Bankruptcy Law – General Information
The legal history for bankruptcy dates back to the ancient world. In fact, from a religious perspective, in the Old Testament, every seventh year was decreed Mosaic Law as a Sabbatical year wherein the release of all debts owed by citizens was required. See Leviticus, 25:8-54. Moreover, Deuteronomy 15: 1-3 specifies that “[a]t the end of every seven years you shall grant a remission of debt.”
Originally bankruptcy was intended to be a remedy for creditors during the reign of King Henry VIII. England codified the bankruptcy laws in 1825, but voluntary bankruptcy for debtors was not actually authorized until 1849.
In the United States the legal source for bankruptcy law is the United States Constitution I, Section 8, Clause 4. The bankruptcy code has undergone several revisions with the most recent one being the Bankruptcy Abuse and Consumer Protection Act, which was enacted in October of 2005.
For the vast majority of Americans there are two primary kinds of bankruptcy relief and both are distinct from one another.
Chapter 7 bankruptcy focus on bankruptcy cases in which consumers are allowed to discharge most, if not all, of their debts. A discharge of debts simply means that the client’s debts are legally wiped out.
Not all debts are dischargeable in a Chapter 7 bankruptcy. For example, under the current law, debts such as student loans, certain types of taxes, child support, alimony, and criminal restitution would not be wiped out. However such debts as medical bills, credit card debt, or other general unsecured debts would be wiped clean by filing Chapter 7 with a bankruptcy lawyer.
Chapter 7 bankruptcy usually takes approximately five to six months to complete depending upon where the bankruptcy case has been filed. Usually there is one hearing in a Chapter 7 bankruptcy case. The hearing is presided over by a Chapter 7 trustee. The Chapter 7 trustee’s role is to ensure that the Chapter 7 bankruptcy laws are met. One of the primary considerations in filing a Chapter 7 bankruptcy case is whether the client can meet the Means Test.
Means Testing determines whether a client can meet the legally mandated income requirements to be able to maintain a Chapter 7 bankruptcy case. If the amount of income a client has received in the six (6) months preceding the filing of their Chapter 7 case exceeds the stated median income limits, you may not be able to file a Chapter 7 bankruptcy case.
Under the bankruptcy laws, if it appears that a person does not initially qualify for Chapter 7 bankruptcy certain expenses such as mortgage payments, child support or alimony, and income tax obligations may be used to reduce the amount of median income. Sometimes these expenses are enough to enable a person to qualify to file for Chapter 7 bankruptcy even though initially it appeared that the person would not qualify.
Whether a person files for a Chapter 7 bankruptcy or a Chapter 13 bankruptcy the bankruptcy laws require clients to complete a consumer credit counseling class, oftentimes referred to as a pre-filing certificate. If a bankruptcy case is filed without completing the pre-filing class, the bankruptcy case would be void. In other words, the bankruptcy filing would be legally invalid.
Chapter 13 bankruptcy is an entirely different bankruptcy proceeding. Chapter 13 bankruptcy is known as a wage earner’s repayment plan. Chapter 13 bankruptcy normally has a duration of at least two to five years. There are several legal reasons, which may require that person file for Chapter 13 bankruptcy. The most common reason is that a person may have fallen behind on their mortgage (foreclosure bankruptcy) or vehicle payments and is unable to bring the payments current, or, perhaps the person’s income exceeds the median income limits.
In the above scenario, if a person files a Chapter 13 bankruptcy the client will be allowed to cure the missed payments over time in the bankruptcy case, and, in most cases be allowed to keep the property.
Chapter 13 bankruptcy laws mandate that a client must be able to afford to make the Chapter 13 bankruptcy payment or the case will be dismissed or converted to a Chapter 7 bankruptcy. Statistics show that most of the Chapter 13 bankruptcy cases are dismissed or they are converted to a Chapter 7 bankruptcy proceeding.
If a person files a Chapter 13 bankruptcy case, the regular mortgage payments must be paid to the mortgage company if the client wishes to retain the residence. If the mortgage payments are not made the creditor may file a motion in court asking that they be allowed to obtain legal possession of the property.
As far as rebuilding your credit, it is probably significantly easier to rebuild one’s credit after filing a Chapter 7 bankruptcy versus a Chapter 13 bankruptcy case. In fact, many times even before all of a client’s debts have been wiped out in a Chapter 7 bankruptcy, credit card companies will solicit a client with new credit card offers. However, rebuilding credit in a Chapter 13 bankruptcy case can not begin until the Chapter 13 bankruptcy has been successfully completed which is usually two (2) to five (5) years.
If you need to review whether Chapter 7 or Chapter 13 bankruptcy is right for you, contact Roger Ghai and his team in Kennesaw or Acworth for a consultation!