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Bankrutpcy Basics

The words “bill” and “debt” are used interchangeably.

Discharge of Debt: The reason most people file for bankruptcy is to reduce or cancel/eliminate debt they owe. The legal term for cancellation is “discharge of debt,” which includes a permanent fed- eral court injunction, restraining creditors ever in the future from attempting to collect the debt.

Automatic Stay (this is very powerful): The moment a bankrupt- cy is filed, an order is in effect restraining almost all creditor action intended to collect a debt, such as collection calls, wage garnish- ments, starting or continuing with a lawsuit, conducting a debtors’ exam, completing a foreclosure, etc. This restraining order, the legal term for which is “automatic stay,” is in effect until the discharge is entered, unless the restraining order is earlier terminated by a court order. This restraining order is what stops foreclosures to allow time to repay any back mortgage payments in a Chapter 13 bankruptcy.

Bankruptcy laws are designed to provide individuals with a “fresh start,” a new life in which one is free of debt. To actually get a fresh start, people filing for bankruptcy are allowed to keep a certain amount of property, even though they are not able to pay their debt. The property that one can keep is called exempt property. Our law makers have made a list of exempt property. So, when we first meet with a client we make a list of their property to determine if it is on the list.

Chapter 7 Bankruptcy: This is the preferred type of bankruptcy because it provides a “fresh start” in about 3.5 months; in these cases the person filing bankruptcy does not have the ability to repay creditors, keeps all their property, and receives a discharge of all their discharge- able debts. Chapter 7 bankruptcy is a five step process, as follows: a) The person filing must take an online course before filing; b) the person files a petition with the bankruptcy court, which includes schedules showing all their assets and debts and incomes and expenses, among other things; c) the person attends a hearing in Santa Barbara at which they are asked questions (we provide our clients with a list of questions that are to be asked, and then we discuss each question and answer with our clients prior to the hearings; d) the person completes a second online financial course; 5) the Court enters a discharge order about 65 days after the Santa Bar- bara hearing.

Chapter 13 Bankruptcy: This type of bankruptcy requires monthly payments for a period from 3 to 5 years. There must be a reason to file a Chapter 13 rather than a Chapter 7, because one does not receive the fresh start for 3 to 5 years, and must make pay- ments. One reason for a Chapter 13 is to stop a foreclosure and then have up to 60 months to repay the amount owed for back payments and late charges, etc. It allows one to keep their home. If a person owes $24,000 in back payments and late charges, by filing a Chapter 13 they stop the foreclosure and pay $400 a month for 60 months, after which time they would not be in default, so the foreclosure would have to be terminated by the creditor.

Another reason to file a Chapter 13 bankruptcy is because they have some money left over each month after paying reasonable and neces- sary living expenses, and can afford to repay some (or all) of their debt. A third reason people file for a Chapter 13 bankruptcy is to have a second mortgage/lien removed from their home. This can only be done in a Chapter 13 bankruptcy and only if the home is worth less than is owed on the first mortgage/lien, in which case the second mortgage/lien has no equity in the home to attach to, so it is “unsecured” (there is no property securing its repayment). There are other reasons to file a Chapter 13, all of which we explore with our clients. Don’t forget, the order restraining creditor action is in effect during the 3 to 5 years that one is in Chapter 13.