The general conception is that Bankruptcy laws help people and small businesses that can no longer pay their creditors or to get a “fresh start” – by liquidating their assets to pay their debts or by creating a repayment plan.
The fresh start aspect of the above statement can be true, but can be false or misleading to an individual or a small business that does not have a full understanding of the bankruptcy system and how it applies to their individual case.
Firstly, one need understand that there are different Codes or Chapters under which a bankruptcy petition can be filed, which are – Chapter 7, Chapter 11, Chapter 12 and Chapter 13.
Chapter 11 is mainly suitable for large corporations and organizations; it is not available to an individual and is rarely suitable for small businesses. Chapter 12 is a special procedure to deal with farmers. These two chapters are beyond the scope of thisarticle.
Why Individuals and Small businesses consider bankruptcy
Some people think that those who consider bankruptcy are immoral; people wishing to take advantage of the system by not paying or taking responsibility for what theyowe.
However, on the contrary those who consider bankruptcy are taking charge of their financial lives; many have found themselves in dire financial difficulties, perhaps due to the loss of a job, a divorce, or a downturn in business activities as a result of the recession. Many of these people have been hounded and harassed by creditors who have “turned up the heat”. Sometimes going into bankruptcy is a way of taking control and deciding what happens to you. As studies show financial pressure can be the route of many problems such as Insomnia, sickness, accidents, marital breakdown, depression, and general grief just to name a few.
How do you take control in Bankruptcy?
The level of actual control you take depends on the chapter of bankruptcy you file under. The Chapter 7 Code
For those who want a quick resolution to their problems and those who do not have a regular income, Filling under Chapter 7 may be the most suitable. Their assets will be liquidated and distributed to the creditors by the Bankruptcy Trustee. Once this is done, they may apply for a discharge.
Once finalized debts are discharged, the debtor no longer has any liability for those discharged debts and this allows the debtor to start the process of making a freshstart.
The Flaws of Chapter 7
- A discharge is only available to individual debtors, not to partnerships orcorporations.
- Although filling under chapter 7 usually results in the discharge of debts, the right to a discharge is not absolute.
- Some types of debts are not discharged and thus continue to existpost-bankruptcy.
- A bankruptcy discharge does not extinguish a lien on properties; therefore, secure creditors may cease goods even after a discharge.
- A party in interest may file a complaint objecting to the discharge or may file a motion to extend the time to object. The good news however is that the grounds for denying an individual debtor a discharge are narrow and construed to the advantage of thedebtor
The Chapter 13 Code
For individuals who have a regular income, especially small businesses who wish to continue in business while dealing with their debt in bankruptcy, this is perhaps the most appropriate chapter to file under.
This is an Individual Debt Adjustment plan which allows an individual develop and propose a payment plan to make installments to creditors over three to five years depending on the level of the debtor’s monthly income. During this period the creditors are forbidden from starting or continuing collection efforts.
Advantages of Chapter 13
- The most noteworthy advantage of Chapter 13 is that it affords individuals an opportunity to save their homes from foreclosure and cure delinquent mortgage payments over time, but all mortgage payments that are due during the existence of the Chapter 13 plan must be paid on time (i.e. as they fall due).
- Chapter 13 allows individuals to reschedule other secured debts and thus allows for payment over the life of the Chapter 13 plan, the effect of which may be to extend the term of the debt and lower the monthly payment. It is a kind of “time order”.
- Chapter 13 may protect co-signatories or guarantors on Consumer debts.
- The Bankruptcy trustee manages the plan and the payment with the creditors; hence the debtor is relieved by having no direct contact with creditors.
The Flaws of Chapter 13
- There is a commitment period of three to five years in which the debtor must maintain the plan.
- The plan must pay priority claims in full unless a particular priority creditor agrees to different treatment or unless the debtor contributes all disposable income to theplan.
- If a debtor wants to keep the collateral securing a particular claim, the plan must provide that the holder of the secured claim receives at least the value of the collateral.
- For secured claims, the debtor may need to pay the full value of the loan as opposed to the value of the collateral which may be less due to depreciation.
- A creditor may object or threaten to object to a plan, this threat may compromise the ability to comply with the plan.
The Fresh Start notion
Many people mistakenly believe that bankruptcy wipes the slate clean by giving them a fresh start of their credit life; however this is not the case.
The fresh start that bankruptcy offers is a discharge or release from the liability to pay some debts. For those debts that are discharged the creditors may no longer initiate or continue any legal or collection action for the discharged obligations. Bankruptcy does not however, remove reference to this debt from your credit file.
As a general rule, the discharge simply releases the debtor from all debts provided for or disallowed in a Chapter 13 plan or for all creditors settled by the liquidated assets in a Charter 7 code (note that some special debt will survive the bankruptcy e.g. child support orAlimony)
The Bankruptcy will continue to appear on the individuals’ credit file for 6 to 10 years and will affect their ability to get credit or you may be offered credit at a higher interest rate.
You will need to rebuild your credit life.
Fallacies and myths about bankruptcy
Contrary to popular belief:
- It is inaccurate to state that bankruptcy ruined a person’s credit. The credit was already ruined by the financial difficulties faced by that individual prior to undergoing bankruptcy proceedings. Many would have had arrears and or judgments before considering bankruptcy.
- Though individual bankruptcies are of public records, they are not generally made public in the United States by newspaper advertisement; which are a requirement for some
countries such as the United Kingdom. In the United Kingdom bankruptcies areusually publicized in the local gazette.
- Bankruptcy will generally not destroy your spouse’s credit, unless you are jointly responsible for the debts, in which case his/her credit would have been ruin by non- payments and arrears.
- Your spouse does not need to file bankruptcy just because you filed.
- You can keep your home, even under Chapter 7, where there is little or noequity
- You will not lose your job unless it is a condition of your employment or profession that you must not enter into bankruptcy. This could be because of a professional license requirement or because you work in the finance industry.
- You will still be able to have a bank account, though if you owe money to your bankthey can freeze your funds. You should consider a new account with a bank that is not your creditor.
- You will still be able to get government guaranteed student loans.
- You can rebuild your credit; it just takes time.
Author: – Lara Akinlude
About the Author:- The author is a dual qualified attorney in England and Wales, United Kingdom and Licensed to practice in California, United States. Lara has been practicing in the UK for over 10years.
To learn more about the author please visit www.laraakinlude.com , or connect on Facebook & Twitter.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.