Bankruptcy is a legal proceeding designed to help individuals and businesses eliminate their debts or restructure and repay their debts under the protections of federal bankruptcy laws.
At Bershatski Law Group, we have extensive experience that enables clients to take control of their circumstances and create a better financial future. While a serious undertaking, a bankruptcy can help you eliminate debts, preserve assets and give you a fresh financial start.
Types of Bankruptcy Proceedings
Generally speaking, there are two types of bankruptcy proceedings: Liquidation (Chapter 7) and Reorganization (Chapter 11 and Chapter 13). Each type of bankruptcy has numerous rules and exceptions. Which chapter is right for you depends upon your particular circumstances and objectives. We listen closely to our clients and are sensitive to their needs and objectives.
Once a bankruptcy case is filed, an “automatic stay” goes into effect, creating a legal barrier to collection actions by creditors. At that point, creditors must stop taking any collection activity against you and your property, such as a lawsuit, foreclosure, repossession, wage garnishment or bank levy.
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy is generally the simplest and quickest form of bankruptcy and is available to most individuals, married couples and business entities.
In a Chapter 7 bankruptcy proceeding, most of your debts are discharged. In exchange for the discharge of your debts, a trustee is assigned to liquidate your nonexempt assets. California exemption laws are very broad and provide substantial protections of assets. Assets include real estate, personal property or possessions such as vehicles, bank accounts, retirement accounts and even household goods and furnishings, clothing and jewelry. Many of these assets have exemptions available to protect them from being liquidated.
Most Chapter 7 cases are no-asset cases; that is, no assets are liquidated because the exemption laws allow debtors to retain certain assets free from the claims of their creditors. At the time of your initial consultation, we will discuss the implications of applicable exemption laws.
To determine one’s eligibility to qualify for a Chapter 7 bankruptcy, the “means test” is used to determine whether the debtor’s income is below a certain threshold established by the federal government. This is designed to prevent filers with higher incomes from filing for Chapter 7 bankruptcy when they have sufficient income to at least pay back part of their debts. However, in many situations, you can earn significant monthly income and still qualify for Chapter 7 bankruptcy if you have considerable expenses, such as a high mortgage payment. The means test is a complicated formula that takes many factors into consideration.
Individual debtors received a “discharge” within approximately four to six months from the filing of the case. The discharge wipes out most debts that existed at the commencement of the bankruptcy case.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy involves a three to five year repayment plan available only to individuals and married couples. Chapter 13 is like a court-enforced reorganization which creditors must accept. Once all payments under the plan are made, any unpaid balances on most debts are wiped out.
There are several reasons why an individual would file a Chapter 13 bankruptcy instead of Chapter 7 bankruptcy:
- The debtor does not qualify for Chapter 7 because he or she makes too much money.
- The debtor has nonexempt property that would be liquidated in Chapter 7.
- The debtor is behind on mortgage payments that he or she would be able to catch up on during the three to five year repayment plan
- The debtor can eliminate a second mortgage.
- The debtor can repay debts that cannot be discharged, such as back taxes or child support.
One fundamental advantage of a Chapter 13 bankruptcy is that, under certain circumstances, it can be used as a vehicle to remove a junior mortgage from your home. We will discuss the viability of this option of Chapter 13 bankruptcy to your individual circumstances at the time of your initial consultation.
A Chapter 13 is a powerful tool for the right debtor. If you fit into any of the above categories, it may be more advantageous for you to file a Chapter 13 than to file a Chapter 7, under the right circumstances.
Chapter 11 Bankruptcy
A Chapter 11 is a reorganization proceeding typically used by businesses, but may be used by individuals who do not qualify for Chapter 13. The purpose of a chapter 11 proceeding is to provide temporary relief from pre-bankruptcy debts while formulating a plan to restructure those debts by payments over time, or to liquidate unnecessary assets in order to reduce overall debt structure.
Chapter 11 also provides the ability to reduce secured debts down to the value of their collateral (e.g., real estate, vehicles), as well as the ability to reject leases and contracts that are no longer necessary.