Introduction to Personal Bankruptcy
By Yvette R. Freedman, Esq., of John Peter Lee, Ltd. (www.johnpeterlee.com)
Chapter 7 bankruptcy is the most popular form of bankruptcy because it allows the debtor to wipe out their debts. Chapter 7 is generally used by debtors who do not have enough income to pay their debts after paying for their basic living expenses. Chapter 7 is available to individuals, couples, corporations and partnerships.
Upon filing of the Petition for Bankruptcy, the court imposes an "automatic stay". The automatic stay is a court order prohibiting creditors from taking any adverse action against the debtor. The lawsuit cannot continue until the creditors go to the bankruptcy court and obtain relief from the automatic stay.
Obtaining relief from an automatic stay is not guaranteed and may take a couple of months for a creditor to obtain; therefore, if a debtor is facing immediate adverse action from creditors, filing for bankruptcy may provide them immediate protection. Filing for bankruptcy also prevents creditors from calling them demanding payment. Once the petition for bankruptcy is filed, all communications from creditors must be directed to the trustee.
When the petition for bankruptcy under Chapter 7 is filed, the bankruptcy court will appoint a trustee to the case and create a bankruptcy estate. The trustee is generally a local attorney who oversees the discharge of debts and the distribution of any assets.
Once the petition for bankruptcy is filed, the court sets a date for the Meeting of Creditors. This is a meeting with the debtor and their attorney, the trustee, and any creditors who wish to attend. During the Meeting of Creditors, the trustee will ask the debtor questions as to whether the papers filed accurately detail all of the income, assets and debts. Then the creditors have an opportunity to briefly question the debtor to determine whether the debtor has any money to pay the debts.
After the Meeting of Creditors, if all the lists of income, assets and debts are accurate and go unchallenged by creditors, the trustee will recommend a discharge of the debts. Discharge means that the debts are wiped out.
A non-dischargeable debt is an obligation which the debtor will continue to be responsible for even after the bankruptcy is over. There are certain debts that are not dischargeable, such as alimony and child support; taxes, penalties and interest under 3 years old; student loans and loans from 401Ks; and recent luxury purchases.
Before considering Chapter 7 bankruptcy, people should take an inventory of the types of debt owed. If most of the debt is non-dischargeable, then filing for Chapter 7 bankruptcy will not be helpful. A Chapter 7 bankruptcy will be appropriate if
(1) a person has not filed bankruptcy in the last two (2) years;
(2) the dischargeable debts outweigh a person's income and assets such that they will likely never be able to fully repay their debts;
(3) their income is not likely to increase substantially in the next five (5) years; and
(4) there is court action, foreclosure proceedings, or other collections efforts are threatened by creditors. If a person is considering filing for bankruptcy, but a Chapter 7 bankruptcy is not appropriate, filing a Chapter 11 or Chapter 13 bankruptcy might be a possibility.
Finally, before meeting with an attorney to discuss the possibility of filing for bankruptcy, gather all credit card statements, tax returns, and other documents relating to income, assets and debts. This will help the attorney to assess whether bankruptcy is an appropriate option and which type of bankruptcy filing would best suit the debtor.
