Demystifying Bankruptcy

Some people are unable to pay their regular bills when they lose a job, have a serious illness, or get divorced. Sometimes people do not handle their credit properly. They end up in situations whereby if they tried to pay all their bills, the just don’t have enough income, or they would be paying until they died, and it still would not be paid in full. They choose, or in some instances, are forced, to file Bankruptcy. When someone files Bankruptcy, what does that really mean?

The Bankruptcy Code is a Federal Law. Bankruptcy statutes have been part of our laws in one form or another for over 200 years, since shortly after ratification of the U.S. Constitution. Currently, there are a number of different chapters under the Bankruptcy Code, but in this article I will only address issues as they arise under the most common form, that being a Consumer Bankruptcy under Chapter 7. Chapter 7 is designed to give debtors a “fresh start” in their financial life. Most of their debts will be discharged, and they will no longer have a legal obligation to pay them.

One of the most frequent questions I am asked by debtors is “Can I file only on certain debts?” Unfortunately, no. All of your debts, as well as all of your assets, become part of the Bankruptcy. In that process, however, certain assets are “exempt” (i.e. you get to keep them), and certain debts you can reaffirm (e.g. mortgages and car loans – so that you can keep your house and your car). Exempt assets include a certain amount of equity in a home, a certain amount of equity in your car, household goods and furniture, and other similar items that would be required for someone to start over.

Another common question is “will the creditors stop calling?” Once you file Bankruptcy, the court issues an automatic stay, and no creditor may attempt to force you to pay a debt other than through the Bankruptcy court. Generally it will take one to two weeks for the creditors to stop the calls and mailings, but eventually, it will stop.

Another question is “will all of my debts be discharged?” In a Chapter 7, most unsecured debts will be discharged. Some exceptions are such things as child support, spousal support, some taxes, and student loans. Secured debt can also be discharged, but doing so will usually mean that the collateral (your house, your car, your 4-wheeler, boat, snowmobile, etc.) will be foreclosed or repossessed by the creditor. Most creditors will allow you to reaffirm secured debt as long as you are current on the loan. Most secured creditors would rather reaffirm the debt than to take back the collateral. They are in the business of making loans, not selling houses or cars.

Finally, some people ask “do I earn to much money to file?” Under the most recent statutory change, that could occur with respect to Chapter 7. The court will require you to disclose your actual income over the last 6 months, and if it is higher than the median income of the county where you live, you might be required to file under Chapter 13, a plan whereby you are required to repay some of your unsecured debt.

Bankruptcy is an action of last resort for people who are financially distressed. In order to get a fresh start, it may be the only action available.

This article is meant to be informative only, and is not intended to be legal advice for any person. It cannot be relied upon for any specific situation. You should consult with an attorney and describe the facts of your particular situation and obtain his or her advice before taking action in a specific case.

Ronald G. Aseltine, Esq., practices law at 42 Main Street, Livermore Falls, ME. He also has an office in Wilton.