The decision to file a bankruptcy should be made only after careful analysis of alternative measures. The filing of bankruptcy is a tool for people who have no possible means of resolving their debts. A bankruptcy filing can remain on your credit report for as long as 10 years, making it difficult to obtain credit during that time. However, many people who file bankruptcy have been able to re-establish their credit through continued timely payments of their mortgage, automobile loans or leases and other periodic obligations.
If you have determined that bankruptcy is the only alternative, then you should educate yourself as to the different types of bankruptcy proceedings available to you. The most common type of bankruptcy is a Chapter 7.
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A Chapter 7 is generally referred to as a complete liquidation. Essentially, you file with the Bankruptcy Court a list of all of your assets and debts. A Chapter 7 Trustee is assigned to your case. Provided that you have any assets over and above your allowed exemptions, (click on this link for a list of Florida Exemptions) the Trustee will attempt to liquidate those assets and distribute the proceeds to your creditors. Assuming that no objections to your bankruptcy discharge or dischargeability of any particular debt are filed, you will receive a discharge of all your obligations 60 days after the Section 341, First Meeting of Creditors.
The First Meeting of Creditors is a brief informal meeting with the Chapter 7 Trustee appointed to your case. Every creditor listed by you in your bankruptcy schedules receives notice of the Meeting and may attend. Any creditor who attends the Meeting may ask you questions concerning your assets and liabilities. However, due to the brevity of the Meeting, creditors rarely attend.
A Chapter 13 is sometimes referred to as an individual debt adjustment or restructuring. Prior to the enactment of the October 2005 Bankruptcy Code amendments, Chapter 13 was generally uses for individuals who needed time to cure a default of their home mortgage payments. Under the amended Bankruptcy Code, many individuals who may have previously qualified for a Chapter 7 are now obligated to file under Chapter 13.
In order to qualify for filing a Chapter 13, you must have regular income. Chapter 13 is designed to provide creditors with a partial or full repayment of debts. A Chapter 13 debtor is required to pay 100% of his/her/their disposable monthly income (take home pay less reasonable monthly expenses). Depending on various factors, the debtor will propose a 36-60 month payment plan. The plan may provide for the curing of arrearages on the debtor's home mortgage over the life of the plan and may modify other secured obligations.
Under a Chapter 13, a debtor may keep all of his/her/their assets so long as the payments under the plan pay creditors at least as much as they would have otherwise received if the debtor filed a Chapter 7.
One of the most significant changes in the 2005 Bankruptcy Code amendments is the addition of a Means Test. The Means Test was implemented as a method to eliminate bad faith filing of Chapter 7 cases. Prior to the amendments, the Bankruptcy Code did not prohibit someone with disposable income from filing a Chapter 7, except in extreme cases. It is now considered bad faith if someone files a Chapter 7 where he/she/they would have the ability to pay at least 25% of their unsecured debt over 5 years. The Means Test incorporates local and national standards for income and expenses to determine whether a presumption of bad faith would arise if a debtor chose to file a Chapter 7. If the presumption exists, then such debtor would be required to file a Chapter 13.
A Chapter 11 is a reorganization generally filed by corporations who need time to restructure their debts. Chapter 11's are the most complex of all bankruptcy cases and generally involve sophisticated parties on all sides.
In a Chapter 11, the debtor proposes a plan to pay its creditors - often for much less than what is owed. In certain cases, the debtor is able to restructure secured debt in order to reduce periodic payments to more feasible terms. Often times, Chapter 11 is used to reject undesirable contacts or leases or to simply allow a debtor some breathing room to regain cash flow. There are many different reasons for filing a Chapter 11 and careful consideration should be taken in planning appropriately before circumstances become out of control.