Bankruptcy: An Overview
In
Arizona and all other states, an
individual or business that is badly in debt can file for bankruptcy protection,
with the objective of having their debts discharged.
Bankruptcy can be filed under various chapters of the U.S. Bankruptcy Code. For
individuals and couples, the most common forms of bankruptcy are Chapter 7 (a
liquidation or “straight bankruptcy”) and Chapter 13 (personal reorganization).
A
bankruptcy discharge releases you from personal liability for certain types of
debts. While the debts that are excepted from discharge vary from chapter to
chapter, here is a list of debts that are generally not dischargeable in
bankruptcy:
-
Taxes and tax liens
-
Student loans
-
Alimony and child support (domestic support obligations)
-
Debts
obtained through fraud, false pretenses or false representation
-
Debts
you failed to schedule in time to allow creditors to file proofs of claim
-
Debts
for willful and malicious injury
-
Government fines or penalties
How Bankruptcy Works
In
general, a Chapter 7 or Chapter 13 case begins with your filing a petition with
the Bankruptcy Court. In addition to your petition, you must file schedules of
assets and liabilities, a schedule of current income and expenditures, a
statement of financial affairs, and a schedule of executory contracts and
unexpired leases.
If
you are an individual debtor with primarily consumer debts, you must file (a) a
certificate of credit counseling; (b) evidence of payment from employers, if
any, received 60 days before filing; (c) a statement of monthly net income and
any anticipated increase in income or expenses after filing; and (d) a record of
any interest you have in federal or state qualified education or tuition
accounts.
Chapter 7 Is the Most Common Form
of Bankruptcy
In a
Chapter 7 bankruptcy, the bankruptcy trustee gathers and sells your non-exempt
assets and uses the proceeds to pay creditors. The Bankruptcy Code lets you keep
certain “exempt” property. These exemptions may apply to assets such as your
home, vehicle, household goods and furnishings and retirement accounts.
Eligibility. One of the primary purposes of bankruptcy is to discharge
certain debts to give an individual debtor a “fresh start”; when your bankruptcy
is finalized, you are no longer responsible for discharged debts.
In a
Chapter 7 case, a discharge is available only to individual debtors. A
partnership or corporation that files for Chapter 7 bankruptcy is dissolved.
Protection.
Filing a petition under Chapter 7 stops most collection actions
against you and your property through the “automatic stay.” As long as the
automatic stay is in effect, creditors generally may not initiate or continue
lawsuits, wage garnishments, or even telephone calls demanding payments. The
bankruptcy clerk gives notice of your bankruptcy case to all creditors whose
names and addresses you provide.
Between 20 and 40 days after the petition is filed, the case trustee will hold a
meeting of creditors. You must attend the meeting and answer questions regarding
your financial affairs and property.
After
a Chapter 7 bankruptcy is final, it stays on your credit report for 10 years
from the date of filing the petition. The existence of the bankruptcy on your
credit record may make credit less available and/or terms less favorable
(although unpaid debt can have the same effect).
Chapter 13 Is a Better Choice for
Many Debtors
Under
Chapter 13 (also called a “wage earner’s plan”), you propose a plan to pay your
creditors over a three- to five-year period. During that time the law forbids
creditors from starting or continuing collection efforts.
While
your Chapter 13 case is pending, you are not permitted to obtain additional
credit without the Bankruptcy Court’s permission.
Eligibility. Any individual, even if self-employed or operating an
unincorporated business, is eligible for Chapter 13 relief as long as the
unsecured debts are less than $360,475 and secured debts are less than
$1,081,400. These amounts are adjusted periodically. A corporation or
partnership may not be a Chapter 13 debtor.
Advantages. Chapter 13 offers individuals a number of advantages over a
Chapter 7 liquidation. Perhaps most significantly, Chapter 13 allows you an
opportunity to save your home from foreclosure. By filing under this chapter,
you can stop foreclosure proceedings and cure delinquent mortgage payments over
time. You must continue to make the regular monthly mortgage payments that come
due during the Chapter 13 plan. A Chapter 13 acts like a consolidation loan
under which you make the plan payments to a Chapter 13 trustee who then
distributes payments to creditors; you have no direct contact with creditors
while under Chapter 13 protection. Finally, a Chapter 13 may allow you to strip
off a completely unsecured second mortgage on your residence or to “cram down”
the amount owing on a vehicle or an investment property to its fair market
value.
Businesses Can File for Bankruptcy
under Chapters 7 and 11
When
a business is unable to service its debts, it can file for protection under
either Chapter 7 or Chapter 11.
In a
Chapter 7 the business ceases operations. A court-appointed trustee sells all of
the business’s assets and distributes the proceeds to its creditors. In a
Chapter 11, the business owner remains in control as a “debtor in possession,”
subject to the oversight and jurisdiction of the court; in certain cases, the
bankruptcy trustee temporarily takes control of the business.
A
Chapter 11 business reorganization can be much more complicated and is not
discussed in detail here. |
