a foreclosure sale of real estate, where a creditor advertises your home for sale at an auction.
There are two types of bankruptcy proceedings that are mostly used by individuals. A Chapter 7 case is filed under chapter 7 of the Bankruptcy Code, and is referred to as a total bankruptcy or as a liquidation case, because the Code provides that the property owned by the debtor be liquidated - or sold - to pay the debts of the individual. A Chapter 13 case is filed under chapter 13 of the Bankruptcy Code, and is referred to as debt adjustment, debtor relief, or as a wage earner plan. Under chapter 13. the Code provides that some or all of the debtor's debts be paid by future earnings. Other types of bankruptcies are chapter 9 cases, which involve state and local governments, chapter 12 cases, which involve family farmers, and chapter 11 cases, which provide for business reorganizations. Under some circumstances, individuals may file under chapter 11 or chapter 12. You should investigate these procedures to see if they might be helpful in your situation, but virtually all cases filed by individuals are filed under either chapter 7 or chapter 13.
Return to top.A chapter 7 case is a total bankruptcy. In a chapter 7 case, you get a discharge. This discharge wipes the slate clean of your unsecured debts. After you get the discharge, you do not owe your unsecured debts, and your creditors cannot do anything to collect them.
As to your secured debts, the discharge also wipes the slate clean. However, the discharge cannot affect the security interest the creditor has on your property. Some liens can be voided, but those liens that are valid can be enforced by the creditor. This means that, if the debt is in default, the creditor has a right to take the property. If your loan is not in default, and you are not behind in your payments, the creditor may not have the right to repossess the property. It is common for you and your creditor to make an agreement that your will pay for the property, and the creditor will let you keep it. These agreements are known as reaffirmation agreements. They must be approved by the court. You can also buy property out-right from a secured creditor by paying the value of the property to the creditor in cash. This is known as redemption. It is done mostly where the collateral has a small value in relation to the debt.
There are certain debts which are not dischargeable under bankruptcy law. These include taxes, child support and alimony, debts incurred by fraud or theft, debts not listed on your bankruptcy petition, and certain student loans. The court may also deny your discharge. Your discharge can be denied if you have destroyed your books and records, committed perjury, concealed you assets, refused to cooperate with the court, or have committed a similar act. If your discharge is denied, you will have gone through bankruptcy, but you still owe all of your debts.
When you file a chapter 7 case, a trustee is appointed. The trustee's job is to investigate your financial affairs, and take possession of your property. There are two types of property he cannot take, and in most cases he will not be able to take any property, because there will be none outside these two categories. The first category is property that subject to an unavoidable lien or security interest. The reason he cannot take possession of this property is because it belongs to the secured creditor, at least up to the amount of the debt. Just as you cannot keep secured property without paying for it, the trustee cannot take it without paying for it.
The second category of property the trustee cannot take is property you are entitled to exempt under the bankruptcy law. These exemptions are determined by the law of the state you live in, or by federal law if your state has no exemption law. The exemptions typically fall into various classes, and the property you can exempt depends upon the classification of the property you wish to exempt. Generally, a married couple can exempt $10.000 to $20,000 worth of property, and an individual can exempt about half that amount. These dollar amounts are usually figured on the fair market value of the property, or what the property can be sold for in a market where similar goods are sold.
In most cases, individuals will not own any property that the trustee will be able to take and sale. These cases are known as no asset cases, because there are no assets available to pay creditors. In the remainder of the cases, the trustee may take possession of property that the debtor owns free and clear above the exemptions, unavoidable liens, and security interests. The trustee will then sell this property, and distribute the money. First, he will pay the administrative expenses. These expenses consist of court costs, professional fees and commissions, and the cost of collecting and selling the property. Second, he will pay other priority expenses, which generally include all taxes. Next, he will pay the unsecured debts. The unsecured debts also include deficiency balances from secured debts, so if a creditor repossess property, sells it, and the amount does not cover the balance of the loan, the creditor may have the balance of the loan paid as an unsecured debt. Finally, if there is anything left over, it will be distributed to the debtors.
Return to top.A chapter 13 case is designed to help individuals who have gotten behind on their debts to pay some portion or all of their debt from future income. For example, if a person has take home income of $1,000 per month, and his living expenses (consisting of rent, utilities, food, clothing, etc.) are $900 per month, he has excess income of $100 per month. If the amount of his debt or $3.600, he may propose a plan that will bay $100 per month for 36 months, and so long as the plan is in effect, no creditor may take any action against him to collect any debt.
The money collected by the chapter 13 trustee is generally distributed in the same manner as the chapter 7 trustee. One important difference is that secured creditors may be paid on their security interests and unavoidable liens.
A plan may contain the following provisions:
The court is required to approve chapter 13 plans. This process is known as confirmation. Without going too deeply into technicalities, a chapter 13 plan must provide that the creditor get at least as much as he would get under chapter 7, be feasible (that is, will work), and usually must provide that all the debtor's excess income be paid under the loan. There is no requirement under a chapter 13 plan that all debts be repaid, and court have approved plans in which nothing has been paid to the unsecured creditors.
Return to top.Chapter 11 was designed to handle cases as large as Eastern Airlines or Continental Airlines, and as small as the comer grocery store. A chapter 11 plan must be tailor made to fit each individual case, and some plans are truly exotic. For an individual debtor, the costs involved usually do not make it worth while. In unusual cases, though, a business person may find that he cannot use chapter 7 or chapter 13, but that chapter 11 gives him the relief he needs to save his business and pay his creditors.
Return to top.It is not possible to discuss all provision of the Bankruptcy Code in this booklet; there are many important provisions.
One important provision is called the automatic stay. When a bankruptcy case is filed, the automatic stay goes into effect. It prohibits creditors from taking any action against the debtor, against the property of the debtor, and in certain cases, against anyone who had co-signed with the debtor. This prevents mortgage foreclosures, garnishments, attachments, seizures, repossessions, lawsuits, judgments, and all collection activity.
Another important provision allows certain liens to be avoided. These include liens place on your property 90 days before filing, some liens on household goods, and some judgment liens. You may even be able to "undo" a house foreclosure or an automobile repossession after it has happened! Other bankruptcy provisions provide for the sale of property in a bankruptcy case under an orderly process, and for borrowing money. The Bankruptcy Code provides that no governmental unit case discriminate against a person because of bankruptcy, and provides for protection of utility services. It also provides that clauses in contracts that say that filing a bankruptcy constitutes a default under the contract are illegal.
There are also important laws outside of bankruptcy. Both creditors and debt collectors are regulated by law, and if they break the law, you may be able to sue them for money! They have to obey the law just like everyone else. It is important that you give your lawyer all of your financial papers so he can examine them. The paper you leave at home may be the one that has been sent illegally.
Many people have question regarding their credit rating. Bankruptcy is a black mark on a credit history. However, it is only one factor among many that creditors consider. Other factors include a person's income, other debts, what the loan is for, the interest rate, the amount of the down payment, whether the person owns or rents his home, how long he has been employed, how long he has lived in the community, and this repayment history before filing bankruptcy. Some people have no trouble re-establishing their credit, and in some cases, are able to borrow money before the bankruptcy case is finished. Other people may have much difficulty in re-establishing credit.
Return to top.As in anything else. the end product is only as good as the materials that are used. A legal opinion based on false facts does no good, and my do a great deal of harm. Lawyers can only advise clients if they know everything about the client's situation. It is every important that you furnish your lawyer all of the information he needs to know. You must make sure that the information is accurate. Information filed in bankruptcy court is filed under penalty of perjury, which means that furnishing false information is a federal crime, and carries a 5-year prison term. Perfect accuracy is not required but the information must be as accurate as possible under the circumstances.
The purpose of bankruptcy is to give an honest person a fresh start, who for whatever reason, has gotten over his head. He has the chance to wipe the slate clean and start over.
The purpose of this booklet has been to introduce some important concepts that relate to bankruptcy. The laws referred to in this brochure may apply in your case, or they may not. There is absolutely no substitute for qualified legal advice. You should discuss your situation with your attorney to find out how particular bankruptcy law affect you and your family.
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