An Overview of Bankruptcy
The Dothan Legal Team Represents Bankruptcy Clients Throughout Alabama
Bankruptcy is a legal term that denotes the status of a person or organization that cannot repay debt owed to creditors. We refer to such persons or organizations as “debtors.” A “creditor” can be a bank, a car dealership, a credit car company, or any person or organization to which the debtor owes money. There are six avenues of bankruptcy, called “Chapters,” that an individual or organization may file depending on its needs and eligibility: Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13, and Chapter 15.
A filing under Chapter 7 is called a liquidation proceeding, and allows for a full discharge of unsecured debt. Unsecured debt refers to debt in which the creditor does not take a security interest in assets of the debtor as collateral. An example of unsecured debt would be credit card debt or medical bills. An example of secured debt would be a mortgage – if the debtor fails to make payments, the creditor can repossess the collateral (the house). Under Chapter 7, secured debts like mortgages remain after discharge, but unsecured debts like unpaid credit card bills are wiped away. A bankruptcy discharge releases the debtor from personal liability for these types of debts, so that the debtor is no longer required to pay them under the law. A discharge is permanent and prohibits creditors from collecting or taking action to collect discharged debts. Indeed, it is a “fresh start” for the financially troubled debtor.
Chapter 9 is municipal bankruptcy, Chapter 11 provides for the reorganization of a business, Chapter 12 is bankruptcy of a family farmer and family fisherman, and Chapter 15 provides mechanisms for dealing with debtors and creditors involving more than one country. The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13.
Chapter 13 allows the debtor to develop a payment plan to repay the debt over a 3 to 5 year period. While none of the debts are “wiped away” as in a Chapter 7 proceeding, under Chapter 13 the debtor’s assets are not liquidated by the court and distributed to creditors. A “means test” is employed to determine which Chapter an individual may proceed under in bankruptcy. The means test considers monthly income, amounts and types of debt, and other variables in the debtor’s unique financial situation to determine if the threshold income after expenses is low enough to qualify for Chapter 7. If a debtor’s average monthly income for the past 6 months is below the state median for the relevant household size, the requirements of the “means test” are met and the debtor may proceed under Chapter 7. If not, the debtor faces the decision whether to proceed under Chapter 13.
If you are seeking debt relief or considering bankruptcy, you need the expert consultation and legal guidance of an experienced bankruptcy attorney. Contact the Dothan legal team of Parkman White, LLP at 334-792-1900, or email us for a consultation.