With today's persistent economic downturn, we hear an awful lot about bankruptcy. Still, many people don't understand some of the basic features of personal bankruptcy. Here is a short primer on some of those basics.
Federal law has for many years provided a way for an individual or couple to obtain a "fresh start" for their financial lives. There are two basic forms of bankruptcy especially suited for individuals, Chapter 7, liquidation and Chapter 13, a reorganization or wage-earner's plan. Chapter 7 is the easier of the two procedures. In theory you file a petition with the court disclosing all of your assets, income, expenses and liabilities. The court then divides your assets pro rata among your creditors. In actuality, because the Bankruptcy Code allows you to exempt certain of your assets using either federal or state exemptions, most consumer bankruptcies end without any asset distribution to their creditors. The filer may receive a discharge and come out of the process debt free. A petitioner's credit rating, however, will probably suffer. In addition, there are limits on how much income an individual or couple may have and still use Chapter 7. There are also limits on the number of times and when you can file and obtain a discharge.
Chapter 13 may be the best approach for some debtors, although it is more time consuming and expensive. It is most useful for those who have a regular income but have fallen behind on their mortgage payments and for those whose income is above the median, which disqualifies them from filing for Chapter 7. Under Chapter 13, in addition to the petition described above, the debtor files a repayment plan. Under the plan he or she may pay off the arrearage on a mortgage, for example, to catch up over a three to five year period, if income permits, while keeping up with current payments. The debtor must apply his "discretionary" income, as determined under federal standards, to pay his unsecured creditors pro rata over the length of the plan. Even if the plan provides that creditors only get ten or twenty cents on the dollar the debtor, at the successful completion of the plan, obtains a discharge as to those unsecured debts.
If you have any questions about this article, Bankruptcy in general or other legal issues facing you, please contact the Worcester MA Law firm of Lian Zarrow. We will be happy to assist you.