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Filing for bankruptcy is an important decision, one that should not be taken lightly. If you are considering bankruptcy as a means of relieving yourself of overwhelming debt, you must know that there are long-term legal and financial consequences of filing for bankruptcy, which is why we recommend consulting a reputable Los Angeles bankruptcy attorney before moving forward with your bankruptcy case. For example, a bankruptcy filing will appear on your credit report for seven to ten years, which may make it difficult for you to qualify for a credit card, mortgage loan or auto loan after filing for bankruptcy. However, for many debtors in Los Angeles, the countless benefits of bankruptcy far outweigh the potential consequences. At ibankruptcyattorneys.com, we can walk you through each step of the bankruptcy process and ensure that you understand your rights and the options available to you based on your specific situation. We offer a free initial consultation, so don’t hesitate to call.
What are the Bankruptcy Chapters?
Bankruptcy is a federal court procedure. Therefore, all bankruptcy cases are handled in federal court under the rules set forth under the U.S. Bankruptcy Code. There are several different kinds of bankruptcy available to debtors in the United States, each one named according to its chapter in the Bankruptcy Code. Chapter 7 and Chapter 13 are the two most common types of personal bankruptcy in California, favored by individual debtors who want to either eliminate some or all of their debts or develop a plan to pay their creditors back over time. In some cases, business debtors can file for bankruptcy under Chapter 7 if they want to liquidate their assets. Otherwise, they can file under Chapter 11 if they want to reorganize, continue operating and avoid liquidation.
Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy, also known as a liquidation, a bankruptcy trustee appointed by the court will sell your nonexempt assets and use the funds from the liquidation to pay your creditors back some portion of what you owe them. Certain assets are exempt from liquidation in a Chapter 7 bankruptcy, meaning they are not part of the bankruptcy estate and can be protected in your bankruptcy case, so you will want to discuss California’s bankruptcy exemptions with your attorney to determine which assets you can keep. Any unsecured debts that remain after this process will be discharged.
Chapter 13 Bankruptcy
If you file for bankruptcy under Chapter 13, you are committing to repaying all or a portion of your debts over a period of three to five years. This bankruptcy option may be more appropriate for borrowers who have a steady income and need some time to catch up on the debts they owe. One of the biggest advantages of a Chapter 13 repayment plan over a Chapter 7 liquidation is that it allows homeowners to save their homes from foreclosure. At the end of the repayment plan, if you have made all of the necessary payments, your remaining unsecured debts will be discharged.
Chapter 11 Bankruptcy
Chapter 11 of the Bankruptcy Code allows a business in debt, usually a partnership or corporation, to reorganize its assets and debts and repay its creditors over time, while keeping the business going. In most cases, the business debtor, known as a “debtor in possession,” runs the business during the bankruptcy proceedings. However, if fraud or mismanagement is a concern, the court may appoint a trustee to oversee business operations. In some cases, high net worth individuals with significant debt who do not qualify for Chapter 7 or Chapter 13 bankruptcy may be able to seek bankruptcy protection under Chapter 11.
What is the Automatic Stay?
One of the greatest advantages of filing for bankruptcy in Los Angeles is the automatic stay, a temporary injunction that prevents creditors, debt collection agencies and government agencies from pursuing borrowers for debts they owe. The temporary stay goes into effect the moment you file your bankruptcy petition and lasts throughout your bankruptcy case, effectively “staying” foreclosure proceedings, creditor calls, debt collection lawsuits, wage garnishment and most other collection actions. There are some situations in which a creditor can ask the court to lift the automatic stay, for instance, if you are behind on your mortgage and your mortgage holder wants to continue with foreclosure proceedings. If the request is granted, the creditor can resume collection actions against you.
What Happens to My Secured and Unsecured Debts in Bankruptcy?
Secured debts are debts that are secured or “backed” by an asset that serves as collateral for the debt. For example, your mortgage loan is backed by the property you purchased with the funds from the mortgage. Because a mortgage loan is secured, if you default on your mortgage, the mortgage holder can seize your property, sell it and use the proceeds to pay back the unpaid balance on the loan. The same goes for an auto loan, which is secured by the purchased vehicle. Unsecured debts, on the other hand, are debts that are not backed by collateral. This includes medical bills, credit card debt, utility bills and personal loan debt.
If you file a Chapter 7 bankruptcy, your nonexempt assets will be sold to repay your unsecured creditors and whatever unsecured debts remain at the end of this process will be discharged, (unless the debts are non-dischargeable). When you are filling out the paperwork for your Chapter 7 bankruptcy, you will have to decide how you want to handle your secured debts. You may be able to keep your exempt property if you can continue making payments to your lenders. Or you may choose to surrender the property to the lender and discharge the underlying debt.
If you file a Chapter 13 bankruptcy, you have a lot more flexibility when it comes to dealing with your debts. When you propose your Chapter 13 repayment plan, you will outline how you intend to repay your debts over the life of the plan. Any past-due payments on your mortgage, for instance, will be included in the repayment plan and if you want to keep your home, you will continue making your regular monthly payments outside of the plan. Unsecured debts are paid after secured debts in a Chapter 13 repayment plan and may not be paid in full, depending on whether they are priority debts (i.e. child support, tax debts or spousal support) or nonpriority debts (i.e. medical bills, personal loans, utilities or credit card debt). Many Chapter 13 debtors only pay a small portion of their unsecured debts through a repayment plan and any amount that is not paid at the end of the repayment period is discharged.
What Debts are Non-Dischargeable in Bankruptcy?
In bankruptcy, a discharge is a court order that releases a debtor from personal liability for certain types of debts, which means the debtor is no longer legally responsible for paying back the debt. Once a debt has been discharged, the creditor is no longer able to pursue you for payment on the debt by filing a lawsuit or seizing your property. You can free yourself from many of your debts by filing for bankruptcy, but others won’t go away, even if you receive a bankruptcy discharge. Differentiating between dischargeable and non-dischargeable debts will be a major factor in your decision about whether or not to file for bankruptcy, because it will determine how much of your debt you can have wiped out and what bills you will have to keep paying. Although we prefer to evaluate dischargeable and non-dischargeable debts on a case-by-case basis, some examples of debts that you may not be able to have discharged in bankruptcy include the following:
- Spousal support and child support obligations from a divorce
- Most student loan debts
- Debts you failed to list in your bankruptcy filing
- Certain unpaid taxes
- Debts for death or personal injury caused by drinking and driving
- Debts for willful and malicious injury to another person or property
Lien Stripping in Chapter 13 Bankruptcy
In most cases, you cannot discharge your mortgage debt in bankruptcy, unless you are willing to surrender the asset used as collateral for the loan, i.e. your home. As a secured debt, your mortgage loan is backed by your property, which means the mortgage lender can legally take possession of the property if you fail to repay the loan as agreed upon. One exception to this rule is “lien stripping,” which may allow you to remove a second or third mortgage from your home by filing for Chapter 13 bankruptcy. This only works if the property is worth less than the amount due on the original mortgage (senior mortgage), meaning the property is “underwater.”
Second and third mortgages are secured by the equity you have in the property you put up as collateral on the loan, and if the property is underwater, it has what is known as negative equity. Because senior mortgages take priority over second or third mortgages (junior liens), if your home is underwater and the original mortgage lender forecloses on your property, the junior lienholder would most likely not receive anything from the foreclosure sale. If this is the case, you may be able to strip the junior lien from your property and recategorize the debt as unsecured, in which case it would be discharged at the end of your Chapter 13 repayment plan, along with your other remaining unsecured debts. Lien stripping is unique to Chapter 13 bankruptcy and is not available in a Chapter 7 case.
Is Bankruptcy Right for Me?
Relentless calls from creditors, wage garnishment, debt collection lawsuits, repossession, eviction, foreclosure. These are just some of the collection actions you may be facing if you are behind on your bills. By filing for bankruptcy, you can seek immediate relief from these collection actions and make significant progress towards resolving your debt. Bankruptcy offers borrowers burdened with overwhelming debt an opportunity to start fresh in a stronger financial position either through liquidation (Chapter 7 bankruptcy) or reorganization (Chapter 13 bankruptcy), but that doesn’t mean bankruptcy is right for everyone. The only way to find out if bankruptcy is the right debt-relief solution for your specific financial situation is to consult a knowledgeable bankruptcy attorney who specializes in bankruptcy law. A good Los Angeles bankruptcy attorney will carefully review your finances, including your monthly income and expenses and your assets and debts, and determine whether filing for bankruptcy protection is the best strategy based on your unique circumstances.
Contact Our Legal Team for More Information
The purpose of bankruptcy is to give troubled debtors an opportunity put their debts behind them so they can move on with their lives and make better financial decisions. However, not all debts are dischargeable in bankruptcy and not all debtors obtain the debt relief they need through bankruptcy. If you are deep in debt, it is possible that bankruptcy is the answer, but only an experienced bankruptcy attorney can tell you for sure whether filing for bankruptcy is the right move, or if there is another debt-relief solution that suits your needs better. For instance, you may be able to negotiate with your creditors and arrange a debt settlement or a loan modification as an alternative to bankruptcy, which our attorneys can also assist you with. To find out which bankruptcy chapter is right for you, or to learn more about alternatives to bankruptcy, contact our skilled bankruptcy attorneys at ibankruptcyattorneys.com as soon as possible. We will help you decide what actions are in your best interest.
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