There are many misconceptions around bankruptcy and what happens when someone declares bankruptcy. Although there is a stigma associated with bankruptcy, Steiner Law Group believes that the stigma is based upon ignorance. Congress enacted the bankruptcy laws to help individuals and businesses burdened with debt to get a fresh start. The bankruptcy laws seek to protect both the interest of those that are owed money – the creditors, and the debtor – the one that files bankruptcy. Bankruptcy is a useful tool to get back on track and the help is available if needed.
Filing for bankruptcy means many things, and this article will discuss what happens if you file bankruptcy and how bankruptcy works.
What Does Bankruptcy Mean?
Bankruptcy means that a person or business is not able to pay its debts, and either wishes to restructure the debt through either
- a personal Chapter 13 bankruptcy;
- a personal Chapter 11 bankruptcy; or
- a business Chapter 11 bankruptcy.
Bankruptcy can also eliminate certain kinds of debt with a personal Chapter 7 bankruptcy, or provide an orderly liquidation of a business through a business Chapter 7 bankruptcy. For example, using a personal Chapter 13 bankruptcy to pay back arrears on a mortgage is a way of restructuring the mortgage arrears debt over 3-5 years. Another example is using a business Chapter 7 to allow a trustee to take assets of a business to sell and distribute the proceeds to creditors in a court overseen process to ensure that priority and other creditors are paid in accordance with the bankruptcy code. Bankruptcy does not mean that the debtor does not own any property and it does not mean that the debtor does not make a good income.
Bankruptcy accomplishes its goals through the automatic stay, prioritization of debt, and in most cases the bankruptcy discharge, and there are many key players in a bankruptcy, such as a trustee, the debtor, debtor-in-possession, U.S. Trustee and creditors.
The Bankruptcy Filing
The actual bankruptcy is paperwork that provides the court, the bankruptcy trustee, and creditors with a complete financial picture of the debtor. The automatic stay which stops collection activity typically goes into effect upon the filing of the case with the court, thus making the filing date a very important date. The bankruptcy paperwork includes a list of all property owned by the Debtor, lists of all creditors, a list of executory contracts and unexpired leases, and for individuals, a breakdown of monthly income and expenses. A bankruptcy also includes a Statement of Financial Affairs that asks many specific financial questions. There are additional forms and schedules that a bankruptcy must have, depending on the nature of the debtor and the chapter of bankruptcy the case is being filed under, but they all aim to provide the players involved in the bankruptcy with a complete financial picture of the debtor.
The Bankruptcy Estate
Also upon the filing of a bankruptcy of the property of the debtor is considered to be property of the bankruptcy estate, which means that there are strict rules on transfers of property during bankruptcy because technically, the debtor no longer owns any property. This also means that the bankruptcy trustee must file taxes for the bankruptcy estate in an individual Chapter 7. In an individual Chapter 7, title to the property is vested back to the debtor upon the chapter 7 discharge, and in a Maryland Chapter 13, upon discharge, notice of plan completion, or dismissal.
What Debts Must Be Included?
All debts belonging to the debtor of whatever nature must be listed in a bankruptcy. The debtor cannot choose to leave out a creditor because it wishes for it to be treated differently. However, many times, debtors can keep their homes and cars and other important assets in a bankruptcy.
The Automatic Stay
Typically, when filing bankruptcy, the automatic stay takes effect. This stops all collection activity such as wage garnishments, foreclosures and bank account garnishments, and gives the debtor breathing room from creditors to allow the debtor to continue to function and get relief.
Prioritizing of Debt in Chapter 13
Bankruptcy also means that debts are prioritized by the Bankruptcy Code, such that certain debts may be paid before others, particularly in Chapter 13 or asset Chapter 7s.
Discharge of Debt
Filing for bankruptcy also typically means that the debtor wishes to receive another benefit of bankruptcy – the bankruptcy discharge. In most no-asset Chapter 7 cases, the discharge is entered about 60 days after the first meeting of creditors. The bankruptcy discharge is a court order that eliminates certain kinds of debt such as personal loans and credit cards, and it also acts as an injunction against the collection of all debt that arose before filing bankruptcy. In a Chapter 13, the discharge is entered upon completion of plan payments. In Chapter 11, the debtor generally receives a discharge upon confirmation of the Chapter 11 plan.
Bankruptcy works through laws giving the debtor the opportunity to get out underneath the burden of debt and restructure or eliminate the debt. If you have questions about bankruptcy, please schedule a consultation or call Steiner Law Group at (410) 670-7060.