by Barry L. Thompson, Esq.
There are several different types of Bankruptcy filings available under the United States Bankruptcy Code; two of which are of interest to the individual consumer. They are Chapter 7 ("Straight Bankruptcy") and Chapter 13 ("Wage Earners Plan"). The vast majority of individuals choose the quicker and less expensive Chapter 7 filing rather than the Chapter 13 filing which involves a court approved repayment plan of a fixed percentage of an individuals debts over a period of three years. This article will deal only with the Chapter 7 Bankruptcy filing.
Under a current law a debtor/individual liquidates or turns over to the Bankruptcy Trustee personal assets to pay off his creditors. All unsecured debt (debts not secured by a mortgage on a home or a lien on a motor vehicle) are eliminated even if the assets are not adequate to pay off the debts. Both Connecticut and Federal law also provide for various and often quite generous exemptions for homes, automobiles, IRA accounts and pensions, tools of the trade, household and personal belongings, and numerous other items. An exemption allows that item or its equivalent value to be kept by the debtor while still eliminating all of his listed debts. In most situations individual debtors are allowed to keep virtually all of their assets and belongings including an automobile and their home without any payments to creditors.
A bankruptcy petition is a lengthy document that contains a listing of all of the debts and assets of the individuals filing the petition (husband and wife may file a single combined petition) and also containing a list of the items or moneys claimed exempt by the petitioners. It is signed under oath and submitted to the United States District Court. Once filed it operates as an automatic order for all creditors to cease any collection activities whether it be a mortgage foreclosure, lawsuit or wage execution until the bankruptcy Court gives permission to continue. A First Meeting of Creditors is scheduled which is an opportunity for any of the creditors to attend and ask questions of the petitioners. An attorney with a great deal of experience in bankruptcy matters called a "Trustee" is appointed by the bankruptcy judge. He is charged with the duty to inquire of the debtor concerning the petition submitted; to gather any of the non-exempt assets of the debtor, and distribute them among the creditors. Several weeks after the First Meeting of Creditors, assuming all is in order, a Notice of Discharge is sent out to all creditors and the debts are eliminated.
There are limits to and exclusions from bankruptcy filings. Several kinds of debts are not eliminated by a bankruptcy filing. Among those not dischargeable in bankruptcy are student loans, alimony and child support, and most debts owed to federal, state or local governments such as taxes and any debts for funds or items obtained by fraud. In addition one can only file a bankruptcy petition once in every seven year period.
Many people often wish to keep a creditor or two and a credit card outside of the bankruptcy filing. Although it is imperative that all debts be listed in the bankruptcy petition a method to preserve some debts known as "reaffirmation" is available. If the creditor agrees and enters into a written agreement which is filed in the Bankruptcy Court any debt can be "resurrected" so that it survives the filing of the petition and is then treated as if it was never listed in the petition. This can be especially useful if a person wants to keep a single credit card with a low balance in order to re-establish a favorable credit history after filing a bankruptcy petition.
The filing of Chapter 7 bankruptcy petitions has been increasing dramatically since 1991. Many people have used this method to escape the large financial burden caused by the dramatic downturn in the value of real estate since 1989 while others have used it to escape catastrophic medical bills or numerous high interest credit card debts. Whatever the reasons for the steady increase of the use of the Chapter 7 petition that increase has not gone unnoticed by the legislators in Washington who have initiated several efforts to reform the current bankruptcy laws. None of the suggested reforms have been implemented but many observers of the legislative scene predict an overhaul of the current bankruptcy laws within the next several years. It is likely that the reforms will entail greater restrictions on those who choose to file a bankruptcy petition. The thrust of the reforms sought is to insure that people with enough assets and income available to pay the majority of their debts, although it may cause some discomfort and financial inconvenience in their lives; will be required to pay those debts.
Bankruptcy is an extreme remedy and should not be entered into lightly. Despite the fact that an increasing number of people have resorted to bankruptcy, thus lessening the embarrassment of filing bankruptcy, it still does have a negative impact on your credit rating for several years. A thorough examination of all present as well as future ramifications of using bankruptcy should be explored before any individual chooses this path.
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