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What is Bankruptcy?
Bankruptcy law in California helps consumer “debtors” – like you, an individual who owes money – get a fresh start financially. Bankruptcy law has processes for a debtor to get relief from some or all debts that the debtor cannot afford to pay. The law also helps creditors – person/entity that is owed money – get paid from the debtor’s assets. However, the debtor is protected so that enough assets remain to live on. This means that creditors do not get everything from the debtor. In addition, some debts are not removed by bankruptcy, and some debts are only removed in certain situations. Regardless, bankruptcy is a legally healthy option for a person who is overwhelmed with debt and needs a fresh start.
Some quick definitions:
A debtor files bankruptcy. The debt is what is owed. The debtor is the person that owes it. For example, if used a credit card and now you need to pay it back, you are the debtor. If you owe money that you cannot pay off, and you file bankruptcy, you are called the debtor.
A creditor is a person or business that is owed money. For example, a bank gives a loan to someone, the bank is owed money from that person. Thus, the bank is the creditor. The credit is the loan, the creditor is the person/entity that loaned it.
A successful bankruptcy case for the debtor resolves in a “discharge.” A debtor wants a discharge in bankruptcy. A discharge is debt elimination.
In contrast, a “dismissal” is a failure in bankruptcy, meaning the case was rejected and or the debt was not eliminated. A creditor wants a bankruptcy case to be dismissed, so that the creditor can get the money back that they loaned to the debtor.
Chapter 7 consumer bankruptcy is for individual debtors filing for debt relief.
Chapter 13 is also consumer bankruptcy but it is for individuals who are trying to avoid liquidating one or more of their assets by having a more manageable payment plan.
Bankruptcy is a legal process to deal with your debt when you cannot pay them. By filing bankruptcy, you may be able to get all or most bills discharged (eliminated, wiped-out), keep all or most of your property, and or get extra time to pay bills if you have a regular income.
An individual, called a debtor, usually files bankruptcy to obtain a discharge to wipe out all or some of their debts so they do not have to be paid.
A married person may file bankruptcy with a spouse or file alone.
Once the bankruptcy starts, creditors cannot try to collect debts from the debtor (person who filed) or sue the debtor to obtain a judgement.
The creditors have no claim on the debtor’s future income or future assets, less a few exceptions.
Bankruptcy may not be the only option, but for many people in debt, simply settling some debts, credit counseling, out-of-court settlements, selling off property, or reducing monthly payments, will not eliminate the overwhelming problem. Almost certainly, these half-way attempts will not fix credit issues for future needs. Only a discharge in bankruptcy will give you a fresh start.
Types of Bankruptcy
For individual debtors, the most common types of bankruptcy are Chapter 7 and Chapter 13. The other common type of Bankruptcy is Chapter 11 but that is for reorganization of a business.
It is worth noting that bankruptcy law is based on federal law, the Constitution and federal code law. However, there are some state laws, that vary by state. For instance, a bankruptcy filed in Los Angeles, California, is subject to different state laws then a bankruptcy filed in, for example, Salt Lake County, Utah. Regardless of the state, bankruptcy cases are only heard in federal courts, specifically, the United States Bankruptcy Court.
CHAPTER 7 BANKRUPTCY: CONSUMER DEBT LIQUIDATION
Chapter 7 is a liquidation bankruptcy. For a debtor to obtain a discharge of debts, meaning the debtor is no longer legally obligated to pay the debts, the debtor may have to turn over some property to the bankruptcy trustee. That property may be liquidated by the trustee to pay off debts. However, the debtor will be able to keep enough to live on.
A bankruptcy “trustee” is the person assigned to administer and manage the bankruptcy case, working under the federal judge. Essentially, the trustee reviews the debtor’s situation and determines if the case should be discharged.
In most Chapter 7 bankruptcies, all property is exempt. This is called a “no-asset” case.
An “asset” is property that has value. A person’s assets in bankruptcy are things that can be used to pay off debts or meet commitments. Some examples of assets are money in the bank, cars, jewelry, house, etc.
However, if the debtor has more assets than can be exempted, the trustee sells the non-exempt property to pay the creditors. By law, creditors are ranked by priority in receiving payments. Some creditors may be fully paid off, while other creditors may get nothing. However, in many Chapter 7 Bankruptcy cases, there are no assets and there is nothing left to pay creditors.
The principal purpose of Chapter 7 bankruptcy is for the debtor to avoid any future debt obligations. If all debts are eliminated, this is a full discharge. However, as noted earlier, some debts, like those incurred through fraud, or child support or alimony, cannot be discharged.
CHAPTER 13: CONSUMER DEBT RESTRUCTURING
Chapter 13 bankruptcy is to allow a person to keep their home or other assets even though they cannot pay all the debts timely. Chapter 13 is for someone who wants to catchup on car or mortgage payments, for example, by way of a payment plan. The debtor must promise to pay part or all of the debts within 3 to 5 years, using future income. If the bankruptcy court judge approves the payment plan, it does not matter if creditors object to the plan. The debtor will be able to keep the asset/property if the debtor makes the court-approved plan payments.
Chapter 13 has some advantages over Chapter 7. Chapter 13 can avoid some assets from being liquidated. Some debts cannot be discharged in Chapter 7 but can be discharged in Chapter 13. In addition, Chapter 13 payment plans allow taxes to be paid over time without interest.
Chapter 13 is only available for an individual, not for a corporation. However, Chapter 13 can only be used if not over certain debt limits. (In rare situations, an individual may file Chapter 11 if they exceed the Chapter 13 limits. Normally Chapter 11 is for reorganizing a corporation.)
Note that there are Non-Dischargeable Debts in Bankruptcy, including Child Support, Alimony, Most Student Loans, Some Federal Income Taxes, and Employer Withholding Taxes. In addition, Debtor Wrongful Conduct may result is debts being not dischargeable; for example, incurring credit card debit without the intent or ability to repay, or obtaining loans using false information. And, Bankruptcy does not eliminate most mortgages or liens.
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