Many of our clients ask us what happens if you file bankruptcy? This is a very important question, and several significant Bankruptcy Code provisions are triggered when filing bankruptcy. Generally, the automatic stay takes effect upon the filing of bankruptcy, and all assets and claims of the person or entity filing for bankruptcy become part of the bankruptcy estate. For Chapter 7 and Chapter 13 bankruptcy, a trustee is also appointed to administer the bankruptcy estate.
The Purpose of Bankruptcy
To answer the question of what happens if you file bankruptcy, it is important to understand what bankruptcy can and cannot do. At its core, bankruptcy allows a debtor to obtain a fresh start unburdened by the same debt that existed before the bankruptcy. Bankruptcy does this by categorizing different kinds of debt and providing various treatment under the Bankruptcy Code. For example, if the debt is for a domestic support obligation such as child support or alimony, it will not be discharged and the obligation to pay remains after the bankruptcy is complete. However, Chapter 7 bankruptcy does eliminate general unsecured debts such as credit cards, personal loans, unsecured guarantees of commercial debts. Chapter 13 and Chapter 11 can eliminate debt, but generally also provides for a plan to repay some or all debts over time. In the previous example, Chapter 13 can be used to pay back child support or alimony arrears over a 3- to 5-year period.
The Automatic Stay
Under 11 U.S.C. § 362, generally when a bankruptcy case is filed, the automatic stay goes into effect. The automatic stay stops all collections, including wage and bank account garnishments, foreclosures, repossessions, and lawsuits. The automatic stay gives the debtor breathing room to reorganize its debts. Creditors who violate the automatic stay can be subject to severe penalties, such as attorney’s fees and punitive damages, which makes the automatic stay a strong protection for debtors. The automatic stay feature of bankruptcy is often utilized to file for bankruptcy before a foreclosure sale to allow the debtor to pay back arrears owed on a home over a period of time.
The Bankruptcy Estate
The next component to answer the question of what happens if you file bankruptcy is understanding the bankruptcy estate, which is created when the bankruptcy case is filed. All of the debtor’s assets, which include claims against third parties, become part of the bankruptcy estate. If a family files for bankruptcy, this often includes their home, cars, bank accounts, furniture, and any other assets.
If an individual or family files for Chapter 7 or Chapter 13, their assets can be protected using bankruptcy exemptions, but these exemptions have limitations. For example, if a debtor has $100,000 of equity in a home, the debtor should take a very close look at how the property is titled, the value of the property, and review any applicable exemptions that may apply.
Since all assets are part of the bankruptcy estate, there are some circumstances in which a debtor must request court approval before using or disposing of assets of the bankruptcy estate. If a debtor wishes to sell real property in Chapter 11 or Chapter 13, the Bankruptcy Code requires under 11 U.S.C. § 363 that certain procedures must be followed. Also, if a person who filed for Chapter 13 has a claim against a third-party, such as a worker’s compensation claim or personal injury claim, the claim becomes part of the bankruptcy estate and any settlement of the claim must be approved by the Bankruptcy court.
The Bankruptcy Trustee
A bankruptcy trustee is appointed by the United States Department of Justice, United States Trustee’s Office in every Chapter 7 and Chapter 13, and sometimes in Chapter 11 cases. The trustee has specific duties depending on the chapter of bankruptcy that is filed, including investigating the financial affairs of the debtor, reviewing the bankruptcy petition and schedules, conducting the 341 meeting of creditors, and issuing reports in the bankruptcy case. In a traditional Chapter 11, the debtor is considered a debtor-in-possession and a trustee is generally not appointed. In a Small Business Reorganization Act of 2019 case, a SubChapter V trustee is appointed, while the debtor also remains a debtor-in-possession. A Chapter 13 trustee is also tasked with accepting and distributing Chapter 13 plan payments, and ensuring that the Chapter 13 plan conforms with the requirements of the Bankruptcy Code.
Steiner Law Group assists our clients in answering the question of what happens if you file bankruptcy? If you have questions about bankruptcy, please call (410) 670-7060 to schedule a consultation.