Although personal bankruptcy is a reality for many Americans, the thousands on the brink of filing may be unaware of the rules and rights available to those considering this life altering step.
Before entering the process, it’s important to fully understand what it means to declare bankruptcy and the implications and the impact bankruptcy will have on future financial endeavors.
Although individuals may have several reasons for declaring bankruptcy, some of the most common include divorce, job loss, excessive credit card or medical expenses. Another emerging reason for declaring personal bankruptcy is the inability to make mortgage payments on one or multiple properties.
Typically, it takes a breaking point or an event to push someone to declare personal bankruptcy. For example, after experiencing a job loss and a diminished savings account, individuals are hounded by constant collection agency phone calls and letters which can be extremely upsetting and disruptive. Mounting calls and persistent correspondence can produce additional stress on a family or individual; making bankruptcy declaration appearing to be the only option.
Bankruptcy Federal and State Rules and Laws
Simply defined, personal bankruptcy is when an individual or a couple files either Chapter 7 or Chapter 13 under Title 11 of the United States Code. Both Chapter 7 and 13 produce a similar end result, however each Chapter approaches the process differently.
Chapter 7 is the complete liquidation of all personal assets, whereas Chapter 13 is when the individual reorganizes debt into a three to five year payment plan to creditors. One way to determine which way to file is through income. If the individual’s income is lower than the median state income, Chapter 7 is not an option and Chapter 13 should be contemplated.
Additionally, individual state laws should be examined before filing. Certain states provide for specific exemptions and understanding state rules is imperative to knowing what falls under local bankruptcy laws.
For example, in Montana a 320 acre farm, one acre outside the municipality or ¼ acre inside the municipality (between $100,000 to $200,000) are considered a federal supplemental exemption. However in New York, real property including a co-op, condo or a mobile home up to $10,000 is considered exempt.
Individuals considering bankruptcy should also be aware of the new regulations released in 2005, making it tougher to declare bankruptcy. The rules were changed to ensure that only debtors in the worst possible financial position were filing for bankruptcy, since bankruptcy has such extreme financial implications.
Examples of law changes include having to furnish federal tax returns from the last year and undergoing credit counseling.
Bankruptcy Automatic Stay Can Provide a Temporary “Time Out” from Collections
Once bankruptcy is filed, individuals are subjected to the possibility of material asset repossession. This includes home, bank account, vehicles and other possessions. While bankruptcy may provide a new start, it may also leave the debtor without the cash and possessions needed for survival.
According to U.S. Bankruptcy Code Section 362, individuals can stop the collections process and possibly hang onto possessions while their case is pending by invoking automatic stay protection.
A bankruptcy automatic stay is an injunction that prevents creditors from collecting debts from someone who has declared bankruptcy, allowing the individual an opportunity to stay in their home or avoid wage garnishment.
Understanding what an automatic stay can (and cannot) do is important in terms of planning and strategizing.
Automatic stay protections DO provide:
- Prevent utilities from being discontinued. Individuals may continue with service for up to 20 days.
- Halting foreclosure proceedings while the automatic stay is in place.
- Stall the eviction process for a few weeks.
- Prevent a government agency from collecting overpaid public benefits.
- Stops wage garnishment while the automatic stay is in place.
Automatic stay protections DON'T provide:
- Protection from some tax proceedings such as an IRS audit or tax deficiency collection.
- Prevention from child support law suits or payment modifications.
- Wage protection from a pension loan.
- Protection from bankruptcy filing numerous times.
Although automatic stay provides powerful protection, it only allows for a temporary reprieve from proceedings; typically the length of the pending case--for Chapter 7 only a few months and Chapter 13 up to five years.
It’s important to note that the automatic stay may be lifted if a creditor pursues having it removed and a judge grants the request. The injunction may also be prematurely lifted if the individual had filed Chapter 7 or Chapter 13 previously and had the case dismissed within the past few years.