In bankruptcy, a person, business or municipality can file for financial help in the United States Bankruptcy Court for the district in which they live pursuant to Article 1, Section 8 of the United States Constitution and title 11 of the United States Code. Once this person, business or municipality files a case, they are referred to as a “Debtor.” The Debtor has certain rights it can assert against its creditors. A creditor is defined as “an entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor.” 11 USC Section 101 (10).
Upon the filing of the bankruptcy case, for a first time filer, an automatic stay goes in effect. This is an order of the court that springs into existence immediately upon filing that, subject to certain limitations, prohibits any entity from starting or continuing a lawsuit, enforcing collection of a lawsuit, taking any action to repossess property, creating or enforcing a lien, setting off debt, or taking any action to collect, assess, or recover a claim against the debtor that arose before the case was filed.
Once the stay goes into effect, all creditors must cease any action, collection attempt, garnishment, repossession, or foreclosure against the Debtor immediately upon receiving notice that the stay is in effect. A creditor’s failure to comply with the stay after notice, can result in damages and/or sanctions being awarded to the Debtor against the creditor by the Bankruptcy Court.
However, the creditor also has rights in the Bankruptcy. Within approximately 30 days from filing, the Debtor must appear at a meeting of creditors (also known as a section 341 meeting) to answer questions from creditors and a trustee concerning their debts, assets, income, expenses, and any information in their petition, schedules, and related documents.
If the creditor has evidence that the Debtor has acted in bad faith in filing the bankruptcy or for other valid reasons, the creditor can file a motion with the Bankruptcy Court seeking relief from the automatic stay to recover collateral or damages, and/or the creditor can object to the discharge of their debt.
If the creditor does not have sufficient cause to file for relief from the stay or to object to the discharge and if trustee has no reason to object to a discharge, the Court will grant a discharge of all dischargeable debts and a discharge stay will go into effect to prohibit collection or repossession for all pre-petition debts. Hopefully, the Debtor is back in budget and will be able to manage its income and expenses from that point forward.
The automatic stay gives the Debtor a chance to determine which debts and assets to keep, which debts to discharge and which assets to surrender. In a chapter 7 case, the Debtor typically reaffirms debts that he/she needs to keep and discharges the rest. For example, if the debtor has a house payment, car payment, and a furniture payment and is current with those payments, he/she may be able to reaffirm and continue to pay the creditors for the house, car, and furniture (and keep these) while discharging credit card debts and medical bills. This is a liquidation bankruptcy.
In a Chapter 13 case, the Debtor proposes a payment plan over a three to five year period in which the Debtor may pay a certain amount to a Chapter 13 Trustee and maybe pay an amount directly to certain creditors such as for a house and keep all property necessary for the Debtor to live and earn a living. This is a wage earner’s plan.
The discharge will occur approximately 4-6 months after the bankruptcy case is filed in a Chapter 7 case. In a Chapter 13 case, the discharge is granted after the Debtor has paid all payments set forth in the confirmed Chapter 13 Plan (3 to 5 years).
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