I’m writing this article as an experienced Pennsylvania
bankruptcy lawyer to provide you with an outline of the basics of bankruptcy and to answer some common
questions.
What Kind of Bankruptcies Are
There?
The two types of bankruptcy most commonly
filed by consumer debtors are called “Chapter 7” Bankruptcy and “Chapter 13”
Bankruptcy, after the Bankruptcy Code sections where the applicable law is
found. Whether to file under one Chapter
or the other depends upon several factors, including your current income, the
value of your assets, and your goals in filing a bankruptcy petition.
How Does Chapter 7 Bankruptcy
Work?
If you file your bankruptcy petition under
Chapter 7, you have passed the “means test” (an evaluation of your debt and
your income and family size in relation to the median income for your
state). Your attorney will help you
determine whether you qualify to file Chapter 7 – extraordinary medical,
commuting or childcare expenses can also factor in and render you eligible to
file even if your income is above the median for your family size.
Procedurally, a bankruptcy case is commenced
when one files a “petition.” Once the
petition is filed, the “automatic stay” goes into effect, which stops or
“stays” collection actions against you, including lawsuits. When you file your petition, you will also
file “schedules” in which you set forth your personal information and your
debts, your income, your expenses, and the nature and value of your possessions
and assets.
Your assets, less some “exemptions,”
constitutes your Bankruptcy “estate.”
The estate is administered by a Trustee.
The Trustee will meet with you and your attorney at the “341(a) hearing”
to establish your identity and verify facts set forth in your petition and
schedules, and to make further inquiries if warranted.
If you file Chapter 7 bankruptcy, you can
expect to receive a “discharge” of unsecured debt within four to six months
from filing, barring complications, and then your case will close, giving you
your fresh start.
How Does Chapter 13 Bankruptcy
Work?
If instead of filing a Chapter 7 petition you
have filed your petition under Chapter 13, you will have experienced much the
same procedure as if you had filed under Chapter 7, and also you will have
filed a proposed repayment “plan” lasting three or five years. You will commence making monthly plan
payments to the trustee, who will, in turn, make distributions to your
creditors in order of priority as set forth in that plan.
When all plan payments have been made, your
Chapter 13 plan is completed and you will receive a discharge as to that
portion of unsecured debt which was not be paid through your plan.
As you might imagine, there is much to
consider in determining whether Chapter 7 or Chapter 13 filing is appropriate
for you. You should meet with a qualified bankruptcy attorney before making the
decision.
I’ve heard that the Trustee can
seize my assets if I file Chapter 7 – is this true?
The short answer is yes, Trustees have the
power to seize assets that are not “exempt” from the bankruptcy “estate” (all
of your assets and possessions). Your attorney’s job is to make sure all of
your assets are protected from seizure by fully utilizing all “exemptions”
(statutory means of taking assets/possessions out of the estate) available
under the law.
Be aware that, to the extent your estate
exceeds your allowable exemptions, the Chapter 7 trustee may liquidate (sell)
and distribute that portion of your estate to your creditors. This can be problematic if, for example, you
have equity in your home or car; in other words, if your home or car are worth
more than you owe on them.
One of the purposes of your initial
consultation with your attorney is to determine whether any of your assets are
at risk of sale by the Trustee. If so,
and you want to retain possessions that are non-exempt and/or in which you have
equity, Chapter 7 may not be right for you and your attorney will help you
explore your other options, including Chapter 13.
Is Debt Settlement Better than
Bankruptcy?
No, unless you have only one or two creditors
and those are willing to negotiate with you.
You should know that no creditor is required
to negotiate with you outside of bankruptcy. Each of your creditors is entitled
to be paid in full per the terms of their contracts with you, and creditors have
little incentive to negotiate with you unless the law intervenes somehow.
Filing a bankruptcy petition is the only sure way to stop collection efforts
and force creditors to the table.
Can Bankruptcy Help Me With
Student Loan Debt?
Bankruptcy will probably not help you with
student loan debt unless they are private loans. Consult with your attorney about whether your
student loans qualify for discharge.
There are programs available through your loan
servicer that can help you temporarily postpone or reduce your student loan
payments. For example, a deferment is a
period of time, usually a year, during which your payments are temporarily
postponed. However, interest continues
to accrue on unsubsidized loans and maybe capitalized, i.e., added to your
principal balance, therefore, while loan deferment may provide you with
temporary relief, it may also increase your overall debt.
Forbearance can also eliminate or reduce your
monthly payment temporarily. There are
two types of forbearance: mandatory and
discretionary. You may ask your lender
for discretionary forbearance due to financial hardship or illness. Mandatory forbearance is granted when certain
conditions are met, among them whether your student loan payment is twenty
percent or more of your gross monthly income.
It is important that you avoid defaulting on
student loans in order to remain eligible for programs such as these. If your unsecured or medical debt burden is
compromising your ability to pay your student loans and your monthly expenses,
perhaps debt consolidation or bankruptcy can help you.
What Does Filing Bankruptcy Do To
My Credit?
While it is true that a bankruptcy filing can
remain on your credit report up to ten years, many debtors find that after they
receive their discharge their credit scores rise because their debt-to-income
ratio has dramatically improved.
After receiving a discharge of unsecured debt, you can and should go about repairing your credit by paying all bills, such as student loans, utilities, rent or mortgage, and car loan or lease, on time and in full. This way, if you need to borrow money in the years following bankruptcy you can show the lender a positive payment history after bankruptcy helped you achieve a fresh start.
About
the author:
David M. Offen, Esq.
Mr. Offen is a Philadelphia bankruptcy attorney who attended Temple University College and Law School. Mr. Offen is licensed to practice in the States of Pennsylvania and New Jersey. He is a member of the Eastern District of Pennsylvania Bankruptcy Conference and the National Association of Consumer Bankruptcy Attorneys and maintains an active blog on all aspects of bankruptcy filing and current events.
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