BAPCPA REQUIRED NOTICE NO. 1
§342(b) and §527(a)(1) of the Bankruptcy Code
PURPOSES, BENEFITS AND COSTS OF BANKRUPTCY
The Bankruptcy Code or law is divided into chapters, and the two chapters most often used by individuals and families are Chapter 7 and Chapter 13. In chapter 7 or "liquidation bankruptcy," the bankruptcy debtor gets to discharge all dischargeable debts, and in exchange for the discharge the bankruptcy trustee will liquidate any of the debtor's non-exempt assets and use the money from that liquidation to pay off creditors to the extent money is available. In chapter 13, the debtor reorganizes some debts (i.e. reorganizes how a mortgage arrearage is paid to avoid foreclosure, how a car is repaid to avoid repossession, etc.), while still discharging some debt, particularly in the case of unsecured, non-priority creditors.
In most instances, the "Automatic Stay" immediately goes into effect when the debtor files. This stay (similar to a "stay of execution") brings to a halt most lawsuits, repossessions, foreclosures, evictions, garnishments, and other attempts to collect the debt, including harassment by creditors. Creditors can continue to collect the debt ONLY with permission from the court, and if the debtor is represented, creditors can only speak with the debtor's attorney. (Some debts are exempt from the stay, such as child support. See additional information below.)
Chapter 7 is generally best for debtors who are having financial difficulties and are unable to repay their debts. To find out if they're eligible for chapter 7 bankruptcy relief, debtors will need to perform a Means Test if their current monthly income is above the State Median Income. Those who aren't eligible for chapter 7 usually still have chapter 13 bankruptcy relief as an option.
Logistically, the way chapter 7 works is that a bankruptcy Trustee is entitled to take possession of all of a debtor's property, but the debtor can claim certain property (such as household goods, clothes, a car, and even a house in some cases) as exempt, as long as it's not subject to any creditor liens. The Trustee then liquidates or sells the non-exempt property (if there is any) and uses the proceeds of the sale to pay off the debtor's creditors according to priorities of the Bankruptcy Code.
The purpose of filing a Chapter 7 is to obtain a discharge of most existing debts. However, in rare cases dishonest debtors engage in certain kinds of improper conduct described in the Bankruptcy Code. If that happens, the dishonest debtor's discharge may be denied by the Court,defeating the purpose of filing. The filing fees charged by the court for a Chapter 7 may be found on the District of Kansas - US Bankruptcy Court website and was $335 as of 12/1/2016.
Some debts are not dischargeable by bankruptcy, such as certain taxes and student loans, alimony and support payments, criminal restitution, and debts for death or personal injury caused by driving while intoxicated with alcohol or drugs. A debtor would still be responsible for those debts even after a successful bankruptcy.
If a debtor chooses, he or she might be able to keep property that they have purchased which is also subject to a valid security interest. (A common example of this would be a debtor wanting to keep a car that is subject to a secured loan.) That process is called redemption and the reaffirmation of an existing pre-bankruptcy debt.
For additional information about chapter 7 bankruptcy, please see Chapter 7 - Bankruptcy Basics prepared by the Administrative Office of the United States Courts.
Chapter 13 is generally best for individuals who have a regular and stable source of income and who are temporarily unable to pay their debts but who still desire to repay as much of those debts as they can. Chapter 13 relief is only available to those whose debts do not exceed certain dollar amounts outlined in the Bankruptcy Code. The filing fees charged by the court for a Chapter 13 may be found on the District of Kansas - US Bankruptcy Court website and was $310 as of 12/1/2016.
Logistically, in a chapter 13 a debtor files a plan with the Court to repay their creditors some or all of money that is owed them. This repayment can be made using future earnings (similar to an installment plan) or by selling or abandoning certain collateral such as land and motor vehicles. Just like with Chapter 7, debtors usually are protected from creditors upon the filing of their case due to the Automatic Stay, but all chapter 13 plans must be approved by the Court before the debtor can begin working toward a discharge.
For additional information about chapter 13 bankruptcy, please see Chapter 13 - Bankruptcy Basics prepared by the Administrative Office of the United States Courts.
Chapter 11 is used almost exclusively for business reorganization, though technically it's available for individual debtors, too. Usually individuals don't use chapter 11 because it is much more complicated than chapter 7 and chapter 13 bankruptcy. It's also much more expensive. The filing fees charged by the court for a Chapter 11 may be found on the District of Kansas - US Bankruptcy Court website and was $1,717 (unless the debtor is a railroad) as of 12/1/2016.
For additional information about chapter 11 bankruptcy, please see Chapter 11 - Bankruptcy Basics prepared by the Administrative Office of the United States Courts.
Chapter 12 is designed specifically to allow family farmers keep their farms, and so it isn't designed for consumer debts. It's similar to a chapter 13 bankruptcy in that it allows the debtors to repay their debts over a period of time. The filing fees charged by the court for a Chapter 12 may be found on the District of Kansas - US Bankruptcy Court website and was $275 as of 12/1/2016.
For additional information about chapter 12 bankruptcy, please see Chapter 12 - Bankruptcy Basics prepared by the Administrative Office of the United States Courts.
What Bankruptcy Can and Can't Do
Bankruptcy may make it possible for people who are struggling financially to:
- Get a fresh start. It allows a debtor to discharge the liability for most (if not all) of their debts. When the debt is discharged, the debtor has no further legal obligation to pay the debt.
- Save their home. Bankruptcy may stop foreclosure actions on their home and allow them an opportunity to catch up on missed payments.
- Save their car. The automatic stay means that a bank may not (usually) repossess the vehicle of a debtor who has filed bankruptcy. Even after it has been repossessed, bankruptcy can force the creditor to return the car or other property.
- Save their wages. Bankruptcy can stop wage garnishment, giving debtors a livable wage again.
- Save their sanity. It can also stop other debt collection harassment, such as phone calls, collection notices, etc.
- Save their water or electricity. It allows debtors to prevent certain utility services from being cut off. If those services have already been cut off, it can facilitate getting them reinstated.
- Save more money. Bankruptcy can lower the monthly payments and interest rates on debts the debtor chooses to keep ("reaffirm"), including secured debts such as car loans.
- Receive their due. If certain creditors have committed fraud or are seeking more money than they're entitled to from the debtor, bankruptcy can allow the debtors to challenge those fraudulent or excessive claims.
Bankruptcy, however, cannot cure every financial problem. It is usually not possible to:
- Eliminate the rights of secured creditors. If debtors owe money on a secured loan (such as a car loan), they cannot keep the collateral (the car) unless they choose to keep making payments on the debt.
- Dodge child support or other priority debts. Certain debts, called "priority debts," receive special treatment by the federal bankruptcy statutes. Priority debts include child support, alimony, student loans, certain court ordered payments, criminal fines, and some taxes.
- Protect cosigners. If a relative or friend cosigned on a bankruptcy filer's loan, the cosigner may still be obligated to repay whatever part of the loan is not paid during the bankruptcy case.
- Eliminate future debts. Bankruptcy can only look backward and discharge debts incurred prior to filing. Debts that are incurred after bankruptcy has been filed will need to be paid in full by the debtor.
- Hide a bankruptcy within the last ten years. By Federal law, a bankruptcy can remain on a debtor's credit history for 10 years. By the time bankruptcy is necessary, a debtor's credit score is usually quite low, but if a debtor wisely uses the fresh start bankruptcy provides, that score can rebound as the debtor makes timely and full payments on remaining debt, saves money, reduces their overall debt load, etc.
Credit Counseling Agencies
If a debtor is not disciplined enough to create a workable budget and stick to it, can't work out a repayment plan with creditors, can't keep track of mounting bills, or needs more help with his or her debts than can be achieved by merely having a few of unsecured creditors lower their interest rates somewhat, it probably makes little sense to consider contacting a credit counseling organization.
If, on the other hand, debtors meet all or most of those criteria, there are many non-profit credit counseling organizations that will work with debtors to solve their financial problems. Reputable credit counselors can advise debtors on reducing debt and managing money. They may also be able to help debtors negotiate a plan to repay their debts.
Unfortunately, many credit counselors are not reputable. If possible, it's probably best to find an organization that offers in-person counseling. Many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate nonprofit credit counseling programs and those tend to be most reputable. Do some research on any credit counseling services that claim to be affiliated with or charitable organizations as they often are little more than collection agents for credit card companies. A debtor's preferred financial institution, local consumer protection agency, and friends and family also may be good sources of information and referrals.
Reputable or not, be aware that just because an organization claims to be "nonprofit" does not guarantee that its services are free, affordable or even legitimate.
Under the bankruptcy reforms of 2005, debtors need to take two short credit counseling courses, one before and one after a debtor has filed bankruptcy. The US Trustee determines which credit counseling organizations may administer those courses.
For additional information about required credit counseling courses within bankruptcy, please see Credit Counseling and Debtor Education Courses prepared by the Administrative Office of the United States Courts.