What is Bankruptcy?
Since the beginning of recorded history, societies have had a form of debt relief for people who found themselves in a financial crisis. Debt forgiveness is mentioned in the Bible, the Code of Hammurabi, and other ancient texts. This is because people have always and will always get themselves into financial trouble that they cannot solve by themselves. The United States Constitution has a provision which expressly provides for Congress to create Bankruptcy Laws. Bankruptcy is word that we use for this debt forgiveness process. Bankruptcy provides debt forgiveness for unsecured debts.
What is an unsecured debt? What is secured debt?
An unsecured debt is debt not secured by collateral. The most common types of unsecured debts are credit card debt, medical bills, and personal loans. One might say that unsecured debts are debts based upon your personal promise to repay the money.
On the other hand, debts such as car loans and home mortgages are the most common types of secured debt. If you have ever taken out a home loan, your bank had you sign two major documents: a “Promissory Note” and a “Mortgage”. The promissory note represents your personal promise to repay the money, and the Mortgage represents the house’s promise to repay the money.
In a bankruptcy you will be relieved of your personal obligation to repay your creditors. Your property is not relieved of its obligation to repay the money.
What about my secured debt? My house and my car are really important to me!
If you continue to make payments on your secured debts then you will not have to give up the property which secures those debts.
If you are behind on your car or mortgage payments and you want to keep your property, a Chapter 13 bankruptcy will allow you to catch up on your missed payments over a three to five year time period.
Don’t I have to give up everything if I file for bankruptcy?
Absolutely not! One of the primary goals of the Bankruptcy Code is to provide a fresh start for people for file bankruptcy. Over the thousands of years governments have realized that starting at zero is not the same as having a fresh start. As a result, the Bankruptcy Code provides individuals with “exemptions” which can be used to protect your assets from your creditors.
In over 98% of Chapter 7 bankruptcy cases filed in New Jersey, everything that a person owns is protected from their creditors. As a result, the person filing gives up nothing, and in exchange they have their debts forgiven.
What happens in Bankruptcy?
There are two main types of bankruptcy which you may have heard about:
1. Chapter 7 – Also referred to as a ‘liquidiation’ or ‘straight’ bankruptcy.
2. Chapter 13 – Also referred to as a “wage earner’s plan”
In a Chapter 7 bankruptcy all of your unsecured debts (credit cards, medical bills, judgments, DMV surcharges, and others) will be wiped out. There are a few kinds of unsecured debt which cannot be wiped out in bankruptcy: student loan debt, child support debt, and recent tax debt being the most common forms of unsecured debt which cannot be wiped out in a bankruptcy.
In a Chapter 13 bankruptcy all of your unsecured debts will be wiped out. If you are behind on car or mortgage payments and want to save your car or home, then a Chapter 13 bankruptcy might be right for you. A Chapter 13 bankruptcy will allow you a three to five year period to catch up on your missed payments.
So how does Bankruptcy stop repossessions, wage garnishments, and lawsuits?
When a bankruptcy case is filed, an “Automatic Stay” of all collection efforts goes into place. The Automatic Stay is a federal bankruptcy protection and it acts to stop all efforts to collect money. If a creditor wants to keep trying to collect money from you or your property, then they have to get permission from the Bankruptcy Court to do so.
In a repossession, the lender will repossess the vehicle and then hold it until the vehicle can be sold at auction. Until the car is sold at auction, it is still your property – even though it is sitting in the lender’s lot. If you file a Chapter 13 bankruptcy after your car has been repossessed but prior to it being sold, you may be able to keep the vehicle if you can catch up on your missed payments in a Chapter 13 plan.
A wage garnishment is a collection effort – the creditor is taking some of your wages to satisfy a debt owed to the creditor. The automatic stay stops wage garnishments immediately.
Similarly, lawsuits against you seeking money are halted in their tracks by the Automatic Stay.
I didn’t think I could file for Bankruptcy. Didn’t Congress change the Bankruptcy Laws in 2005 to make it harder for people to file for Bankruptcy?
The new bankruptcy law that went into effect in October 2005 does not prevent anyone from filing a bankruptcy case. The bankruptcy system was created and still exists to serve you. If you are dealing with a job loss, divorce, separation, uninsured medical expense or some other financial distress, then I have good news for you. Everyone who needs to file for bankruptcy because of a financial crisis still can.
The new law says that people making a lot of money must file a Chapter 13 bankruptcy case instead of a Chapter 7 bankruptcy case. In a Chapter 13 case a person repays some or all of their debts out of future income under court supervision. What does this really mean to you? If you are a family of four in New Jersey making less than $99,474 or a family of four in Pennsylvania making less than $78,626 per year, than this part of the new law does not even apply to you.
