Understanding Bankruptcy – Your Guide Through Tough Times

At James H. Wilson, we recognize that financial struggles can happen to anyone, and knowing the options for managing debt is essential. Bankruptcy is a legal procedure under federal jurisdiction that’s intended to assist individuals and businesses in either eradicating or repaying their debts within the security of the bankruptcy court. Generally speaking, bankruptcies fall under two principal categories – “liquidations” or “reorganizations.”

Under Chapter 7 bankruptcy – the liquidation form – certain assets are sold off to settle as much debt as possible, enabling you to retain essential property for a new beginning. On the other hand, Chapter 13 bankruptcy – commonly engaged for consumer reorganization – allows you to restructure and repay your debts across a window of three to five years.

Both Chapter 7 and Chapter 13 bankruptcies are bound by intricate rules, including exceptions concerning eligible debts, the qualifications for filing, and which assets you can retain.

The Chapter 7 Liquidation Process

Also known as straight bankruptcy, Chapter 7 is accessible to individuals and businesses. The process typically spans between three to six months.

Filing under Chapter 7 may involve selling your assets to pay creditors. In exchange, most, if not all, of your unsecured debts, such as credit card and medical bills, can be discharged. Essential possessions termed “exempt” – including clothing, vehicles, and household items – are normally safeguarded by state or federal exemptions. A “no asset” case may apply if all your property falls under exemptions.

With secured debts – like car loans where the collateral secures the payment – you have options: allow repossession, continue with the payment arrangement, or provide a lump-sum equal to the property’s current replacement value. Certain secured debts may be dischargeable through Chapter 7 bankruptcy.

Not everyone qualifies for Chapter 7; individuals with enough disposable income to afford a Chapter 13 repayment plan may not be eligible.

However, bankruptcy isn’t a cure-all. While it can clear various debts, obligations like child support, spousal support, and most tax debts remain unaffected by a Chapter 7 discharge.

Restructuring with Chapter 13 Bankruptcy

Termed as the “wage earner’s plan,” Chapter 13 bankruptcy caters to those with a steady source of income adequate to repay a portion of their debts. Your secured debts must not surpass a certain amount, with unsecured debts below another specified amount, to qualify for Chapter 13.

In this arrangement, you’ll present a repayment blueprint, illustrating your intentions to settle debts over a span of three to five years. The precise repayment amount is influenced by your income level, the extent of your debt, and the potential repayment amount to unsecured creditors under Chapter 7.

Chapter 13 also provides a lifeline for those behind on secured debts, such as mortgage or car payments; you can include these arrears in your plan and address them over time to prevent foreclosure or repossession.

Exploring Other Reorganization Options

Apart from Chapter 13, there are alternative reorganization pathways like Chapter 11 and Chapter 12.

Chapter 11 often supports businesses needing to restructure, although individuals can file too; due to its complexity and costliness, it’s usually adopted by those with substantial assets or exceeding the debt thresholds of Chapter 13.

Chapter 12, resembling Chapter 13 but specific to family farmers, requires your debts to be primarily farm-related and accommodates greater debt limits. Chapter 12 filings are rare, but they grant added leverage in managing liens. Seeking legal advice is essential when considering Chapter 12.

At James H. Wilson, we are committed to providing the counsel and guidance necessary to navigate these challenging processes. If you are considering bankruptcy or require more information about your options, please contact us at 804.740.6464. Our knowledgeable team is ready to assist in procuring the relief you need for a fresh financial start.