Welcome to Bankruptcy 101, designed to help answer common questions you may have about bankruptcy and its process.
What is bankruptcy?
Bankruptcy is federal law found under Title 11 of the U.S. Code, commonly referred to as the “Bankruptcy Code”. It provides a means for debtors to obtain debt relief and allow for a new start. This means that most debt is discharged and will stop all creditor actions against the debtor.
Almost all consumer-debtors qualify to file for bankruptcy, which can be done individually or jointly, if married.
Types of Debts
There are three main types of debts: priority, secured, and unsecured. Priority claims are those granted special status by the Bankruptcy Code, such as most taxes and the costs of bankruptcy proceeding. Secured claims are those for which the creditor has the right to take back certain property if the debtor does not pay the underlying debt, such as a house backed by a mortgage. In contrast to secured claims, unsecured claims are generally those for which the creditor has no special rights to collect against particular property owned by the debtor.
DC and Virginia laws, and the federal Bankruptcy Code allow for exemptions of certain property for debtors to keep from creditor’s claims. DC recognizes the federal property exemptions as well, which can be a big bonus for some, while Virginia follows their own property exemption laws. All three exemptions can be found on this page.
Upon filing, an “automatic stay” triggers an injunction that stops foreclosures, lawsuits, garnishments and most other debt collection activity with a few exceptions. An “estate” is opened granting a trustee legal and equitable interest in all non-exempt property.
Chapter 13 repayment plan
In a Chapter 13, the debtor must file a repayment plan with the petition or within 14 days after the petition is filed for court approval. The plan must provide for payments of fixed amounts to the trustee on a regular basis, typically biweekly or monthly. The trustee then distributes the funds to creditors according to the terms of the plan, which may offer creditors less than full payment on their claims.
There are two main chapters available to individuals: Chapter 7, where debtor’s non-exempt property is sold to satisfy any debts and Chapter 13, which allows debtors to keep property and pay debts over time, usually three to five years. Most debtors file for Chapter 7, although it’s good and required by law that all debtors know they have the Chapter 13 option.
Debtors are required to take credit counseling prior to filing their petition and then required to take a second debtors education course prior to their hearing. The least expensive service I’ve found and recommend to my clients is DebtorCC; however, you can find plenty of other approved credit counselors if you wish.
What information is required in bankruptcy filings
When preparing bankruptcy paperwork, debtors are required to list all assets, debts, income and expenses onto schedules. It’s very important to be as accurate as possible because you run the risk of fraud and discharge may not be granted in a Chapter 7.
Meeting of the Creditors (341 Meeting)
They also have to attend a section 341 meeting of creditors with the trustee to make sure all paperwork is submitted and allow for questions of any attending creditors. In a Chapter 7, the court will grant a discharge if there are no objections.
In a Chapter 13, no later than 45 days after the meeting of creditors, the bankruptcy judge must hold a confirmation hearing and decide whether the plan is feasible and meets the standards for confirmation. Once the court confirms the plan, the debtor must make the plan succeed. The debtor must make regular payments to the trustee either directly or through payroll deduction, which will require adjustment to living on a fixed budget for a prolonged period.