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How does bankruptcy work?

How does bankruptcy work?

Your bankruptcy case will begin with the filing of your petition and schedules with the United States Bankruptcy Court, a division of the US District Court. Upon filing, the Court enters an order called the Automatic Stay which requires your creditors to stop all collection activity. Bankruptcy stops foreclosures, repossessions, lawsuits, phone calls and letters. Approximately 30 days from the date of filing, you will be required to attend the section 341(a) Meeting of Creditors. It is here that you will meet with the Trustee assigned to your case. Once the Trustee has concluded the meeting, Chapter 7 debtors are done. They must wait for all deadlines to run before the discharge order is entered and the case is closed, but their involvement is complete. Chapter 7 bankruptcy takes 3-5 months from filing to discharge. Chapter 13 debtors remain protected by the Court while they make their payments. Upon the debtor’s successful completion of the payment plan, the Court will enter the discharge order and close the case. Chapter 13 bankruptcy takes 3-5 years.

What Can Bankruptcy Do?

People drowning in debt can discharge certain debts and start over through bankruptcy. The two most common bankruptcy filing options, Chapter 7 and Chapter 13, have their advantages and, in some situations, handle debt and property differently.

Your goals, property, and income determine which chapter is best for you. Here are things you can expect in both Chapters 7 and 13.

Bankruptcy Can Stop Creditor Harassment and Collection Activities

The Court gives a directive known as the automatic stay as soon as you file. The stay halts most creditor calls, wage garnishments, and lawsuits, but not all of them. For instance, criminal proceedings will go forward, and creditors can still get support payments.

Bankruptcy Can Stop a Foreclosure, Repossession, or Eviction (At Least Temporarily)

As long as these actions are pending, the automatic stay will halt them. Bankruptcy won’t help when it’s finished.

Evictions

After filing for bankruptcy, an eviction still pending in Court will be halted. However, the visit will probably only be brief. Remember that in most states, filing for bankruptcy won’t assist if your landlord already has an eviction judgment against you.

Foreclosure and Repossession

Although the automatic stay will halt foreclosure or repossession, filing for Chapter 7 won’t help you keep the property. Once the stay is lifted, you will lose the house or the vehicle if you cannot bring the account current. On the other hand, Chapter 13 contains a system that will let you make up missed payments to maintain the asset.

Bankruptcy Can Wipe Out Credit Card Debt and Most Other Nonpriority Unsecured Debts

Except for student loans, bankruptcy effectively wipes off the majority of nonpriority unsecured debts. You may be able to discharge unsecured debt such as credit card debt, medical expenses, past-due utility bills, personal loans, gym memberships, and more.

If you didn’t pledge to return the purchased item or didn’t pay the payment, the debt is said to be unsecured. On the other hand, if you have a secured credit card, you will need to send the item back. Secured debts frequently include jewelry, gadgets, computers, furniture, and big-ticket items.

Bankruptcy Can Wipe Out Secured Debt (But You’ll Have to Give Up the Purchased Property)

You may be able to discharge the debt through bankruptcy if you cannot make a payment that was secured with collateral—such as a mortgage or vehicle loan. However, the house, car, computer, or other goods used as collateral for the loan will be forfeited. You must pay any debt you freely agree to have secured by property or return the property.

What Can’t bankruptcy Do?

Bankruptcy doesn’t cure all debt problems. Here’s what it can’t do for you.

Bankruptcy Doesn’t Prevent a Secured Creditor From Foreclosing or Repossessing Property You Can’t Afford

Debts are discharged in bankruptcy, but liens are not removed. A lien enables the lender to seize assets, sell them at public auction, and use the proceeds to pay off outstanding debt. Until the obligation is satisfied, the lien remains on the property.

Bankruptcy can discharge your financial obligations if it is a secured debt—one for which the creditor has a lien on your property. The creditor can still retrieve the collateral. Therefore the lien will remain on the property.

For instance, you might eliminate a mortgage if you file for Chapter 7 bankruptcy. But the residence will still be subject to the lender’s lien. Once the automatic stay is lifted, the lender may utilize its lien rights to foreclose on the property as long as the mortgage is still outstanding.

Bankruptcy Doesn’t Eliminate Child Support and Alimony Obligations.

You will still be obligated to pay child support and alimony in full as if you had never declared bankruptcy since these responsibilities endure bankruptcy. Additionally, if you file for Chapter 13, you must include payment for all these debts in your plan.

Bankruptcy Doesn’t Eliminate Student Loans Except in Limited Circumstances.

If you can demonstrate that repaying the debt would put you through “undue hardship,” which is a complicated threshold to achieve, may student loans be erased in bankruptcy. You must demonstrate that you are now unable to pay your debts and that there is little chance you will be able to do so in the future.

Bankruptcy Doesn’t Eliminate Most Tax Debts.

Eliminating tax debt in bankruptcy isn’t easy, but it’s sometimes possible for older unpaid tax debts.

Bankruptcy Doesn’t Eliminate Other Non-dischargeable Debts.

Both chapters do not permit the cancellation of the following debts:

  • debts you forget to list in your bankruptcy papers (unless the creditor learns of your bankruptcy case)
  • debts for personal injury or death due to intoxicated driving
  • fines and penalties imposed as a punishment, such as traffic tickets and criminal restitution

These debts will still exist after your case if you petition for Chapter 7. You will pay off these debts as part of your Chapter 13 repayment plan.

Which Debts Will Chapter 7 Bankruptcy Discharge?

Chapter 7 filers discharge all of the following debts (a Chapter 13 discharge erases a few more):

  • credit card charges, including overdue and late fees
  • collection agency accounts
  • medical bills
  • personal loans from friends, family, and employers
  • past-due utility balances
  • repossession deficiency balances
  • most auto accident claims
  • business debts
  • past-due rent and money owed under lease agreements
  • most civil court judgments
  • old tax penalties and unpaid taxes
  • most attorneys’ fees
  • government program overpayments, including welfare, Social Security, and veterans assistance programs

Which Debts Does Chapter 7 Bankruptcy Can’t Discharge?

The debts you eliminated under Chapter 7 will not be listed in the discharge order. Instead, it will detail the obligations that, according to bankruptcy law, all filers are still obligated to pay. You’re still responsible for the following:

Mortgages, Car Loans, and Other “Secured” Debts If You Keep the Property

Mortgages, car loans, and other secured obligations are discharged in a Chapter 7 bankruptcy. But if you don’t keep up with your payments as planned, the lender will use its lien rights to seize the house, car, or other collateralized property.

Recent Income Taxes, Support Obligations, and Other “Priority” Debt

Even if you declare bankruptcy, you must pay back significant priority debts.

Debts Incurred by Fraud or Criminal Acts

Suppose a filer misled the creditor or committed another illegal conduct, like hurting or murdering someone while driving under the influence. In that case, the Court may rule that the debt is not dischargeable.

A bankruptcy case, or “adversary proceeding,” must first be filed by the creditor, who must then show the debtor committed fraud or another qualifying unlawful act.

Student Loans

The bankruptcy court does not automatically discharge student loan debt. After filing for Chapter 7 bankruptcy, you’ll still be liable for paying back student loans unless you file an adversary petition, demonstrate that doing so will put you in a difficult situation, or satisfy a comparable standard set by your bankruptcy court.

What Are the Debts That You Must pay in Chapter 13 Bankruptcy?

In a Chapter 13 case, debts—or claims, as they are known in bankruptcy—are not all settled in the same manner. What you’ll have to pay will depend on whether the claim is a:

  • secured claim (like a mortgage or car payment)
  • unsecured priority claim (such as recent tax debt or support arrearages)
  • general unsecured claims (credit card balances, medical bills, and the like)

Paying Secured Claims in a Chapter 13 Repayment Plan

Although various factors are at play, you will often continue to make payments and pay interest on these loans. Other information to be aware of is as follows:

If your payments ordinarily take longer than the planned time (for instance, most mortgages), you are not required to pay the amount in full.

In a cramdown, you might be able to make payments that are less than what you owe on your vehicle or other property.

By removing a lien, you might be able to cancel a junior mortgage (like a second).

You’ll need to make up any missed payments from the plan.

Mortgage Debt Example

Even though your mortgage is a secured debt, you are not required to pay it off entirely under Chapter 13. When your lawsuit is over, you’ll still make mortgage payments. However, it would be best to settle any past-due debt in full via your plan.

Property Tax Example

You must pay the whole past due debt plus interest during the Chapter 13 plan if you are using it to pay back overdue property taxes.

Car Payment Example

You must pay the remaining debt on your auto loan in full during your Chapter 13 plan if it falls due before the plan’s expiration date. However, how much you ultimately pay will depend on whether you can repay the loan in full. You are eligible if you purchased the vehicle more than 910 days ago. 

You will pay the market value plus interest through your plan and repay the remaining balance with ordinary unsecured debt.

Paying Unsecured Claims in a Chapter 13 Repayment Plan

Unsecured claims are not supported by collateral, in contrast to secured claims. The creditor cannot seize your property if you don’t pay your bill. Two unsecured claims exist: priority and nonpriority (general) unsecured claims.

Priority Unsecured Claims

Although these claims lack collateral guarantees, bankruptcy law deems them essential enough to be paid before nonpriority unsecured claims. Priority claims must be fully paid under the Chapter 13 plan and cannot be discharged in Chapter 7 or 13.

Priority debts not secured by collateral include:

  • Current income tax payments.
  • Unpaid child support.
  • Unpaid spousal support.
  • Other unpaid domestic support obligations.
  • Administrative costs are further included.

Nonpriority Unsecured Claims

The claim is generally unsecured if it does not fit into another classification. The most typical ones include utility bills, credit card debt, personal loans, and medical expenses. General unsecured claims are paid a pro-rata amount of the disposable income left over after other eligible debts are settled or the value of any property that is not excluded from bankruptcy, whichever is higher.

The Chapter 13 plan is frequently only used by many Chapter 13 debtors to pay off a tiny amount of their unsecured obligations. However, some people choose to pay nothing under a plan known as a zero percent plan or the whole amount of their debt.

Experienced Bankruptcy Attorneys Serving Clients Throughout Kansas City

We at Jeppson Law Office are prepared to assist you in getting out of debt. Our firm only deals with bankruptcy cases, which allows us to concentrate our efforts and provide superior service to our clients. When you contact us for debt relief assistance, we work one-on-one with you to evaluate every aspect of your circumstances and your financial objectives.

We will explain any anticipated problems, help you through the filing process, and find bankruptcy solutions that can meet your needs.

We’ll help you save both time and money. Making an independent bankruptcy filing might result in expensive, preventable blunders, especially when filling out complex documentation. To ensure everything is done the first time correctly, our Kansas City bankruptcy attorneys can assist you in putting together the required paperwork.

No matter how severe your debt situation may appear, our legal team can assist you in your struggle to file for bankruptcy to start over financially. To set up an initial consultation, call or email us.

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