What Is Bankruptcy?
What is Bankruptcy?
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What is Bankruptcy?

Debts often pile up quickly, placing individuals or their families in a challenging financial position. Often times people in difficult financial situations ask what is bankruptcy? Bankruptcy provides individuals saddled with substantial debts a solution by giving them a way to get out from under it while legally treating their creditors. Once the bankruptcy process is complete, people often describe the relief they feel as they get a fresh start without the burden of unpaid bills.

Generally, bankruptcy falls into one of two (2) types, liquidation, or reorganization of debts.

  • Chapter 7 bankruptcy: wipes out certain debts, but the bankruptcy trustee may sell some of your nonexempt property to pay back your creditors.
  • Chapter 13 Bankruptcy. In Chapter 13 bankruptcy, your debts are reorganized, much like a corporate Chapter 11. Although you may retain all of your property, you must pay a three to five-year reorganization plan.  The Chapter 13 Plan will pay your creditors the greater of 1) what they would have received in a hypothetical Chapter 7 liquidation, or 2) your disposable income as determined by the bankruptcy rules.

Chapter 7 Bankruptcy

A Chapter 7 Bankruptcy is a liquidation type bankruptcy where the debtors get their debts (e.g., unsecured credit cards, medical bills, and personal loans) wiped out without paying a monthly plan.

To have these debts wiped out, the debtor agrees that the Chapter 7 bankruptcy trustee (the individual responsible for overseeing the case) can sell the debtor’s nonexempt property. After the nonexempt property is sold, the trustee disburses the sales proceeds to the debtor’s creditors following the Bankruptcy Code’s priority system.

In Chapter 7, a debtor does not have to surrender all of his/her assets to the trustee. Debtors can keep their homestead, $1,000 worth of personal property such as household furnishings, clothing, and $1,000 of equity in their car. In most cases, many debtors can keep all of their property.

It is important to note that a Chapter 7 bankruptcy will not wipe out all debt. Some debts are deemed nondischargeable debts by the Bankruptcy Code remain with you even after the bankruptcy is completed. Here are some examples of debts that are nondischargeable:

1) 11 USC § 523(a)(5) – Child support and alimony;

2) 11 USC § 523(a)(1) – IRS income taxes incurred within the last three (3) years;

3) 11 USC § 523(a)(4) – fraud or defalcation;

4) 11 USC § 523(a)(9) – injury or wrongful death awards stemming from operating a vehicle while intoxicated, and

5) student loan debt.

Both individuals and businesses can file a Chapter 7 Bankruptcy. A Chapter 7 bankruptcy lasts four (4) to six (6) months.

Essential Aspects of Chapter 7 Bankruptcy

Here are some of the critical points about Chapter 7 that you should know.

Eligibility to File Chapter 7

Specific individuals cannot file and receive a discharge under Chapter 7.  Suppose a majority of your debts are consumer debts (not business-related). After subtracting certain allowed expenses from your income, that is sufficient to fund a Chapter 13 plan; you will not be permitted to proceed under Chapter 7 as it will be considered an abuse.

Property in Chapter 7

You will be able to exempt certain assets allowed under the Florida exemption. Many people who file for Chapter 7 find that all of their property is exempt under Florida state exemption laws. To learn more, contact a Miami Chapter 7 Bankruptcy Lawyer.

Secured Debt in Chapter 7

If you have fallen behind on your mortgage or car loan, you will have to choose whether your creditor repossesses the property, and the debt becomes discharged. If you are up to date on with your secured debts, you may keep the property but must continue to make your contractual payments.

Consumer nondischargeable  debts

Bankruptcy works well to eliminate credit card debts, medical bills, and personal loans. However, some debt such as child support, alimony, and specific income tax bills can not be discharged in bankruptcy. For more information, please see What Bankruptcy Can and Can’t Do.

Chapter 13 Bankruptcy

In a Chapter 13 bankruptcy, often called a “wage earner” bankruptcy, you must have an income source to file under this chapter to repay a portion of your debts.

Chapter 13 Plan

You must propose a Chapter 13 plan that demonstrates how you will deal with your debts over three to five years. The minimum amount you will have to pay the Chapter 13 Trustee towards your plan payments depends on how much disposable income you have (income minus expenses permitted by the Bankruptcy Code) or your nonexempt property’s equity.

Chapter 13 Debt limits

Pursuant to 11 USC § 109(e), a debtor cannot have secured debt exceeding more than $1,257,850 and unsecured debt exceeding $419,275 (as of April 2019).

Arrearages in Chapter 13

A Chapter 13 bankruptcy repayment plan is the chapter of choice that allows individuals to catch up on past due mortgage and vehicle payments in order to avoid foreclosures and repossessions. For more information, see How can I save my Home with Chapter 13?

Hire an Experienced and Patient Miami Bankruptcy Lawyer

Being behind on your bills can be extremely stressful. Hiring an experienced and patient Miami Bankruptcy Lawyer can help you get back on track financially so that you can focus on your work and your family, instead of that stack of bills. We’ll review all of your financial information to help you determine what type of bankruptcy best meets your needs and ensure that the entire process runs smoothly. Please call us at (305) 515-5928 today to schedule a consultation.

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