FAQ's

What can a creditor do to collect a debt?

A creditor has certain rights that are available under state and federal law to collect unpaid debts. These rights include: commencing a lawsuit to collect the debt and obtain a judgment; repossessing collateral (such as a car or boat) used to secure the loan; foreclosing on collateral (such as a house or commercial building); and garnishing the debtor's wages. Another option available to creditors is forcing the debtor into "involuntary" bankruptcy.

What is bankruptcy?

Bankruptcy law is federal law, which provides that individuals and businesses unable to pay their debts may petition the bankruptcy court for relief. Depending on the circumstances, bankruptcy law permits debtors to either obtain a fresh start through "liquidation," or to restructure payments to creditors through a payment plan - known as "rehabilitation." Bankruptcy law is also meant to ensure fair treatment for creditors. Although it is not very common, creditors can sometimes force a debtor into an "involuntary" bankruptcy.

Are there different types of bankruptcy?

The most common type of bankruptcy is a Chapter 7 "liquidation" case. Other types of bankruptcy allow debtors to "rehabilitate." The most common are Chapter 11 cases (reorganization), Chapter 12 (debt adjustment for family farmers), and Chapter 13 (debt adjustment of individuals).

What is a Chapter 7 bankruptcy?

Chapter 7 of the bankruptcy code is titled 'liquidation." Chapter 7 bankruptcy is available to individuals or businesses. The debtor's goal in a Chapter 7 is to "discharge" his or her debts by giving up all non-exempt property. In a Chapter 7 bankruptcy case, a bankruptcy "trustee" is appointed. Typically, the bankruptcy trustee collects and sells all of the debtor's nonexempt assets, then distributes the money to the creditors. A creditor with a valid lien will receive its collateral or the proceeds from its sale. An unsecured creditor with an allowed claim will receive its prorata share of the amount collected by the trustee. However, the bankruptcy code provides that certain creditors have priority and will be paid before other unsecured claims. In addition, not all claims are allowed.

What is a Chapter 11 bankruptcy?

Chapter 11 of the bankruptcy code involves rehabilitation rather than liquidation, and usually involves a business debtor. However, individual non-business debtors may also file under Chapter 11. In a typical Chapter 11 case, no "trustee" is appointed. Rather, the debtor as "debtor in possession" or "DIP" keeps the property of the bankruptcy estate, operates the business, and creditors are paid from the debtor's post-petition earnings. The amount a particular creditor receives is governed by a "plan" of reorganization which outlines the terms and conditions of repayment. Typically, in a Chapter 11 case, the debtor receives a discharge when its plan is confirmed, that is, when the plan is approved by the creditors and the court.

What is a Chapter 12 bankruptcy?

Chapter 12 of the bankruptcy code involves rehabilitation of family farmers with regular income. Chapter 12 is similar to Chapter 13. Only a "family farmer" with regular income from a farming operation are eligible to file a Chapter 12. Also, to be eligible under Chapter 12, debtors must meet certain debt limits. Individuals, corporations, or partnerships may be eligible to be debtors under Chapter 12, provided they meet certain debt limits. In a Chapter 12 case, the debtor usually keeps his or her property and proposes a plan to repay creditors over a three to five year period. Plan payments are usually made through the Chapter 12 tr ustee, who also monitors the family farmer's operations during the life of the plan.

What is a Chapter 13 Bankruptcy?

Chapter 13 of the bankruptcy code involves rehabilitation of an individual debtor. Chapter 13 is restricted to individual debtors with regular income. Also, only individual debtors who meet certain debt limits are eligible to file under Chapter 13. In a Chapter 13 case, the debtor usually keeps his or her property and prepares a plan providing for payment to creditors over a three to five year period. Unlike a Chapter 11 plan, creditors do not vote on a Chapter 13 plan. The bankruptcy code outlines what the plan must provide and what the plan may provide. The payments under the plan are typically made through the Chapter 13 trustee. If the plan is confirmed by the court and the debtor makes the payments called for in the plan, the debtor receives a discharge.

What is the "automatic stay"?

After filing a bankruptcy petition, the debtor needs protection from creditors' collection efforts. In a Chapter 7 (liquidation) case, the trustee needs time to collect the property of the estate, sell it, and distribute the proceeds to creditors. In cases filed under Chapters 11 and 12, the debtor needs time to prepare a plan. In all cases, creditors' collection efforts must be stopped quickly in order to permit the orderly and fair administration of the debtor's property. To accomplish this goal, the bankruptcy code provides that the "automatic stay" immediately goes into effect upon filing a bankruptcy petition. The automatic stay prevents a creditor from starting or continuing efforts to collect a debt or take action against (foreclose or repossess) the debtor's property.

What is a "discharge"?

A "discharge" releases the debtor from personal liability for his or her pre-bankruptcy debts. Only an individual debtor may receive a discharge, but a discharge is not necessarily granted to all individual debtors. The bankruptcy code lists a number of reasons why a debtor may not receive a discharge. Those reasons include defrauding creditors, transferring or concealing assets, and making false statements in connection with the bankruptcy case. In addition, certain debts may be "excepted" from a debtor's discharge. Some of the most common debts excepted from discharge are certain taxes, fraudulently incurred credit card debt, child support and alimony obligations, most student loans, and judgments for someone's injury or death as a result of the debtor's intoxicated driving.

What is a reaffirmation agreement?

Reaffirmation agreements are agreements regarding a debt that would otherwise be discharged in bankruptcy. The debtor usually enters into a reaffirmation agreement because the debt is secured by collateral that the debtor wants to keep, and that the creditor could foreclose on or repossess. The reaffirmation agreement obligates the debtor to repay the entire amount agreed upon, even if that amount is more than the value of the collateral.

To be enforceable, a reaffirmation agreement must be voluntary, and must be made before the debtor receives a discharge. In addition, it must contain a statement informing the debtor that he or she can rescind it any time before discharge or 60 days after it is filed with the court (whichever is later). If the debtor is represented by an attorney, the attorney must certify that the reaffirmation agreement won't create an undue hardship on the debtor. If the debtor is not represented by an attorney, the bankruptcy court must find that the reaffirmation agreement won't create an undue hardship for the debtor.

How long is a bankruptcy listed on my consumer credit report?

A bankruptcy is listed on a consumer credit report for ten years if you have filed under Chapters 7, 11 or 12, and for seven years if you have filed under Chapter 13.

What is a "workout?"

The term "workout" means an out-of court agreement with a creditor in connection with an existing debt. In some cases, a debtor may able to negotiate a longer repayment term or a complete settlement of a debt for less than the amount owed. A workout is a viable alternative to bankruptcy in many circumstances.

The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.

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