You may file for bankruptcy when you have a large debt and do not have the resources to pay it off. When you do this, your creditor (the one you owe) has to do one of two things: they either have to structure your repayment to allow you to quickly pay off your debt based on your current means or cancel it outright.
When your bankruptcy petition is successful, a court may grant you a discharge. This means that the court effectively cancels your debts.
However, filing for bankruptcy is not as straightforward as it may seem; there are some legal aspects that you need to understand. Knowing them is key to navigating the legal hurdles attached to filing for bankruptcy.
First of all, let us consider what bankruptcy is.
Understanding What Bankruptcy Law Is
The law states that a person or corporate body may declare bankruptcy when it cannot pay off debts, which are considered “unmanageable.”
Bankruptcy laws are federal laws. This means that when you have any issues related to filing for bankruptcy, state courts cannot preside over such matters; only federal courts can.
Types of Bankruptcies
There are different types of bankruptcies. You should note that the law regards these types as “chapters”. Each chapter has different laws that guide it.
When you have an unmanageable debt but you have assets, then your case falls under Chapter 7. This chapter relates to selling off your assets to get funds to pay off the debt.
Chapter 7 does not provide a structure for the payment of debt. You pay depending on how well you sell your assets.
Chapter 13 covers you if you do not have assets to cover you. In this case, a federal court will restructure your debt and devise a payment plan. This plan may span up to 5 years.
The court does flexibly restructure your debt and break it into bits that make it convenient for you to pay. Then, the court will appoint someone to help oversee the repayment process.
If the entity filing for divorce is a company with a huge debt, it may file for Chapter 11. This chapter helps keep the business afloat while still settling the debt. For this, a court will restructure the debt so that the company can pay without harming the business.
Chapter 12 covers payment restructuring for individuals the law regards as “family farmers.” In this chapter, a court will restructure the debt in accordance with how the person wants to pay. Basically, the debtor is the one restricting the payment of the debt. The law states that payment must not exceed a maximum period of five years.
Bankruptcy laws also make provisions for foreign individuals. This law, which falls under Chapter 13, protects foreign creditors from discrimination.
Types of Debts
Now that you know the types of bankruptcy, it is time to know the different types of debts. You should note that the type of bankruptcy you file for is also largely dependent on the type of debt you have.
There are generally three types of debt: secured debts, priority unsecured debts, and unsecured debts.
Secured debts are usually for people who have assets like landed properties or other valuables as collateral. Such debts include mortgages and car loans.
Priority unsecured debts are legal debts. These are the kinds of debts that the law compels you to pay. A pension is a type of priority in unsecured debt.
Unsecured debts are a type of debt that are not mandatory for you to take or require collateral. Credit card debt and personal loans are types of unsecured debts.
Settlement of Debts
These types of debts have a hierarchical settlement structure when creating a payment plan or settling debts with assets. The law gives precedence to secured debts.
“When you liquidate your asset, the court will settle your secured debt, and then the priority debts come next. The court may choose to either cancel unsecured debts or settle them if there are funds left from the liquidation of your assets,” says attorney Justin Gillman of Gillman Bruton Capone Law Group.
It is essential to note that the court may cancel your debts when you file for bankruptcy and have no assets to cover up.
The Process of Filing for Bankruptcy
Bankruptcy is a provision of the law, which means there is a legal procedure for it. Below are the steps to take to file for bankruptcy
1. Engage an attorney
2. Send a petition to the court with the attorney’s help
3. Know if there are any unique state provisions on the matter
4. Pay the filing fee (you may choose to pay in instalments if you cannot cover it all at once)
5. Calculate your income level
6. Know the poverty income level
7. If your income level is 150 percent below the poverty level, then you may request that the court waive the Chapter Seven filing fee
8. Court accepts petition
9. Court appoints a trustee
Things You Might Lose When You File for Bankruptcy
First, you should know that the court may refuse your bankruptcy petition. In such a situation, the court may have learned that you concealed some assets just to get discharged of your debts.
Other than that, the court usually accepts your bankruptcy petition. However, it is not all good news when you file for the petition. You also stand to lose some things. There are two significant losses you may incur when you file for bankruptcy. They include:
1. Loss of ability to improve your credit score on your credit card for about ten years
2. Loss of your assets to liquidation. Assets may include houses, other landed properties, cards, and jewellery, among other items.
Why You Should Contact a Lawyer
Although bankruptcy falls under federal laws, local laws are still applicable in some situations, especially when the federal law does not cover such circumstances. That means you need an attorney who understands the law to guide you.
You may also need help determining which chapter you fall under and drafting your petition. You need to sort out other technicalities before filing for bankruptcy.
You may need to calculate your assets if you have properties. Your attorney can take care of all of these. The attorney will also advise you on the right course of action. That makes having an attorney crucial.
Source: Gillman Bruton Capone Law Group
