Understanding Bankruptcy Law
Bankruptcy law governs debtor-creditor relations. Federal bankruptcy law is contained in Title 11 of the United States Code, passed by Congress under its constitutional authority to establish uniform laws on this subject, Article I, Section 8.
Individuals seeking bankruptcy relief can file Chapter 7 (liquidation), or Chapter 13 (debt repayment). Both processes prevent creditors from garnishing wages, repossessing cars, foreclosing houses and cutting off utility services. Keep in mind that anything that deals with law should be verified with a Harrisburg bankruptcy lawyer for accurate help and information.
What is Bankruptcy?
Bankruptcy is a legal proceeding designed to help debtors deal with overwhelming debt. Bankruptcy law is governed by federal statutes (Title 11 of the U.S. Code), which Congress created under its constitutional authority to "establish uniform laws on the subject of bankruptcy throughout the United States."
Bankruptcy law allows for liquidations and reorganizations. Liquidations involve the sale of assets to pay creditors. Reorganizations allow individuals and businesses to keep their assets but work out a timeline to repay their debt. It can also eliminate some unsecured debt, and reduce or wipe out other unsecured debts like court fines, criminal restitution orders and taxes.
To qualify for Chapter 7 bankruptcy, you must pass Part 1 of your state's "means test" - which looks at your disposable income and compares it to your debt obligations. Your non-exempt assets would then be sold to satisfy your creditors, but you're allowed to keep certain personal effects, tools of the trade and a limited amount of equity in your home.
How Does Bankruptcy Work?
Bankruptcy is a legal proceeding that enables individuals and businesses to resolve outstanding debts while providing protection during the process. The proceedings are governed by federal law, including the United States Bankruptcy Code. It creates a special court with specialized jurisdiction to handle bankruptcy cases.
The Code divides debts into two broad categories: secured and unsecured. Secured debts are those backed by collateral such as home mortgages or car loans. Unsecured debts include credit card bills, personal loans and medical bills. Debtor’s assets may be seized and sold by creditors to pay their debts under Chapter 7 bankruptcy. However, the courts have enacted a “means test” to ensure that most people with significant debts do not qualify for Chapter 7 bankruptcy.
Bankruptcy also provides protection from a variety of collection activities, such as foreclosures, repossessions and garnishments. A bankruptcy filing immediately stops most lawsuits, wage garnishment, creditor harassment and disconnection of utility services. There are several different types of bankruptcy - including Chapter 7, Chapter 11, and Chapter 13. Most consumers file for Chapter 7 or Chapter 13 bankruptcy.
What Can I Keep in Bankruptcy?
Individual debtors are allowed to keep property that is exempt from liquidation, such as a home and personal vehicles. The rest of the debtor's belongings become property of the bankruptcy estate, which is temporarily controlled by the court. These belongings may be sold to pay creditors.
In exchange for surrendering nonexempt assets, individual debtors are typically granted a discharge of their prepetition unsecured debts (subject to some statutory exceptions). This is similar to how a Chapter 13 case works.
However, filing for bankruptcy doesn't stop foreclosures or repossessions on homes and cars. To prevent these, it is usually best to work with the creditor and keep making payments. If you do not do this, the creditor may ask to "lift" the automatic stay – which must be approved by the court. Also, bankruptcy does not discharge child support or alimony obligations, court restitution orders, most student loans, and criminal fines or penalties. In addition, individuals cannot file for bankruptcy more than once every eight years.
What Can I Lose in Bankruptcy?
Regardless of the chapter you choose, filing for bankruptcy stops creditors from taking legal action against you to collect debts until the court sorts out your case according to federal law. This may include stopping a mortgage or car loan foreclosure, a wage garnishment and/or stoping a creditor from taking your property.
Debts you owe to secured creditors, such as those holding a mortgage or lien on your home or vehicle are typically not eliminated in bankruptcy. Creditors can repossess or take back the collateral if you fail to make payments on these debts during and after the bankruptcy.
You may not qualify to file for Chapter 7 if your current monthly income, net of statutorily allowed expenses and secured debt payments, is more than your state’s median income. You can rebut the presumption of abuse by showing special circumstances that justify additional expenses or changes to your current monthly income. You should also consider alternatives to bankruptcy that could allow you to repay your debts, such as negotiating with creditors, seeking lower interest rates or working more hours at work or through side jobs such as Door Dash or Uber.
