About Bankruptcy - Chapter 7 and Chapter 13

Bankruptcy is a legal method of eliminating debt and providing a means for debt-oppressed people to obtain a "fresh start." In many cases, bankruptcy means the elimination of the debt that you owe to your creditors. They are two primary forms of bankruptcy, Chapter 7 and Chapter 13.

Warning Signs. In assessing whether or not you should seek some kind of debt relief, consider the following questions:

• Do you ever use one form of credit, such as a credit card or debt consolidation loan, to make payments on other debt? Or to put it in Biblical terms "Robbing Peter to Pay Paul"?

• Have you taken one or more cash advances greater than $500 in the past few months to pay living expenses such as everyday utility bills or even groceries?

• Do you ever borrow from friends or family to meet regular expenses, such as food and utility bills?

• Can you barely make the minimum required payment on credit cards or other debts?

• Are you receiving harassing calls or letters from creditors or collection agencies?

• Are you being sued (summons and complaint), or are your creditors threatening to sue you?

• Are your wages being garnished, or are your creditors threatening a garnishment?

• Are your financial problems impacting your health or relationships due to stress?

• Do you owe two months salary or more on your credit cards?

• Are you using one-quarter or more of your take-home income to pay credit card bills and personal loans (excluding mortgage payments)?

• Are your revolving credit cards charged to the limit or maxed out?

• Have you bounced more than one check in the past year?

• Are you without cash reserves for a rainy day or emergency?

• Are you behind on house (mortgage or rent) or auto payments?

• Are your creditors threatening to take your car, house, or other property (foreclosure or repossession)?

• Are you behind on your taxes or do you owe the IRS, State of Michigan or City of Detroit?

If you answered “yes” to one or more of the preceding questions, you should consider seeking some form of debt relief. Bankruptcy, of course, offers very effective debt relief, but there are possible alternatives to filing bankruptcy which shall be covered below.

Why is it legal to file bankruptcy?

More so than in any other time in our country's history, our economy is based on consumer debt. In fact, in this age of multibillion dollar corporate bailouts, easy credit and relentless bombarding of seductive messages cajoling us to "charge, consume, buy" it is not surprising that so many people are drowning in debt.

For many of us, this debt is insurmountable and is causing family problems and feelings of hopelessness and even suicide. With credit card interest rates of 18-27%, many feel like modern day indentured servants. Many times, the debt is occasioned by unforeseen events such as loss of a job or medical bills, but more often it is simply poor planning. Nevertheless, in instituting our bankruptcy laws, Congress recognized that responsible, well-intentioned people could from time to time run into financial problems. By allowing you to recover from your debt burden you will be able to start afresh, look to the future and become a more productive member of society. This is good for you and good for society as a whole.

Bankruptcy - An Overview

Even the hardest workers and the most diligent bill-payers can find themselves with more debts than they can pay as they become due. In such cases, filing bankruptcy may provide a solution to what seems like an insurmountable problem. If you or someone you know is facing serious financial challenges, it is very important to seek the counsel of an experienced bankruptcy attorney. Once considered a last resort, bankruptcy has evolved into an accepted method of resolving serious financial problems. The bankruptcy lawyer's goals are to help debtors make a fresh start and ensure that creditors get paid. A skillful attorney can guide you through the complicated legal maze of bankruptcy.

Bankruptcy law is primarily federal in origin and therefore varies little from state to state. The United States Constitution grants to Congress the power to establish uniform bankruptcy laws throughout the United States, which ensures consistency and predictability in how bankruptcy proceedings are conducted. The individual states do, however, retain jurisdiction over certain debtor-creditor issues that are not addressed by and do not conflict with federal bankruptcy law, such as which property remains exempt from creditors' claims.

Commercial and Consumer Bankruptcy

Both businesses and individuals may file for bankruptcy. Commercial bankruptcy is a remedy available to businesses that are unable to pay their debts. Options include liquidation, in which many of the business's assets are sold and the proceeds are divided among the creditors, and reorganization or restructuring, in which the business continues to operate according to a plan that allows for at least partial payment to creditors. Consumer bankruptcy, by contrast, is a method by which individuals may be able to get out from under insurmountable debt and make a fresh start, albeit with a negative impact on their credit ratings. As in commercial bankruptcy, there are two options: liquidating assets to pay off creditors, and filing a wage-earner plan that allows the debtor to retain more assets while working to pay off his or her debts. An experienced bankruptcy attorney can help you choose the right course of action for your particular situation.

Chapter 7 Liquidation

Bankruptcy law provides two basic forms of relief: (1) liquidation, and (2) rehabilitation, also known as reorganization. Most bankruptcies filed in the United States involve liquidation, which is governed by Chapter 7 of the Bankruptcy Code. To qualify for Chapter 7, an individual debtor has to satisfy a financial means test. In a Chapter 7 liquidation case, a bankruptcy "trustee" collects the debtor's "nonexempt" property (as opposed to the property that the debtor is allowed to keep and that is not subject to the creditors' claims) and converts it into cash. The trustee then distributes the resulting funds among the various creditors according to an order of priority described in the Bankruptcy Code. Not all creditors receive the full amount owed through this process; in fact, some may receive no payment at all. When liquidation and distribution are complete, the bankruptcy court may discharge any remaining debts of an individual (non-business) debtor. If the debtor is a corporation, it ceases to exist after liquidation and distribution, and there is therefore no reason for further discharge because the creditors cannot seek payment from an entity that no longer exists.

Chapter 11 or 13 Reorganization

In a rehabilitation or reorganization, the option often preferred by the courts, creditors may be provided with a better opportunity to recoup what they are owed. This type of bankruptcy is governed by Chapter 11 or Chapter 13 of the Bankruptcy Code. Chapter 11 generally applies to individual debtors with excessive or complex debts, or to large commercial entities like corporations. Chapter 13, by contrast, generally applies to individual consumers with smaller debts. Farmers and municipalities may seek reorganization through the Code's special chapters, Chapters 12 and 9, respectively. Reorganization provides debtors with a greater opportunity to retain their assets if they agree to pay off their debts according to a plan approved by the bankruptcy court. If the debtor fails to adhere to the plan, however, the court may still order liquidation.

Whatever the Chapter, the petitioning debtor must first undergo an individual or group briefing regarding credit counseling and budget analysis skills.

"Voluntary" and "Involuntary" Bankruptcies

Most bankruptcy cases are filed by the debtor and are thus considered "voluntary bankruptcies" (although few would "volunteer" to be in this position). Once a bankruptcy petition is filed, the debtor is immediately entitled to relief from creditors through the bankruptcy procedure known as the "automatic stay." The automatic stay freezes all debt-collection activity and forces creditors to allow the bankruptcy court to determine how payment will be made.

Not all bankruptcy proceedings are voluntary, however. Under Chapters 7 and 11, creditors, too, have the option of filing for relief against the debtor, in which case the proceeding is called an "involuntary bankruptcy." Involuntary bankruptcies are allowed only when certain minimum thresholds are met; for instance, there must be a minimum number of creditors and a minimum amount of debt. The debtor has the right to file a response to an involuntary petition, after which the court will determine whether the creditors are actually entitled to relief. If the court dismisses an involuntary bankruptcy filing because it has no merit, the creditors may be ordered to pay the debtor's attorneys' fees, damages for any losses the debtor experienced because of the bankruptcy, and even punitive damages to punish the creditors for the frivolous or abusive filing of a petition. An experienced bankruptcy attorney can provide essential advice whether you are a debtor considering voluntary bankruptcy or facing an involuntary bankruptcy proceeding, or a creditor seeking relief through an involuntary bankruptcy.

Conclusion

Lawyers specializing in bankruptcy law can help both debtors and creditors overcome obstacles to the repayment of debt. Their expertise often extends beyond bankruptcy to include debt repayment and collection options that can circumvent the need for a bankruptcy filing. Experienced bankruptcy attorneys have the knowledge and expertise to help their clients get out from under formidable debt and emerge as productive citizens, and can also assist their creditor clients in collecting what is rightfully theirs.

Walter Metzen-Bankruptcy Lawyer-(313) 962-4656-Suite 3156 Penobscot Building, Detroit Michigan 48226-Serving the Entire Metro Detroit Area and Southeast Michigan for over 10 years