A Philadelphia Bankruptcy Attorney Presents: A Quick Guide to Bankruptcies in America
Every year in the US, hundreds of thousands of people -or more- file for bankruptcy as a way of getting out from under debts and other obligations they are unable to pay without assistance. Some of these people are here in Philadelphia and considering whether they should seek the services of a Philadelphia bankruptcy attorney to help them with their debt restructuring.
Bankruptcy can be an extremely complicated undertaking and one which is often misunderstood by the public. Alfred Abel Law Offices wants to provide a short guide covering the most important things people should know about bankruptcy.
Every bankruptcy situation is different. We can provide a broad overview, but the specifics of every case will vary – including yours if you are considering bankruptcy. The only way to know how your own specific bankruptcy will play out is by consulting with a qualified Philadelphia bankruptcy attorney.
With that established, here are the basics.
A Philadelphia Bankruptcy Attorney Offers an Overview of Bankruptcy
I. What Do Bankruptcies Accomplish?
Bankruptcy is a legal tool that fulfills several basic purposes when a person or business has debts or other financial obligations they are unable to meet.
A – Protects the debtor from collections actions and lawsuits from creditors,
B – Allows a judge to evaluate the debtor’s ability to pay, in a structured environment, and
C – When possible, creates a plan to pay back some or all of those debts while forgiving and discharging what cannot be paid back.
D – Provides a fresh start for individuals, and a chance for a business to re-emerge as a profitable company.
E – Allows individuals to catch up on mortgage or car payments and keep their property, while businesses can reject leases and contracts that are causing losses.
In short, bankruptcy allows a debtor to get back on his/her feet after being in a financially precarious situation. For those who are burdened by more debt than they can hope to pay back, bankruptcy puts them on a path towards a new financial start.
II. What Kinds of Bankruptcies are there?
At present, six recognized forms of bankruptcy exist in US Courts, each numbered: Chapters 7, 9, 11, 12, 13, and 15. Of these, Chapters 9, 12, and 15 are rarely invoked and only apply to very specific situations. The vast majority of US bankruptcy cases are Chapter 7, 11, or 13.
Without getting heavily into the details, which are beyond the scope of this blog, here are the basics of what the three most common types of bankruptcy entail:
Chapter 7 Bankruptcy
Under Chapter 7, an individual or family declares an inability to pay, and if the court agrees, the vast majority of the debts are simply discharged by judicial order. In general, the only forms of debts which cannot be discharged under Chapter 7 are student loans, child or family support, tax bills, and criminal fines. Chapter 7 allows an individual to keep some property and other assets up to certain limits. Property above those limits is sold to pay the debts, and creditors often get a small fraction of their debt or nothing at all. Chapter 11 Bankruptcy
Chapter 11 is almost always invoked by businesses rather than individuals. Under Chapter 11, the business continues operation while having its debt restructured, and its revenue is overseen by the court to ensure debts are paid off over time.
Chapter 13 Bankruptcy
Chapter 13 bankruptcies are available to both individuals/families as well as sole-proprietor businesses and involve the creation of a payment plan which is spread over a period of time up to five years. In the event that the debtor fails to uphold the payment plan, they can once again be subject to collections activity or other legal action.
For more information on Chapter 11 vs Chapter 13 bankruptcies, please see our recent blog where our Philadelphia bankruptcy attorney explains the differences.
III. Which of Your Assets Are Protected?
When a person files for Chapter 7 bankruptcy, some property is protected from creditors. The property is protected by the use of exemptions. The court may seize assets that exceed the exemptions and auction them off to pay some of the debt.
Exceptions vary from state to state, but in general, will include:
- A limited amount of equity in a primary residence.
- A primary vehicle needed for work or school.
- Possessions required to do work, such as computers or tools of a trade.
- Paid-in entitlements, such as retirement plans or social security.
- Health aids and medicines
- A limited amount of normal household goods
- A limited amount of jewelry
However, the rules governing protected assets are complex. Consultation with a qualified Philadelphia bankruptcy attorney is vital for the most successful bankruptcy case filing.
IV. How Do Creditors Get Paid?
As previously explained, this largely depends on the form of bankruptcy being undertaken. Under Chapter 7, the debtor’s assets that cannot be protected with exemptions are used to pay off the debts. Under Chapters 11 and 13, payments are made on set schedules, as approved by the courts and often agreed upon with the trustee overseeing the bankruptcy.
V. How Are Bankruptcies Resolved?
A bankruptcy is resolved once the conditions imposed by the court are met. In the case of Chapter 7 bankruptcies, the time frame could be as little as 3-4 months, if the debtor has no substantial assets which can be taken as payment. Chapters 11 and 13 involve longer-term payment plans, which can take up to five years for a chapter 13 and longer for a chapter 11
VI. How Is the Debtor’s Credit Affected by Bankruptcy?
Here, distinguishing between bankruptcy and the events leading up to that bankruptcy is important. A bankruptcy will not remove anything from a debtor’s credit record – any missed payments and other negative items will still be on the credit report. Having a bankruptcy on the credit record will also be visible to future creditors, and could impact lending decisions.
On the other hand, bankruptcy will almost always reduce the amount of debt a debtor is carrying – and this generally improves the credit score. Basically, a bankruptcy will do less harm to a credit record than allowing delinquencies and collections activities to continue unabated.
Considering Bankruptcy? Get the Personalized Help You Need
Alfred Abel is a Philadelphia bankruptcy attorney with a long history of serving the local community. Before you commit to any action regarding your finances, please schedule a consultation for an analysis of your situation.