Bankruptcy - Joynes & Gaidies | Virginia

Bankruptcy is a legal process that allows individuals or businesses that cannot pay their debts to have some or all of their debts discharged or reorganized. This enables the debtors to get a "fresh start" on their finances. It also attempts to provide a fair method for compensating creditors.

Chapter 7 Bankruptcy is the most common type of bankruptcy proceeding. It is a liquidation type of proceeding (as opposed to a reorganization proceeding). All of the debtor's assets, with the exception of "exempt" property, will be sold, and the proceeds will be used to pay their debts. If the proceeds are not enough to pay off all the debts, unpaid amounts on "dischargeable debts" will be discharged.

First the debtor files a bankruptcy petition in which he lists all of his assets as well as all of his outstanding debt. Assets fall into two categories. Exempt assets are those that the debtor will be able to keep after the bankruptcy proceeding. Generally a certain amount of equity in a person's home, a certain amount of equity in a vehicle, a small amount for clothing, and a small amount for other personal items will be considered exempt property. The exact value of the exemptions will vary depending on what jurisdiction the bankruptcy is filed in.

Non-exempt assets are all of the debtor's assets that are not exempt. The trustee who is appointed in the Chapter 7 bankruptcy will collect all of the debtor's non-exempt assets and sell them. The proceeds will be distributed to the creditors.

There are also different categories of debts. A secured debt is one in which the creditor retains an interest in some of the debtor's property until the debt is paid. The property in which the creditor has a security interest may be the same property that was purchased with the loan, or it may be some other property of the debtor. Secured debts will get paid off before non-secured debts.

Non-secured debts are the last type of debts to be paid. These debts may end up being discharged altogether if there are not enough assets to pay them, and in many Chapter 7 bankruptcy cases, there are not. Examples of non-secured debts are credit card debts or signature loans.

Some debts are non-dischargeable even by a Chapter 7 bankruptcy proceeding. This means that you will still have to pay off these debts even after bankruptcy. Examples of non-dischargeable debts include child support, student loans, and taxes.

Chapter 13 Bankruptcy is what is known as reorganization bankruptcy. Chapter13 bankruptcy is filed by individuals who want to pay off their debts over a period of three to five years. This type of bankruptcy appeals to individuals who have non-exempt property that they want to keep. It is also only an option for individuals who have predictable income and whose income is sufficient to pay their reasonable expenses with some amount left over to pay off their debts.

The debtor will file a bankruptcy petition that includes schedules of the debtor's assets and liabilities. Then the debtor will have a limited amount of time to file a repayment plan with the court. Once the plan is filed the person's creditors and the Chapter 13 bankruptcy trustee will have a limited amount of time to object to the plan. If there are no objections and the plan is confirmed, the debtor and the creditors must follow it.

In order to be confirmed a reorganization plan must meet confirmation tests. One of these tests compares the amount that the unsecured creditors will receive under the plan to the amount they would receive under a Chapter 7 bankruptcy. Unsecured creditors must receive at least the same amount under the Chapter 13 plan as they would in a Chapter 7 bankruptcy. Another test requires that the debtor must also pay all of his disposable income into the repayment plan.

With a Chapter 13 bankruptcy the debtor may keep all of their property whether it is exempt or non-exempt. The main reason for dividing property into the exempt and non-exempt categories in a Chapter 13 bankruptcy is for purposes of comparing it to a Chapter 7 bankruptcy in a confirmation test. The debtor may, however, give up some secured property to the secured creditor as part of the reorganization plan.

If a debtor wants to keep secured property, but has fallen behind on payments, Chapter 13 bankruptcy allows the debtor to keep the property and get caught up on missed payments during the reorganization. For example a debtor who is facing a foreclosure for failing to make several mortgage payments can halt the foreclosure by filing for Chapter 13 bankruptcy. What is known as an "automatic stay" is ordered by the court, preventing creditors from taking any collection actions pending the outcome of the bankruptcy proceeding. The debtor can then use the reorganization period to get caught up on past due amounts, thereby avoiding foreclosure. If the debtor is unable to get caught up on payments during this period, he will still be subject to foreclosure at the end of the reorganization.

For secured property with a value that is less than the amount of the debt that is owed, there are 2 options. The debtor may return the property to the creditor who will be able to sell the property and keep the proceeds to satisfy the debt. Any excess debt that is not is not satisfied through the sale of the property will become unsecured debt. If the debtor keeps the property, the reorganization plan will require the debtor to repay the debt up to the value of the property. The excess amount of debt will be converted to unsecured debt.

Non-secured creditors share whatever amounts are left over after priority claims have been satisfied. In a Chapter 13 bankruptcy some of the debtors payments will go to unsecured creditors. The unpaid portion of the non-secured debts will be discharged at the end of the reorganization period.

There are other important differences between Chapter 7 and Chapter 13 bankruptcy. Contact an attorney with experience in the practice of bankruptcy law to determine which type is best for your situation.