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This LegalCapsule,™  prepared by the Auerbach Law Firm, is a plain-English explanation of bankruptcy. In an effort to be brief, many points may be oversimplified. Readers are therefore cautioned to check with our offices or another lawyer as to the particulars of their case; this generalized information should not be construed to be formal legal advice.

What is bankruptcy?

Chapter 7 Overview

Chapter 13 Overview

Chapter 11 Overview

A bankruptcy case: step-by-step

A final word

What is bankruptcy?

Federal law provides several types of procedures which offer protection and relief to persons experiencing significant financial difficulty. Contained in the Bankruptcy Code, the laws offer protection from creditors with the goal of providing a fresh start to those who seek the use and protection of the laws.

Although there are different types of bankruptcy cases, all cases have several things in common. For example, when any bankruptcy case is filed, an automatic stay is immediately put into effect. This means that creditors must cease any and all actions to collect money or property from those who file bankruptcy. Thus, creditors must terminate the use of letters, telephone calls, lawsuits, attachments, garnishments, repossessions or foreclosures to collect a debt.

Bankruptcy laws are designed to allow debtors an opportunity to revise their financial lives so as to eliminate or reduce future problems, while still recognizing fairness to creditors.

Chapter 7 overview

A Chapter 7 bankruptcy case is usually filed by those who own limited assets and whose debts are dischargeable. With certain exceptions, this type of proceeding results in a discharge, or elimination, of all debts.

Many debts are dischargeable, such as signature loans, credit card accounts, bills for services (such as medical bills, etc.), lines of credit, and money owed from contracts. Debts which are non­dischargeable include most income tax debts, most student loans, credit obtained by fraud, child support and alimony.

In a Chapter 7, the debtor is permitted to retain a certain amount of assets, referred to as an exemption amount. Assets which are subject to a lien, such as an automobile with an auto loan do not, for practical purposes, count toward the exemption amount, except to the extent that the value of the automobile exceeds the balance of the loan. Also, most retirement funds are not counted toward the exemption.

Debtors who file a Chapter 7 case may elect to keep property which is subject to a lien, such as an automobile with an auto loan, but the debtor would be required to maintain regular payments on the debt. Debtors have the option of surrendering the encumbered asset and owing nothing further.

Chapter 13 overview

A Chapter 13 is a type of bankruptcy intended for individuals who have a regular income and are in a position to repay their debts, in part or in full, over a period of time. Debtors file a Chapter 13, rather than a Chapter 7, for any number of reasons, including:

  1. A desire to repay debts;

  2. A means of repaying debts over a period of time;

  3. A way to repay debts in an affordable manner and still keep all assets;

  4. If the debtor is behind on installment payments on a secured debt, such as a home mortgage or auto loan, a Chapter 13 allows the debtor to catch up on those past due installments, while preventing the secured creditor from foreclosing on the home or repossessing the vehicle.

In order to repay the creditors under a Chapter 13 "plan," the debtor pays monthly payments to a Court-appointed Trustee. The amount of payment depends on the debtor's income and expenses as well as the value of the debtor's assets.

Chapter 11 overview

A Chapter 11 case is far and away the most complex of the types of bankruptcies, and is usually intended for businesses or individuals in business. This proceeding is designed to allow a business to reorganize its financial life, with a confirmed and completed Chapter 11 Plan being the consummation of the case. The debtor must file monthly operating reports with the Court, and the creditors often form a committee to participate in the case.

Unlike a Chapter 13 case, where the plan is usually funded through the debtor's future in­come, the debtor's plan in a Chapter 11 often is funded not only through future income (or sales), but also through liquidation of certain assets, financing, or a combination of these.

It is most difficult to adequately summarize Chapter 11 bankruptcy in these few sentences. A client interested in filing a Chapter 11 can ex­pect an extended and intense analysis in the law office.

A bankruptcy case: step-by-step

To proceed with the filing of cases, these steps are generally followed:

  1. AN INITIAL OFFICE CONFERENCE. The first step is to review your financial background at a conference in the law office. We ask you to bring copies of all bills, titles to your vehicles, deeds to your properties, recent paycheck stubs, and any contracts to which you are a party.

  2. A SECOND OFFICE CONFERENCE TO REVIEW AND SIGN THE COMPLETED PETITION. After we have prepared the petition, we ask you to return to the office to review all the information contained in the document

  3. THE CASE IS FILED. Once the case is filed, the automatic stay provisions of the Bankruptcy Code bar any further action by creditors to collect any money or property. Those who file a Chapter 13 will be required to make a monthly plan payment to the court-appointed trustee.

  4. THE TRUSTEE MEETING. About one month after the case is filed, a meeting will be held with the court-appointed trustee, where the trustee asks questions about the information in the petition.

  5. THE CONFIRMATION HEARING. In Chapter 13 cases, a hearing is held in the Bankruptcy Court, where the Bankruptcy Judge considers the confirmation, or approval, of the Chapter 13 plan.

  6. THE DISCHARGE. An Order of Discharge will be forwarded by the Court upon the successful completion of proceedings.

A final word

The Bankruptcy Code, Rules, and related cases are often complex. This summary is intended only to give a general overview as to the subject matter. Please remember that there are exceptions and additional data to all the information explained herein, which will be reviewed in detail in the law office, depending on the individual case.

The information in these LegalCapsules is intended as brief overview of its topics. Since the subject is complex, the information is not comprehensive and is not intended as legal advice to apply to any specific situation. Please contact our firm for further information.

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