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Bankruptcy might sound like a daunting term, but that is because it is so often surrounded by myths and misconceptions. The reality, in contrast, is quite different. Bankruptcy is nothing more than a legal process designed specifically to provide financial relief to individuals and businesses struggling with insurmountable debt. At the Law Office of Charles A. May, we are committed to guiding you through this process in the friendliest and most understanding manner. We understand how bankruptcy can be a lifeline for families struggling with debt, and we encourage people to avail themselves of the law’s protections and benefits when necessary. See below for a quick overview of U.S. bankruptcy laws. If you are battling debt in Orange County, Los Angeles, and elsewhere in Southern California, call our office for a free consultation with a compassionate and dedicated lawyer.

What Is Bankruptcy?

Bankruptcy is a federal legal procedure that allows consumers and businesses to eliminate or repay their debts under the guidance and protection of the bankruptcy court. While the prospect of declaring bankruptcy might sound intimidating, it is important to understand that it is often a viable option for people who need a fresh financial start. Hundreds of thousands of people file for bankruptcy every year because they need the help and comfort it can bring.

There are many different “chapters” of the Bankruptcy Code, offering help to consumers, businesses, family farmers, and even municipalities. Individuals and families generally opt for Chapter 7 or Chapter 13, while businesses prefer the help Chapter 11 brings.

Chapter 7 Bankruptcy for Consumers: A Clean Slate and a Fresh Start

Chapter 7 bankruptcy is often referred to as “straight bankruptcy.” This form of bankruptcy is generally the quickest and simplest, and it is designed for consumers with limited income. The primary benefit of Chapter 7 is that you can eliminate most unsecured debts like credit card balances, medical bills, and personal loans. This can provide you with the financial freedom you need to rebuild your life.

In a Chapter 7 bankruptcy, a court-appointed trustee collects your non-exempt assets, sells them, and then distributes the proceeds to your creditors. The entire process usually takes about three to six months. With the aid of a knowledgeable California bankruptcy attorney, you may be able to exempt enough of your assets so that you will not lose any property to the bankruptcy trustee.

It is important to know at the outset that not everyone qualifies for Chapter 7. Your eligibility is determined by a “means test,” which examines your income and expenses to see if you are genuinely unable to pay your debts. We can take you through the process of determining Chapter 7 eligibility. If you do not qualify, you would still likely be eligible for relief through Chapter 13.

Chapter 13 Bankruptcy for Consumers: Debt Adjustment and Breathing Room

Chapter 13 bankruptcy, often termed “reorganization,” is designed for individuals with regular income who can pay back a portion of their debts through a repayment plan. Chapter 13 is commonly referred to as a “wage earner’s plan,” although you don’t necessarily need to have a job to qualify.

Under Chapter 13, you propose a repayment plan to make installments to creditors over three or five years. The amount you will repay is based on your income, expenses, and types of debt. To qualify, you must have a regular source of income and your debts must not exceed certain limits, which are updated periodically.

Chapter 13 allows you to keep most or all of your property while you make payments. It can also stop foreclosure and allow you an opportunity to catch up on missed mortgage payments. The debts you owe can be adjusted as part of the process, and at the end of your bankruptcy, you can get a discharge of remaining unsecured debts.

Chapter 11 Bankruptcy for Businesses: Reorganization

Chapter 11 is generally meant for businesses, although individuals can file as well. It is a form of reorganization, similar to Chapter 13 but more complex. In Chapter 11, the business proposes a plan to keep the operation running while paying off creditors over time. Businesses have the chance to restructure and optimize operations for profitability.

The business can continue to operate during a Chapter 11 reorganization, keeping employees on the payroll while the repayment plan is being followed. This can be particularly beneficial for businesses that are fundamentally sound but temporarily struggling. Companies that successfully complete their Chapter 11 emerge stronger, leaner, and more stable than before.

Both small and large businesses can file for Chapter 11. The process can be complex and expensive, traditionally making it more suitable for larger corporations, but recent changes to the law provide a more cost effective, streamlined process for certain small businesses.

Chapter 7 v. Chapter 13

If you are drowning in debt, bankruptcy can be an appropriate tool to deal with that debt effectively or eliminate it entirely, giving you a fresh start and handing you back the reins to better control your finances going forward. But before you file for bankruptcy, you have to decide which kind of bankruptcy to file. Consumers have two basic options to choose from: Chapter 7 and Chapter 13. These sections of the Bankruptcy Code offer different types of protection and are suitable for debtors with different needs and circumstances.

The Law Office of Charles A. May helps individuals and families in Orange County, Los Angeles and all of Southern California find effective, affordable debt relief through either Chapter 7 or Chapter 13 bankruptcy. Learn some of the important similarities and key differences between the two types of bankruptcy below, and when you are ready for a fuller discussion as to which bankruptcy chapter might be right for you, call our office for a free consultation with a skilled and dedicated Irvine bankruptcy lawyer.

What Do Chapter 7 and Chapter 13 Have in Common?

Firstly, both Chapter 7 and Chapter 13 are federal bankruptcy laws, which means the procedure is governed by federal rather than state laws. The United States Bankruptcy Code outlines how these cases are processed and resolved. That said, each state has different rules that supplement or impact the Bankruptcy Code. For example, California has two systems when it comes to exempting property from liquidation in Chapter 7, and debtors must choose one of these systems rather than using the federal bankruptcy exemptions.

One powerful feature of bankruptcy that applies in both Chapter 7 and Chapter 13 cases is the automatic stay. Regardless of which type of bankruptcy you file, the automatic stay goes into effect as soon as you file your case. This means that creditors must cease all collection activities, giving you immediate relief from phone calls, letters, and even lawsuits or wage garnishments.

In both Chapter 7 and Chapter 13, a trustee is appointed to oversee your case. The trustee’s responsibilities vary between the two chapters but generally include reviewing your bankruptcy petition and financial records, as well as managing any non-exempt assets in a Chapter 7 case or administering your repayment plan in Chapter 13.

Credit Counseling is another feature of bankruptcy both chapters have in common. You are required to complete credit counseling courses for both Chapter 7 and Chapter 13, generally before filing and again before receiving a discharge of debts.

Key Differences Between Chapter 7 and Chapter 13

Even more important than what Chapter 7 and Chapter 13 have in common are the ways in which they are different. The differences are significant and determine which form of bankruptcy will work best for you.

Chapter 7 is sometimes known as “liquidation bankruptcy” because it involves the selling of non-exempt assets to repay creditors. After these assets are liquidated and the proceeds distributed, most of your remaining debts are discharged, meaning you are no longer legally obligated to pay them. With expert application of the California exemptions, you may be able to exempt enough property so that you receive a “no-asset” discharge of all your unsecured debt, such as credit card bills, medical bills and personal loans, without losing any property.

Chapter 13, on the other hand, is sometimes referred to as a “reorganization bankruptcy.” Rather than selling assets, you enter into a repayment plan to pay back a portion of your debts over three or five years. At the end of this period, any remaining unsecured debts may be discharged.

The eligibility criteria for Chapter 7 and Chapter 13 are significantly different. Chapter 7 has strict income limitations, assessed through the “Means Test.” Conversely, Chapter 13 requires that you have a steady income sufficient to meet your repayment obligations. Changes to the Bankruptcy Code in 2005 made it harder to qualify for Chapter 7 because the government would prefer you to enter into a Chapter 13 repayment plan rather than get a straight discharge of debt in Chapter 7.

The two forms of bankruptcy also have different impacts on assets and property. In Chapter 7, you may have to sell non-exempt assets, while in Chapter 13, you generally keep all of your property but must pay back an equivalent value through your repayment plan.

When to Choose Chapter 7 or Chapter 13

If you primarily have unsecured debts like credit card bills and medical expenses, then Chapter 7 is your key to making a fresh start by eliminating that debt. For the majority of households, Chapter 7 provides the most comprehensive debt relief and the quickest way to get there.

There are, however, a few reasons why you might find yourself filing for Chapter 13 instead of Chapter 7. Opt for Chapter 13 if:

  • You are behind on mortgage or car payments and are about to lose the property. Chapter 13 lets you catch up on those missed payments and takes you out of default.
  • You have non-exempt assets you wish to keep. Non-exempt assets are subject to liquidation in Chapter 7, so be sure to go through the California bankruptcy exemptions carefully before deciding to file Chapter 7.
  • Your income disqualifies you from filing for Chapter 7. Chapter 7 is for people with income below the state median or whose expenses outpace their income so that they cannot pay their debts. Chapter 13 still provides effective relief to get you back on top over time, adjusting some debts and discharging others.

Bankruptcy Myths

Bankruptcy has an undeserved reputation, which is unfortunate. Some people equate bankruptcy with financial failure or a lack of personal responsibility or restraint. The fact is that anybody can run into severe economic troubles, and bankruptcy exists for the very purpose of helping people avoid financial ruin and get the tools and help they need to make a fresh start. Below we explore some of the more common and persistent myths about bankruptcy, and we attempt to give you the facts so you can proceed with comfort and confidence if bankruptcy is the route you choose. To talk in detail about your personal situation, and whether bankruptcy can help, call the Law Office of Charles A. May to speak with a caring and compassionate Irvine bankruptcy attorney, serving individuals, families and businesses in Orange County, Los Angeles, and throughout Southern California.

Separating Fact From Fiction When It Comes to Filing for Bankruptcy

Myth #1: People file for bankruptcy because they are financially irresponsible.

Fact: Even people who work hard and try their best to manage their finances can need bankruptcy protection, and it is not because they overspent on things they didn’t need or foolishly mismanaged their money. Many people are forced by economic circumstances to get by from paycheck to paycheck without a savings account, and borrowing from the bank or overextending on credit cards is the only way they can meet their monthly obligations. Then the loss of a job, a serious illness that puts them out of work, or a major emergency expense like a necessary home or car repair, can put them so far in debt that they can’t get out, no matter how hard they try. For the 38 million people living in poverty, and the millions of others who work and strive but fall farther and farther behind every month, filing for bankruptcy does not represent a moral failing; it represents a smart choice to get the help that is available to make a fresh start.

Myth #2: If I file for bankruptcy, the court will take all my property.

Fact: In a Chapter 7 filing, the bankruptcy trustee can theoretically sell your non-exempt property to pay your creditors before discharging any remaining debt. At The Law Office of Charles A. May, we utilize California’s generous bankruptcy exemptions to safeguard your property, ensuring it remains exempt or unattractive for seizure by the bankruptcy trustee. Our objective is to attain a “no-asset” bankruptcy discharge, meaning your unsecured debts are eliminated without you having to lose any property. This is often possible with our help.

Myth #3: Chapter 13 isn’t really helpful, because you still have to repay your debts.

Fact: Chapter 13 involves creating a debt repayment plan that pays your debts off comfortably over a three or five-year period, and the government does indeed prefer you to file Chapter 13 over Chapter 7 because more of your creditors get paid back. However, Chapter 13 is rightfully termed a “debt adjustment” because it allows you to alter the terms of some of your payments, such as adjusting the interest or principal payment on your home mortgage. Also, at the end of the plan, any remaining unsecured debts (credit cards, doctor bills, personal loans) can be wiped away. Chapter 13 is not the same as Chapter 7, but it still provides welcome relief.

Myth #4: Student loans can’t be discharged in bankruptcy.

Fact: It is difficult to get rid of student loans in bankruptcy, but it is not impossible. The legal standard requires you to prove that paying back the loan is an “undue hardship.” In the past, courts took a very narrow view of this term, but more and more in recent years, courts have loosened their interpretation when it comes to deciding undue hardship in individual cases. If student loan debt is hampering your ability to succeed in life, it is worth talking to a bankruptcy lawyer to see what can be done.

Myth#5: Having a bankruptcy on my record will keep me from buying a home or getting credit.

Fact: Your credit takes a hit when you file for bankruptcy, but it doesn’t mean you can’t get credit; it’s just that the interest rates are less favorable. For example, within only two years of a Chapter 7 discharge, or one year from the start of a Chapter 13 plan, you could apply for an FHA loan based on positive factors such as having a regular income and the required down payment.

Myth #6: You are better off paying down your debt rather than filing for bankruptcy.

Fact: If you are battling a credit card with a balance in the thousands of dollars and a 24% interest rate, you can continue to make the minimum payment each month, but you will only end up deeper and deeper in debt, paying interest and late fees but not actually servicing your debt. Even considering the hit to your credit from filing for bankruptcy, you can start to rebuild your credit after your discharge compared to living forever in debt, missing payments or paying late, and watching your creditworthiness get worse and worse. You don’t need to wait until you are completely broke to file for bankruptcy, nor should you.

Call Charlie May in Irvine to Talk About Bankruptcy in Southern California

At The Law Office of Charles A. May, our bankruptcy attorney is dedicated to making the bankruptcy process as smooth as possible for you. Whether you are a consumer or a business owner, our team is here to guide you through every step, ensuring you make the best decisions for your financial future. From our office, we serve clients in Orange County, Los Angeles, and throughout Southern California. Call today for a free consultation.

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