Filing for Bankruptcy: Is it for You?
By Masood Khan, Esq.
Los Angeles , CA
(The information provided below is not intended as legal advice and is of a general nature. Please consult an attorney for your specific legal questions.)
One of the very real effects of the recent economic meltdown has been an increase in the filing of bankruptcies by individuals and businesses who are unable to pay back loans or other bills. For most people who file for bankruptcy, there is little or no other choice except to file. Although there is a stigma attached to the idea of being “bankrupt” the process is in fact designed to assist and protect borrowers who are faced with severe economic hardship.
Bankruptcy is a legal proceeding in which an individual who can’t pay his or her bills can get a new financial start. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court. Filing for bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law. Bankruptcy may allow for the elimination of some - or in some circumstances - all of your existing debt. This is called a “discharge” of debts.
Bankruptcy may also allow stop foreclosure –at least temporarily- against your home and allow you an opportunity to catch up on missed payments. The process may also allow the restoration or termination of utility services and also allow you to challenge creditors who are attempting to collect more money than what you actually owe them. The moment a bankruptcy petition is filed with the Court, all collections activities against you must immediately cease by all creditors.
Bankruptcy cannot, however, cure every financial problem. Nor is it the right step for every individual. In bankruptcy, it is usually not possible to eliminate certain rights of "secured" creditors. A "secured" creditor is a one who has taken a mortgage or other lien on property as collateral for a loan. Common examples are car loans and home mortgages. You can force secured creditors to take payments over time in the bankruptcy process and bankruptcy can eliminate your obligation to pay any additional money if your property is taken. Nevertheless, you generally cannot keep the property unless you continue to pay the debt. In addition, you cannot eliminate child support, spousal support (and other debts related to divorce), criminal fines and in most circumstances student loans.
Different Types of Bankruptcy Filings
In a chapter 7 case, an applicant files a petition asking the court to discharge all debts. The basic idea in a chapter 7 bankruptcy is to wipe out your debts in exchange for your giving up property with the exception of "exempt" property which the petitioner is allowed to keep. The properties which are non-exempt usually includes your home, which is not considered “exempt” because it is “secured”. Non-Exempt Property is sold, and the money is then distributed to creditors. If you want to keep property like a home or a car and are behind on the payments on a mortgage or car loan, a chapter 7 case probably may not be the right choice for you. That is because chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt.
For someone who wants to try to keep their home, a Chapter 13 may work better, assuming they meet the requirements. Chapter 13 cases are usually filed for individuals who are still earning some income but who are overburdened by extreme debt. A major requirement under Chapter 13 is that an applicant would have to have enough income to pay for necessities and to keep up with the required payments as they come due.
In a chapter 13 case a "plan" is filed showing how the applicant will pay off some of the past-due and current debts due over three to five years. The most important thing about a chapter 13 case is that it will allow the applicant to keep valuable property--especially a home and car--which might otherwise be lost, if the applicant can make the payments to creditors. In most cases, these payments will be at least as much as your regular monthly payments on your mortgage or car loan, with some extra payment to get caught up on the amount you have fallen behind.
After a Bankruptcy petition is filed with the Court, the applicant must attend a meeting of creditors which is usually held about 1 month after the filing. The applicant is put under oath, and the creditors have the right to ask the debtor about the debtors assets and liabilities. Truthfulness is of the utmost importance because a person charged with Bankruptcy fraud may face serious consequences. In most instances, however, the meetings are quite brief, and often limited to the debtor simply confirming that the bankruptcy papers contain a true and accurate listing of all of his assets and debts. If complications arise, such as litigation with a creditor or the trustee, the debtor may have to attend a court hearing or additional examinations, and he will receive such notice from the court or his attorney. If there are no objections to the debtor s discharge, then the debtor receives a written notice from the court, stating that he has been discharged of all of his dischargeable debts.
Does Bankruptcy My Affect Credit Score?
One of the most common concerns of individuals filing for bankruptcy is whether it will affect their credit and for how long. Bankruptcy does appear on your credit report for a period of about 10 years. However, for most individuals who are faced with financial problems, their credit is mostly likely already bad because of late or missed payments on bills. If the applicant receives a discharge of his debts, then he will often be in a good position to pay his current bills, and may be able to eventually get new credit.
Although bankruptcy seems to be a scary option for many people which may ruin their “good name” it may sometimes be the only option available, especially in order to protect their home and allow them an opportunity to get back on their feet after suffering from crippling debt.
(Masood R. Khan is a practicing attorney in Southern California and a member of the teaching faculty in the Department of Finance and Law at Cal State .A. He can be reached at mkhan@khanlegal.com )
