What is the bankruptcy process
For most consumer debtors, bankruptcy is filed either under Chapter 7 or Chapter 13 of the title 11 of the United States Code.
I will discuss the process for each chapter in this article. The primary purpose of filing bankruptcy is to resolve unsecured debt and to resolve secured debt where the secured items are being surrendered regardless of which chapter you file. Unsecured debt is generally credit cards, medical bills, repossessions, unpaid utilities, signature loans and payday loans. Any debt that is not attached to collateral is generally a unsecured debt. For the wide variety of unsecured debts, they get wiped out in bankruptcy. Some unsecured debts have exceptions to discharge. Those are generally recent tax obligations, student loans and debts incurred fraudulently. Also, debts such as alimony and child support survive most bankruptcy discharges. There are exceptions to every rule, but as a very common general brush stoke, if you have a governmental debt or domestic support obligation, it probably is not going to go away. Secured debts, such as mortgages and car loans survive bankruptcy to the extent that the lien is still attached to the collateral until paid or surrendered. If you file bankruptcy and have a car loan, and you want to keep your car, you must pay for it or give it up. Bankruptcy does not wipe out secured loans unless you give up the collateral. No switching to the differences between Chapter 7 and Chapter 13.
The Chapter 7 process is quite rapid. A typical Chapter 7 case has a life of about 4 months from filing until discharge. Chapter 7 can only be filed every 8 years. So if you filed a Chapter 7 five years ago, you cannot file another Chapter 7 until you are at your 8th year anniversary. A Chapter 7 petition is prepared by a bankruptcy attorney which is about 50 pages in length. The petition answers a variety of questions and makes disclosures that are publicly available once filed. Such as what assets the debtor has, the debts of the debtor, income/expenses and various disclosures about activities of the debtor over the past 2 years prior to filing. Once filed, a 341 hearing is scheduled and a trustee examines the debtor. Chapter 7 trustees look for assets that can be sold. For more information on that subject, please see this article: Difference Between Ch 7 and 13. After the 341 hearing, the debtor can generally expect a discharge within about 90 days, unless the trustee or a creditor files a complaint with the Court complaining of dishonest conduct of the debtor. The Chapter 13 process is quite more involved. Similar in nature to the Chapter 7 process, but following the 341 hearing, several additional hearings may be required. When a Chapter 13 is filed, the debtor files a reorganization plan and serves it on all creditors. The plan is how the debtor chooses to repay creditors. The debtor pays money into a pot. A trustee is appointed and he takes that money and disburses it to creditors per the terms of the plan. So the plan has substantial binding effect on the rights of creditors.
A good example would be, say you have a car loan with a balance of $20,000 at 18% interest but the car value is only $8,000. The plan may purpose to repay the loan by "cramming down" the loan to $8000 payable at 5.25%. (for more on cram downs see: Cram Down in Bankruptcy). That plan is served on the car finance company who may either accept the terms of the plan or object to them. Accordingly, the Chapter 13 case generally has a confirmation hearing where objecting creditors may be heard by the Court to determine whether the proposed plan meets the obligations of the bankruptcy code and creditors are being treated appropriately. So, in addition to the 341 hearing, a debtor may have to appear for a plan confirmation hearing. Additionally other hearings may be required, such as objections to claims, motions to incur debt etc.. Chapter 13 cases last 3-5 years, and there are generally many things that get filed in the case, some that require hearings and some that do not. But the case is more, much more complex than a Chapter 7. At the end of the Chapter 7 or Chapter 13, a discharge is entered. A discharge is an order from the Court that the debts listed in the petition are no longer enfoceable against the debtor (saving those that are excepted from discharge such as student loans). The case closes and that is it.
Once the case closes, it is common that debtors will notice their credit reports are not accurate. There is a common misconception that bankruptcy fixes credit reports. This is simply not true. Bankruptcy releases legal obligations. Updating your credit report requires most debtors to deal direclty with the credit reporting agencies. There are three. Equifax, Transunion and Experian. They are private companies, and a debtor should pull their credit report after receiving a bankruptcy discharge to make sure the reports are accurate.
Should you wish to discuss bankruptcy options, please feel free to contact my office at 877-214-9640 for a free consultation.
