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Filing Bankruptcy should always be considered as a last resort. For individuals, a bankruptcy filing will remain on their credit record for 10 years. When a bankruptcy is filed the law requires full disclosure of the debtor’s finances, including a complete list of ALL debts and All assets. This information is filed with the court and submitted sworn, under penalty of perjury.
The most important benefits that individuals receive by filing bankruptcy are the automatic stay and the discharge. The automatic stay takes effect immediately upon the filing of the petition and prohibits creditors from commencing or continuing legal action against the debtor. It stops lawsuits, garnishments, foreclosures, and repossessions. The stay also requires that creditors cease any and all contact with the debtor. If a creditor contacts a debtor after the automatic stay is in effect they are in violation of the stay, an offense that is punishable by contempt of court. The discharge issued at the end the case permanently wipes out the debtor’s liability on most types of debt.
With that said, the following is a brief overview of the different types of bankruptcy that are available:
Chapter 7 (liquidation a.k.a. straight bankruptcy): Individuals, Corporations, Limited Liability Companies, and Partnerships are all eligible for filing Chapter 7 bankruptcy. Under Chapter 7, a Bankruptcy Trustee is immediately appointed upon filing the petition. It is the Trustee’s job to take possession of and sell any property owned by the Debtor that is not mortgaged or exempt. Most individuals filing for bankruptcy have sufficient exemptions provided under Mississippi State Law to prevent them from losing any property. However, under Chapter 7, if property has been pledged as collateral, such as a home mortgage or a car loan, that property may only kept if the payments on the debt are continued and made on time. Unsecured debts such as medical bills, credit cards, and signature loans are usually discharged under Chapter 7. On a secured debt such as a home mortgage or a car loan, the debt is also wiped out if that property is surrendered to the lien holder. Some types of debts are generally non-dischargeable in Chapter 7 including most taxes (please see tax section below for exceptions), student loans, or support obligations. Chapter 7 cases are ordinarily fairly simple and an average case is completed within four months. If there are assets for the Trustee to administer, the case will remain open until that is finished, but that should not delay the granting of the discharge.
Chapter 13 (payment plans for individuals with regular income): Only individuals, not corporations, partnerships or limited liability companies (LLCs) are eligible for Chapter 13 bankruptcy relief. Chapter 13 cases require a monthly payment to the court for a time period of between three years (36 months) and five years (60 months). To qualify, the Debtor must have a regular source of income on which the monthly payment to the bankruptcy court is calculated. In order for a Chapter 13 to work, the Debtor’s take home income must be at least enough to pay the basic living expenses with some excess left over from which the payment to the Bankruptcy Court is made. Under Chapter 13 the unsecured Creditors (medical bills, credit cards, signature loans), which usually receive no payment under Chapter 7, receive at least some amount, however that amount is dictated by the Debtor's ability to pay. If all the payments called for under the Chapter 13 Plan are completed, any remaining unpaid unsecured debt is discharged at the end of the case. Some secured debts, such as car loans may be restructured under Chapter 13 to reduce the payment and/or the interest rate on the loan. Home mortgage payments do not change under Chapter 13, but if there is an arrearage on the home mortgage when the case is filed, it can be repaid over the life of the plan (up to five years).
Chapter 11 (reorganization): Chapter 11 is designed for the reorganization of business entities, but individuals are also eligible. Chapter 11 cases are more complex, expensive, time consuming and paper work intensive than Chapter 7 or Chapter 13. Attorney’s fees and court costs are much higher than those for 7 and 13. For details on how Chapter 11 cases work, please contact our office.
Chapter 12 (payment Plans for family, farmers and fishermen): This Chapter of the Bankruptcy Code is something of a cross between a Chapter 13 payment plan and a Chapter 11 Business Reorganization. They are more complex than Chapter 13, but less complicated than Chapter 11. Chapter 12 plans allow for the restructure of secured and unsecured debts. In many cases Chapter 12 can be very beneficial to farmers and fisherman by enabling them to restructure secured debts to retain the land or vessels they need to continue their business operation.
Special Bankruptcy Provisions regarding Discharge of Taxes: Although most taxes are not discharged in bankruptcy, in some cases incomes taxes owed to the Federal government or the State are dischargeable, regardless of the amount owed. In order to determine the dischargeability of taxes it is always necessary for the individual to obtain account transcripts from IRS for each year of tax that is owed. This document provides essential details needed to determine if the tax may be discharged. Generally, income taxes that were due more than three years before the date of the filing of the bankruptcy are dischargeable if the Debtor filed the requisite tax return when it was due, or at least two years before the bankruptcy and there is no fraud or willful attempt to evade payment of the tax involved. This is a slight simplification of the rule, but should give you an idea of which taxes may be dischargeable. If no tax return was filed, it does not matter how old the taxes were, they may not be discharged. In addition, these provisions only relate to income taxes. Employee withholding taxes (941 taxes) and sales taxes are never dischargeable, no matter their age.
Bankruptcy is a very specialized area of law. If you feel that you may be in need of bankruptcy relief, contact a certified bankruptcy specialist. It could save you a lot of grief. You've got nothing to lose but a lot of worrying.
Plain English Overview of Bankruptcy Law
Additional Bankruptcy Information:
A good resource on bankruptcy in relation to consumer debt.
Description of bankruptcy and the bankruptcy process writen by Cornell University Law School professors.
Here you'll find overview articles explaining what bankruptcy is, the difference between Chapter 7 and Chapter 13 bankruptcy, how each type of bankruptcy works, and what bankruptcy can and cannot do.
United States Courts website with all up to date forms for bankrutpcy
The only source for free credit reports. Authorized by Federal Law. Gives you the ability to get a free copy of your credit report every 12 months from each credit reporting company.
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