Bankruptcy Information in Plain Language
Offices located at:
50 Founders Plaza, Suite 108
East Hartford, Connecticut 06108
(860) 282-0216, fax (860) 282-0261, E-mail:
HJK@HJKroeger.com
50 Founders Plaza, Suite 108
East Hartford, Connecticut 06108
(860) 282-0216, fax (860) 282-0261, E-mail:
HJK@HJKroeger.com
Please access any of the following sections below:
The United States Bankruptcy Laws are designed to provide a wide variety of financial relief for all honest individuals and businesses who find themselves in financial difficulties. The primary purpose of the U.S. Bankruptcy Code is to provide the debtor with a "fresh start." All individuals and businesses who are willing to honestly disclose all income, assets, liabilities and financial affairs may take advantage of the relief as provided by the Bankruptcy Laws; which may include the elimination of most type of debts. This relief is designed, in most circumstances, to allow the debtor to keep or retain enough assets to gain the "fresh start" needed for their respective personal and/or corporate financial lives.
The U.S. Bankruptcy Code provides relief in a very wide variety of circumstances. Each Chapter of the Bankruptcy Act addresses different types of financial circumstances. The Bankruptcy Act is divided into various types of relief. You may choose which Chapter best suits your needs.
Chapter 7 is designed for individuals and results in or provides a discharge for most unsecured debts. A discharge is the court order which states you do not have to repay those debts and operates as a shield which prohibits the creditors from making any and all efforts to collect on those debts.
Since Bankruptcy is designed to treat all creditors equally and this can only be accomplished with full disclosure of financial information, your discharge may be denied if you conceal or destroy property, conceal, destroy or falsify records, or make false oaths concerning your financial condition. You may only file and receive a discharge once each eight full years. You must and should include all debts on your Bankruptcy Petition. This insures that all creditors are treated equally and also insures that your discharge applies to all debts which are dischargeable. In the event a creditor is not listed, the discharge may not apply and you may be responsible for the repayment of those debts for the next six years.
There are some debts which cannot be discharged in Bankruptcy, for example, most taxes (there are exceptions here), child support, alimony, most student loans, government or court ordered fines and debts incurred as a result of personal injuries you may have inflicted upon someone else while intoxicated. Intentional acts which have inflicted injuries upon anyone and result in damages cannot be discharged. Also any debts you incurred through fraud or deception are not dischargeable in Bankruptcy. This is not an exhaustive list of non-dischargable debts but only an illustration of the most common type of non-chargable debts.
In accordance with the principle of a "fresh start", the Bankruptcy Code allows you to retain a certain amount of assets while discharging your debts. These are called exemptions and are listed or claimed on your Petition. These exemptions are quite generous and include various dollar amounts for household furnishings, automobiles, clothing, saving accounts, home equity, pensions and other assets. It is noted here that most pension plans are fully exempt property to the extent, regardless of dollar value, that it is needed for the future support of the debtor; however, in general, the pension plan must be the type where you cannot withdraw the monies without penalty until retirement or termination of employment. These pension plans are usually exempt under the Federal exemptions if they qualify under the I.R.S. 401a through 401 k regulations.
There are Federal Exemptions for property contained within the Bankruptcy Code and also individual State Exemptions contained within individual state statutes, however you must elect either the Federal or State exemptions and the most advantageous choice may only be determined after an analysis of each individual financial circumstance by an Attorney. Exemptions must be chosen carefully as any property of the debtor which is not exempted is subject to liquidation and sale by the Trustee who will apply the proceeds to the creditors in accordance with the preferences or orders of payment as established by the Bankruptcy Code. In some circumstances, the liquidation of the debtors non-exempt assets is advantageous to the debtor as the remaining debts are discharged and the debtor does retain all exempt assets.
Lastly, it should be noted that upon an appropriate filing of your Petition, your current income cannot be taken to satisfy any part of any debts for any reason whatsoever. Your income may be subject to those non-dischargeable debts only after you have completed the Bankruptcy process and received your discharge.
The bankruptcy law treats secured and unsecured debts differently. A secured debt is a debt which is secured by some type of collateral; where you pledge some type of property as collateral or security for the loan. Examples are a car loan or a mortgage for a home; if you fail to pay the debt, the creditor can take the collateral and if the collateral or property is not sufficient to pay off the debt, the creditor also can recover the balance from your other assets or income. An unsecured debt is one where no property is used to secure the debt. Examples are credit cards, doctor bills and other credit extensions where you have not signed a separate agreement to pledge property as security for the loan. If the credit is unsecured, the entire debt is likely dischargeable in bankruptcy. The overwhelming majority of credit card debt is unsecured and therefore dischargeable.
In the situation where you have a secured debt, the Bankruptcy Law gives you the following choice; if you wish to keep the property (the house, the car) you must continue to pay on the debt and make timely payments, if you wish to return the property, you may do so and the debt is discharged. This is important for those situations where the property (the house, the car) value is less than the debt. For example, you purchased a car and now still owe $5,000.00, but the car is worth only $2,000.00; you return the car and the debt is extinguished. This concept also applies to bad real estate investments. The understanding of how secured and unsecured debt is treated in bankruptcy is essential to planning which debts you should or should not continue to pay when considering bankruptcy.
Chapter 11 is the debt reorganization chapter used by most businesses but is also available for individuals, although not really suited to most individual needs. In this Chapter, the debtor proposes a plan by which to re-pay the creditors in whole or in part, retains control of the business and at the end of the plan term re- emerges as financially sound. The creditors vote on the acceptance or rejection of the plan, which also must be approved by the Court. The Court also has the power to appoint a Trustee to take possession and control of the business if appropriate. This Chapter has been successfully used by large and small corporations alike and under the new Bankruptcy Act is likely to be used more and more by individuals as well.
Chapter 12 is designed for family farmers. Family farmers propose a plan to re-pay all, or in some instances part of, their debts over a period of three to five years. The plan must be approved by the Court. Plan payments are made through the Trustee who distributes the payments to the various creditors. The Trustee does not take control of the farming operations but does monitor the farming operations through the course of the plan term. This type of Bankruptcy allows the operations to continue and as long as the plan is approved by the Court and the plan payments are made, the creditors are bound to accept the plan payments and cannot, under most circumstances, disturb the family farming operation.
Chapter 13 is also a plan type Bankruptcy which applies to individuals rather than corporations or farmers. The debtor writes or proposes a plan which must be submitted within fifteen days of the filing of the Bankruptcy Petition. This type plan offers to re-pay debts from the debtors future income while retaining their assets. The plan must be approved by the Court and the Court will examine the current and future income of the individuals as well as their current basic living expenses to ensure that there exists sufficient excess monthly income over and above the normal monthly living expenses to actually fund the payments proposed under the plan. The monthly payments are paid directly to the Trustee who distributes same to the various creditors. Once the plan is approved the various creditors must accept the payment terms and can take no actions to collect on the debt. Any legal interest which was accruing on the debts ceases and any interest paid on the debt is paid only in accordance with the terms and conditions of the plan. The approval of the plan by the Court prohibits the creditors from any attempts to collect the debts, stops all courts actions and protects the income of the debtor while the plan remains in effect.
This type of Bankruptcy is most commonly used by individuals who are facing, or in, foreclosure proceedings with respect to their homes. The State foreclosure court action is stopped upon the filing of the Petition and once the plan for re-payment is approved, the foreclosing party (Bank) must accept the terms. The interest which was accruing on the debt in accordance with the mortgage note is replaced with the interest as proposed and approved under the plan for those payments which stand in arrears. Of course, the debtor must be able to and in fact continue the current mortgage payments as due to the creditor on a monthly basis during the term of the plan. The plan addresses only the arrearage due and owing to the bank as of the date of the bankruptcy filing.
A word of advise or warning, a good number of proposed plans do not get approved by the Court. It is the opinion of this author that this is in large part due to the inadequate examination of the debtors financial circumstances by the consulting attorney. Therefore, all potential debtors who consult an attorney should not simply pay the attorney fee and hope for the best, but should rather insist that the attorney examine their respective financial circumstances, provide a realistic appraisal of the chances for plan acceptance, and then pay the appropriate fee. This author has seen too many debtors who have paid a substantial legal fee to an attorney who has filed a plan with no realistic hope of court approval and thus lost additional valuable income as payment to the attorney.
Once the plan is accepted and is paid over the appropriate period, the debtor is given a discharge. This is a realistic and viable alternative to foreclosure in the appropriate circumstances.
It is noted that Chapter 13, is only available to individuals with regular income (wage earners) whose total debts do not exceed $1,000,000. ($250,000. unsecured debt and $750,000. secured debts)
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