Anyone who has thought about bankruptcy as an option for their financial problems has already suffered through harassing and threatening letters and phone calls from creditors and debt collection agencies.  The anxiety and stress can be overwhelming.

In ancient times, bankruptcy relief didn’t exist.  Those who owed money had to pay their debts regardless of their personal situation.  Those who couldn’t pay were forced into debtor prisons or debtor slavery arrangements where they were forced to work off their debts to their creditors.  Fortunately, these situations don’t apply in the United States.  Bankruptcy proceedings are governed by federal law and allow individuals and some companies to resolve their indebtedness and begin their lives over again.

Collections & Related Litigation:

Bankruptcy does not include most mortgages or liens; however, judgment liens and some liens on personal property, called “non-purchase money security interests,” may be voided if they encumber exempt property. If a debtor wants to keep his or her house, generally the debtor must continue the payments on the mortgage. If the debtor wants to keep a car which is liened, he or she must likewise continue the payments. A debtor facing foreclosure on his or her home may use Chapter 13 to repay past due payments and other costs, while also making the regular mortgage payments, and keep the home. Chapter 13 may also be used to get back a car that has been repossessed by a creditor. In a Chapter 7 liquidating bankruptcy, certain property can be “redeemed” from a lien by an appropriate proceeding in the bankruptcy, which would require paying to the lien holder the market value of the property.

If a creditor or the trustee objects, a debtor may be denied a discharge and continue to owe the debts as if the bankruptcy had never been filed. Some of the reasons for being denied a discharge are fraudulent transfer of an asset to keep it away from creditors or the bankruptcy trustee, concealment of assets, or disobeying or making a false statement to the court. Such acts may also constitute federal crimes for which the debtor can be fined or imprisoned.

Certain types of debts, such as child support, alimony, some federal income taxes, and all employer withholding taxes are not discharged in bankruptcy. Generally, student loans cannot be discharged, unless the first loan payment was due more than seven years before filing bankruptcy. The debtor’s wrongful conduct may make some debts non-dischargeable in a liquidation bankruptcy, such as incurring credit card charges when the debtor had no intent or ability to repay, or obtaining loans using false financial information.

Chapter 7:

This is a liquidating bankruptcy, formerly called “straight bankruptcy.” In return for having debts discharged, the debtor must turn over to the bankruptcy trustee all property except for certain assets which Florida law allows the debtor to keep as exempt. The trustee sells the property and distributes the proceeds to the creditors according to priorities established by law. Very often there is not enough money to pay for anything more than the costs of administration, and the creditors will receive nothing. The principal advantage of Chapter 7 is that the debtor emerges from bankruptcy without any future obligations on his or her discharged debts.

Chapter 11:

Another type of proceeding in bankruptcy is a Chapter 11 reorganization. It is generally used by busi­nesses, or by debtors who do not qualify for Chapter 13 because of their substantial debts, and have assets that would be lost in Chapter 7. In a Chapter 11 proceeding, the creditors are temporarily stopped from taking any ac­tion against the debtor while the debtor tries to work out a plan of reorganization, in which a method of paying all or part of debts is proposed. The creditors vote on the plan, and it must also be approved by the court. This type of proceeding is designed to preserve a going business which would otherwise be lost in a liquidation. This is a compli­cated and costly proceeding, generally used by busi­nesses.

Chapter 13:

This proceeding is often used by individuals who want to catch up past due mortgage or car loan payments and keep their assets. In Chapter 13, the debtor must propose in good faith to pay all or part of the debts from future income over a period of time ranging from three to five years. If the court approves the plan of payment, the debts may be settled in this manner, even if the creditors are not willing to go along with the plan. If the debtor makes the payments as required, he or she will not have to surrender property to the trustee.

Chapter 13 can be more advantageous than a liquidating bankruptcy. Some of the debts not discharged in a Chapter 7 will be discharged once the debtor completes a Chapter 13 plan. Also, the debtor can pay most non-dischargeable federal taxes over the term of the Chapter 13 plan without interest.

Chapter 13 can only be used by an individual debtor, not by a corporation, and only if the total debts owed are less than certain limits for secured and unsecured debts. However, an individual engaged in business might use Chapter 13 to pay debts or settle them over a period of time while he or she continues to own and operate the business.

Debtor & Creditor Representation:

The bankruptcy filing will be noted by several commercial credit reporting companies. Federal law limits the length of time that this information may be carried on a report. As of 1997, the limit on reporting bankruptcy filing is 10 years. Also, the law prevents certain governmental units and agencies from discriminating against persons who have filed bankruptcy. Again, a lawyer can give you guidance in this area.

Many people find that if, after filing bankruptcy, they promptly make the payments they are left with such as car payments, house payments, rent or utility payments, they can re-establish their credit in about two years’ time. However, individual credit ratings are based on overall credit history, as well as income and assets, and it may be harder for some people to re-establish a good credit rating than it is for others.

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