NEW YORK—- During the recession of past couple of years, many consumers and small businesses are having a tough time making ends meet. The unemployment, reduced consumer spending, and mounting consumer debt are putting many Americans on the brink of insolvency. Cash strapped households and small businesses are desperately looking for solutions. Many turn to bankruptcy but is bankruptcy a good option for everyone struggling to make ends meet?
The answer depends on individual situation and consulting an experienced bankruptcy attorney should be the first step. But here are some basics to help individuals decide if bankruptcy is right for them.
What most people don’t realize is that there are adverse consequences to bankruptcy. Bankruptcy stays on consumer credit reports for up to 10 years. This may make it difficult to obtain a car loan, buy a new house, or even rent an apartment. Individuals and business should carefully consider these negative consequences before rushing to bankruptcy court.
Bankruptcy is governed by federal law. This means the law is the same and will not change from State-to-State. There are some limited exceptions to this but those exceptions are highly technical and they are best left to an experienced attorney to worry about. There are different types of bankruptcies depending on the debtor and the debtor’s ability to make payments.
The simplest and the most straight forward bankruptcy is a Chapter 7. If the debtor’s assets are less than what the debtor owes, the debtor may file for Chapter 7 protection. The filing of the bankruptcy petition will trigger the automatic stay. This means creditors, collection agencies, and even the IRS cannot contact the debtor. The automatic stay remains in effect for as long as the case is pending before the bankruptcy court. In most consumer bankruptcies, this is usually several months.
Once the case is concluded, the bankruptcy judge issues what is known as a discharge order. Discharge order relieves the debtor from responsibility to pay the debts the court has discharged. Unless a debt is specifically mentioned in the discharge order, it is not discharged.
It is important to realize that not all debts are dischargeable. Generally, secured debts such as homes secured by a mortgage and an auto loan secured by the car are not dischargeable. In most cases, the debtor must give up possession of secured debts unless the debtor has entered into what is known as an affirmation agreement. The affirmation is an agreement by the debtor promising to make payments on secured obligations as a condition of keeping those assets.
Certain types of debts are not dischargeable. The best examples are student loans, child and spousal support obligations, criminal fines, and certain legal judgements. Therefore, bankruptcy is not helpful to those whose financial difficulties stem from non-dischargeable debts. An attorney is the best person to analyze debts in order to determine which is dischargeable and which is not.
Sometimes debtors have income but the income is not sufficient to service all of the debtor’s obligations. Chapter 13 may be an option in those circumstances. A plan is created through the bankruptcy court that includes reduced payments to unsecured creditors such as credit card companies.
The duration of the repayment agreement is generally three to five years. Once the debtor complies with the provisions of the plan, the unsecured debts provided for in the plan are discharged. The discharge takes effect at the end of the repayment period.
However, even under Chapter 13, student loans and child support obligations are not dischargeable. Student loans may be discharged under Chapter 13 if the debtor is able to demonstrate hardship. Similar to chapter 7, secured debts cannot be discharged under a chapter 13 repayment plan.
When the Chapter 13 repayment plan is in effect and the debtor is in compliance with its provisions, the automatic stay becomes operative and will prevent unwanted phone calls from creditors and collection agencies.
A major draw back to Chapter 13 is the debtor must have a stable source of income. Unlike a Chapter 7 liquidation proceeding, a debtor in Chapter 13 typically must use all earnings to satisfy the terms of the repayment plan. This means, very little money for discretionary expenditures.
If the debtor is unemployed, Chapter 13 is not an option. Chapter 11 is the same as Chapter 13 except it is a reorganization plan for businesses.