Not filing bankruptcy does more harm than the good
Not filing bankruptcy does more harm than the good.
Bankruptcy is the special kind of civil litigation involving people and organizations. Bankruptcy represents the status of bankrupt of debtor or the corporation. History of the Bankruptcy dates back to the medieval Italy, when the merchants used to borrow money from the Creditors and set up the business on bench or table to provide the service or sale of goods. When the merchants were unable to pay the debt, it was a common practice for creditors to break the trading table/bench of the Merchant to signify their business failure. Often creditors used to break the table or bench over their head.
Over the period of many centuries, the concept of Bankruptcy has changed a lot. The first bankruptcy law was passed by the Parliament of England in 1542.
Article 1, Section 8 of the US Constitution gives Congress the exclusive power to establish uniform laws on the subject of bankruptcies throughout the United States. Congress enacted the first bankruptcy law in 1800 to allow the involuntary bankruptcy of traders. Later congress passed and repealed the bankruptcy law many time throughout the two centuries. New bankruptcy law in 1841 allowed for voluntary and involuntary filing of bankruptcy. Finally, the Bankruptcy Reform Act was passed in 1978. BAPCPA made major changes to the bankruptcy act in 2005.
Till recently, Private Student Loan Bankruptcy Fairness Act of 2011 is reintroduced in the parliament (H.R. 2028) and expects to modify the dischargeability of debts for certain educational payments and loans.
Filing of bankruptcy is one of the peaceful and the best options to start with the fresh financial start. It will also provide for reorganisation of debts than any other systems can do.
People have lot of misconceptions about filing of Bankruptcy. Filing and not filing bankruptcy good or bad depends on the each client cases and circumstances.
If we study about the statistics on the Bankruptcy it shows that not filing bankruptcy does more harm than the good. More than 10 million people have filed for bankruptcy over the decade. 96% of the cases filed under the chapter 7 were "No asset cases".
If the filing of Bankruptcy was doing more harm than the good, these numbers of people would never have filed for Bankruptcy.
When we analyse the filing and not filing of bankruptcy we can summarize the outcome/client situation as below:
Debtor's Assets:
Debtor's house:
If debtor does not file: If the debtor defaults on the mortgage loans and does not make any payments. The creditors can sell the house either through judicial and non judicial foreclosure sale. Debtor is liable for any difference amount arisen out of foreclosure sale and the creditors also can file for recovery of the difference amount by filing the law suit.
If debtor files:
Chapter 7: Under chapter 7, various state exemptions allows debtor to keep the house by paying equity in the property. E.g. If the mortgage on the house is 400,000 dollar and current market value of the property is 450,000, a debtor can keep the property by exempting the $50,000 equity in the property. Most of the states in the US provides for homestead exemption on the debtors residence. Homestead Exemptions vary widely from state to state. For example, the exemption is $5,000 in Ohio, $80,000 in North Dakota, and $125,000 in Nevada. $150,000 in Arizona , $67,500 in Alaska , $5,000 in Alabama, $50,000 in Delaware, $100,000 in Idaho.
Chapter 13: Allows the debtor to keep the property by making payments over the 3 to 5 years. Most of the mortgage payment on the house is paid outside the plan.
Moreover the debtor can strip off the judicial or secondary mortgages which impair the exemption. For example: In the above example if the debtor has judicial lien on the property which is $50,000 and the law provide for $50,000 exemption, debtor can avoid the lien since it impair the available exemptions.
Debtor's Car:
If the debtor does not file: If the debtor default on car loan payment, the car will be repossessed. Creditors will also sue for any difference amount. Debtor will lose the car and still owe the debt on the car on auction sale difference amount.
If debtor files:
Chapter 7:
Options: 1. Debtor can keep the car by claiming any exemptions. Motor vehicle exemptions vary from state to state. $1,000 to $15,000. Some states do not have Motor vehicle exemptions but can be claimed by using the wild card exemption.
2. If any loan on the car and the car is required for primary means of transport, debtor can redeem the car by paying current market value of the property. (722 redemption)
3. If the loan on the car is upside down, if the debtor do not want to redeem the car, debtor can give up. Creditors cannot sue for the debt/car loan which is discharged in the Bankruptcy.
Chapter 13: Debtor can pay the car loan payment over the 3 to 5 years.
If the loan on the car is 910 days old, debtor can get the car loan modified to current value of the property. Debtor can also reduce the car loan interest as per the decision in Till Vs.SCS Credit Corp (also called as "till rate")
Cash on hand: Most of the state and federal exemptions allows the debtor to keep the certain amount as exempt from the bankruptcy estate.
Checking and saving account: Most of the state and federal exemptions allow the debtor to keep the certain amount as exempt from the bankruptcy estate.
Household goods and furnishings: Most of the state and federal exemptions allow the debtor to keep the certain amount of Household Goods and furnishings as exempt from the bankruptcy estate
Jewelry: Most of the state and federal exemptions allows the debtor to keep the certain amount Jewelry as exempt from the bankruptcy estate.
Debtor's wage: If the debtor is default on the payment, creditors can bring an order to garnish the wages. Bankruptcy stops all type of garnishment on the wages. If the wage is already garnished and the amount transferred is above $600 prior to 90 days of filing bankruptcy, debtor may be eligible to recover this based on the preferential payment.
Debtor Debts:
Medical Bills:
If the debtor does not file: Creditors will initiate the law suit against the debtor. They can also create the judgement lien on the debtor property. Lien will remain on the property as long as the debtor pay off the debt.
If debtor files:
Chapter 7: Debtor will get discharge from the medical bills. Debtor is no longer obligated to pay the debt.
Chapter 13: The amount the creditors receive varies from 0% to 100%.
Student loans:
If the debtor does not file: Creditor or the agency can Garnish wages upto 15% of debtor's disposable income to payback the student loan.
If debtor files:
Chapter 7: If the debtor is facing a real hardship in paying the student loans, court can consider the discharge. Many of the bankruptcy court use the Brunner Test to determine the dischargeability of student loans.
Chapter 13: Debtor can propose a plan to pay the student loan, any remainder of the student loan has to be paid after the plan.
Taxes:
If the debtor does not file: If debtor default on the tax payment to government, government can create a tax lien on the debtor property.
Chapter 7: Debtor can discharge the 3 year old taxes if it meets certain requirement.
Chapter 13: Debtor can pay off the debt over the period of 3 to five years and receive the discharge.
Utility bills:
If the debtor does not file: Utility service provider will cancel the utility services and sue for the balance amount.
Chapter 7: Debtor's utility bills can be discharged under chapter 7. However, if debtor wants to continue with the utility services, debtor needs to deposit two months average utility bills.
Chapter 13: Debtor can propose a plan to pay off the arrears on utility bills under chapter 13 plan.
Credit Card Debts:
If the debtor does not file: If debtor defaults on credit card payment, debtor will receive the notice from the credit card agencies and attorneys for the recovery of balance amount. Creditors also can file a suit against debtor to recover the amount. They can also create the lien on debtor's property.
Chapter 7: If debtor is able to claim appropriate exemptions for his/her equity in the property, debtor's credit card debt will be completely discharged. Most of the cases filed under chapter 7 are no asset cases.
Chapter 13: The amount the creditors receive varies from 0% to 100%.
Personal loans:
If the debtor does not file: If debtor default on personal loan payment, debtor will receive the notice from creditor. Creditors also can file a suit against debtor to recover the amount. Creditors can also create the lien on debtor's property.
Chapter 7: If debtor is able to claim the exemptions in his/her equity in the property, debtor's personal loan will be completely discharged.
Chapter 13: The amount the creditors receive varies from 0% to 100%.
Repossession deficiencies
If the debtor does not file: Most of the times, when the house is foreclosed and sold or the vehicle is repossessed and sold, creditor may not receive the amount what they had lent to the debtor. Deficiency will arise on the property sold. Creditors will send the notice to recover this amount. If debtor defaults on deficiency payment, creditors can file a suit against debtor to recover the amount. They can also create the lien on debtor's property.
Chapter 7: If debtor is able to claim the exemptions in his/her equity in the property, debtor deficiency debt will be completely discharged.
Chapter 13: The amount the creditors receives varies from 0% to 100%.
Judgments:
If the debtor does not file: If debtor default on judgement amount payment, creditors can create the lien on debtor's property.
Chapter 7: If debtor is able to claim the exemptions in his/her equity in the property, debtor's judgment amount debt will be completely discharged.
Chapter 13: The amount the creditors receive varies from 0% to 100%.
Lease payments
If the debtor does not file: Landlord can evict tenant from the premises. Creditors can also repossess the leased vehicles.
Chapter 7: Debtor will have the option of rejecting and assuming the Lease.(11 USC Sec. 365. If the lease is assumed, debtor must cure all the defaults. If the debtor has an obligation on the car lease payment and wants to surrender the leased car, any obligation on the car lease payment can be discharged under chapter 7.
Chapter 13: Debtor can assume or reject an unexpired lease under chapter 13 (11 USC Sec. 1322). Debtor will have the certain obligations depending on the assuming or rejecting the unexpired lease.
Personal Guaranties
If the debtor does not file: Debtor may be responsible for the debts for which he has given personal guaranty.
Chapter 7: If the debtor has signed a personal guarantee for others debt, with the few exceptions, debtor liability for the debt will be discharged. Although, debtor can discharge some personal guarantees for which he/she has signed for the corporation, corporation will still owe the debt.
Chapter 13: Discharge of debts under chapter 13 is depend on the circumstances of the case. Debtor can file chapter 13 to pay the debt over the time.
Child support payments and alimony
If the debtor does not file: If the debtor owes arrear on the child support payment it may cause him the trouble including the imprisonment and professional license cancellation.
Chapter 7: Child support payments and alimony cannot be discharged under chapter 7.
Chapter 13: Debtor can propose a plan and make full payment towards the arrears.
Penalties, Fines & Restitution:
If debtor files:
Chapter 7: Penalties, Fines & Restitutions are not dischargeable under bankruptcy (11 USC 523(a)(7) & (19) )
Chapter 13: Penalties, Fines & Restitutions are not dischargeable under bankruptcy. However, it can be paid under chapter 13 plan.
Conclusion: Bankruptcy is a complex matter. A bankruptcy attorney can only think wisely about each client matter and provide expert opinion on the filing and not filing of bankruptcy depending on the clients issues. If we analyse the filing of the bankruptcy over the last decade, bankruptcy has eliminated many billion dollars in debt. If you are facing a problem in paying back your debt and to analyse your current situation, contact your nearest bankruptcy attorney today.
Bankruptcy is the special kind of civil litigation involving people and organizations. Bankruptcy represents the status of bankrupt of debtor or the corporation. History of the Bankruptcy dates back to the medieval Italy, when the merchants used to borrow money from the Creditors and set up the business on bench or table to provide the service or sale of goods. When the merchants were unable to pay the debt, it was a common practice for creditors to break the trading table/bench of the Merchant to signify their business failure. Often creditors used to break the table or bench over their head.
Over the period of many centuries, the concept of Bankruptcy has changed a lot. The first bankruptcy law was passed by the Parliament of England in 1542.
Article 1, Section 8 of the US Constitution gives Congress the exclusive power to establish uniform laws on the subject of bankruptcies throughout the United States. Congress enacted the first bankruptcy law in 1800 to allow the involuntary bankruptcy of traders. Later congress passed and repealed the bankruptcy law many time throughout the two centuries. New bankruptcy law in 1841 allowed for voluntary and involuntary filing of bankruptcy. Finally, the Bankruptcy Reform Act was passed in 1978. BAPCPA made major changes to the bankruptcy act in 2005.
Till recently, Private Student Loan Bankruptcy Fairness Act of 2011 is reintroduced in the parliament (H.R. 2028) and expects to modify the dischargeability of debts for certain educational payments and loans.
Filing of bankruptcy is one of the peaceful and the best options to start with the fresh financial start. It will also provide for reorganisation of debts than any other systems can do.
People have lot of misconceptions about filing of Bankruptcy. Filing and not filing bankruptcy good or bad depends on the each client cases and circumstances.
If we study about the statistics on the Bankruptcy it shows that not filing bankruptcy does more harm than the good. More than 10 million people have filed for bankruptcy over the decade. 96% of the cases filed under the chapter 7 were "No asset cases".
If the filing of Bankruptcy was doing more harm than the good, these numbers of people would never have filed for Bankruptcy.
When we analyse the filing and not filing of bankruptcy we can summarize the outcome/client situation as below:
Debtor's Assets:
Debtor's house:
If debtor does not file: If the debtor defaults on the mortgage loans and does not make any payments. The creditors can sell the house either through judicial and non judicial foreclosure sale. Debtor is liable for any difference amount arisen out of foreclosure sale and the creditors also can file for recovery of the difference amount by filing the law suit.
If debtor files:
Chapter 7: Under chapter 7, various state exemptions allows debtor to keep the house by paying equity in the property. E.g. If the mortgage on the house is 400,000 dollar and current market value of the property is 450,000, a debtor can keep the property by exempting the $50,000 equity in the property. Most of the states in the US provides for homestead exemption on the debtors residence. Homestead Exemptions vary widely from state to state. For example, the exemption is $5,000 in Ohio, $80,000 in North Dakota, and $125,000 in Nevada. $150,000 in Arizona , $67,500 in Alaska , $5,000 in Alabama, $50,000 in Delaware, $100,000 in Idaho.
Chapter 13: Allows the debtor to keep the property by making payments over the 3 to 5 years. Most of the mortgage payment on the house is paid outside the plan.
Moreover the debtor can strip off the judicial or secondary mortgages which impair the exemption. For example: In the above example if the debtor has judicial lien on the property which is $50,000 and the law provide for $50,000 exemption, debtor can avoid the lien since it impair the available exemptions.
Debtor's Car:
If the debtor does not file: If the debtor default on car loan payment, the car will be repossessed. Creditors will also sue for any difference amount. Debtor will lose the car and still owe the debt on the car on auction sale difference amount.
If debtor files:
Chapter 7:
Options: 1. Debtor can keep the car by claiming any exemptions. Motor vehicle exemptions vary from state to state. $1,000 to $15,000. Some states do not have Motor vehicle exemptions but can be claimed by using the wild card exemption.
2. If any loan on the car and the car is required for primary means of transport, debtor can redeem the car by paying current market value of the property. (722 redemption)
3. If the loan on the car is upside down, if the debtor do not want to redeem the car, debtor can give up. Creditors cannot sue for the debt/car loan which is discharged in the Bankruptcy.
Chapter 13: Debtor can pay the car loan payment over the 3 to 5 years.
If the loan on the car is 910 days old, debtor can get the car loan modified to current value of the property. Debtor can also reduce the car loan interest as per the decision in Till Vs.SCS Credit Corp (also called as "till rate")
Cash on hand: Most of the state and federal exemptions allows the debtor to keep the certain amount as exempt from the bankruptcy estate.
Checking and saving account: Most of the state and federal exemptions allow the debtor to keep the certain amount as exempt from the bankruptcy estate.
Household goods and furnishings: Most of the state and federal exemptions allow the debtor to keep the certain amount of Household Goods and furnishings as exempt from the bankruptcy estate
Jewelry: Most of the state and federal exemptions allows the debtor to keep the certain amount Jewelry as exempt from the bankruptcy estate.
Debtor's wage: If the debtor is default on the payment, creditors can bring an order to garnish the wages. Bankruptcy stops all type of garnishment on the wages. If the wage is already garnished and the amount transferred is above $600 prior to 90 days of filing bankruptcy, debtor may be eligible to recover this based on the preferential payment.
Debtor Debts:
Medical Bills:
If the debtor does not file: Creditors will initiate the law suit against the debtor. They can also create the judgement lien on the debtor property. Lien will remain on the property as long as the debtor pay off the debt.
If debtor files:
Chapter 7: Debtor will get discharge from the medical bills. Debtor is no longer obligated to pay the debt.
Chapter 13: The amount the creditors receive varies from 0% to 100%.
Student loans:
If the debtor does not file: Creditor or the agency can Garnish wages upto 15% of debtor's disposable income to payback the student loan.
If debtor files:
Chapter 7: If the debtor is facing a real hardship in paying the student loans, court can consider the discharge. Many of the bankruptcy court use the Brunner Test to determine the dischargeability of student loans.
Chapter 13: Debtor can propose a plan to pay the student loan, any remainder of the student loan has to be paid after the plan.
Taxes:
If the debtor does not file: If debtor default on the tax payment to government, government can create a tax lien on the debtor property.
Chapter 7: Debtor can discharge the 3 year old taxes if it meets certain requirement.
Chapter 13: Debtor can pay off the debt over the period of 3 to five years and receive the discharge.
Utility bills:
If the debtor does not file: Utility service provider will cancel the utility services and sue for the balance amount.
Chapter 7: Debtor's utility bills can be discharged under chapter 7. However, if debtor wants to continue with the utility services, debtor needs to deposit two months average utility bills.
Chapter 13: Debtor can propose a plan to pay off the arrears on utility bills under chapter 13 plan.
Credit Card Debts:
If the debtor does not file: If debtor defaults on credit card payment, debtor will receive the notice from the credit card agencies and attorneys for the recovery of balance amount. Creditors also can file a suit against debtor to recover the amount. They can also create the lien on debtor's property.
Chapter 7: If debtor is able to claim appropriate exemptions for his/her equity in the property, debtor's credit card debt will be completely discharged. Most of the cases filed under chapter 7 are no asset cases.
Chapter 13: The amount the creditors receive varies from 0% to 100%.
Personal loans:
If the debtor does not file: If debtor default on personal loan payment, debtor will receive the notice from creditor. Creditors also can file a suit against debtor to recover the amount. Creditors can also create the lien on debtor's property.
Chapter 7: If debtor is able to claim the exemptions in his/her equity in the property, debtor's personal loan will be completely discharged.
Chapter 13: The amount the creditors receive varies from 0% to 100%.
Repossession deficiencies
If the debtor does not file: Most of the times, when the house is foreclosed and sold or the vehicle is repossessed and sold, creditor may not receive the amount what they had lent to the debtor. Deficiency will arise on the property sold. Creditors will send the notice to recover this amount. If debtor defaults on deficiency payment, creditors can file a suit against debtor to recover the amount. They can also create the lien on debtor's property.
Chapter 7: If debtor is able to claim the exemptions in his/her equity in the property, debtor deficiency debt will be completely discharged.
Chapter 13: The amount the creditors receives varies from 0% to 100%.
Judgments:
If the debtor does not file: If debtor default on judgement amount payment, creditors can create the lien on debtor's property.
Chapter 7: If debtor is able to claim the exemptions in his/her equity in the property, debtor's judgment amount debt will be completely discharged.
Chapter 13: The amount the creditors receive varies from 0% to 100%.
Lease payments
If the debtor does not file: Landlord can evict tenant from the premises. Creditors can also repossess the leased vehicles.
Chapter 7: Debtor will have the option of rejecting and assuming the Lease.(11 USC Sec. 365. If the lease is assumed, debtor must cure all the defaults. If the debtor has an obligation on the car lease payment and wants to surrender the leased car, any obligation on the car lease payment can be discharged under chapter 7.
Chapter 13: Debtor can assume or reject an unexpired lease under chapter 13 (11 USC Sec. 1322). Debtor will have the certain obligations depending on the assuming or rejecting the unexpired lease.
Personal Guaranties
If the debtor does not file: Debtor may be responsible for the debts for which he has given personal guaranty.
Chapter 7: If the debtor has signed a personal guarantee for others debt, with the few exceptions, debtor liability for the debt will be discharged. Although, debtor can discharge some personal guarantees for which he/she has signed for the corporation, corporation will still owe the debt.
Chapter 13: Discharge of debts under chapter 13 is depend on the circumstances of the case. Debtor can file chapter 13 to pay the debt over the time.
Child support payments and alimony
If the debtor does not file: If the debtor owes arrear on the child support payment it may cause him the trouble including the imprisonment and professional license cancellation.
Chapter 7: Child support payments and alimony cannot be discharged under chapter 7.
Chapter 13: Debtor can propose a plan and make full payment towards the arrears.
Penalties, Fines & Restitution:
If debtor files:
Chapter 7: Penalties, Fines & Restitutions are not dischargeable under bankruptcy (11 USC 523(a)(7) & (19) )
Chapter 13: Penalties, Fines & Restitutions are not dischargeable under bankruptcy. However, it can be paid under chapter 13 plan.
Conclusion: Bankruptcy is a complex matter. A bankruptcy attorney can only think wisely about each client matter and provide expert opinion on the filing and not filing of bankruptcy depending on the clients issues. If we analyse the filing of the bankruptcy over the last decade, bankruptcy has eliminated many billion dollars in debt. If you are facing a problem in paying back your debt and to analyse your current situation, contact your nearest bankruptcy attorney today.
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