About Bankruptcy
Bankruptcy is a legal process by which debts are rendered unenforceable and thus, for all intents and purposes, they are “erased”. Bankruptcy laws and procedures are governed by Title 11 of the United States Code. There are special bankruptcy courts that are set up to handle all bankruptcy cases.
The whole idea of bankruptcy is to give a debtor a “fresh start”. This fresh start refers to the debtor’s finances. Debt is an important part of everyone’s life. From car loans, to mortgage loans, to student loans, to tax debts, to medical bills, to parking tickets, and to credit card bills, debts permeate all aspects of our lives. But as we all know, sometimes debts become too large and burdensome. Sometimes it becomes impossible to come out from under the heavy burden of debts which have been accumulating for years. Other times, we are relatively debt-free, but large debts are unexpectedly thrust upon us. For example, in the unfortunate situation where a person needs to be hospitalized for any prolonged period of time, their new, unexpected, and large medical debts typically will overwhelm the unsuspecting victim. Another example is when a person is sued, and a large judgment is entered against him or her.
Bankruptcy is important because it gives individuals a way out from under impossible situations. The idea of bankruptcy is as old as the Old Testament of the Bible, where God orders the Jews to forgive the debts of their neighbors once every 7 years.
Today bankruptcy is very common. With the current state of the economy, a lot of people have lost their jobs and are no longer able to make payments on their debts. There is absolutely nothing to be ashamed about when a person files for bankruptcy. It is simply a part of our economy and our way of life.
Chapter 7 Bankruptcy:
This is the most common form of bankruptcy. It is also called “liquidation bankruptcy” or “straight bankruptcy”. The mechanics of a chapter 7 bankruptcy are as follows:
(1) The debtor files a bankruptcy petition disclosing all his assets and all his debts
(2) The Trustee takes all of debtor’s non-exempt assets, sells or “liquidates” them, and pays over the proceeds of the sale to the creditors to satisfy their claims.
(3) All claims or portions thereof not satisfied after the liquidation sale are “discharged”, meaning that debtor is free from those claims forever.
Under California law, many or all of debtor’s assets are “exempt” from being sold by the Trustee in order to pay debtor’s creditors. In fact, more than 85% of Chapter 7 cases are “no asset” cases, meaning that none of debtor’s assets will be taken away. Practically speaking, this means that all of debtor’s debts are erased but the debtor does not lose or give up anything. This is why a Chapter 7 bankruptcy is such a powerful and effective tool.
Since Chapter 7 is such a powerful tool, there is an income-based means test to qualify. For people whose income is above a certain threshold, they will not qualify for a Chapter 7 and will have to file a Chapter 13 instead.
Chapter 13 Bankruptcy:
Debtors who have a substantial income above a certain threshold cannot file a Chapter 7, but may qualify for a Chapter 13. This chapter of bankruptcy is for individuals with regular income who are able to repay all or a portion of their debts over time in installments. Under a Chapter 13, you must file with the court a plan to repay your creditors all or part of the money that you owe them, using your future earnings. The period allowed by the court to repay your debts may be three years or five years, depending upon your income and other factors.
After completing the payments under your plan, your debts are generally discharged except for domestic support obligations; most student loans; certain taxes; most criminal fines and restitution obligations; certain debts which are not properly listed in your bankruptcy papers; certain debts for acts that caused death or personal injury, and certain long term secured obligations.
Which Chapter of Bankruptcy do people most commonly file under?
The overwhelming majority of bankruptcies filed are Chapter 7 bankruptcies.
Which of My Debts are Discharged in a Bankruptcy? Which are not discharged?
Different debts are discharged in different chapters of bankruptcy. In a Chapter 7 the rule is that all debts are discharged minus certain exceptions. Therefore it is easier to list which debts are NOT discharged.
Debts NOT discharged in a Chapter 7:
-Most student loan debts *(there are exceptions)
-Most tax debts *(there are exceptions)
-Most public fines, such as parking tickets
-Some loans and/or cash advances taken out 70-90 days before a bankruptcy petition is filed
-Domestic Support obligations (child support or spousal support arrears)
-Debts caused by willful or malicious injury to property of another
This list is NOT AN EXCLUSIVE LIST. There are other debts which are not dischargeable. Schedule a free consultation with me in order to discuss your situation.
