Those who are struggling to make payments on a loan or other large debts may be considering bankruptcy as an option. Chapter 13 of the U.S. Bankruptcy Code allows individuals with a regular income to reorganize their debts and establish a repayment plan over three to five years. One of the most appealing aspects of this type of bankruptcy is that it allows for cramdowns, which can reduce the amounts of certain types of loans and save debtors money.

What Is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is a type of bankruptcy filing that allows people to keep their assets and pay off their debts over time. Unlike Chapter 7, which eliminates most unsecured debts entirely, Chapter 13 requires debtors to repay their creditors over the course of three to five years. However, the amount a debtor will be required to repay can be significantly less than what was originally owed due to “cramdown” provisions in the law.

What Are Cramdowns?

A cramdown is a provision in Chapter 13 bankruptcy that reduces the amount of secured debt owed on certain loans. A secured debt is one that is backed by collateral. For example, in an auto loan, the vehicle a debtor purchased is the collateral, and if the debtor defaults on the loan, the lender will have the right to repossess the vehicle. With a cramdown, the amount of the loan is reduced to match the market value of the collateral. This means that if a debtor owes more than what the car is worth, a cramdown can provide some relief by reducing the amount that the debtor will be required to pay to the lender over the remainder of the loan.

Debt can be a difficult issue to deal with, but it is something that affects most people. Regardless of the reasons why debts have accrued, an individual or family that experiences financial difficulties may be unable to make payments as required, and this may lead creditors to seek legal judgments against them. In these situations, a debtor may find themselves facing wage garnishment or liens against their property. By understanding the best ways to deal with these issues, including the options for filing for bankruptcy, debtors can determine how to receive relief from their debts and avoid ongoing financial problems.

What Is Wage Garnishment?

Wage garnishment is the legal process of taking money from a person's paycheck or other forms of income in order to pay debts owed. When a creditor initiates a lawsuit against a debtor, and the court rules in their favor and states that they are allowed to collect the debt, the creditor may then seek to enforce this judgment through a wage garnishment order.

When it comes to debt, no one is immune. Whether you have lost your job, had an unexpected medical emergency, or encountered other financial difficulties, the stress you may face in these situations can be overwhelming. These issues can sometimes become even worse if you are considering bankruptcy as a viable option. It is important to remember that a better financial future is possible, and there are ways to manage the stress associated with bankruptcy. Here are some tips for addressing emotional issues related to debts and other financial concerns:

Take Care of Yourself 

The first step in dealing with any stressful situation is to make sure you are taking care of your health and well-being. You may need to make sure you are taking time for yourself, getting enough sleep, eating healthy meals, and exercising regularly. Taking care of yourself will help you feel more grounded, and it will help ensure that you will have the energy you need as you tackle your financial troubles. 

Filing for bankruptcy can be a difficult and overwhelming decision. While nobody wants to be in this situation, there are many cases where debts become overwhelming and impossible to repay due to unforeseen circumstances. Rather than living with this burden indefinitely, struggling to make payments every month, and worrying about constant calls from creditors and the possibility of losing property, a family can benefit by receiving relief from their debts through Chapter 7 or Chapter 13 bankruptcy. However, it is important to understand the bankruptcy process and the steps that will need to be followed before, during, and after filing. Here is what you need to know as you prepare for bankruptcy:

Understand Your Options 

Before filing for bankruptcy, it is important to understand all of your options. There are two types of personal bankruptcy that individuals or married couples can pursue: Chapter 7 and Chapter 13. A Chapter 7 bankruptcy involves liquidating assets in order to pay off creditors, while a Chapter 13 bankruptcy reorganizes debt into a manageable payment plan over a three-to-five-year period.  In many cases, Chapter 7 is the preferred option, since it will allow for a relatively quick discharge of debts, and most of the time, debtors will be able to use exemptions to avoid the loss of most or all of their assets. However, Chapter 13 may be a better option for debtors who do not pass the means test to qualify for Chapter 7 or for those who wish to maintain ownership of their home after catching up on mortgage payments. Depending on your individual circumstances, one type of bankruptcy may be the better option, and you can speak with an experienced attorney who can help you decide which type of bankruptcy is best for you. 

If you are considering filing for bankruptcy, you might be wondering what will happen to your money and property. Will you lose everything you have worked so hard for? Depending on the type of bankruptcy you file, you may be required to turn over certain assets. In a Chapter 7 bankruptcy, you may receive a discharge of most of your debts, but the bankruptcy trustee may seize some of your assets and liquidate them in order to repay some of what you owe to creditors. Fortunately, exemptions apply to your property, and you will be able to keep any assets that are exempt. However, determining whether to use exemptions that are available under federal or state laws can sometimes be difficult.

Federal Bankruptcy Exemptions

Under federal law, certain types of assets are exempt from bankruptcy. The federal exemptions are updated every three years, and the most recent update went into effect on April 1, 2022. Some examples of the current federal exemptions include:

There are multiple types of debts that can cause a person or family to experience financial difficulties. While filing for bankruptcy can provide relief from debts, it is important to understand how different types of debts will be handled during the bankruptcy process. Understanding how domestic support obligations, which include child support and spousal support, will be affected by bankruptcy can be a crucial part of the planning process. If you are currently paying alimony or child support, you will want to work with an attorney to determine your best options for addressing these obligations and other debts you owe.

Understanding How Priority Debts Are Handled During Bankruptcy

Domestic support obligations are considered to be priority debts, and this means that they typically cannot be discharged through bankruptcy. Court-ordered child support or spousal support must be paid as required, and any missed payments will need to be made up. In addition, interest may apply to past-due amounts.

If you file for Chapter 7 bankruptcy, certain types of debts may be eliminated, such as credit card balances and medical bills. While you will still owe domestic support obligations, the elimination of other debts may free up money that can be used to pay child support or alimony. You will continue to be responsible for these payments after you file for bankruptcy, but by becoming current on your obligations, you can ensure that you will be able to maintain ongoing financial success. 

There are many situations where Americans may encounter financial struggles, and they may be unable to pay certain bills due to issues such as the loss of a job. However, missed payments can have consequences, and if a person defaults on their auto loan, the lender may repossess the car. In situations where a debtor is facing a potential repossession or where a lender has already taken possession of the vehicle, bankruptcy may be an option that will allow them to stop the repossession process.

Filing for Bankruptcy Before a Repossession Takes Place

In cases where a person has failed to make payments on an auto loan, bankruptcy can offer some protection against repossession. After filing a bankruptcy petition, an automatic stay is put in place. This means that creditors are prohibited from taking any collection action, including repossession. The automatic stay will remain in effect until the bankruptcy case is concluded.

For anyone who owns a home, the possibility of foreclosure may be a concern. A homeowner who experiences financial difficulties such as the loss of a job may be unable to make mortgage payments. Late payments may result in fees and penalties, and a homeowner may struggle to make up what is owed while continuing to make ongoing payments and covering other expenses. When a loan is in default, a lender may begin foreclosure proceedings, and this could result in the loss of the home. In these situations, homeowners will need to understand their options and determine the best ways to proceed.

Bankruptcy and Other Foreclosure Defense Options

In many cases, filing for bankruptcy is a good first step that will stop a lender from proceeding with a foreclosure. After a bankruptcy petition is filed, a “stay” will automatically be put in place by the bankruptcy court that will force creditors to cease all debt collection actions, including foreclosure proceedings, repossession of property, or wage garnishment. The debtor can then determine whether Chapter 7 or Chapter 13 bankruptcy will allow them to eliminate certain debts, become current on their mortgage, and avoid the loss of their home.

As an alternative to bankruptcy, a homeowner may be able to contact their mortgage lender and determine whether loan modifications may be made. Depending on the debtor’s circumstances, a lender may agree to a forbearance in which a person may not be required to make payments for a certain period of time, and these payments may be added on to the end of the loan. A lender may agree to add the missed payments and fees to the principal of the loan (known as “capitalization of arrears”), or other adjustments may be made, such as lowering the interest rate. By reaching agreements with a lender, a homeowner may be able to find affordable solutions that will allow them to continue making mortgage payments and avoid foreclosure.

People who are looking to get out of debt may be unsure about their options for filing for bankruptcy, but by consulting with an attorney, they can determine the best methods for eliminating debts, reducing the amounts they owe, and avoiding issues such as foreclosure. Many people are unaware of the benefits they may be able to receive by filing for bankruptcy, which may include the reduction of the amounts they owe on certain loans. A bankruptcy lawyer can help determine whether techniques known as “cramdowns” or “lien stripping” may be used to address home mortgages, auto loans, or other debts.

Reducing and Reclassifying Debts During Chapter 13 Bankruptcy

The approach to different types of debts may differ depending on the type of bankruptcy a person pursues. While Chapter 7 bankruptcy will allow for the elimination of most debts, this could result in the loss of certain assets, including through the repossession of a vehicle or a home foreclosure. For those who are looking to maintain ownership of their assets, Chapter 13 bankruptcy may be the preferred option.

In a Chapter 13 case, a debtor will propose a repayment plan in which monthly payments will be made toward certain debts over several years. In addition to paying some of what is owed toward unsecured debts (such as credit cards or medical bills), missed payments toward secured debts (such as a home mortgage or auto loan) may be made up through the repayment plan. When creating a repayment plan, some secured debts may be reduced, or they may be reclassified as unsecured debts.

If you owe significant debts, creditor harassment can be a problem. Creditors may repeatedly call you or send notices through mail, email, or other methods, and they may threaten to take your property, file lawsuits, or even pursue criminal charges. As you determine your options for debt relief, it is important to understand your rights, the steps you can take to respond to communication from creditors, and how filing for bankruptcy may help your situation.

Your Rights Under the Fair Debt Collection Practices Act

The Fair Debt Collection Practices Act (FDCPA) is a federal law that limits the types of actions that creditors can take when collecting debts, and it also provides consumers with options for limiting contact with creditors and requiring them to stop certain actions. Under the FDCPA, creditors have restrictions on the types of communication that are allowed with debtors. They are generally prohibited from contacting you at unusual times, such as after 9:00 p.m., and they cannot attempt to contact you more than once per day. 

While creditors can contact you through multiple methods, such as calling you at work, they are required to stop doing so if requested. In fact, you can request that they cease all communication with you by submitting a written request. This will not stop them from taking actions to collect debts, such as by filing a lawsuit, but it can stop them from calling or otherwise contacting you while you determine how to address the debts that are owed. You can also request a validation of your debts, and in these cases, a creditor must send you a validation letter that states the name of the creditor, the amount owed, and information about disputing the debt.

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.