General Overview of Bankruptcy
The goal in filing a Chapter 7 Bankruptcy is to obtain a discharge of all obligations and debts, except for specific debts which are either non dischargeable under the law or specific debts the debtor wishes to retain after bankruptcy. This will give the individual debtor a fresh start and enable them to begin rehabilitating their credit which will be reported to credit reporting agencies. Creditors will now begin to look at the person’s credit post-bankruptcy to determine their credit worthiness. Most lenders will grant car loans and many other secured loans immediately after bankruptcy, but with higher interest rates. Starting about one year after the bankruptcy case is over creditors will begin lending at normal rates.
Chapter 7 bankruptcy will enable the person struggling with debt to discharge all debts with certain exceptions. Unsecured debts like personal lines of credit, lawsuits, and credit cards are normally dischargeable, unless they fall into one of the exceptions to the dischargeability rules. Secured debts are debts for which some collateral security has been pledged to secure the debt or involuntary liens placed upon the property. They range from secured loans such as the home mortgage, automobiles, appliances, etc one the one hand and involuntary judicial liens, administrative tax liens, and statutory liens on the other.
When you file Chapter 7 you are given several options. They consist of paying nothing to the secured creditor and surrendering the collateral; or reaffirming the debt at the fair market value of the collateral; or even redeeming the collateral with a lump sum cash payment for fair market value. For example, if you want to keep your car you will offer to reaffirm that debt by signing a reaffirmation agreement prepared by the secured creditor. This will be signed and filed with the court and you will continue making all monthly payments as usual and nothing will change. Or the debtor may make arrangements to surrender the unwanted vehicle to the dealer and owe nothing. If a debtor wishes to reaffirm secured merchandise such as appliances, computers, television sets etc. the only obligation is to reaffirm for “fair market value” which in many cases is less than what you owe on the property! The term “fair market value” in this context is usually the value the collateral would have if sold at a garage sale or distress sale which value is determined by negotiation between the lender and the debtor. The secured creditor is more than willing to negotiate with me on behalf of my clients because they usually do not want to take the property back.
Whether you choose to file a Chapter 7, a Chapter 11 or a Chapter 13 Bankruptcy will depend on the particular problem you find yourself in. If you are behind on a mortgage you might want to first request that the lender give you a payment plan with which to make up the arrearage. Some lenders will let you make it up in 3 -6 months, still others will allow you to add the delinquent amount to the back end of the loan and modify the loan. However, if your lender won’t work with you and foreclosure is imminent, you can force them to accept a payment plan by filing Chapter 13. You can list the arrearage amount and offer to pay it back in up to 60 months without interest in most cases.
Another example is when you are current on your mortgage but not able to pay your credit cards. If you are among the minority these days that have equity in a residence which exceeds the allowable exemption limit in Bankrupcty, you could stand to lose your property if a Chapter 7 is filed. The allowable limit of equity in a residence which you occupy and for which you can safely exempt in Chapter 7 is one of the following: (1.) $75,000 for a single person; (2.) $100,000 for a married persons, or for an unmarried debtor who resides with a member of the family unit; (3.) $175,000 if the judgment debtor or spouse residing in the residence is either (a.) 65 years of age or older, (b.) physically or mentally disabled and as a result is unable to engage in gainful employment; (4.) a person 55 years of age or older with a gross annual income not exceeding $25,000, or if married not exceeding $35,000. If you own and reside in a home and are within the above exemption limits you may safely file a Chapter 7 case without fear of losing your home. Your Chapter 7 case will discharge all of your unsecured debts and you will keep your residence.
If the equity in your residence exceeds the limits above, or if you own other real property with equity, or other personal property which is not exempt, then you may have to file a Chapter 13 instead of a Chapter 7 in order to protect that equity and/or property. The criteria in Chapter 13 is that creditors must receive no less than they would receive in liquidation if you had filed a Chapter 7 case. You would therefore propose to pay back at least the amount of the excess equity which exceeds the exemption limits through a Chapter 13 plan of up to 60 months. The balance of unsecured debts are discharged.
However, in Chapter 13 it is imperative that you remain current on all of your post-petition mortgage payments and begin making regular monthly plan payments every 30 days; otherwise your case will be dismissed.
Still another example is when you are behind in the mortgage payments, tax payments, and/or other debts and you cannot possibly start making plan payments within 30 days as well as keep current on the post-petition mortgage payments. You may have lost your job and have no income. You would consider filing Chapter 11 in order to give yourself breathing room to market the sale of your home, or to buy you time to find a new job. Chapter 11 will allow you at least 4 months before any plan must be filed and you will not have to make either plan payments or post-petition mortgage payments during this period of time. Chapter 11 is utilized largely by businesses but individuals may take advantage of it as well.
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