What is bankruptcy?
-Bankruptcy is a legal declaration of the inability of an individual or organization to pay its creditors.
-Bankruptcy is a federal court proceeding in which a consumer may obtain protection from the creditors. There are two general types of bankruptcy: voluntary bankruptcy or liquidation bankruptcy (Chapter 7) and involuntary or reorganization bankruptcy (Chapter 13).
A voluntary bankruptcy is initiated when a consumer files a petition in court, while in an involuntary bankruptcy it’s the creditor that forces the consumer into filing.
How does a bankruptcy start?
Under the Bankruptcy Abuse Prevention and Consumer Protection Act or BAPCPA, which amended the U.S. Bankruptcy Code, in October 17, 2005, the consumer must first undergo a mandatory credit counseling course (under a court approved credit counseling entity) before filing bankruptcy.
–>Upon completion and if it was decided that bankruptcy is the best and only solution for the consumer’s debt situation, he/she fills out a form, which is a request to the court to make his/her declaration of bankruptcy legal.
–>With the filing there is a fee to be paid to the courts.
What is mandatory credit counseling?
The mandatory counseling makes sure that the consumer knows that he/she has options other than bankruptcy.
The credit counseling agency must be:
–>Approved by the U.S. Trustee’s office.
–>Completed within 180 days before filing bankruptcy.
This pre-bankruptcy counseling session should include:
–>An evaluation of the consumer’s financial situation
–>A discussion of the alternatives to bankruptcy.
–>A 2-hour course on personal financial management (budget counseling).
The consumer at the end of the program must have:
–>Counseling Completion Certificate (pre-filing)
–>Debtor Education Completion Certificate (post-filing).
What is the consequence of failure to obtain those certificates?
–>If the consumer is unable to complete the course and failed to obtain a Debtor Education Completion Certificate within the required deadline, the case may be dismissed by the court and the bankruptcy will not be discharged.
Is it possible to be excused from credit counseling?
–>The court excuses a consumer that is mentally incapacitated or in a military combat zone.
–>Even if an appropriate agency is not available in the consumer’s district and/or the consumer has physical disability that prevents him/her to travel, he/she may not be excused from class, as it is also available by phone or online. If the consumer prefers to not travel and instead take the last two options, they must first clear it with the Trustee.
–>Another way to avoid attendance is if the consumer can prove to the court that they must file for bankruptcy immediately: to stop an urgent move by the creditor, like wage garnishment and/or the consumer was not able to obtain counseling within five days after they’ve requested for it. The consumer has 30 days to prove the immediacy to the court and 15 more days if they are granted an extension.
What is Chapter 13?
It is that chapter that allows the consumer to pay back all or at least a part of his/her debts as directed by the Bankruptcy Court.
A consumer filing Chapter 13 must be aware of the impact of bankruptcy to their credit report. That it stays on for 10 years after the debts have been discharged and that it may also cause higher interest rates on future loans. Not only that, Chapter 13 Bankruptcy relies on the consumer’s income, which the repayment plan will own for three to five years, so the consumer has to make sure that it is the only option left for them and that they have really exhausted all avenues to debt relief.
Under Chapter 13 bankruptcy, the consumer deals with the court appointed trustee. The trustee will oversee the consumer’s financial affairs and payments, as well as its distribution to the creditors.
What happens after the bankruptcy is discharged?
Once the consumer completes the three to five year repayment plan, has remained current on their income tax returns, child support, alimony payment, and has obtained the mandatory budget management course, the remaining unpaid balance on the debts that qualify for discharge are going to be wiped out. The consumer is no longer responsible for the discharged debts.
What is Chapter 7?
1. Chapter 7 bankruptcy (which is sometimes called a straight bankruptcy) is a liquidation proceeding, in which a consumer turns their non-exempt properties to the bankruptcy trustee, who would then distribute the proceeds of the liquidation to the creditors. The bankruptcy would be discharged from all dischargeable debts in the span of three to five months.
But because of the amendments in the bankruptcy law in 2005, this bankruptcy chapter is no longer that accessible to consumers. They are instead forced to file Chapter 13 instead of 7, because a Chapter 7 requires for the consumer to pass their state’s income test or Means Test.
2. Chapter 7 bankruptcy is liquidation proceeding wherein the consumer receives a discharge of debts within four months. The consumer pays the debts out of their non-exempt assets. They relinquish those assets to a trustee (court-appointed official) who then converts them to cash for distribution to the creditors, or the trustee turns the assets over to the creditors.
A Chapter 7 discharge can only happen once every six years and not everyone is eligible for debt relief under it. The eligibility for a Chapter 7 bankruptcy is based on the “means test” or the income based test.