Bankruptcy is usually the last step an individual takes in repairing an extremely negative financial crisis. When an individual can no longer pay creditors, or hasn’t paid creditors for a certain length of time, and those creditors are attempting to collect – going so far as to threaten prosecution – this is when many seriously consider the option of bankruptcy.
THE OPTIONS AVAILABLE TO A DEBTOR FILING BANKRUPTCY
The purpose of bankruptcy is to find relief for both the debtor and the creditor. It provides a way for debtors to either repay their debts or receive relief from impossible to repay debts while at the same time providing creditors a way to receive payment for their loans. All bankruptcy laws are governed under Title 11 of the United States Code and are uniform throughout the states in regard to the available options for relief.
In the case of Individuals and married couples who file bankruptcy there are two options available under the law. The first is referred to as Chapter 7, and basically offers the following in terms of relief to the debtor:
- Liquidation of non-exempt assets to be sold by a trustee who will distribute the proceeds to the debtor’s creditors for repayment within four to six months after filing for bankruptcy;
- The debtor is allowed exempt assets which he may keep in order to start his financial life over again;
- Many debts may simply be forgiven if the debtor doesn’t have sufficient non-exempt assets in which to cover them;
- After the discharge of the bankruptcy, any wages earned by the debtor are his to keep; they cannot be used to further satisfy the creditor’s expectations of relief.
The second option for individuals considering bankruptcy is referred to as Chapter 13. This option applies to those who continue to have a regular income and have less than $336,900 in unsecured debt and less than $1,010,650 in secured debt. Their debt is restructured by the debtor and a court appointed trustee which allows them:
- To keep their property and make regular payments to the trustee over a given period of time, usually between three to five year;
- To discharge certain debts that cannot be discharged under Chapter 7;
- Options that help prevent repossession and foreclosure as they follow a newly organized plan of repayment.
THE EFFECTS ON SPOUSES OF THOSE WHO FILE BANKRUPTCY
When one spouse files for bankruptcy, there are certain consequences which affect the other spouse. There is an “automatic stay” which goes into effect right after filing. This prevents creditors from attempting to collect from the debtor until the bankruptcy is discharged. This is designed to give the debtor relief from losing his property, being sued or having his wages garnished. However, this does not fully cover the non-filing spouse if both are jointly liable for the debt. Creditors can attempt to collect from the spouse, unless the spouse filed under Chapter 13. (Co- debtor stay in §1301)
The marriage contract does not mean that all contracts signed by either spouse become jointly enforceable on both marriage partners. Home loans and credit card agreements are legally binding only between the parties who have signed and contracted together. Only the marriage partner who has signed the contract is liable for its repayment, and therefore, if he ever files for bankruptcy, the non-filing spouse cannot be sought by the creditor for relief.
In the case of jointly owned property, it is usually the case that the property becomes part of the “bankruptcy estate,” (the legal and equitable assets owned by the debtor at the time of filing which can be liquidated in order to provide relief to creditors). In community property jurisdictions, both halves of the community property fall under the definition of “bankruptcy estate” even if only one spouse has signed the contract regarding the property. However, in such a case, both spouses are protected during the “automatic stay” period and any property they purchase after the discharge of the bankruptcy is also protected from future attempts at collection.
