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Individuals and businesses who are having trouble paying their debts may file for bankruptcy as a remedy for their situation. The individual or business which files the bankruptcy is called a "debtor". The individuals or businesses to whom the debtor owes money are called "creditors." In the most general terms, a bankruptcy is a legal proceeding whereby an individual debtor attempts to obtain a "discharge", which will typically eliminate most or all of their debts, and, at the same time, potentially protect their home, vehicle(s), personal property, bank accounts, retirement accounts and wages. Please note that, although businesses can file a bankruptcy case, they do not actually receive a discharge. The two most common types of bankruptcies are referred to as Chapter 7 and Chapter 13.
A discharge is a court order which releases an individual from personal liability for paying their unsecured debts (that is, those debts that are not specifically attached to a home, vehicle or furniture) and their secured debts (that is, those debts that are specifically attached to an individual's home, vehicle or furniture), so long as the debtor surrenders (turns over) the property to which the specific secured debt is attached. The discharge is typically granted once the bankruptcy case has been completed.
Creditors are prohibited from attempting to collect on any debts that have been discharged through bankruptcy. This means that they cannot contact the individual, harass them, sue them, get a judgment against them or try to take any of their property (including wages) once a debt has been discharged. In fact, if a creditor attempts to do any of these things after being notified of an individual's bankruptcy, they may be sanctioned (punished) by the Court.
Although most unsecured debts can be discharged through bankruptcy, some cannot. Examples of those which cannot are as follows: most taxes; domestic support obligations such as child support and alimony; most student loans; court-ordered fines and criminal restitution penalties; debts obtained through fraud or deception; and intentional personal injury debts.
Chapter 7 is often referred to as a "Fresh Start" or "Liquidation" bankruptcy. This type of bankruptcy is typically filed by either low income individuals or those individuals who have little or no disposable income (as determined under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) to potentially discharge unsecured debts such as credit cards, personal loans, medical bills, repossessions, and money judgments, as well as secured debts on surrendered property. Although businesses can file a Chapter 7 case, they do not actually receive a discharge. Instead, the bankruptcy process is normally used to liquidate their assets and close the business.
In return for having the debts discharged, the bankruptcy court puts a limit on the amount of property that an individual is entitled to keep. This property is referred to as exempt property. The most common types of exempt property under Florida law are as follows (please note that those individuals who have not continuously resided in the state of Florida for at least 730 days before filing will very likely have a different list of exempt property available to them):
In the majority of filed Chapter 7 cases, most, if not all, of an individual's property will be protected under the above exemptions. However, in those cases that it is not, the individual typically has the option of either turning over all non-exempt property to the bankruptcy estate in order to be sold for the benefit of their creditors or keeping the non-exempt property by paying the bankruptcy estate the monetary value of it over a relatively short period of time (typically three to six months).
Chapter 13, which is also referred to as a "Personal Reorganization" bankruptcy, may be used by individuals who have monthly disposable income in order to create a payment plan and potentially do any or all of the following:
The individual must put together a Chapter 13 Plan (typically with the help of an attorney) which makes a good faith proposal to do any or all of the above by making monthly payments over a period of up to 60 months (5 years). If the plan is confirmed (approved) by the bankruptcy court and all payments are made as required, then the individual's mortgage and other home-related debts will be reinstated, the IRS and secured personal property debts will be paid off, all remaining balances on the dischargeable unsecured debts will be eliminated, and the individual will not be forced to surrender any of their property.
1. Credit Counseling Requirement. All individuals who wish to file a bankruptcy case after October 17, 2005 must receive a briefing which sets out their credit counseling options and assists them with a budget analysis. Only one such briefing, which will typically last approximately 60 to 90 minutes, is required. The briefing must be provided by a non-profit counseling agency which has been specifically approved by the office of the United States Trustee and must be done within the 180 day period prior to filing the bankruptcy case.
2. Preparation and Filing of the Petition. In order to file a bankruptcy case, the debtor(s) must prepare and then file a document called a "Petition" with the bankruptcy court. The Petition is signed by the debtor(s) and is submitted with a number of documents called "schedules", which list all of the debtors' assets, debts, income, and expenses, as well as other important financial information. The schedules must be completed truthfully and accurately, as they are intended to give the bankruptcy court a very detailed picture of the debtors' financial position at the time that the Petition is filed. In addition, the debtor(s) must file a certificate showing completion of the credit counseling requirement (see number 1, above) and their pay statements received within the 60 day period preceding the bankruptcy filing (if applicable).
3. Automatic Stay. A very important aspect of bankruptcy is the "automatic stay" which generally goes into effect as soon as the bankruptcy petition is filed. This automatic stay prevents creditors from continuing any type of collection efforts or bothering the debtor(s) in any way about money owed to them unless and until they get special permission from the Bankruptcy Court. This automatic stay includes, with some limitations, the immediate stoppage of such things as lawsuits, foreclosures, repossessions, garnishments, collection letters, and harassing creditor phone calls.
4. The Trustee. The administration of a bankruptcy case is handled, in large part, by an individual, called a Trustee, who is specifically assigned by the Court for that purpose. The duties of the Trustee vary according to the kind of bankruptcy filed, but they generally include verifying the accuracy of the debtors' bankruptcy petition and schedules, determining the debtors' financial circumstances related to their bankruptcy filing, and making sure that the creditors are being treated properly under the law. In addition to the above, the Trustee in a Chapter 7 case is responsible for liquidating the debtors' non-exempt property (or for disbursing the money received from the debtors in order to retain such property) for the benefit of the creditors; and the Trustee in a Chapter 13 case is responsible for evaluating the debtors' proposed bankruptcy payment plan and for disbursing all payments made pursuant thereto.
5. Making Payments Under a Chapter 13 Plan. In a Chapter 13 bankruptcy, the debtor(s) must begin making payments to the Trustee pursuant to the Chapter 13 plan within 30 days of the date of filing of the Petition. The debtor(s) must typically continue making these payments each and every month for the duration of their Chapter 13 plan, which may be as long as 60 months. However, there are certain circumstances that may allow debtors to successfully complete their Chapter 13 plan earlier than initially scheduled.
6. Meeting of Creditors. The Trustee and creditors have the opportunity to ask debtors about their assets, finances and the circumstances surrounding their accumulation of debt. This occurs at a brief Meeting of Creditors, which usually takes place about four to six weeks after the Petition is filed. There is no judge at the creditor's meeting; instead the Trustee runs the meeting by asking the debtor(s) questions and then allowing creditors who appear to ask a few questions of their own. All debtors are required to be present at this meeting (if a husband and wife have filed jointly, they must both be present), provide proof of their identity (typically a driver's license and social security card), and must cooperate by providing all information, records and/or documents that the Trustee may request.
7. Financial Management Instructional Course. Within 45 days after the creditors meeting in a Chapter 7 case and before the final payment is made in a Chapter 13 case, all debtors are required to take an instructional course intended to help them to better manage their future finances so as to avoid the circumstances that may have directly or indirectly led to the bankruptcy filing. It is important to note that, if this requirement is not fulfilled, then a discharge will not be entered in the debtors' case (see number 8, below).
8. Entry of the Discharge. In a Chapter 7 bankruptcy, the typical debtor will receive their discharge within 75 to 90 days from the date of the Creditors Meeting. In a Chapter 13 bankruptcy, the typical debtor will receive their discharge within 30 to 60 days from the successful completion of their Chapter 13 plan. Although there are circumstances that could delay or even prevent the debtor from receiving a discharge in a bankruptcy case, these are usually limited to situations where the debtor has proven to be uncooperative with the bankruptcy Trustee or has perpetrated some type of fraud or deception.
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