Approximately one million bankruptcy cases are filed each year, involving billions of dollars of debt. All commercial transactions are structured with bankruptcy implications in mind. To this end, the bankruptcy system should provide predictability as well as economically efficient structures for dealing with the consequences of financial failure of various types of enterprises.


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WHAT IS BANKRUPTCY?

Bankruptcy is a legal procedure designed both to protect an individual or business that can't meet its financial obligations and to protect the creditors involved. To begin the process, proper papers must be filed.

There are specific chapters of the federal bankruptcy law. Proceedings under Chapter Seven (known as straight bankruptcy) involve taking most of the borrower's property. The court appoints a trustee to sell off the assets and distribute the cash among the creditors. Proceedings under Chapter Thirteen (known as wage earner's bankruptcy) involve the borrower proposing a plan for repaying a portion of the debt in installments from the borrower's income. Chapter Eleven of the federal Bankruptcy Act is generally used by corporations and not by consumer debtors. Its proceedings are expensive and complex. Consumer debtors normally use Chapter Seven or Chapter Thirteen.

Once the bankruptcy proceeding ends, the borrower is no longer liable. This occurs when the bankruptcy court enters a discharge order in a Chapter Seven case or the borrower has paid the debts due to the credit grantors according to a plan in a Chapter Eleven or a Chapter Thirteen case. In legal terms, the court has discharged the borrower from the debts. The borrower then starts over again with a clean financial slate, but the record of the bankruptcy will remain on the borrower's credit record for up to ten years.

Bankruptcy may be the best, or only, solution for extreme financial hardship. However, it should be utilized exclusively as a last resort, since it always has long lasting consequences. Be sure to consult a financial expert before resorting to bankruptcy as a means of solving your economic troubles.

* CAN BANKRUPTCY HELP TAX MATTERS?

Taxes are debts to a government agency much like debts you might have to individuals and companies. They are different from other debts, however, because the governmental agencies collecting these taxes have greater power over you and your property than other creditors have.

Since the Bankruptcy Code provides for protection to anyone filing bankruptcy, these taxing authorities may have less ability to affect you and your property while you are under bankruptcy protection. The filing of a bankruptcy case may stop collection activity of governmental agencies for the collection of taxes owed. A Chapter 13 bankruptcy can provide for level monthly payment of your tax obligation without additional interest or penalties. Chapter 7 and Chapter 13 can reduce or eliminate certain tax obligations that have been due and payable for more than three years.

Bankruptcy may be the best, or only, solution for extreme financial hardship. However, it should be utilized exclusively as a last resort since it has long lasting consequences. The record of a bankruptcy remains in your credit files in credit bureaus for as long as ten years. It is recommended to consult a financial expert before resorting to bankruptcy as a means of solving your economic troubles.

* CAN CO-SIGNERS BE PROTECTED?

If you file Chapter Seven bankruptcy, the creditor can proceed against your co-signers, according to the terms of the debt agreement. However, if you file a Chapter Thirteen debt adjustment, a co-signer is protected if the following conditions are met. The debt must be a consumer debt. Also, the debt may not be incurred in the ordinary course of business, and the co-signer cannot benefit from the proceeds of the debt. As long as the debtor is making the required payments under the Chapter Thirteen plan, the creditor cannot act to collect from the co-signer. The purpose of this provision of Chapter Thirteen is to allow a debtor to repay the debt without the creditor approaching the co-signer for repayment.

In conclusion, if you file a Chapter Seven bankruptcy, your creditors have the right to immediately demand payment from your cosigners. If, on the other hand, you file a bankruptcy petition and a proposed payment plan under Chapter Thirteen, your creditors cannot collect from your co- signers unless it becomes clear that the Chapter Thirteen plan will not pay the entire amount owed.

It is important to choose a qualified lawyer or financial adviser to set up your repayment plan. If you are unable to make your payments under Chapter Thirteen, you may still file for Chapter Seven bankruptcy. However, your creditors would then have the right to immediately demand payment from your cosigners.

* CAN CREDITOR HARASSMENT BE STOPPED?

There are several strategies for dealing with creditor harassment. First, be as honest as possible. If you explain why your account is in default, you may be able to persuade the creditor to allow you more time for payment or to make other arrangements for payment. But this is not always the case. Some creditors and collection agents are reasonable; others may rely on threats and intimidation.

A second method of stopping creditor harrasment is to file for bankruptcy. Though bankruptcy can have long-lasting consequences, it may be the best solution in certain cases. In addition, filing for either Chapter 7 or Chapter 13 bankruptcy will immediately stop creditor harrasment.

* CAN HOME FORECLOSURE BE PREVENTED?

If a person gets behind on his or her house payments, the creditor may call the loan in default, accelerate the debt, and begin foreclosure proceedings. When a debt is accelerated, the full balance of the note, not just the monthly payments, is due, in full, immediately. This is usually preceded by the creditor's refusal to accept monthly payments.

In the event a creditor begins foreclosure, you will receive a notice of the foreclosure proceeding. Unless the creditor is willing to accept payments to reinstate the loan, you will have to either pay the full balance remaining on the loan, or file bankruptcy for protection to stop the foreclosure. One additional option is to contact HUD for mortgage assistance. Sometimes creditors will agree to stop foreclosure while HUD is reviewing your file.

The beginning of a bankruptcy case, if before the foreclosure sale date, will stop the foreclosure sale from taking place. Under a Chapter 13 plan, you can make regular monthly payments and be given a reasonable period of time to bring your loan payments up to date to save your property.

Bankruptcy may be the best solution for extreme financial hardship. However, it should be used as a last resort, since it can have long- lasting consequences in relation to your credit.

For more information on foreclosures, consult with an attorney experienced in bankruptcy law.

* CAN MONTHLY PAYMENTS BE REDUCED?

If you have unmanageable debt and file a Chapter Seven straight bankruptcy, you will not be required to repay your debts. This affords you a clean slate with which to approach future obligations. Those electing to repay their debts under Chapter Thirteen must first determine their expected future monthly income or take-home pay. All types of income can be considered, such as wages, commissions, child support, spousal support, social security, workers compensation, unemployment, disability benefits, retirement, and dividends, so long as they constitute regular income.

After determining income, an amount should be set aside to provide for normal living expenses. The amount of income remaining after providing for living expenses is the maximum amount available for debt payments. If you cannot repay your debts in full over three to five years, you may be eligible for a partial repayment plan, or a "best efforts" plan. According to the "best efforts" plan, the idea is to repay as much as you can afford. At the end of the plan, any unpaid plan debts will be discharged. In any event, Chapter Thirteen almost always reduces your payments to an amount you can afford.

* HOW WILL MY CREDIT BE AFFECTED?

How your credit will be affected by filing either a Chapter Seven bankruptcy or a Chapter Thirteen debt reorganization petition depends on a number of individual factors. One is your credit status today. If your credit is perfect, bankruptcy will have a negative affect on your credit. If your credit is substantially impaired, now or in the near future, filing bankruptcy may be one of the best things you can do to improve your credit. There are two main reasons for this:

1. After filing bankruptcy you are debt free, making your ability to repay any new credit better after bankruptcy than before, simply because you have no other debts to pay after declaring bankruptcy.

2. There is no limit to the number of times you can file a Chapter Thirteen, so long as pre-established percentages of debt have been repaid. However, you can file Chapter Seven bankruptcy only once every six years.

* LAWSUITS AND JUDGMENTS

The filing of either a Chapter Seven straight bankruptcy or Chapter Thirteen debt adjustment immediately stops any lawsuits from being filed or judgments being taken against you. If a law suit is pending at the time of such filing, it can go no further. If a judgment has been taken, its enforcement can go no further. If a creditor has a judgment and is garnishing your wages, the garnishment can be stopped. Filing for Chapter Seven straight bankruptcy may relieve you of the obligation to pay the judgment. In a Chapter Thirteen debt adjustment, you may be able to satisfy the judgment over a period not to exceed five years. If the judgment has placed a lien on your home, that lien can be removed if it interferes with your homestead. If lawsuits or judgments are a threat or reality, the protection afforded under the bankruptcy laws may be an appropriate solution for you.

* PROTECTION OF PROPERTY FROM REPOSSESSION

Repossession is the power of the creditor to take back goods because of the buyer's failure to meet the loan payments.

There are two types of loans: secured and unsecured. A secured loan is one that requires you to pledge something as collateral. For example, if you purchase a car, the creditor will usually require you to put up the car as collateral. On the other hand, an unsecured loan, does not require collateral. Using a credit card is usually an unsecured loan.

If you default on an unsecured loan, the creditor's only recourse, after the letters and the collection agency efforts fail, is to sue. But if you default on a secured loan, the creditor can repossess the collateral and sell it. If the money from the sale isn't enough to pay off the loan, the creditor can sue you for the balance of the loan.

If you fall behind in your loan, you should contact your creditors as quickly as possible and attempt to work out a voluntary repayment plan. You can do this yourself or with the assistance of the non-profit Consumer Credit Counseling Service. Their toll-free number is: 1-800- 388-2227.

Bankruptcy may be able to cancel the debt, or it may give the opportunity to stop the repossession. However, bankruptcy should be used in only the most serious circumstances since it can affect your credit for up to ten years. If your property has already been repossessed, some states give you the opportunity to have your property returned by paying all outstanding loan charges, fees, and costs.

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