Bankruptcy is a process designed to allow an individual who has accumulated far more debt than they can hope to repay a method to resolve their debt, reset their finances, and start over with a clean financial slate.
At its heart, the basic tenet on which the bankruptcy code is founded is the need to give an honest debtor – someone who entered into their debts with honest intentions to repay them – but whose financial fortunes are such that they are unable to repay their debts the means to start over.
To that end, the bankruptcy code allows a number of chapters under which an individual or business can eliminate or restructure their debt.
Most individual debtors file under one of two chapters of the bankruptcy code, either Chapter 7 or Chapter 13.
Chapter 7 is commonly referred to as a ‘liquidation bankruptcy’ in which most if not all of a debtor’s assets are sold to repay the debt. This chapter is generally reserved for those debtors with little or no financial resources or assets which they can use to repay their debts.
Chapter 13, commonly referred to as a ‘wage earner’s repayment plan bankruptcy’, is a bankruptcy under which the debtor is allowed to keep their property and make payments to their creditors under a consolidated payment plan.
Although Chapter 7 is the most common form of bankruptcy filed by individuals, Chapter 13 is a better option for many debtors due to the fact that the debtor is allowed to keep most if not all of their assets.
Under Chapter 13, a debtor is required to file a full and true accounting of their financial situation with the court-appointed trustee who has been assigned to their case. This accounting should list all current debts and creditors, and all current and anticipated assets and income, include such things as interest in trust and inheritance.
The trustee will then hold a hearing with the debtor – creditors are invited to attend, but rarely do – and will use this information to negotiate a settlement amount which he feels is fair to both debtor and creditor. This amount will be used by the trustee to come up with a repayment plan, taking into account what percentage of the debt the debtor can be reasonably expected to repay.
This plan will then be presented to the judge presiding over the bankruptcy for their approval.
If the plan is approved, the debtor will then begin making regular payments to the plan, a process which can take up to five years. At the end of the repayment period, any remaining debt is discharged, meaning the debtor is forever cleared of any responsibility to repay the debt, and the case is closed.
Bankruptcy is a serious decision, and one that should not be taken lightly.
For many debtors, it is the first step towards future financial solvency, and can give them the fresh start they need to build a solid financial future for them and their loved ones.
If you think bankruptcy may be the right decision for you, contact us and see what our experienced legal team can do for you.