What Exactly Is Bankruptcy?
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Bankruptcy is a federal court process designed to help people eliminate their debts or repay them under the protection of the bankruptcy court. Bankruptcies can generally be described as “liquidation” or “reorganization.”
Will Filing for Bankruptcy Protect Me from Creditors’ Efforts to Collect What I Owe?
When you file bankruptcy, an “automatic stay” goes into effect. The automatic stay prohibits most creditors from taking any action to collect the debts you owe them unless the bankruptcy court lifts the stay and lets the creditor proceed with collections.
What is the Difference between Chapter 7 and Chapter 13 Bankruptcy?
In Chapter 7 bankruptcy, you ask the bankruptcy court to discharge most of the debts you owe. In exchange for this discharge, the bankruptcy trustee can take any property you own that is not exempt from collection, sell it, and distribute the proceeds to your creditors.
In Chapter 13 bankruptcy, you file a repayment plan with the bankruptcy court to pay back your debts over time. The amount you’ll have to repay depends on how much you earn, the amount and types of debt you owe, and how much property you own.
What Might I Lose if I File for Bankruptcy?
- You may be able to exempt up to $17,425 of your home’s equity. Some states have no homestead exemption; others allow debtors to protect all or most of the equity in their home. (This is only an estimate, so please consult a local bankruptcy lawyer to discuss your individual situation)
- Insurance. You usually get to keep the cash value of your policies.
- Retirement plans. Pensions that qualify under the Employee Retirement Income Security Act (ERISA) are fully protected in bankruptcy. Additionally, so are many other retirement benefits; often, however, IRAs and Keoghs are not.
- Personal property. You’ll be able to keep most household goods, furniture, furnishings, clothing (other than furs), appliances, books and musical instruments. You may be able to keep jewelry only worth up to $1,000 or so. Most states let you keep a vehicle with more than $2,400 of equity. And many states give you a “wild card” amount of money — often $1,000 or more – that you can apply toward any property.
- Public benefits. All public benefits, such as welfare, Social Security, and unemployment insurance are fully protected.
- Tools used on your job. You’ll probably be able to keep up to a few thousand dollars worth of the tools used in your trade or profession.
- Wages. In most states, you can protect at least 75% of wages that you have earned but not yet received.
How Creditors Can Get Around the Automatic Stay
Usually, a creditor can get around the automatic stay by asking the bankruptcy court to remove (“lift”) the stay if it is not serving its intended purpose. For example, say you file for bankruptcy the day before your house is to be sold in foreclosure. You have no equity in the house, you can’t pay your mortgage arrears, and you have no way of keeping the property. The foreclosing creditor is apt to run to court soon after you file for bankruptcy, to ask for permission to proceed with the foreclosure – and that permission is likely to be granted.
Will bankruptcy stop a foreclosure?
Yes and no… A home is an asset usually secured by a deed of trust. The mortgage company is entitled apply to the court for relief from the automatic stay, the order preventing creditor action by virtue of the bankruptcy. Depending upon several factors, you may be able to prolong a foreclosure until you have received your discharge from bankruptcy. Usually, to keep a home that is in foreclosure you will have to make a deal with the mortgage company. This is the key, you still must work something out with the mortgage company to repay the past due amount. This is why we say filing for bankruptcy is like putting a band-aid on a bullet wound… it may help you at first but major surgery is still required.
The bottom line is that bankruptcy may buy you a small amount of time but negotiations will still need to be made with the mortgage company to enable you to keep your home. Most people who file bankruptcy to save their home from foreclosure wish they had not because in most cases they are in a worse position that when they started. Filing bankruptcy removes your leverage and places your fate in someone else’s hands. Your best option is for you to stay in control, and allow AFS to attempt to work something out for you prior to filing.
Pros for filing bankruptcy to stop foreclosure
- The foreclosure proceedings will be temporarily suspended.
Cons for filing bankruptcy to stop foreclosure
- There will be a bankruptcy on your record for 10 years.
- The mortgage company can work around the bankruptcy and still foreclose.
- You lose any leverage and control you once had.
- A deal must still be worked out with the mortgage company to repay the past due amount.
- If you are 1 day late on any trustee payments your case may be dismissed, the stay will be lifted and you will be back in foreclosure.
- We can negotiate on your behalf with the mortgage company to keep your home from foreclosure and get your loan back in good standing.
We are not attorneys and in no way are giving you legal advice. We are only attempting to explain how bankruptcy may affect foreclosure in our opinion. You must consult a local attorney to discuss your case as it concerns bankruptcy.
Which Bankruptcy Chapter to File?
Below is a list to help determine what chapter to file
Chapter 7 Is Commonly Used When:
- You have little property except for the basic necessities like furniture and clothing
- You have little or no money left after paying basic expenses each month – or you’re not even meeting the basic expenses.
Advantages of Chapter 7:
- Most unsecured debts can be discharged (completely eliminated)
- The process moves quickly – you may receive your discharge in just a few months
- Creditors can’t contact you while the automatic stay is in effect – or after debts are discharged.
Who Can File Under Chapter 7?
- Debtors who have qualified under the “means test” and completed a required pre-filing session with a credit counselor may file for Chapter 7 bankruptcy protection.
Chapter 13 is Commonly Used When:
- You have significant equity in a home or other property and want to keep it.
- You have regular income and can pay your living expenses, but you can’t keep up thr scheduled payments on you debt.
Advantages of Chapter 13:
- You keep most of your property while spreading out to pay past due accounts.
- You’ll have 3-5 years to catch up delinquent accounts according to a scheldule that you and the bankruptcy trustee have agreed on.
- You’ll make one monthly payment to the bankruptcy trustee for distribution – you’ll have no direct contact with creditors during the protection period of 3-5 years.
- Co-signors may be protected
Who Can File Under Chapter 13?
- Any individual debtor who unsecured debts are below $350,475 and whose secured debts are less than $1,081,400. (Verify – Subject to Change)
The above list is just a quick overview of some of the most common reasons for choosing which Chapter to file.
THIS IS NOT LEGAL ADVICE. IF SUCH IS DESIRES CONTACT A COMPETENT ATTORNEY FOR SUCH.
Selling Assets When Considering Bankruptcy
When looking into different options to get out from under a pile of debt there are some things that need to be considered. Selling assets, returning assets to creditor’s, and bankruptcy are some of the ways that this may be accomplished.
If considering selling assets and possibly bankruptcy, there are some important things to know. When meeting with a bankruptcy attorney they will most likely ask about assets in a debtor’s possession, any payments they’ve made to creditors, and if they have sold any assets recently. The reason the attorney will ask about any assets sold recently is because the bankruptcy trustee will look into any sales made by the debtor before filing bankruptcy. The trustee is looking for any proceeds from the sales and where the proceeds went.
The trustee wants to see if un-exempt property was sold to avoid it being liquidated, or to see if creditors were paid with the proceeds. If the property was sold to avoid liquidation the trustee may seize the money to pay back creditors. If the proceeds were used to pay a creditor, that could also be considered favoring one creditor over another. In this case the trustee will probably try to recover the money from the creditor and divide it among all the creditors. If proceeds were from un-exempt property, and then used to purchase exempt property, the trustee will probably not allow the exemption for the newly purchased property.
The attorney’s job is to show that proceeds from any sales were used properly and not to defraud creditors. Many times the trustee will allow payments if the proceeds were used for non-dischargeable debts such as; student loans, child support, or alimony.
As Virtual Bankruptcy Assistants, when preparing bankruptcy petitions for attorneys it’s important that we know what to look for, and what questions to ask. If we can alert the attorney, we are working for, to possible problems with sales of assets, our services will bring a lot of value to the attorney. Any extra value that we bring will end up helping our businesses and keep our relationship going with the attorneys. Being educated on all the ins and outs of bankruptcy will allow us to deliver a thorough and correct bankruptcy petition to the attorneys that we partner with.
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