What to Know When Considering Filing Bankruptcy

Answering Your Legal Questions About Bankruptcy

“The Ins and Outs of Bankruptcy: A Guide for Debt-Ridden Individuals

Individuals struggling with debt often contemplate bankruptcy as a solution to escape collection efforts, eliminate some or all their debts, or restructure their debt payments to a more manageable level. This guide provides general information about bankruptcy but is not a substitute for seeking advice from a qualified legal expert.

What is Bankruptcy?

Bankruptcy is a federal court-supervised process that provides debt relief for individuals and businesses. It aims to protect the rights of secured creditors and provide equal treatment to unsecured creditors. There are four types of bankruptcy, and individuals may choose one based on their financial situation. The most common types are Chapter 7, also known as “straight” or “liquidation” bankruptcy, and Chapter 13, known as “wage-earner” or “debt-adjustment” plan. This guide will focus on Chapters 7 and 13.

Who Can Declare Bankruptcy?

There are few restrictions on who can file for bankruptcy. The decision to file and under which Chapter depends on the individual’s need for debt relief, their ability to pay, and their willingness to undergo a procedure with long-term financial consequences. Prospective filers must pass a means test to determine eligibility for Chapter 7. Those whose annual income exceeds the median income for a similar-sized family in their state are generally not eligible. It’s advisable to consult with a debt counselor or attorney to explore alternative options to bankruptcy.

Who is involved in bankruptcy proceedings?

In a bankruptcy case, several parties are involved, including:

The debtor – also known as the petitioner, who files for bankruptcy
The creditors – individuals, firms, or entities that claim the debtor owes them money
The trustee – a court-appointed person who manages the bankruptcy proceedings and the bankruptcy estate, and represents the interests of unsecured creditors
The bankruptcy judge – who presides over any hearings on disputed matters
The credit counselor – an independent financial advisor who certifies the completion of required credit counseling and financial management courses by the debtor.

What constitutes the bankruptcy estate?

The bankruptcy estate includes all property owned by the debtor, co-owned property, and post-filing income from all sources (including a non-filing spouse in a Chapter 13 case). The estate also includes property acquired through gifts, inheritances, divorce settlements, and life insurance proceeds, as well as property recovered by the trustee. The value of the estate is reduced by exempt assets, and the balance remaining is the final bankruptcy estate.

What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is a common type of bankruptcy that offers relief to debtors who have limited financial resources. The process allows debtors to obtain a fresh start by eliminating many of their financial obligations through a discharge. In exchange for the discharge, debtors are required to turn over certain nonexempt assets to the trustee for distribution to creditors. The distribution of proceeds from the sale of these assets is based on priorities set by the Bankruptcy Code, with priority expenses such as administrative costs, taxes, and domestic support obligations paid first. If there are remaining proceeds, unsecured creditors who file proof of their claims within the time set by the court will share in the remaining amount proportionately. Property that is subject to unavoidable liens is generally not administered by the trustee and is instead governed by the contract between the parties and state law.

What are some of the advantages and disadvantages of filing bankruptcy?

Advantages:

Bankruptcy stops ongoing legal actions against the debtor, prevents creditors from beginning new legal actions, and prohibits creditors with notice of the bankruptcy case from contacting the debtor or anyone else besides the debtor’s attorney to discuss or seek collection of a debt.
Most liabilities relating to credit card debts, medical bills, civil judgments, past-due accounts, and judgments due to repossessions and foreclosures may be discharged.
A debtor may be able to keep all or most of their property through federal and/or state exemptions.
Certain liens and involuntary transfers (such as garnishments) may be avoided if timely action is taken.

Disadvantages:

Debts relating to certain taxes, governmental fines, forfeitures, and restitution, criminal or fraudulent conduct, child and spousal support, drunk driving, most student loans, and willful and malicious injuries may not be dischargeable.
Creditors having a mortgage or security interest in a home or motor vehicles may be able to repossess their collateral after bankruptcy unless the debtor reaffirms the debt or redeems the collateral.
Bankruptcy filings are matters of public record and are generally noted on a debtor’s credit history for 10 years, making it more difficult to obtain credit in the future. A stigma may be associated with bankruptcy, identifying a debtor as financially or socially irresponsible. Some debtors find the proceedings embarrassing since they must submit to a public examination about their financial affairs and provide detailed financial disclosures, which are open to the public.
In most cases, a debtor may receive a discharge only once in eight years. Debtors contemplating bankruptcy must consider their financial stability and ability to avoid the problems resulting in bankruptcy during that period.
There may be significant tax consequences from a bankruptcy.

What debts are not discharged in a Chapter 7 bankruptcy?

Under Chapter 7 bankruptcy, not all debts can be discharged. Debts that are typically unaffected by bankruptcy include certain income and business taxes, alimony, child support, property divisions incident to divorce, government-imposed fines, forfeitures, or restitution, most student loans, and liabilities resulting from drunk driving. Certain abuses of cash advances and credit cards on the eve of bankruptcy are also presumed to be non dischargeable, as well as debts arising from fraud, misrepresentation, theft, and willful and malicious injuries to a person or property. Creditors may bring a lawsuit against the debtor in the bankruptcy court within 90 days after the filing to hold these latter forms of debts non dischargeable. Debts resulting from fraud, concealment of assets, or fraudulent transfer of assets may also result in the entire discharge being denied or revoked. Personal liability for debts secured by collateral may be discharged, but the affected creditor’s right to enforce its lien against collateral pledged for a loan is generally unaffected by bankruptcy. The debtor may have to reaffirm the debt or redeem the collateral to retain the collateral.

Chapter 7 Bankruptcy Property Exemptions

I. Wisconsin Exemptions

In Wisconsin, there are certain laws known as exemptions that protect certain types of property from being seized and sold by creditors. These exemptions vary between federal and state laws, and the exact amounts may change due to legislative changes. Some of the protected assets include personal residences, vehicles, household goods, tools for work, life insurance, deposit accounts, and in some cases, retirement benefits.

II. Secured Collateral

When a debtor’s property is secured by a lien, such as a home mortgage or vehicle loan, the debtor must decide whether to keep or surrender the collateral. If the collateral is surrendered, the remaining debt (or any deficiency) is usually discharged along with unsecured debts. If the debtor wishes to keep the collateral, they must either reaffirm the debt or redeem the collateral. Redemption is only possible for personal household items (excluding real estate), and vehicles may not be redeemed for less than the balance owed if the loan is less than 22 years old.

III. Lien Avoidance

In some cases, a debtor may be able to avoid certain liens on items used for personal or household purposes (excluding vehicles or real estate) and keep the item without reaffirming the debt or redeeming the collateral. This process is handled by the bankruptcy court and may come with additional costs to the debtor. Debtors should discuss any additional costs with their bankruptcy attorney.

Chapter 13 Bankruptcy Explained

Chapter 13 bankruptcy is a legal process that enables a debtor to propose a plan to repay as much of their debt as feasible, given their financial circumstances. The debtor must present this plan to their creditors and the court, and it must be confirmed by the court. The plan outlines how the debtor’s future income will be subject to court administration, and it generally lasts for three years, but can be extended up to five years if required.

Once a reasonable budget has been established, the debtor’s remaining income is paid to the trustee, typically on a monthly basis, by the debtor’s employer. The trustee then takes a commission before paying the creditors according to the plan provisions. At the end of the plan, the debtor is entitled to receive a discharge of any remaining debt.

Overall, Chapter 13 bankruptcy is a useful tool for debtors who have a reliable source of income and the ability to make regular payments towards their debts. By proposing a repayment plan, debtors can keep their property and assets while still working towards becoming debt-free. It is important to consult with a bankruptcy attorney to determine if Chapter 13 is the right choice for your financial situation.

Eligibility for Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a legal option available for individuals and unincorporated businesses who have a regular source of income. To qualify for Chapter 13, the debtor’s secured debts must be less than $1,149,525, and their unsecured debts must be less than $383,175.

A “regular source of income” is defined as income that is reliable and certain enough to enable the debtor to assign it to the trustee on a regular basis for payment to creditors. This regular payment plan is a central part of the Chapter 13 process and is designed to help debtors repay as much debt as feasible given their financial circumstances.

In summary, if you are an individual or unincorporated business with a reliable source of income and a level of debt that falls within the limits set by the law, you may be eligible for Chapter 13 bankruptcy. However, it is important to consult with a bankruptcy attorney to determine if Chapter 13 is the right choice for your specific financial situation.

Pros and Cons of Chapter 13 Bankruptcy

Chapter 13 bankruptcy can provide significant advantages and disadvantages for those seeking relief from debt. Here are some of the key benefits and drawbacks to consider:

Advantages:

It prevents creditor actions against co-debtors if the creditor is paid in full under the plan.
The debtor can retain all desired property if creditors receive at least as much as they would under Chapter 7.
Secured non-homestead debts can be “written down” to the collateral value.
Interest rates on some loans can be modified, and the payment term on non-homestead debts can be extended to make them more affordable.
Loan defaults can be cured by making installment payments, and accelerated mortgages and other notes can be reinstated.
The Chapter 13 discharge is broader than under Chapter 7, making more types of debts dischargeable.
Secured and tax creditors may be subject to “cram-down,” where affordable payments are forced that cannot be done under Chapter 7.
Interest stops on most tax obligations paid under the Chapter 13 plan.

Disadvantages:

The debtor’s future income is subject to administration by the trustee for up to three, and possibly up to five, years.
The debtor must establish and live under a firm, potentially adjustable budget during the repayment period.
The trustee is entitled to a commission on payments paid to creditors, which reduces the value of what is paid to creditors.
Chapter 13 bankruptcy will still appear on credit reports.

Procedures for Filing Bankruptcy

Filing for bankruptcy involves a series of steps, including:

Gathering financial information to prepare the bankruptcy petition and schedules of assets, debts, income, and expenses.
Obtaining the required pre-filing credit counseling.
Filing the petition, schedules, and statement of financial affairs, and paying the filing fee to the bankruptcy court.
The court notifies creditors of the case filing, the meeting of creditors, the injunctive stay against creditor actions, the last date for creditors to file challenges to the debtor’s discharge or the discharge ability of a particular debt, the initial status of assets available in the case, and other pertinent information.
The debtor appears before the trustee to be examined at the meeting of creditors and submits to creditors’ questions.
The debtor completes the reaffirmation, redemption, or surrender of secured collateral according to the Statement of Intentions filed with the case.
All parties receive the discharge notice approximately 90 days after filing a Chapter 7 case or at the conclusion of payments in a Chapter 13 case. A discharge will not be issued unless the debtor has completed a prescribed course in financial management.

Do I Need a Lawyer to file bankruptcy?

While anyone can represent themselves before the bankruptcy court, it is highly recommended to seek the assistance of a skilled bankruptcy lawyer. Bankruptcy is a complex legal process that involves many details and interpretations based on prior case law. Each case is unique, and the consequences can vary for each debtor.

Proper planning before filing for bankruptcy can potentially save a debtor money, property, and countless hours of revising improperly completed documents. In some cases, bankruptcy may not even be necessary. An experienced bankruptcy lawyer can analyze a debtor’s specific circumstances and provide valuable guidance on the best course of action.

This guide provides general information about bankruptcy, including the types of bankruptcy available (Chapter 7 and Chapter 13), eligibility requirements, parties involved in the proceedings, what constitutes the bankruptcy estate, and advantages and disadvantages of filing bankruptcy. The guide also discusses exemptions for secured collateral and property, eligibility requirements for Chapter 13 bankruptcy, and the procedures involved in filing for bankruptcy. The guide concludes with a recommendation to seek the assistance of a skilled bankruptcy lawyer to navigate the complex legal process.

This information, which is based on Wisconsin law, is a guide to inform and not to advise. No person should ever apply or interpret any law without the aid of a trained expert who knows the facts, because the facts may change the application of the law.

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