Petitions for bankruptcy are filed with the US Bankruptcy Court and federal laws govern the process. Although there are several types of bankruptcy, those most commonly used by consumers (non-businesses) are the Chapter 7 and Chapter 13.
One of the prime concepts of any bankruptcy is that once it is filed, the debtor is under the protection of the court through the creation of the automatic stay. This means that creditors are 'stayed' or prevented from collecting on the debt, thereby halting phone calls, foreclosures, repossessions, garnishments and lawsuits.
Through a Chapter 7 or liquidation bankruptcy, you can discharge or erase your liability on most unsecured debt such as credit card debt, medical bills, and repossessed vehicle deficiencies. Eligibility will be determined through legal counseling and includes demonstrating the inability to repay the debts.
The process includes fulfilling educational components and producing required documentation of your financial situation. You are allowed to keep assets in order to get your ‘fresh start’ after the Chapter 7, and the state exemption statutes are used to protect those assets from being used to pay your creditors. You will also state your intent or choices on how to deal with assets that are collateral for secured loans, such as mortgages and vehicle loans.
While not all debts can be discharged in a Chapter 7 bankruptcy, eliminating these unsecured debts often allows debtors to handle any remaining obligations.
Although the Chapter 13 bankruptcy shares similarities with the Chapter 7, the focus is on repayment of debts through a court approved payment plan. Chapter 13 is useful in repaying mortgage arrearages to avoid a home foreclosure and repaying debts that would not be discharged in a Chapter 7. It is also required if you have the ability to repay part of your debt. Chapter 13 is also used to good advantage for relief from a second home loan when the current home value is less than the balance of the first mortgage.
Structuring the Chapter 13 payment plan is a complex process based on the type of debts and the income available. The resulting plan must be approved by the court, and payments will be made over a period of three to five years.
The Mortgage Modification Mediation Program has recently been added by the court to be used in conjunction with a Chapter 13 bankruptcy. The purpose of the program is to facilitate the submission of loan modification documents while the borrower is under the protection of the bankruptcy court, (i.e. safe from possible foreclosure). It utilizes a court appointed neutral mediator to oversee the process, and documents are submitted to the lender once the packet is complete.
This program can reduce the frustration of missing documents and communication problems with the lender. And, both homeowner and lender demonstrate their commitment to the modification by using this program.
Sometimes, debt relief can be found through means other than filing a bankruptcy. This might include loan modification for delinquent home loans, negotiations with creditors to settle the debt, or debt consolidation loans.
Since filing a bankruptcy is an important decision, you are encouraged to explore your options. A legal consultation to assess your situation will help you make the right choice.
The purpose of this web site is to provide general information and it is not intended to be legal advice regarding your specific situation. Neither the site nor its contact form creates an attorney-client relationship. Confidential information should not be sent until the attorney-client relationship has been established.