Nearly everyone has debts, and while some may be able to manage these issues successfully, others may have experienced significant financial difficulties that have affected their ability to repay what is owed while also addressing their ongoing living expenses. People in this situation may be regularly receiving calls or letters from creditors, and they may be worried that they could lose their home or other property, face lawsuits, or have their bank accounts seized or their wages garnished. Unfortunately, many people are hesitant to consider bankruptcy in these cases due to some common misconceptions about this form of debt relief. By understanding when bankruptcy may be used and the processes that are followed, a debtor can determine whether this option is right for them.

Busting Bankruptcy Myths

Some common misconceptions about bankruptcy include:

• Myth: Bankruptcy is mostly used by people who have been irresponsible with money - There are a multitude of reasons why people experience overwhelming debt, and in many cases, these situations occur unexpectedly with little or no chance to prepare. In fact, the majority of bankruptcy cases involve medical debt. Even if a person has insurance, a serious illness or major injury can result in massive medical bills that a family may have no chance of paying. An unexpected layoff or other issues that affect a person’s income can also lead to significant financial difficulties, making it hard for a family to pay bills. Everyone has the right to file for bankruptcy and receive relief from their debts, and there should be no shame in seeking out help when a family struggles with financial problems.

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Financial issues are one of the most common factors that can lead to divorce. In some cases, couples may encounter disagreements about how to handle money, or the stress of dealing with debts and expenses may be one of the reasons for the breakdown of a couple’s relationship. Even if financial problems are not the cause of a divorce, a couple may need to determine how to handle debts as they proceed with the process of ending their marriage. For couples or individual spouses who are considering bankruptcy, it is important to understand the role that this may play in the divorce process and how the end of their marriage will affect their ability to eliminate their debts.

Filing for Bankruptcy Before or After Divorce

Determining the right time to file for bankruptcy can sometimes be difficult. In some cases, a couple may want to deal with their debts and ensure that they will both be in a stable financial position as they move on following the end of their marriage. However, they will also want to make sure filing for bankruptcy will not affect their ability to complete their divorce (and vice versa). Understanding the correct timing of bankruptcy and divorce proceedings can help a couple ensure that they will be able to receive relief from their debts and terminate their marriage successfully.

In cases involving Chapter 7 bankruptcy, a couple may be able to complete this process prior to filing for divorce. A Chapter 7 case (also known as a “liquidation bankruptcy”) will allow certain types of debts to be discharged, and debtors may be required to turn over certain non-exempt assets that will be liquidated so that a portion of their debts may be repaid. This process will typically take no more than a few months, and it may allow a couple to eliminate their joint debts before they move forward with the divorce process. However, debtors must pass a means test before they can qualify for Chapter 7 bankruptcy, and if a couple’s combined income and assets exceed a certain amount, they may not be able to file for this type of bankruptcy together. In these cases, one or both parties may be able to qualify for Chapter 7 separately based on the resources available to them after their divorce.

For those who are looking to obtain relief from their debts, bankruptcy is often the best solution. In a consumer bankruptcy, a person or married couple will generally have two options: Chapter 7 or Chapter 13. While Chapter 7 may be the preferred choice in certain situations, since it will allow for unsecured debts to be eliminated, some debtors may not qualify for this type of bankruptcy, or they may wish to avoid the loss of certain types of property. If a person will be filing for Chapter 13 bankruptcy, they will need to understand how their income and expenses will affect their case.

Creating a Chapter 13 Repayment Plan

In a Chapter 13 bankruptcy, a debtor will propose a plan in which they will make payments to the trustee in their case, and the trustee will apply the amounts paid toward the debts that are owed. The debtor will not be required to turn over any of the assets they own, and if they continue making payments toward secured debts such as a home mortgage, they will be able to avoid the foreclosure of their home or the repossession of other property. If the debtor’s income is below the median income in their state, their repayment plan will last for three years; otherwise, the plan will last for five years.

A debtor will be required to pay all of their disposable income toward their Chapter 13 repayment plan. Disposable income is calculated by taking the income a person earns and subtracting applicable expenses. Income includes a person’s wages and any bonuses, tips, or commissions they earn, as well as interest, dividends, or royalties they earn; income from a business or rental property; payments received through a pension plan or retirement account; spousal maintenance/alimony payments; and unemployment benefits. However, income does not include child support payments, Social Security benefits, or payments received from the federal government related to the COVID-19 pandemic.

In consumer bankruptcy cases, debtors generally will choose from one of two options. A Chapter 7 bankruptcy will allow a person’s debts to be discharged (eliminated), but they may be required to turn over certain assets, and if they have any secured debts (such as a home mortgage or auto loan), the collateral used to secure these debts may be repossessed. For those who do not qualify for Chapter 7 or who wish to avoid the loss of certain assets, Chapter 13 bankruptcy may be the preferred option. In these cases, certain debts will be consolidated into a repayment plan, and the debtor will be required to make monthly payments toward this plan for three or five years. Unsecured debts included in the repayment plan will be discharged once all payments have been made. A multi-year repayment plan can be a significant commitment, and circumstances may arise that may affect a debtor’s ability to complete their plan. In these cases, debtors will want to determine their options, which may include converting their case into a Chapter 7 bankruptcy and receiving a discharge of their debts.

Reasons to Convert a Bankruptcy From Chapter 13 to Chapter 7

Once a Chapter 13 repayment plan has been confirmed in bankruptcy court, a debtor will be required to make all payments in the plan. If a debtor fails to make any payments, this may result in a dismissal of their bankruptcy case. Following a dismissal, the debtor will owe the full amount of their debts, and creditors may begin taking action to collect what is owed.

If a debtor encounters financial problems that could potentially result in the dismissal of their bankruptcy case, they will want to address these issues promptly. If a person loses their job and cannot earn enough income to make ongoing payments on their Chapter 13 repayment plan, they may seek to convert their bankruptcy to Chapter 7 and receive a discharge of their debts. A debtor may also decide to pursue a conversion if the reasons they chose Chapter 13 no longer apply. For example, if a person was looking to avoid the loss of their home, but their lender has foreclosed on the property because the debtor was unable to make mortgage payments, converting to a Chapter 7 bankruptcy may allow the debtor to eliminate their debts and receive a fresh start.

There are a variety of situations where businesses may no longer be able to operate successfully while paying off debts and meeting other financial obligations. Depending on the unique circumstances that affect a company, debts may be addressed through a business bankruptcy. However, there are multiple options available to business owners, and understanding the best ways to address issues related to debt will ensure that a person can resolve these issues while minimizing their financial losses.

Types of Business Bankruptcy

The options available to business owners will usually depend on the structure of their business, the extent of their debts, and whether they will be able to keep their business in operation. Bankruptcy options in these cases include:

• Chapter 7 bankruptcy - A liquidation bankruptcy may be the best option if there is no viable way for a company to continue operating. In this type of bankruptcy, business assets will be liquidated, and the proceeds will be used to repay the business’s debts and financial obligations. The business will then cease operating. This may be the best option for sole proprietors who are personally liable for business debts.
• Chapter 11 reorganization - Business owners who wish to ensure that a company can continue operating may be able to use this option to reorganize their business operations and pay off debts. In these cases, a business will need to submit a reorganization plan showing how debts will be repaid and detailing the changes that will be made to ensure that a business will be able to continue operating successfully. Creditors will usually need to approve this plan, and the business owner will need to provide a detailed accounting to ensure that they are meeting their ongoing obligations. While this option may require a business to make significant changes or scale back operations, it can help owners avoid the closure of a business.
• Chapter 13 bankruptcy - In some cases, sole proprietors may be able to use this type of bankruptcy to reorganize their debts and pay them off through a repayment plan. This may allow a business to continue operating while ensuring that a business owner will be able to maintain possession of personal assets such as their home.

Contact a United States Business Bankruptcy Lawyer

When a business is struggling to meet its financial obligations while maintaining business operations, owners, partners, or shareholders will want to understand the options that are available. By determining whether bankruptcy will provide a way to address debts and either continue operating or cease operations, business owners will be able to move forward and avoid additional financial issues. If your business is struggling, and you need to determine your options, you can find a business bankruptcy attorney near you and begin taking steps to address these concerns.

If you have significant debts, you may be considering your options for receiving debt relief through bankruptcy. However, you may also be concerned that if you file for bankruptcy, you may be forced to surrender certain property that you own. By understanding the effects of different types of bankruptcy and how bankruptcy laws apply to the property you own, you can make the best decisions that will allow you to regain financial security.

Property Ownership in Chapter 7 Bankruptcy

In many cases, debtors will choose to pursue a Chapter 7 bankruptcy, since this will allow them to eliminate all of their unsecured debts. However, this type of bankruptcy may require a person to turn over certain items they own so that this property can be liquidated and some of the debts they owe can be repaid. Fortunately, some exemptions apply to the property that can be liquidated. Federal bankruptcy laws recognize the following exemptions in cases filed before April 1, 2022:

• Homestead - A person may exempt up to $25,150 of the equity they own in their home.
• Motor vehicle - A vehicle may be exempt if it is worth $4,000 or less.
• Personal property - Multiple types of household goods may be exempt, including furniture, clothing, appliances, books, pets, and musical instruments. Individual items may be exempted if they are valued at $625 or less, and the total value of exempt property may be up to $13,400.
• Tools of the trade - Professional tools, books, or other equipment used as part of a person’s profession that are worth a total of up to $2,525 may be exempted.
• Jewelry - Up to $1,700 worth of jewelry may be exempt.
• “Wild card” - Other property that does not fall into one of the above categories may be exempted, up to a total of $1,325. A debtor can also put up to $12,575 of an unused homestead exemption toward other types of property.
• Life insurance - Up to $13,400 of an unmatured policy may be exempted.
• Personal injury judgments or settlements - Damages awarded for loss of income in a personal injury lawsuit or compensation paid to a family member for a person’s wrongful death can generally be exempted. Non-economic damages, other than pain and suffering, of up to $25,150 are exempt.
• Benefits and support payments - Social Security benefits, veterans’ benefits, unemployment benefits, disability benefits, and spousal support payments are exempt.
• Retirement funds - In most cases, the full amount that is saved in a retirement account will be exempt.

In addition to the federal exemptions, each state’s laws define exemptions that apply to residents who file for bankruptcy. In many cases, state laws allow for additional exemptions above those that are provided in federal law. Some states allow debtors to choose either the state or federal exemptions.

People who have experienced financial difficulties that have caused them to be unable to pay their debts may be concerned about the steps that creditors may take to collect what is owed. Creditors or collection agencies may contact a debtor and ask them to make payments, and some creditors may act in a harassing manner, including making threats or contacting a person’s employer. In some cases, a creditor may initiate a lawsuit attempting to collect what is owed, or they may repossess property or begin foreclosure proceedings on a debtor’s home. For debtors who are considering bankruptcy, it is important to understand the protections they can receive, including the automatic stay that will go into effect during the bankruptcy process.

What Is the Automatic Stay?

In legal terms, a “stay” is an order by a court that requires parties to temporarily stop certain actions. When a debtor files a bankruptcy petition, an automatic stay will be put in place while the case is ongoing. This stay will require creditors to cease all collection actions, including:

• Creditor harassment - Creditors will be prohibited from contacting a debtor and asking them to pay what is owed. They cannot call a person at home or at work, send them notices in the mail, or use any other methods to attempt to recover debts.

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Making ongoing payments to pay off debts is a reality for most Americans. For those who struggle to make these payments or are unable to do so while covering their own living expenses, consumer bankruptcy can provide some relief and allow them to receive a fresh start. While many types of debts can be discharged through bankruptcy, there are rules about how these debts are addressed, and the elimination of certain types of debts may not be possible. Student loans, which are an issue for millions of Americans, are notoriously difficult to discharge. Those who are concerned about their ability to repay these loans will want to understand how they are handled during bankruptcy and how the laws may soon be changing.

The “Undue Hardship” Rule for Discharging Student Loans

Nearly all student loans are either provided through federal programs or are backed by the federal government. These loans generally cannot be eliminated through bankruptcy in most cases. To discharge student loans, a person must prove that repaying the loans would lead to “undue hardship.” This is a difficult standard to meet, especially since bankruptcy courts do not always agree on the definition of undue hardship. Typically, to prove undue hardship, a person will need to provide evidence showing that:

• They have made efforts to pay off a student loan in the past.

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A family may experience multiple different types of financial difficulties that affect their ability to pay their debts while also covering their regular expenses. For those who are struggling with overwhelming debts, bankruptcy can offer relief by eliminating debts and allowing a family to regain control of their finances. The elimination of debts during bankruptcy is known as a “discharge.” However, it is important to understand how different types of debts are addressed during the bankruptcy process, including which types of debts can or cannot be discharged.

Bankruptcy and Non-Dischargeable Debts

During bankruptcy, debts may be handled differently depending on whether they are secured or unsecured. Most types of unsecured debts, such as credit card balances, can be discharged once bankruptcy is complete, and a debtor will no longer be required to pay these amounts to creditors. Secured debts which are backed by collateral may also be discharged, but when this happens, a creditor will usually repossess the property. For example, if a person chooses to use bankruptcy to discharge the amount owed on an auto loan, the lender will most likely repossess the vehicle. 

There are certain types of debts that typically cannot be discharged during bankruptcy, including:

During the COVID-19 pandemic, many Americans have faced financial difficulties, causing them to be unable to pay some of their debts and ongoing expenses. To prevent people from losing housing during a public health emergency, the federal government and multiple states have implemented a moratorium on foreclosures for certain types of mortgages, preventing lenders from repossessing people’s homes. While the federal foreclosure moratorium has been extended several times, it is currently set to end on June 30, 2021. Because of this, homeowners who have defaulted on their mortgage or who are struggling to make payments will need to understand their options for avoiding foreclosure.

Mortgage Forbearance and Loan Modifications

Once the foreclosure moratorium ends, lenders may begin foreclosure proceedings against those who have defaulted on their mortgages. Some lenders have stated that they have halted all foreclosure activities until the end of 2021, while others may resume foreclosures as early as July of 2021. Homeowners who are behind on mortgage payments may need to take action before the end of the moratorium to ensure that they can prevent the loss of their homes.

Along with the foreclosure moratorium, current federal policies require lenders to allow homeowners to receive a forbearance on mortgage payments for federally-backed loans. This will allow for payments to be paused temporarily while a family is experiencing financial hardship. The deadline to apply for forbearance is June 30, 2021, and a homeowner may receive up to 12 months of forbearance. If a person had already received a forbearance before June 30, 2020, they can receive an additional six-month forbearance, up to a maximum of 18 months. 

Individuals or families who have debt that they cannot repay may be looking at their options for getting rid of this debt and regaining financial stability. For many, filing for bankruptcy is the best option for addressing overwhelming debt. However, debtors will want to determine the best type of bankruptcy for their situation. In many cases, Chapter 7 bankruptcy is the preferred choice, because it will allow for the elimination of outstanding debts, giving a family the fresh start they need. Chapter 7 bankruptcy may require a debtor to turn over certain assets, which will be liquidated to repay some of their debts to their creditors. Because of this, homeowners may be unsure about whether they will lose their home in a Chapter 7 bankruptcy or whether they will be required to use other options.

Understanding Exemptions in a Chapter 7 Bankruptcy

Fortunately, debtors are not required to give up everything they own to file for Chapter 7 bankruptcy. Multiple types of exemptions apply, and the amount of property that is exempt may vary depending on the state where the debtor lives. The homestead exemption applies to a certain amount of equity in a home, so if the equity a person owns falls under this amount, they may be able to keep their home.

The homestead exemption differs from state to state. In some states, it is as low as $5,000, while in others, it may be as high as $100,000 or more. To use a state’s homestead exemption, a person must have resided in the state for at least 40 months. Otherwise, the federal homestead exemption will apply. As of 2021, the federal homestead exemption is $25,150.

Homeowners may experience a variety of financial difficulties that cause them to be unable to meet their financial obligations, and if they default on their mortgage, they may face the foreclosure of their home. During the COVID-19 crisis, this has become a major concern, since factors such as job losses or increased expenses due to illness have affected many homeowners’ ability to make mortgage payments. Those who are facing a potential foreclosure or struggling to pay off debts may consider bankruptcy, but for those who are not ready to take this drastic step, other alternatives may be available, including requesting loan modifications from a mortgage lender.

Types of Loan Modifications

To provide relief for those who have been affected by the COVID-19 pandemic, the federal government and many state governments have placed a moratorium on foreclosures. Borrowers who are experiencing financial hardship and who have a mortgage insured by the Federal Housing Administration (FHA) can receive a six-month forbearance of their mortgage payments, as well as an additional six-month extension if needed. A forbearance will allow a homeowner to defer their mortgage payments, although they will be required to make up any deferred payments once the period of forbearance has ended. 

Even after receiving a forbearance, some homeowners may find that they will be unable to afford ongoing mortgage payments alongside their other financial obligations. In these cases, a homeowner may be able to negotiate with their lender to modify the terms of their loan. Many lenders are willing to make these types of modifications, since proceeding with the foreclosure process may result in financial losses. Making arrangements in which ongoing payments will be made is often the most financially beneficial option for both parties.

Many Americans struggle with debts and other financial problems, and if they have been unable to make some mortgage payments, they may fear that they will lose their homes to foreclosure. The COVID-19 pandemic has placed many people in positions of financial uncertainty, but while a moratorium on foreclosures has been implemented to protect people who are struggling, those who have defaulted on their mortgage may face the potential loss of their home in the future. If you are in this position, you may be able to address your past-due mortgage payments and avoid foreclosure by filing for Chapter 13 bankruptcy.

Debt Reorganization Through Chapter 13

By filing for bankruptcy, you can halt the foreclosure process and prevent a creditor from selling your home or having you evicted. In a Chapter 13 bankruptcy, you will propose a repayment plan in which you will pay off your outstanding debts over a period of three to five years. This repayment plan may include unsecured debts, as well as payments of secured debts (such as a mortgage or car loan) that are in “arrears,” meaning that they were not paid on time and are still owed.

Once you complete your Chapter 13 repayment plan, any unsecured debts that have not been fully paid off will be discharged, and you will no longer owe any money to those creditors. Secured debts typically cannot be discharged without the creditor repossessing the property secured by the debt. However, the amount of your arrears can be included in your repayment plan, allowing you to pay off the past-due amount over time. If you continue making ongoing mortgage payments throughout your repayment plan, you will become current on your payments once the plan is complete, and you will be able to maintain ownership of your home.

While many Americans struggle with debt even in the best of times, the COVID-19 pandemic has created a crisis that has affected millions of people and families. Job losses and other financial issues have made it difficult or impossible for many people to pay their ongoing expenses, putting them at risk of foreclosure or eviction. In addition to financial problems, this may also lead to significant safety issues, since being forced out of a home would likely increase the chances of family members becoming infected and suffering serious health problems. Fortunately, the federal government has taken action to protect families in these circumstances, including providing options for addressing mounting debts through bankruptcy.

Foreclosure Moratoriums and Mortgage Forbearances

When the coronavirus pandemic began to reach crisis levels in 2020, the federal government placed a moratorium on foreclosures, and as the crisis has continued, this moratorium has been extended several times. Most recently, President Joe Biden issued an executive order extending the moratorium at least through March 31, 2021. This moratorium applies to mortgages on single-family homes that are insured by the Federal Housing Administration (FHA). 

In addition to prohibiting lenders from beginning or proceeding with foreclosures while the moratorium is in effect, the Department of Housing and Urban Development (HUD) has also required lenders to provide forbearances to borrowers who have experienced financial hardship due to COVID-19. This will allow borrowers to defer mortgage payments for up to six months, and if necessary, borrowers can request an extension and receive an additional six-month forbearance.