What Is Consumer Bankruptcy?
When an individual falls desperately behind in his or her debt payments, one option may be to declare bankruptcy, a legal proceeding in a federal bankruptcy court that relieves the debtor of some or all of his or her debts. While bankruptcy may not be the best option for everyone, in the right situations, it can provide people with a fresh start.
Bankruptcy Choices for Consumers
Consumers, like businesses, have options in terms of which bankruptcy type to pursue. These options are set forth in separate chapters of the federal bankruptcy law – called the Bankruptcy Code – and they are commonly referred to by their chapter numbers. Consumers most commonly file either under Chapter 7 or Chapter 13, with a few filed under Chapters 11 or 12.
2005 changes to the federal bankruptcy laws created a new requirement that debtors receive credit counseling from approved agencies in the 180 days before filing for bankruptcy under any chapter, with some exceptions.
Most consumer bankruptcy cases are initiated voluntarily by consumers, but under certain circumstances, can arise involuntarily when creditors force debtors into bankruptcy in an attempt to collect debts.
Chapter 7 bankruptcies, called liquidation bankruptcies, are the most common type chosen by consumers. Chapter 7 proceedings begin with the debtor’s filing of a petition with the bankruptcy court, triggering the automatic stay – bankruptcy terminology for the cessation of all debt-collection activity. The court appoints a trustee who oversees the case and liquidates the debtor’s nonexempt assets to pay off eligible debts to the extent possible.
Not all of the debtor’s assets will be sold in a Chapter 7 bankruptcy case because the law specifies that certain property is exempt from liquidation. For many typical consumers, all of their property is exempt or already subject to valid liens, so eligible debts will be discharged without the loss of any property. These are commonly called no-asset cases.
Once the trustee has collected any nonexempt assets and paid creditors from the proceeds of selling them, any remaining unpaid debts are discharged, meaning that they no longer legally exist and the debtor has no further obligation to pay them. Some debts, however, are non dischargeable under Chapter 7 and normally remain valid such as most taxes, domestic-support obligations, debts obtained by fraud or embezzlement, and damages from debtors’ willful or malicious acts.
Alternatively, a consumer may choose Chapter 13 if he or she has stable income, believes the crisis is temporary and wants to repay at least some debt. The debtor must have less than a certain level of debt to be eligible for Chapter 13 (for example, as of April 1, 2010, $360,475 in unsecured debt and $1,081,400 in secured debt).
A Chapter 13 proceeding, called a wage-earner plan, is also initiated by filing a petition, stopping creditors from trying to collect debts. The debtor proposes a debt repayment plan to which creditors may object. If the court approves the plan, however, the creditors normally can take no action outside the plan’s scope to collect their debts. Once the plan is completed, the debtor is entitled to a discharge, which releases him or her from all debts dealt with by the plan.
Relatively fast and inexpensive by comparison, Chapter 7 is the usual choice for the consumer with high debt and few assets in excess of those that are exempt.
Chapter 13 though has certain advantages over Chapter 7 in some consumer bankruptcies. Chapter 13 allows the debtor to discharge more types of debts. Although many average consumers have no-asset cases with only exempt property, some consumer debtors may have assets eligible to be sold to pay down debts. For these consumers, Chapter 13 may allow them to retain more of their assets.
A consumer’s choice between Chapter 7 and Chapter 13 is not necessarily permanent; once proceedings have begun, a case may be converted to a different chapter under certain circumstances.
Sometimes consumers find themselves in such dire financial situations that filing for bankruptcy is their best option. Any decision to file for bankruptcy should be made carefully after consulting an experienced bankruptcy attorney. Contact a bankruptcy lawyer at our firm to learn more about your options to protect your financial well-being.
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