The right to file Bankruptcy is part of the Constitution of the United States. The laws allow Americans a chance for financial redemption.
The Chapter 7 bankruptcy is the most common form of bankruptcy filed. It is commonly referred to as a “Wipe Out” or “Fresh Start.” To determine eligibility for Chapter 7 bankruptcy, debtors go through a series of tests to demonstrate that they cannot afford to repay anything to their creditors. These tests include: a Means Test which verifies how much money was made in the last 6 months; a Budget Analysis which determines what their income and expenses will be going forward; and finally, an Asset Analysis which determines if a debtor owns too much property. If the debtor fails the Means Test or Budget Analysis, they will be forced to repay what they can afford to their creditors in a Chapter 13 bankruptcy.
Chapter 7 bankruptcy will discharge or wipe out most unsecured debts. Some common examples of unsecured debts are utility bills, credit cards, medical bills and payday or signature loans. However, there are some bills that cannot get wiped out in a Chapter 7 bankruptcy. For example, debts that are incurred through fraud, owed on certain income taxes, owed for child support or incurred as a result of intoxicated use of a motor vehicle cannot be discharged or wiped out in a Chapter 7 bankruptcy. Also if you have secured debt, meaning that a creditor has a lien on your property, and you want to keep your property, you will have to reaffirm or agree that such loans are unaffected by your Chapter 7 bankruptcy. Typical examples of secured debt are mortgages, car loans, title loans and financed furniture or electronics.
Chapter 13 bankruptcy is a consolidation plan based on what a debtor can actually afford to pay over the course of 3 to 5 years. Often, amounts paid back are less than the full amount owed. The tests in a Chapter 13 bankruptcy are similar to the tests listed above in a Chapter 7 bankruptcy. However, in a Chapter 13 bankruptcy, instead of showing that the person filing bankruptcy cannot afford to pay anything, the test shows how much a person can afford after deductions for reasonable and necessary expenses. This means that the Court will look at your income, less what you need to live, and set a payment that you can afford. Chapter 13 bankruptcy also has some additional benefits:
Chapter 13 bankruptcy can allow you to modify the terms of your secured contracts. You can reduce your interest rate to prime plus a risk factor of between 1% and 3%. If you are paying a high interest rate on a car, this can save you thousands of dollars.
Chapter 13 bankruptcy allows you to catch up on your mortgage. If you are behind on mortgage payments, a Chapter 13 bankruptcy allows you to freeze the amount you are behind and pay it back over years.
Chapter 13 bankruptcy will also freeze IRS interest and penalties allowing you to pay back what you owe the IRS as of the date you file your case and not a penny more.
Once you file a Chapter 7 or Chapter 13 bankruptcy, none of your creditors can call you, write you, sue you, garnish you, repossess your car, or foreclose on your house. This is called the “automatic stay.”
If your creditors contact you after you have filed a Chapter 7 or Chapter 13 bankruptcy, you may be entitled to damages. The Bankruptcy Code allows those who have been hurt by a violation of the automatic stay to recover actual damages and potentially punitive damages if it can be shown that the creditor acted intentionally. Please contact us.