When you file for bankruptcy, you get a fresh start, if, according to the Supreme Court, you are an honest yet unfortunate debtor.
Honest debtors file accurate paperwork in good faith. Even an unintentional omission of a debt, income stream, or asset could lead to bankruptcy fraud charges. Good faith debtors use bankruptcy as a shield to protect themselves, not a sword to attack their creditors.
The financial problems of unfortunate debtors are at least mostly beyond their control. In most cases, that’s true. For example, high medical bills force most people file Chapter 7. Poor financial management usually contributes to, rather than causes, a bankruptcy filing.
When filing for Chapter 13 bankruptcy in Orlando, individuals are seeking a reorganization of their debts rather than a complete discharge. This process allows debtors to develop a repayment plan over three to five years, enabling them to keep their assets while gradually paying off creditors. It requires careful budgeting and adherence to the court-approved plan.
Benefits of Bankruptcy
For most debtors, a “fresh start” means getting off the credit card treadmill or catching up on past-due mortgage payments.
The average credit card interest rate is over 24 percent. So, the minimum monthly payment usually doesn’t change the UPB (unpaid principal balance). It’s very frustrating to spend hundreds of dollars a month just to stay on a treadmill.
As for mortgage payments, most families spend about a third of their income on housing. Missing one or two payments usually creates such a deep hole that a family cannot possibly dig out of it, unless the family gets help.
Furthermore, bankruptcy’s Automatic Stay, which is found in Section 362 of the United States Bankruptcy Code, immediately stops most creditor adverse actions, such as:
- Home foreclosure,
- Wage garnishment,
- Vehicle repossession,
- Lender harassment,
- Apartment eviction, and
- Creditor lawsuits.
Many people file bankruptcy just to take advantage of the Automatic Stay. Technically, the Stay goes into effect the moment debtors file their voluntary petitions. However, the Stay is only binding on creditors that receive notice.
We mentioned foreclosure above. This process usually involves a lender, a servicer, and a foreclosure or auction company. All three must receive notice to stop a foreclosure. Your lawyer typically must do some digging to identify and notify all these entities.
Incidentally, the Automatic Stay technically prohibits creditors from contacting debtors. So, in many cases, creditors stop sending statements and suspend ACH payment agreements. This suspension doesn’t change your payment obligations.
At the same time, in most states, debtors get to keep their houses, cars, personal property, retirement accounts, and most or all of their other personal assets.
Filing bankruptcy has some downsides as well, which is why bankruptcy is a last resort for most people. However, these downsides aren’t as bad as lenders would have you believe.
For example, “bankruptcy ruins your credit” is a common misconception. By the time they file, repeated late payments and other negative information have already drastically lowered most credit scores. A bankruptcy filing takes them from bad to worse. After discharge, if debtors keep practicing good financial habits, their credit scores have mostly recovered within six months.
Do I Need a Lawyer?
Clearly, the bankruptcy process is very complex. Nevertheless, if you are filing a no-asset Chapter 7 and you have substantial legal training, you probably don’t need a lawyer. If you don’t know what a no-asset Chapter 7 is and/or you have no training, you probably need help.
A bankruptcy lawyer is an extra expense at a time when money is usually tight. But a relationship with a bankruptcy lawyer is a partnership that always pays off. Only an attorney prepares all the paperwork and stands up for you in court.
When seeking a bankruptcy lawyer, it’s essential to do your research and choose someone with expertise in bankruptcy law, particularly in the area where you’re filing. Look for a legal representative with a track record of success and consider scheduling consultations to discuss your situation and assess their suitability for your needs.
While cost is undoubtedly a factor, prioritize finding a lawyer who inspires confidence and demonstrates a genuine commitment to helping you achieve the best possible outcome in your bankruptcy proceedings.
Choose the Right Form of Bankruptcy
Chapter 7 and Chapter 13, named for two parts of the Bankruptcy Code, are the most common consumer bankruptcies in most states.
Many people call a Chapter 7 a “liquidation” bankruptcy, but because of the exemptions mentioned above, most Chapter 7 debtors don’t liquidate anything. Instead, in as little as nine months, Chapter 7 discharged most unsecured debts, such as credit card and medical debt.
“Discharge” means a judge wipes out the legal obligation to repay a debt. Discharge doesn’t affect the collateral consequences of debt. For example, if the IRS filed a lien on Mary’s house before she filed bankruptcy, her lawyer must take care of that lien separately, even if the judge discharges Mary’s tax debt.
Chapter 13 is the “wage-earner” bankruptcy. Debtors repay allowed claims, mostly delinquent secured debts, over three or five years. Secured debts include house payments and other obligations related to collateral, such as a house. Chapter 13 also discharges most unsecured debts. The Automatic Stay usually remains in effect for all three or five years.
Chapter 11 is mostly a corporate reorganization bankruptcy. Some family farmers and fishers are eligible to file Chapter 12. It recognizes the unique challenges faced by people in these industries and offers tailored solutions to help them achieve financial stability.
Chapter 12 allows debtors to propose a repayment plan to restructure their debts over three to five years. They can reduce or modify certain types of debts, such as secured loans on agricultural or fishing property. However, Chapter 12 offers certain advantages and accommodations specifically tailored to the financial realities of agricultural and fishing businesses.
Qualifying for Bankruptcy
Consumer bankruptcy matters have formal requirements which apply to everyone, and informal requirements which vary in different jurisdictions.
Chapter 13 debtors must be under debt ceilings, which are usually $400,000 in unsecured debt and $2.5 million in secured debt. These ceilings could be an issue if the debtor has more than about a dozen credit cards and/or lives in a large, expensive home.
These debtors must also complete two financial management courses, a debt counseling class before they file and a budgeting class before the judge issues a discharge order.
Chapter 7 debtors must complete these courses as well. But the big Chapter 7 qualification is the means test. Debtors usually pass this test, unless their incomes are substantially above the median incomes for that family size in that geographic area.
Informal requirements usually focus on Schedules I and J, the monthly income/expense statements.
If the debtor has a negative income/expense balance each month, the trustee (a person, who may or may nor be a lawyer, that supervises a consumer bankruptcy for a judge) believes the debtor is in bad shape, and s/he doesn’t question a Chapter 7 filing.
In contrast, if a Chapter 13 debtor isn’t in the black each month, the debtor might not be able to make a monthly debt consolidation payment. If the debtor cannot make this payment, a judge will dismiss a Chapter 13.
Beginning the Bankruptcy FIling Process: Petition and Schedules
In most cases, the income/expense statement is only a small part of the bankruptcy filing package. Most debtors must file extensive, detailed paperwork that includes:
- Total debt,
- Complete list of creditors,
- All assets, and their values,
- Income/expense information, and
- Overview of financial practices.
Additionally, at the 341 meeting, the trustee usually inspects additional financial documents, like W-2 statements, lease/mortgage agreements, and tax returns. It’s usually a good idea to collect such documents early rather than scramble for them at the last minute.
In an emergency, the judge may allow a debtor to file a bare-bones bankruptcy, which is basically just a petition. The debtor must also pay the filing fee in whole upon filing, although some judges allow payment plans.
Bankruptcy Procedure
Some preliminary matters in a bankruptcy include the 341 meeting, adverse motions, and bankruptcy modification actions.
A 341 meeting of creditors is mandatory in all consumer bankruptcies. As mentioned, the trustee always reviews financial documents at this meeting. In a Chapter 7, the trustee also examines identification documents, usually a drivers’ license and Social Security card. In Chapter 13, the trustee works with the debtor to create a repayment plan.
The other items mentioned above are uncommon. Adverse motions include turnover motions that challenge claimed exemptions and a creditor’s request to bypass the Automatic Stay and take adverse action against the debtor. Bankruptcy modifications usually involve a Chapter 7 to Chapter 13 conversion, or vice versa.
Discharge Order
As mentioned, debt discharge eliminates the legal repayment obligation. A discharge is final and permanent.
The discharge order also starts the clock for bankruptcy re-fling and delisting (removal from a credit report). Most people can file bankruptcy again in four or eight years, However, if a lawyer did a good job during the first proceeding, re-filing is rarely necessary.
