Bankruptcy is the legal process that gives a debtor acting in good faith a “fresh financial start” by eliminating most of the debtor’s debts, and repays creditors in an orderly manner to the extent the debtor has available property.

The filing of a bankruptcy petition triggers an “automatic stay” that prevents creditors from collecting debts. Most creditors cannot take any action during the course of an open bankruptcy without permission of the court. Notably, filing bankruptcy will:

* Stop bill collectors from calling.

* Stop wages from being garnished.

* Stop most pending civil court proceedings.

* Temporarily stop foreclosures and possibly delay evictions.

Once a bankruptcy is successfully completed, most of a person’s debt is permanently erased (“discharged”). This means creditors cannot collect on the discharged debt.   Once you’ve decided that bankruptcy is the right solution for your financial situation, you will need to decide which type of bankruptcy if most beneficial.  If you are an individual or small business owner, then your most obvious choices are Chapter 7 “liquidation’ bankruptcy or Chapter 13 “wage earners” or “reorganization” bankruptcy.

A Chapter 7 bankruptcy is often referred to as a “liquidation” bankruptcy. This type of bankruptcy cancels most ordinary consumer debt and allows the debtor to keep certain “exempt” property.  However, you may have to surrender some property.  A bankruptcy trustee may collect and sell your nonexempt money and assets, and then use the proceeds to pay your creditors. Any remaining balances owed to those creditors are discharged.  People who file Chapter 7 are usually low income earners with few assets to protect.  Chapter 7 is designed primarily to help eliminate overwhelming debt. Chapter 7 will not permanently stop a pending foreclosure or car repossession. To keep a car or house in Chapter 7, you must be able to keep making the regular payment. Chapter 7 can be helpful for car owners who want to stop paying a car loan and surrender the car. It also helps homeowners by eliminating the balance due on their mortgages after foreclosure.

A Chapter 13 bankruptcy provides a “reorganization” of debts by allowing the debtor to either partially or fully repay debts through a three- to five-year repayment plan. Chapter 13 allows you to keep some or all of your property. In exchange, you must pay the trustee all of your monthly disposable income for three to five years, and the trustee in turn pays your creditors. Upon successful completion of a Chapter 13, your remaining dischargeable debts are eliminated.  The total of payments over the three to five years must be enough to pay at least the full amount of all mortgage arrears, back taxes, payments for retained secured items, child support and spousal support arrears, and a trustee fee.

Tanika M. Capers, Esq. 

Disclaimer:  This information is provided for general purposes only and is not meant to constitute legal advice.  Legal advice is dependent upon the specific circumstances of each situation and provides an analysis of the last commensurate with the facts of the situation.  MFM accepts no liability for the consequences of any actions taken on the basis of the information provided herein.