Bankruptcy allows individuals and businesses to eliminate, reduce and/or extend debt. Our law office represents clients under all chapters of the bankruptcy code (Chapters 7, 13 and 11).
- What Is Bankruptcy?
- Who Can File for Bankruptcy Protection?
- What Are the Potential Benefits of a Bankruptcy Case?
- What Are the Alternatives to Bankruptcy?
- What Are the Basic Types of Bankruptcy Cases?
- Can a Credit Rating Be Rebuilt After a Bankruptcy Filing?
- When Can or Should a Bankruptcy Case Be Filed?
What Is Bankruptcy?
Federal bankruptcy law (Title 11 of the United States Code, otherwise called the “Bankruptcy Code”) was enacted to allow the honest debtor, who is unable to meet his/her financial obligations, to obtain a fresh financial start or to reorganize his/her financial affairs. Bankruptcy law accomplishes this goal by providing debtors with a legally enforceable mechanism through which they may: (1) eliminate, reduce and/or extend most debts, and (2) protect themselves, subject to certain qualifications, during the bankruptcy case, from pursuit and harassment by their creditors. At the same time that bankruptcy law seeks to give relief to the debtor, it is also the goal of bankruptcy law to deal equitably with a debtor’s creditors by: (A) protecting the creditors against fraud, (B) treating similarly situated creditors in an equal manner, (C) providing a mechanism whereby the debtor must disclose information about assets and income to verify that their eligibility for a case, and (D) providing the creditors with constant notice and an opportunity to be heard during the bankruptcy case.
Who Can File for Bankruptcy Protection?
With only certain limited exceptions, an individual (alone or together as a married couple) or a business (a sole proprietorship, partnership, or corporation) may file for bankruptcy protection. While debtors filing for bankruptcy protection are usually “insolvent” (meaning that they are either unable to pay their debts as they become due, or that their liabilities are greater than their assets), insolvency is not a requirement for a voluntary bankruptcy filing.
What Are the Potential Benefits of a Bankruptcy Case?
The filing of a bankruptcy case will immediately create an “automatic stay” that would protect the person filing the case from their creditors. In Chapter 7 most debts can be eliminated by the bankruptcy “discharge” and in a Chapter 13 or Chapter 11 case most debts can be cured, reduced and/or reorganized under a plan. Bankruptcy cases are overseen by a federal bankruptcy court that specifically has jurisdiction to administer bankruptcy cases and therefore there is a forum to go to if there are disputes or issues as to a case. However, creditors are generally respectful of the bankruptcy stay and discharge and will cease all collection efforts upon the filing of a case, and note the discharge on a person’s credit report.
A bankruptcy filing is often used as follows:
- By individuals to eliminate overwhelming credit card debt, medical bills, and other types of debt;
- By individuals or businesses to save their real property or house from foreclosure or to save their car or other assets from repossession;
- By businesses, under a cash flow squeeze to obtain a “breathing spell” from their creditors in order to reorganize their financial affairs or to sell off assets;
- By individuals or businesses to extend, resolve and/ or reorganize mortgage or real estate tax arrears or burdensome sales and withholding tax liability; and
- By businesses to stop eviction from leased real property or repossession of leased equipment.
The above uses of bankruptcy are not exclusive and a bankruptcy case can be used for other purposes. However, an individual or business contemplating filing a bankruptcy case should carefully review their goals with a bankruptcy attorney since bankruptcy law can be complex. A bankruptcy attorney will be able to determine whether the above goals can be achieved depending upon the particular circumstances of a situation.
What Are the Alternatives to Bankruptcy?
While filing for bankruptcy protection is often an option chosen by debtors in resolving serious financial problems, there are also non-bankruptcy options that may provide an alternative to a bankruptcy filing. Some of these options involve out of court negotiations, leading to potential settlements or loan modifications with creditors. Other options entail litigation defense by answering the creditor’s complaint (within 20 or 30 days) and defending against a creditor’s pursuit of debt by either challenging the legitimacy of the debt or the methods by which the creditor has attempted to pursue the debt.
In some situations, non-bankruptcy options are available and preferable. However, a bankruptcy filing is often the most direct and powerful tool for a debtor to deal with serious financial problems. Nonetheless, it must be stressed that bankruptcy is not the solution for every problematic financial situation, and that in some cases, bankruptcy entails certain risks.
If your debts are primarily unsecured debts, like credit cards, negotiations with your credit cards, especially by a firm like ours that can otherwise file a bankruptcy case can be effective in lowering the debt. Lump sum agreements give more of a discount than payment plans, but both can yield positive results. We can also litigate with unsecured creditors, especially when there is a potential dispute, or where we need additional time or leverage to reach a positive settlement. Bankruptcy usually provides more certainty and immediacy in terms of a resolution of debt. However, negotiated agreements or litigation defense may be preferable when the client does not have a general debt problem, but only has issues one or two isolated creditors, or where a client may not qualify for bankruptcy (due to income or asset limitations in Chapter 7 or due to debt limitations in Chapter 13, as explained further below). Also, some clients may prefer to try to avoid bankruptcy, and negotiation options, even if not as effective as bankruptcy, can provide enough relief in their situations without the need for a bankruptcy filing. Our office generally negotiates most debts on behalf of our clients including credit card, tax, mortgage, and other debts.
What Are the Basic Types of Bankruptcy Cases?
There are three basic types of bankruptcy cases: Chapter 7, the most common, is a liquidation bankruptcy, Chapter 13, also frequently used by individuals, is a “wage earner’s bankruptcy,” and a Chapter 11, mostly used by businesses, is a business reorganization. These basic types of bankruptcy cases are named after their respective chapters in the Bankruptcy Code and are appropriate to different situations. A Chapter 7 bankruptcy case may be used to eliminate or “discharge” most debts of an individual or to liquidate a business. A Chapter 13 bankruptcy case may be used by an individual or by a sole proprietorship business, that has a regular income, in order to pay debt over a period of time, and is often used by debtors who seek to save their house or other real property from foreclosure or by individuals with other problematic debt who do not choose Chapter 7 because of excess income or excess equity in their assets. A Chapter 11 reorganization case may be used by a business or an individual to reorganize its financial affairs while continuing to own, manage, and operate its property.
The mechanics, requirements, and rights involved in these different types of bankruptcy cases vary drastically and how they may apply to a particular case can also vary greatly depending on the particular circumstances and parties involved in a case.
What are the Qualifications for Bankruptcy?
Chapter 7, is the most frequently filed bankruptcy case because it “discharges” or eliminates debt. However Chapter 7 is not available for everyone since it has criteria which determine whether a client can and/or should file a case under Chapter 7. The main criteria is the income level of the client as determined by family size (or the number of dependents in a household), when compared to the median income for a family of that size in New York State. Means testing is designed to determine if a client above the median income for their household size in the State of New York qualifies to file a case based upon their necessary expenses as determined by their actual provable spending as capped by certain IRS standards used in such testing. The test looks at a client’s income, deductions and necessary expenses in the 6 months prior to filing the bankruptcy case. To qualify for Chapter 7 it is necessary to have negative disposable income under the means test. If a client has positive disposable income according to such test, they can still qualify for Chapter 13 relief, and perhaps pay a relatively small percentage of their debt over a 5 year plan, but they may not file for Chapter 7 at that time. Besides official, statutory limitations on the income level, Chapter 7 has other non-official limitations in terms of the equity in the client’s assets. While such equity is potentially protected by liens and exemptions, if there is a large amount of unprotected equity in a client’s assets, the client’s assets could potentially be at risk for a sale by the Chapter 7 trustee. Therefore, a client may not want to file under Chapter 7 if there is a large, exposed amount of equity in a potential asset.
Unlike Chapter 7, Chapter 13 is much more open to persons filing and does not have an official income or an unofficial asset value limitation. Chapter 13, allows an individual with positive disposable income and/or with equity in their assets to obtain bankruptcy relief under a 5 year Chapter 13 plan where the debt or a portion of the debt is paid without additional interest or charges by the creditor. However, Chapter 13 has a limitation on the amount of secured debt (which cannot exceed $1.08 million), and unsecured debt (which cannot exceed $360,000.); however because such limitations are very high, they usually only affect persons investing in real estate, or in business, or who have unusually high mortgages. Persons affected by the debt limits of Chapter 13 case, can file in Chapter 11, which is designed to accommodate larger debt loads, for larger cases, usually filed by businesses.
Deciding which chapter of the bankruptcy code to use can in some cases require careful strategy with a bankruptcy attorney. Call us for a free consultation.
Can a Credit Rating Be Rebuilt After a Bankruptcy Filing?
Persons and businesses contemplating filing for bankruptcy protection are often undergoing serious financial problems that have already, or will shortly in the future, appear on their credit reports. While a bankruptcy filing would also appear on a person’s credit report, the bankruptcy filing has the advantage of dealing with and potentially solving some of the financial problems inherent in the situation. Therefore, after a bankruptcy filing, a person is often better situated to repay new creditors and in time can be a better credit risk than they were prior to the bankruptcy filing.
Any financial transactions in which you are engaged may affect your credit report. Most clients inquiring about bankruptcy already have many entries on their credit report which show that they are in financial hardship. Such entries have already affected the client’s credit and while the bankruptcy case will also indicate that the client had financial hardship, the bankruptcy case will also ease the situation by helping the client eliminate the debt that is the cause of such hardship. Essentially the client after having eliminating their overwhelming obligations in the bankruptcy case, can now concentrate on rebuilding their credit, which usually takes 6 months to 2 years.Although the notation that there was a bankruptcy filing will remain on the client’s credit report for 1o years, this is the same amount of time that any judgment would remain on the credit report. Therefore, the difference between judgments on your credit report and a bankruptcy filing on your credit report is that the bankruptcy filing says that you already eliminated your problematic debt obligations and that the financial hardship was in the past. A judgment, on the other hand, says that your debt obligation is ongoing, and that your situation may be too risky and uncertain for creditors to give you new credit. Therefore, to the extent that you have debt that is already in collections or is about to be in arrears, a bankruptcy case, by eliminating or reorganizing problematic debt, can with time help you to restore your credit by eliminating the source of your financial hardship.
A bankruptcy attorney can advise persons filing for bankruptcy protection as to the methods by which they can rebuild their credit rating.
When Can or Should a Bankruptcy Case Be Filed?
A bankruptcy case becomes an option when a person or family is unable to pay its bills as they become due. If this is a temporary problem and it is possible to catch up with unpaid bills, a bankruptcy case may not be necessary. But if the problem persists and bills are falling further behind, than the bankruptcy option should be considered. When credit cards and other obligations are not paid for several months, they start to call and send letters demanding payment and threatening legal action. When creditors, after protracted efforts, are unable to get paid for monies owed, they turn over the delinquent account to collection attorneys who start litigation to obtain a judgment. This process usually occurs after five (5) months to one (1) year of payment delinquency. Therefore if you are overwhelmed with bills, and do not expect your finances to improve in the coming months, the bankruptcy option should be considered. If you have been in collections already and there are judgments threatened or already obtained against you, it is detrimental to your finances and to your credit rating to allow such difficulties to persist and a bankruptcy case becomes a strong option to protect one’s wages, bank accounts, assets and credit rating. The bankruptcy case will immediately protect the person filing from their creditors and help them to discharge or eliminate the vast majority of debts, such as credit cards, personal loans and hospital bills. In most cases the person filing will be able to keep their cars, home, bank accounts and other assets. Please call us to discuss whether a bankruptcy case will help you with your financial difficulties.
Whether or not to file for bankruptcy is a personal decision. However, there are many ways in which you can tell whether it is a strong option. Firstly, if your debts are overwhelming and clearly disproportionate to your income, bankruptcy should definitely be considered. Secondly, if you are presently vastly behind with your debts and see no way to catch up, once again, bankruptcy becomes a strong option. Thirdly, if you are barely current with your debts, but realize that you are juggling important bills, credit cards, mortgage payments, etc., bankruptcy should again be looked at as a possible option because you do not want lower priority debt, such as credit card bills, to interfere with higher priority debt such as mortgage and car payments. Lastly, if you realize that your payments are merely buying you time, that in the long run there is no way to take care of all the debt, and that your payments are being wasted on debt that will with time go bad anyway, than bankruptcy again should be considered. The best way to approach the issue is to seek a free consultation. Our office offers a free consultation by phone or in person at our Melville, Long Island law office, and we can certainly review with you your options and whether a bankruptcy case is the best way to proceed.
Our consultations are free, the advice may be invaluable.
Please call us at (631) 479-2455, or e-mail us at email@example.com for a free consultation at our Melville, Long Island law office to discuss legal options, including Bankruptcy Solutions, in greater detail.