Bankruptcy: How to Reorganize Your Financial Life & Get a Clean Start

Bankruptcy is a formal legal process that allows someone with debt to seek protection under the bankruptcy code. It gives people with medical bills and other forms of debt a clean financial slate once they complete the process. In this article, you’ll learn more about bankruptcy so that you can better understand the common types of bankruptcy. More information is available through the US Courts’ Bankruptcy Basics website.

What Are the Two Most Common Types of Bankruptcy? 

The two most common types of bankruptcy are Chapter 7 bankruptcy and Chapter 13 bankruptcy. Under bankruptcy laws, after a debtor declares bankruptcy and completes the process, Chapter 7 discharges their unsecured debt (such as medical bills and credit cards). This occurs after the sale or liquidation of non-exempt property, if any exists, by the local trustee appointed by the DOJ’s Trustee Program. 

If a Chapter 7 case is considered as an asset case, meaning that there were non-exempt assets the Trustee could sell, some of the unsecured debt is paid. During the process, some secured debts, such as the homestead or the main vehicle, may be considered an exempt asset based on state exemption laws. Often, many of these cases are considered non-asset, meaning that there is nothing of value to sell for the payment of unsecured debt. 

Chapter 7 does not discharge certain types of debt, including most student loans (although there are exceptions). To learn more about whether filing for bankruptcy is right for you, schedule a consultation with our office. We’re happy to answer your questions. 

Sisson Highlight - Bankruptcy Basics

Chapter 13 is the second most common type of bankruptcy. It allows individuals and couples to adopt a repayment plan and repay both secured debt and a portion of unsecured debt over three to five years. Payments are made directly to the trustee program. The Trustee assigned to the Chapter 13 bankruptcy then makes the payment to the creditors. Certain debts including child support arrearage, spousal support, and certain tax debts must be repaid in full. These debts will take the highest priority over any other debts that are part of the case. If you’re behind on secured debts, such as your mortgage, you get the opportunity to catch up on your payments while also keeping your home. Other unsecured debts, such as medical bills, may get paid something, but they might not receive the total balance since they are not a priority debt. 

Once the repayment plan is completed, the remainder of the unsecured debt is discharged. However, much like Chapter 7, most student loan debt is not erased if you file for Chapter 13. 

How Can Chapter 13 Bankruptcy Help If You Have a Mortgage?

Filing for Chapter 13 bankruptcy can help if you have a mortgage and you’re facing foreclosure or serious financial hardship because of junior mortgages. Although you’re required to catch up on any past due payment, this type of reorganization can stop a foreclosure while you get time to get caught up. In some instances junior mortgages may be stripped off of your home if your home is worth less than the amount of the primary mortgage.

Sometimes, Chapter 13 is chosen by those who do not qualify for Chapter 7 because they exceed the income limits or by those who have disposable income that will be used for their repayment plan. 

Chapter 11 Bankruptcy

Chapter 11 is a process usually relied upon by corporations,partnerships, or small businesses, but it can also be used by individuals whose debt exceeds the Chapter 13 limitations. Under Chapter 11, the bankruptcy code enables businesses to remain open while they complete their reorganization within the confirmed Chapter 11 plan.

Chapter 11 does have similarities to Chapter 13 bankruptcy. The debtor proposes a debt repayment plan, however, this repayment plan must be approved by both the bankruptcy court and the creditors who are owed the most money. If the debtor doesn’t create an acceptable plan, the trustee or one of the creditors can create one and present it for a vote during the case. Once the debt reorganization plan is confirmed, it moves forward similar to a Chapter 13 by payments being made to creditors according to that plan.

Chapter 12 Bankruptcy

Chapter 12 bankruptcy is designed to help family farmers and fishermen reorganize their debts and regain solvency. If you file for chapter 12, you have 90 days after filing to propose a three-to-five-year repayment plan that can involve seasonal payments instead of monthly ones. Your reorganization plan can include secured debt cramdown (such as farmland mortgages) and modification of secured debt payments to go beyond five years if necessary.

However, much like the other types of bankruptcy, your repayment plan must propose to repay 100% of all domestic support claims. It must also use all of your disposable income. 

Chapter 9 Bankruptcy

Chapter 9 bankruptcy is strictly for municipalities and government bodies such as utilities. The reorganization plan and its approval are similar to the Chapter 11 process, with creditors and taxpayers being allowed to object. However, it is also substantially different than other types of bankruptcy because there is no law that requires the liquidation of assets for the benefit of creditors as this would violate the Tenth Amendment as well as state sovereignty. 

What Happens After You Declare Bankruptcy?

After you declare bankruptcy and complete the filing of your petition and at least some of your schedules, you receive what is known as an automatic stay. An automatic stay means that creditors must stop harassing you for payments, garnishing wages, pursuing foreclosure, etc. 

A meeting of creditors (sometimes called a 341 Meeting) will be scheduled. During this meeting, creditors are allowed to come and ask questions about your case. They also have a certain amount of time under bankruptcy code to file claims that, depending on the type of case you filed, may or may not get paid. 

At the conclusion of your bankruptcy case, you receive a discharge from your debts. If you have student loans, priority tax debt, or domestic support obligations, you are still required to pay those debts. A bankruptcy will appear on your credit report for a limited time, however, it does not mean that you’ll never receive the opportunity to rebuild your credit, buy a home, or buy a car. 

Learn More about the Bankruptcy Process in Oklahoma

If you are able to repay your debts over a specified payment period, bankruptcy chapters that include a reorganization plan can make it possible to keep your possessions and, in the case of a business, stay open and continue to operate. At the Law Offices of B. David Sisson, we assist both consumer and business debtors with bankruptcy reorganizations that are fair to creditors while enabling our clients to regain their financial footing as quickly as possible. To learn more about the process and which type of bankruptcy may best suit your needs, schedule your consultation with the Law Offices of B. David Sisson now!

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