When faced with overwhelming debt, bankruptcy can offer a viable path towards financial recovery. However, it is not a decision to be taken lightly. As an individual considering bankruptcy, it’s crucial to understand your options and the legal implications associated with them.
Understanding the Governing Law
Before embarking on this journey, it is paramount to understand the governing law. The bankruptcy law in the U.S. is primarily contained in Title 11 of the United States Code. Key chapters to familiarize yourself with are Chapters 1, 3, 5, 7, and 13. They provide an overview of the procedures and rules that govern the bankruptcy process.
Bankruptcy offers a “fresh start” through the discharge of all dischargeable debts, allowance of exemptions, and opportunities for redemption of certain personal property or reaffirmation of certain secured debts.
Consumer debtors often have two bankruptcy options: Chapter 7 or Chapter 13.
Chapter 7 Bankruptcy
Chapter 7, also known as “liquidation bankruptcy,” is designed for debtors in financial difficulty that do not have the ability to pay their existing debts. Debtors whose debts are primarily consumer debts are subject to a “means test” designed to determine whether the case should be permitted to proceed under Chapter 7. If your income is above the median income for your state of residence and family size, there may be a presumption that you don’t qualify for Chapter 7.
When considering filing for Chapter 7, it’s crucial to ensure you can exempt all your assets. Texas has the best exemptions in the United States. In Texas you can use either state or federal exemptions, meaning most people don’t have to forfeit any assets in the process. Additionally, you’ll need to qualify under the means test, which evaluates your income from the past six months and considers specific deductions. While you can deduct out-of-pocket health expenses, charitable donations, mortgage payments, and vehicle payments, remember that some deductions, like for a vehicle, may not be at their full value. Ultimately, the means test determines your eligibility for Chapter 7.
Chapter 7 bankruptcy usually spans 100 days. On the first day, you file your case. Between days 30 and 45, you attend a 341 meeting. There’s then a 60-day period for creditors to challenge based on fraud concerns. After this, the court grants an order of discharge, freeing you from debts. Within 30-60 days, credit scores typically improve, with most seeing scores between 670 and 700 within a year. By the second year, current FHA guidelines suggest eligibility to buy a home.
Chapter 13 Bankruptcy
Chapter 13, often referred to as a “wage earner’s plan,” is designed for individuals with regular income who would like to pay all or part of their debts in installments over a period of time. You are only eligible for Chapter 13 if your debts do not exceed certain dollar amounts set forth in the Bankruptcy Code.
In a Chapter 13 bankruptcy, you propose a repayment plan to make installments to creditors over a period of three to five years. If your monthly income is less than the state’s median income, you can do a 3 year plan. If your monthly income is greater than the median income, the plan generally must be for five years. The court must approve the plan before it can take effect.
One advantage of Chapter 13 is that it allows you to save your home from foreclosure. By making regular mortgage payments and making up arrears through your Chapter 13 plan, you can stop a foreclosure and keep your home.
Chapter 13 also has a special provision that protects third parties who are liable with the debtor on consumer debts, such as co-signers, and also provides a broader discharge of debts compared to Chapter 7 bankruptcy.
It’s important to note that not everyone is eligible for these options and not all debts are dischargeable under bankruptcy. Legal advice is highly recommended when considering bankruptcy.
Non-Bankruptcy Debtor Options
Prior to filing for bankruptcy, it’s worth exploring non-bankruptcy debtor options. These could include debt management plans, offers in compromise, or even compositions or extensions. These alternatives can sometimes provide a solution without the long-term impact of a bankruptcy filing on your credit history.
State Court Remedies
In some cases, businesses, including sole proprietorships, can seek financial reorganization outside the bankruptcy court through the appointment of a State Court Receiver or an “Assignment for the Benefit of Creditors”. However, these remedies are rarely used in consumer cases and are often not cost-effective.
Mediation could be another viable option, especially when there’s a single major creditor. In mediation, the issue of collectability may be more important than the issue of liability, offering a unique perspective on the debt resolution process.
In conclusion, navigating bankruptcy requires understanding the various paths to financial recovery. Whether it’s through non-bankruptcy options, state court remedies, mediation, or filing for bankruptcy, the right choice depends on your specific financial situation. It’s always recommended to seek professional advice to ensure you’re making the most informed decision possible.