Bankruptcy is a legal process whereby a debtor obtains a "fresh start" from his or her creditors. The United States Constitution grants Congress the exclusive power to make bankruptcy laws. This means that even though most business disputes, such as breach of contract, are governed by the laws of a particular state, bankruptcy rules are uniform throughout the country.
The current bankruptcy law provides for six types of cases. Individual debtors generally file for just two of these types, known as Chapter 7 and Chapter 13. Of the two, Chapter 7 is the more straightforward. This is what’s known as a liquidation bankruptcy proceeding. A Chapter 13 case is called an adjustment of debts of an individual with regular income.
When a person files for Chapter 7 bankruptcy, he or she provides the bankruptcy court with a list of existing assets and liabilities, together with other financial information such as current income. Federal law allows a debtor to protect a certain amount of exempt property from the bankruptcy process. In some cases, there may be specific exemption rules for a particular state. In Florida, for example, you can generally exempt the entire value of your personal residence.
All non-exempt property is then surrendered to a bankruptcy trustee, an impartial government officer who reviews your case. If the trustee determines you have no non-exempt property, he’ll file a "no asset" report with the bankruptcy court. If there are assets, however, the trustee will inform your creditors and give them time to file a claim. The trustee then liquidates the non-exempt assets and uses the proceeds to pay your creditors as much as possible.
Adjustment of Debts
In a Chapter 13 bankruptcy, the debtor proposes a plan to repay existing creditors over a period of three to five years. The debtor must therefore demonstrate he or she has a regular income with enough "disposable income" to make monthly debt repayments. A bankruptcy court must approve the repayment plan, and as with Chapter 7 cases, a bankruptcy trustee serves as an impartial administrator of your assets.
A key reason many individuals opt for Chapter 13 over Chapter 7 bankruptcy is the desire to protect their homes from foreclosure. If a person is behind on his or her mortgage payments, Chapter 13 bankruptcy temporarily stops foreclosure activity and affords the debtor a chance to make back payments. A Chapter 13 plan also functions much like a debt consolidation loan, whereby the debtor makes a single monthly payment to the bankruptcy trustee, who then pays each individual creditor.
Obtaining a Discharge
The goal in any bankruptcy case is to obtain a discharge of outstanding debts. This happens more quickly under Chapter 7 than Chapter 13. In a Chapter 7 case, once the trustee has either determined there are no non-exempt assets, or all exempt assets have been liquidated, the court will then discharge the debtor from any further obligation to pay most debts. This usually happens within a few months of filing the bankruptcy petition. By contrast, since a Chapter 13 bankruptcy involves repaying a portion of a person’s debt over several years, the court will not discharge the debtor until all payments are made.
A bankruptcy discharge does not eliminate all types of debt. Student loans, income taxes and child support are among the categories of debt that are usually non-dischargeable. There are also different rules regarding dischargeable debts under Chapter 7 and Chapter 13.
Bankruptcy is a complex legal proceeding. This article only provides a brief overview of the process and what it entails. If you are contemplating filing for bankruptcy, it’s essential you contact an experienced bankruptcy attorney who can walk you through the entire process.
Steve Williams is a legal blog writer for Hoffman, Larin and Agnetti PA, South Florida’s premier bankruptcy attorneys. We offer personal attention and make sure that you understand the precise nature of your case and the legal principles involved. If you are looking for a bankruptcy attorney in Key West, look no further than Hoffman, Larin and Agnetti PA.