In life unexpected events happen which make it difficult for individuals to pay bills.  The law allows relief in certain circumstances.  At McCULLOUGH LAW  we help provide relief.  We handle three (3) types of bankruptcy cases:

Chapter 7 is commonly referred to as “straight” bankruptcy or “liquidation” or “fresh start”.  The debtor may be required to give up property which exceeds certain limits known as “exemptions”.  Most debts discharged.

Chapter 11 is commonly referred to as “reorganization”.  This type is frequently used by businesses and individuals with very large debts.  May require an adjustment of debts either by reducing the debt or extending the time for repayment or may seek a more comprehensive reorganization.

Chapter 13 is commonly referred to as “debt adjustment” or “wage earner”.  This type requires a debtor to file a plan to pay some of the debts from current income. This is used to save a car from repossession or a house from foreclosure when payments are delinquent.

Bankruptcy 101

While there may still be a sliver of a stigma associated with bankruptcy, with the most recent economic downturn, bankruptcy is now viewed more as a strategy to rise above an almost impossible situation. From job loss and cutbacks to medical bills and divorce, life happens to us all.  Over a million people at various stages of life file for bankruptcy every year, including Presidents Abraham Lincoln, Ulysses S. Grant, Thomas Jefferson; major companies Chrysler, General Motors, Chuck E. Cheese’s, Delta Airlines, K-Mart, Perkins Restaurant, United Airlines; even famous folks Donald Trump, Walt Disney, Larry King, Mike Tyson and Toni Braxton. So looking at those that have file, there is life after bankruptcy.

Bankruptcy has come a long way from years ago when debtors were subject to punishment such as “debtor’s prisons” or the removal of an ear.  Over the course of time, the laws have changed, morphed and developed into a more civilized set of regulations.

The right to file bankruptcy is firmly embedded in the US Constitution.  The Constitution directs Congress “to establish uniform Laws on the subject of bankruptcies throughout the United States.” Therefore the bankruptcy laws are driven by Federal law with state differences in exemptions. These laws which are located in Title 11 of the United States Code divided by Chapters are how we describe the various types of bankruptcies available such as Chapter 7, 11 or 13 which we will discuss in detail over the course of our next articles. But now we will focus on the basics of bankruptcy.

Effect of Bankruptcy on Credit

A bankruptcy may stay on your record for 7 to 10 years and will drop your credit score initially. Bankruptcy will not destroy your credit. The truth of the matter is that not paying your bills timely has probably resulted in a poor credit score.  But in time, if planned properly, a debtor can rebuild and establish a better credit history.  In a Chapter 13 bankruptcy, by making consistent payments, the debtor’s credibility to pay is reinforced to brokers and lenders.  After a Chapter 7, by gaining control of finances, the debtor is in a better position to rebuild credit.  Within a short period of time, the debtor may be able to purchase a home or car.

Non-Dischargeable Debts

Bankruptcy provides a fresh start in many situations.  However some debt typically cannot be discharged.  A few of those debts include: child support, alimony, most taxes, student loans, criminal fines, and judgments for injury or death.

The Bankruptcy Process

All bankruptcy filings begin with a petition. This petition includes information about your finances which includes a detailed listing of your assets, liabilities, current income, contracts and/or leases.  Once your petition has been filed, you will be granted an automatic stay which means that your creditors can no longer attempt to collect from you.

Automatic Stay

The day that your bankruptcy is filed, you are granted the stay, thus the title “automatic stay”.  This means no more phone calls, letters, liens, garnishments, repossessions or foreclosures once you let your creditors know that you have filed bankruptcy.  All activity should stop.  The automatic stay is not permanent.  In order to maintain the stay, the debtor must now abide by the plan established by the court and remain current on payments moving forward.

Bankruptcy Trustee

The bankruptcy trustee plays a major role in bankruptcy proceedings. The trustee is an officer of the court who oversees the process for the unsecured creditors.  The role of the trustee is to approve a debt discharge or repayment plan that resolves debt problems in an orderly fashion.

In Chapter 7, the trustee has an immense amount of power.  Per the law, the trustee can take ownership and control of the debtor’s nonexempt assets.  The trustee will then analyze them to determine whether to leave the assets with the debtor or sell them to satisfy debts.

In Chapter 13, the trustee still oversees the process.  However the trustee is typically collecting the monthly payments and sending them to creditors.

Meeting of Creditors

Whether you are filing a Chapter 7 or Chapter 13, it will be necessary for the debtor to attend a brief hearing before the trustee. This hearing is very professional, organized, and designed to verify under oath what is in the petition.  Although creditors are free to attend, they usually do not.  So do not think that creditors will be in the room to harass in person.  Typically the trustee, debtor and attorney will be the only ones in attendance