A bankruptcy case is a legal proceeding brought by a debtor to achieve certain objectives made possible by a federal statute known as the “Bankruptcy Code.”
For individuals, there are two types of relief available. The first is a liquidation case under chapter 7 of the Bankruptcy Code, often referred to as “straight bankruptcy.” In a chapter 7 case, the debtor’s “non-exempt” assets are converted to cash with the proceeds distributed to creditors. In exchange, the debtor is released of most debt obligations owed as of the date of the commencement of the bankruptcy case.
The second type of bankruptcy relief is reorganization of the debtor’s financial obligations under, in the case of most individual debtors, chapter 13 of the Bankruptcy Code. Under this chapter, the debtor prepares a plan to use future income to satisfy all or part of the debtor’s pre-bankruptcy debts. The debtor in a chapter 13 case generally retains his or her assets.
The Bankruptcy Code, as amended from time to time, was drafted to promote two primary goals – the first, a “fresh start” for the debtor; and second, equity among creditors. Consumer bankruptcy cases are focused more on the first goal – that is giving the debtor “a new opportunity in life, unhampered by the pressure and discouragement of pre-existing debts.” Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934).
This article briefly describes the advantages and disadvantages of a chapter 7 bankruptcy case for an individual, or “consumer,” debtor.
Advantages of a Chapter 7 Bankruptcy Case for an Individual Debtor
Discharge of Most Debts
The number one goal of most consumer bankruptcies is a discharge of most debts. A “discharge” means that the debtor is no longer legally obligated to repay the debt and the creditor to whom the debt is owed is permanently enjoined from attempting to collect on the discharged debt from the individual debtor.
Protection of Property and Income against Execution by Unsecured Creditors.
Certain of the debtor’s property and assets may be placed beyond the reach of creditors through the use of exemptions in bankruptcy. Bankruptcy also stops any garnishment of wages after the bankruptcy petition is filed.
The simple filing of a bankruptcy petition creates (with certain exceptions) an automatic injunction that prohibits creditor action against the debtor including repossessions, garnishments, and foreclosures. The stay also ends creditor collection efforts including dunning letter and telephone calls. The automatic stay gives the debtor a chance to take a “step back” and assess the situation more clearly without the interruptions associated with creditor collection activities.
Another Protection Afforded by Bankruptcy
Bankruptcy may present the only way for a debtor to regain a driver’s license subject to revocation because of an unpaid accident judgment.
Disadvantages of a Chapter 7 Bankruptcy Case for an Individual Debtor
Bankruptcy is not the only way to fix an individual debtor’s debt and legal problems, and there may be several valid reasons not to file for bankruptcy protection.
Loss of Some Property in a Chapter 7 Bankruptcy
A consumer debtor will likely lose non-exempt property in a chapter 7 case, but that may be of little importance if the debtor has little or no nonexempt property. The vast majority of consumer chapter 7 cases are so-called “no asset” cases because the debtor has no nonexempt, unencumbered property to be administered and sold for the benefit of unsecured creditors.
Effect on Credit
Bankruptcy will most likely become a part of an individual debtor’s credit history for as long as ten years. That may or may not be a problem when seeking future credit — some creditors believe the debtor’s bankruptcy discharge makes the debtor less likely to default on new, post-bankruptcy debts. In addition, the debtor always retains the option of voluntarily repaying an important creditor with whom they wish to maintain a line of credit.
Cost of Filing a Chapter 7 Bankruptcy Case
In addition to attorney’s fees, fees for filing the petition and the cost of credit counseling and a personal financial management course must also be taken into account.
The foregoing is a non-exhaustive list of factors to be considered in deciding the best course of action when a consumer debtor is overwhelmed by too much debt. Other factors specific to an individual may play a more important role in determining whether to file for bankruptcy protection under chapter 7.
If you are thinking of filing for bankruptcy, contact me at 914-385-1032.
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