Making the decision to file for bankruptcy is almost always a tough situation. You might want to pay your debts to your creditors in all righteousness, but sometimes it may just not be possible. If you are in the process of considering your options on how to deal with your mounting debts, this guide will help you understand the intricacies of bankruptcy and determine if it is the right, or perhaps the only, choice for you.
By the time you finish reviewing this guide, you will know about the different types of bankruptcy and the ideal way to declare yourself bankrupt, depending on your business and the nature of your debts. This decision could mean losing your home, business, and other assets, or losing the ability to spend your money as you wish for at least a few years.
Filing for bankruptcy too soon or too late could impact your business and credit scores differently, apart from affecting your emotional state. In this situation, it is best to get help from seasoned New York City bankruptcy lawyers who will advise you and provide you with strong legal representation in order to protect your rights, whatever you decide.
What Is Bankruptcy?
When an individual or entity cannot pay their debts, they can file a bankruptcy petition with the bankruptcy court. The party filing the bankruptcy petition (known within the bankruptcy case as the “Debtor”) can get a complete or partial “discharge” of their personal obligations from most of their unsecured and secured loans (the lien from the secured loans [e.g., a mortgage] will often remain on any property of the debtor even though the Debtor’s personal obligation to pay has been discharged). They can also get a flexible payment plan for their other loans and pay them in smaller amounts spread over a longer duration.
There are multiple situations where a person might file for bankruptcy:
- Payment notices or repeated harassment from creditors
- Mounting credit card bills
- Unpaid personal loans
- Home loan on the verge of foreclosure
- Forced to use money from retirement funds
The underlying reasons pushing you into a situation of bankruptcy could be:
- Medical Needs
- Student Loan Debt
- Job Loss
Bankruptcy can help rebuild your finances, but it will have a long-term impact on your credit score. You need to understand the various aspects of the related bankruptcy laws in order to find the ideal course of action that involves minimum hassle and monetary loss. Let us first get to know what bankruptcy can or cannot do.
Primary Benefits of Bankruptcy
There are two primary benefits to filing for bankruptcy protection.
First and foremost: the automatic stay.
The automatic stay is one of the most powerful injunctions in the United States judicial system. Functionally, the moment the debtor files the petition with the bankruptcy court the automatic stay takes immediate effect. It prohibits any further collection or legal action against the Debtor (with very limited exceptions) for any claims that arose prior to the Debtor filing for bankruptcy protection. So, for example, if your home is subject to an upcoming foreclosure sale, or a creditor is about to get a judgment against you for an unpaid bill, the filing of the bankruptcy petition will stop these actions in their tracks.
The second primary benefit to filing for bankruptcy is the discharge. The discharge injunction, commonly known as simply the “discharge”, forever bars any creditor or claimant from pursuing the debtor for debts or claims after the court issues the discharge order. The discharge is what gives the Debtor a “fresh start.”
Which Debts Are Discharged Through Bankruptcy?
Unsecured debts such as credit card bills, personal loans, and medical and utility bills are generally discharged when you file for bankruptcy. Any undergoing eviction or repossession litigation will go on hold immediately after you file your case.
With that said, debts relating to child support, alimony, pending tax (assuming they are not old tax obligations), student loans, or government debt are not discharged. Further, if you have fines against legal proceedings, like for driving under the influence of alcohol and other such scenarios, or have debts due to involvement in fraud, you will not get relief.
If you have debts that you would like to disperse from the former category, bankruptcy might be the way to go. There are three broad types, or chapters, under which you can file bankruptcy.
Types of Bankruptcy
The types of bankruptcy are categorized under different chapters. Chapters 7, 11, and 13 are the most common types individuals and corporations use to file for bankruptcy. Chapters 9, 12, and 15 are meant for specific businesses like fishing or family-owned farms, municipalities, or situations when the involved entities are based in different countries.
Chapter 7 Bankruptcy
You can solve matters quickly within 3–4 months by filing bankruptcy under Chapter 7. Filing under this type is ideal for people who do not have a high income or a large asset portfolio. Pertaining to this, you must pass a means test to file for Chapter 7 bankruptcy.
Chapter 7 is also called liquidation bankruptcy, and it can be filed by individuals and businesses. The reason it is called a liquidation bankruptcy is because the chapter 7 trustee appointed to your case is required to liquidate non-exempt assets for the benefit of the Debtor’s unsecured creditors. This may seem daunting at first, but it shouldn’t be, because exempt assets include equity in your home (a single Debtor can protect $179,950.00 of equity in their home in NYC and Long Island), equity in your vehicle, a certain amount of cash in your bank account, and your retirement and college savings accounts. So your home, car, cash, and retirement accounts will often all be protected and free from liquidation.
Individuals or entities with limited income are often best off going for Chapter 7 bankruptcy. Your last six-month average income should be less than the median household income in your state to file bankruptcy under this chapter. In most cases, such filers do not have many assets to liquidate.
Chapter 13 Bankruptcy
People will file bankruptcy under Chapter 13 if they have a regular income source that exceeds the median household income for a household of their size. People who are ineligible for Chapter 7 under the means test will file for Chapter 13.
Also called the wage earner’s plan, Chapter 13 will get the Debtor(s) a debt repayment plan generally spread over three to five years. You can restructure your debts within this period as you get more time to pay them, and can sometimes remove secured debt (e.g., a mortgage) from your property altogether if there is no equity left for that mortgage (i.e., your first mortgage loan is owed $500,000 and the fair market value of your home is only $400,000. In this scenario, you can strip the entirety of your second or third mortgages).
The debtors will submit a payment plan after meeting the trustee, and any creditors that appear, and then seek approval from the court. You should know that you must start with the proposed payments within 30 days, even if the court approval process is still underway.
Any foreclosure notices against your home loan will be halted as soon as you file for Chapter 13 bankruptcy. The repayments are made through the court-appointed trustee, who will further pay your creditors per the agreed terms.
A special provision under Chapter 13 bankruptcy will protect co-signors as they cannot be pursued by the creditors, which is not the case in Chapter 7 bankruptcy.
End result: in Chapter 13, you are repaying a portion or all of your debt over time, whereas in Chapter 7, subject to limited exceptions, your obligation to pay these debts is discharged without payment.
Chapter 11 Bankruptcy
This form of bankruptcy also utilizes a repayment plan for the debtor. Anyone, be it individuals or corporations, can file under Chapter 11, but it is most common among companies.
The Debtor(s) get their debt restructured when filing with Chapter 11, and the creditors get their payment, which they otherwise have no hope of receiving. However, it is the most costly and cumbersome way of declaring bankruptcy. The legal fees and court charges are higher than the other two methods discussed above.
In most cases, Chapter 11 bankruptcy does not involve a trustee, and the filers act as debtors in possession. They will get the repayment plan approved by a majority of their creditors.
Now that you know the most important aspects of filing for bankruptcy, let us help you understand the broad step-by-step procedure.
How Can You File for Bankruptcy?
The procedure starts when you send your request to the court in writing. Next, depending on the Chapter of bankruptcy you choose to file under, you will meet your trustee and any creditors that appear. Here are the steps you will follow in detail.
Find a Skilled Bankruptcy Attorney to Handle Your Case
If you live in or run your business in New York, NY, or the surrounding area and are looking to file for bankruptcy, you should seek counsel at a reputable bankruptcy law firm. You can get the best legal advice from leading NY bankruptcy lawyers, like those at The Frank Law Firm. Our team of experts will help you prepare the right documentation and file for bankruptcy. A highly-rated NY bankruptcy attorney with a demonstrable track record of performance will be with you every step of the way to help you reach the best possible outcome.
Collect Your Income Documents
Bankruptcy under any chapter requires full disclosure of the Debtor’s financial condition. The court, and the bankruptcy process in general, is affording the Debtor a great benefit, so the Debtor must abide by two basic principles: notice (as into the Debtor’s creditors) and disclosure. This most commonly includes pay stubs, tax returns, and bank statements. The Debtor will also want to provide mortgage statements, financing statements for any vehicles, etc., to establish that these assets are exempt, if so.
Seek Debt Counseling
In accordance with the bankruptcy law set by the United States Department of Justice, you must get pre-bankruptcy credit counseling from an approved provider in your district 180 days before filing. Debtors must also undergo a debtor education course after filing for bankruptcy.
File Petition and Schedules with Court
Once you have retained a skilled bankruptcy attorney, provided them with all necessary information, and taken the credit counseling course, your attorneys will prepare your petition and schedules to file with the court. The petition and schedules provide the financial disclosure that is vital to the bankruptcy process. Before filing, you must review, confirm accuracy, and then sign the petition and schedules.
Meet with Trustee
After filing, you will then meet with your court-appointed trustee and testify under oath as to the details of your financial status. Sometimes your creditors may appear, as well. It’s a mandatory meeting as per Section 341 of the Bankruptcy Code. It usually happens within 21–50 days after filing your case.
In the context of chapter 7, the case will end when the Debtor gets their discharge, or the case is closed without a discharge. For chapters 11 and 13, the case will end once the repayment plan is confirmed.
What Can You Do If You Do Not Wish to File Bankruptcy?
The decision to file for bankruptcy is tough and should be your last resort under most circumstances. There are more ways to settle your debt, each of which has pros and cons. Here’s a look at the potential alternatives to filing for bankruptcy through New York consumer bankruptcy attorneys:
Negotiate Forbearance with Your Creditors
You can mutually agree to pause your payments for a certain duration in a forbearance agreement with your creditors. In this case, you will still accumulate the interest due on your payment, but you will have the time to plan your financial future and make adjustments.
You can consolidate your debt by taking a large personal loan to pay off all your existing debt. However, you might not qualify for debt consolidation if you have a bad credit score.
Debt Relief Companies
You can negotiate settlement letters with your lenders or consult debt relief companies to do the same. With that said, if your lenders accept the settlement, your credit history still shows that the debt wasn’t fully paid for at least 7–10 years.
Consumer advocacy agencies like Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB) recommend against debt settlement. Moreover, the forgiven debt is subject to tax. Form 1099-C sent by your creditor will reflect this amount.
When Is the Time to File for Bankruptcy?
It is never too early to consult an experienced bankruptcy attorney. Perhaps bankruptcy might not be right for your right now, but it may be in a year. Consulting with competent counsel can put you on the right path sooner than later, and may prevent you from making disastrous financial decisions that could have been avoided.
Potential Effects of Bankruptcy
Filing for bankruptcy and its resulting impact is not always smooth. You cannot just file the papers and relieve yourself of all your debt. Outlined below are the future consequences that you might have to face due to filing for bankruptcy:
If you have a high credit score, you will likely experience a sharp fall after filing for bankruptcy, though there isn’t a set criterion to estimate this fall. While Chapter 13 bankruptcy stays on your credit history for seven years, Chapter 7 bankruptcy will remain for ten years.
Oftentimes, however, Debtors will see that their credit score has increased substantially within 12 months of filing.
People who have agreed to pay your loan or c0-signors might still be pursued if you file for a Chapter 7 bankruptcy even after your case is finalized.
This is not the case, however, if you have filed for Chapter 13 bankruptcy. In Chapter 13, co-signors on consumer debts are not disturbed as long you are current with your payments per the defined agreement.
Choose The Frank Law Firm for Competent and Trustworthy Bankruptcy Services
Our attorneys at The Frank Law Firm have been through the legal trenches before and understand that bankruptcy and business reorganization can be extremely stressful and overwhelming. We can empathize with the mental strain you are going through, and you can count on us to find quick and effective solutions. Our committed bankruptcy attorneys will do everything to make the process streamlined with the least possible stress and financial loss for you.
We will make every effort to keep our clients out of court and reach a mutual agreement with your creditors without the need for bankruptcy. And if we cannot reach an agreement with your creditors, then we’ll walk you through each step of the bankruptcy process until you are out of bankruptcy, debt-free, and moving on to the next chapter of your life.
Over the years, we have fought for individual clients, business owners, asset buyers, institutional lenders, investors, landlords, trustees, and corporation debtors/creditors and have provided them with exceptional legal services. If you choose The Frank Law Firm, your case will be handled with acumen by established bankruptcy lawyers in New York.