If you have to file bankruptcy, Chapter 13 is the best option to consider first. Though creditors never look on bankruptcy as a positive event, a Chapter 13 shows the debtor is at least trying to pay off their debt. This is sometimes referred to as the “wage earner” plan.
The debtor must have verifiable income sufficient to make monthly payments. The court works with all parties involved to create a longer, more manageable payment plan for all debts usually three to five years.
There are several other advantages to Chapter 13 bankruptcy. If a debtor is in danger of losing his home to foreclosure the court can intervene. They devise a plan to make up late payments. The debtor agrees to make all future payments on time. Other secured debts (not including the home) are restructured to lower the monthly payment amount. Third-party debtors, like co-signers, are exempt from payment. Basically Chapter 13 is like a debt consolidation, endorsed by the court and offering protection to the debtor.
Other forms of bankruptcy require the debtor to liquidate or sell certain assets with the proceeds applied to their debt. With Chapter 13 the debtor is allowed to keep assets and property. To be eligible an individual’s unsecured debt can not exceed $307,675 and for secured debt the limit is $922,975. With the changes made in Bankruptcy Code in 2005, a debtor must prove they received credit counseling from an approved counseling agency prior to filing bankruptcy.
Chapter 13 is initiated by filing a petition with a federal court. All financial information must be disclosed. The judge appoints a trustee to work with the debtor and creditors. All creditors are notified and given the opportunity to appear in court. During the confirmation hearing the debtor presents their repayment plan to the judge. If it’s approved, the trustee collects monthly payments for distribution to creditors. If the judge doesn’t approve the plan, the debtor can rework it.
Another change made in 2005 was comparing the debtor’s income with the median income for their state. This determines how long the repayment plan will last. Once the court approves the repayment plan the debtor is bound to comply. After all debt is paid as agreed the bankruptcy is discharged. A bankruptcy can stay on credit reports for up to 10 years. The best thing a creditor can do to prove they will pay future bills on time is to make all payments as agreed after filing bankruptcy.
Margaret Norton, a Personal Life Coach/Writer/Speaker, resides in St. Peters, Mo.
Bankruptcy was designed to help individuals or companies get out of difficult financial situations. There are six types of bankruptcies; each fills a different need. In some situations, all debt is forgiven, allowing the individuals involved to start over. Other times the bankruptcy court approves a reorganization of debt, giving the individuals relief from creditors and more time to repay their obligations.
Lawmakers felt that farmers and fisherman had unique situations. Chapter 12 was designed just for them. The farmer or fisherman must be able to prove regular annual income. The court recognizes their income is seasonal and that weather and nature affects their potential to earn money. With a Chapter 12 the debtor proposes a reorganization plan to the court. Basically this gives them more time to repay their debt, typically three to five years.
The court defines family as an individual or individual and spouse and a corporation or partnership. They have to meet other criteria such as: proof they operate the business for profit and debt can not exceed a certain amount (defined as fixed or variable)at least 50 percent of the income must come from farming or fishing.
For corporations, more than one-half the outstanding stock must be owned by one family or one family and its relatives.
Chapter 12 bankruptcy begins when a petition is filed with the bankruptcy court. This automatically stops creditors from contacting the debtor directly. A trustee is appointed to collect payments from the debtor for distribution to the creditors. All creditors are notified and given the opportunity to appear in court. The debtor has to provide a complete disclosure of all assets, obligations, financial statements and all sources of income. They present a repayment plan to the bankruptcy judge. The judge approves the plan or they can recommend a Chapter 11 or 13 instead.
Debts are classified as:
priority
secured
unsecured
Priority claims are paid first, and unsecured claims are paid last. Once the repayment plan is approved it is binding on debtor and creditors. When the trustee determines that all obligations were paid as agreed, they request a discharge.
Bankruptcy is never easy but it’s sometimes necessary. It does affect your credit score and can remain on your credit report for up to 10 years. The best way to reestablish your credit after a bankruptcy is to make all payments, after the bankruptcy, on time.
Margaret Norton, a Personal Life Coach/Writer/Speaker, resides in St. Peters, Mo.
Chapter 7 bankruptcy is sometimes referred to as liquidation bankruptcy. The personal possessions of the debtor can be sold. The proceeds from the sale are applied toward the outstanding debt.
After everything is sold, any remaining debt is forgiven, subject to approval of the bankruptcy court. A bankruptcy is always a negative on your credit report. It remains part of your credit for 10 years and significantly lowers your credit score. Creditors prefer a Chapter 13 to a Chapter 7. With a Chapter 13 you work out a repayment plan with your creditors. But debtors don’t always have the income required to pay their debt. Without the needed income the only option is a Chapter 7.
Chapter 7, as well as the other types of bankruptcy, does not allow all debt to be forgiven. Things like child support, alimony, tax liens, student loans, debts involving fraud, debts resulting from law suits, etc. must be paid. Bankruptcy code was amended in 2005. Debtors are now required to verify they’ve consulted an approved credit counseling agency before filing bankruptcy.
Another change is a “means test“. Your income, compared to the state median income, determines if you abused your finances. If the court feels you incurred credit card debt with no intention of ever paying it back your petition for bankruptcy could be denied.
There are cases of abuse, but many times individuals can’t pay back their debt. Circumstances beyond their control–sickness, divorce, death, job loss–results in lost income. Bankruptcy law was designed to give individuals like this a second chance. Once the bankruptcy petition is filed the creditors can no longer attempt to collect the debt. To file a Chapter 7 the debtor completes paperwork (list of all assets, list of all debts/creditors, financial statement, current income earned), which is filed with the federal bankruptcy court. The court appoints a trustee to the case.
You are allowed to keep certain property (exempt) like your home, car and vital necessities, if you have the income needed to continue making the payments. The trustee decides what items to sell and works with the creditors to determine balances owed. The debtor is required to appear before the bankruptcy judge. All creditors are given the opportunity to respond. After all assets are liquidated and applied to outstanding debt, the judge makes a determination. If they agree with the petition for bankruptcy, the remaining debt, with the exception of excluded items listed above, is discharged. If they don’t agree, the debtor can apply for a Chapter 13.
Filing for bankruptcy is not the end of the world. It takes time to rebuild your credit. You may have to pay cash for awhile or a higher interest rate if granted credit. Most creditors will not lend you money after a bankruptcy until you prove that you have reestablished your credit. The best way to do this is to make all payments on time after the bankruptcy.
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