How to file for bankruptcy (and whether you should)
Half of all Americans carry medical debt. What's more, 1 in 10 Americans carry significant medical debt. For many of these Americans, bankruptcy is the only option to discharge their debts and stop the debt collectors from calling.
If you're struggling with debt in Birmingham, meeting with a Birmingham bankruptcy attorney may be the first step to getting your life back on track.
What is bankruptcy?
Bankruptcy is a legal process that helps people who can no longer pay their debts get a fresh start by liquidating assets (selling their stuff) to pay their debts or creating a repayment plan. Bankruptcy can also be used to help struggling businesses.
A bankruptcy case typically begins when a debtor files a petition with the bankruptcy court. All bankruptcy cases are handled in federal courts. This means that Birmingham residents typically file bankruptcy petitions in the United States Bankruptcy Court for the Southern District of Alabama.
Here's the address for the bankruptcy court in Birmingham:
Robert S. Vance Federal Building
1800 Fifth Ave N
Birmingham, AL 35203
Telephone: (205) 714-4000
Fax: (205) 909-9432
What are the different types of bankruptcy?
The United States Bankruptcy Code lists 6 types of bankruptcy. However, there are 2 common types of bankruptcy for individuals struggling with financial debt:
- Chapter 7
- Chapter 13
In 2020, there were 544,463 bankruptcy filings. Chapter 7 was by far the most popular type (70 percent of filings), and Chapter 13 was the second most popular type (28.3 percent of filings).
Chapter 7 bankruptcy
Chapter 7 bankruptcy (also called a "liquidation bankruptcy") requires you to sell most of your assets (home, cars, household items, jewelry, etc.) to pay your creditors. This process is accomplished by a court-appointed trustee.
As soon as you file a Chapter 7 bankruptcy petition, your creditors are prohibited from contacting you. In other words, creditors must immediately stop the harassing phone calls, letters, wage garnishments, repossessions and foreclosures.
Under a Chapter 7 bankruptcy, you may be able to keep some personal property that's exempt from liquidation. One of the most important exemptions is the homestead exemption.
To understand how the homestead exemption works, let's take a look at how your home is used to pay off creditors without an exemption. Here's what the process looks like:
- The trustee sells your home.
- The trustee pays off your mortgage.
- The trustee uses any remaining proceeds from the sale to pay your other creditors.
However, the homestead exemption allows you to keep some of the profits and possibly even your home. With the homestead exemption, the process looks like this:
- The trustee sells your home.
- The trustee pays off your mortgage.
- The trustee reimburses the amount of the homestead exemption ($16,450 or $32,900).
- The trustee uses any remaining proceeds to pay your other creditors.
How can you keep your home using the homestead exemption? Consider the following example:
Bob has a lot of medical debt and decides to file a Chapter 7 bankruptcy. Bob owns a home in Birmingham. The home is worth $200,000. Bob owes $16,000 on the mortgage.
Because the homestead exemption is $16,450, Bob can keep his home.
There are a number of other exemptions in Alabama. What's more, it may be possible to keep your home even if you owe more on the mortgage than the exemption allows.
Unfortunately, not everyone qualifies for Chapter 7 bankruptcy. If your debts are consumer debts and your income exceeds certain thresholds, you may not be eligible for Chapter 7 relief.
Chapter 13 bankruptcy
A Chapter 13 bankruptcy (sometimes called a "wage earner's plan") allows individuals with regular income to develop a plan to repay all or part of their debts over a period of 3-5 years. In most cases, Chapter 13 allows the debtor to lower their monthly payments and eliminate interest on credit card debt.
Chapter 13 is often preferable to Chapter 7 because it allows debtors to stop a foreclosure and keep valuable property (such as their home).
Just like with a Chapter 7 plan, debtors are protected from lawsuits, garnishments and other creditor actions while the plan is in effect.
Any individual is eligible for Chapter 13 relief so long as the individual's unsecured debts are less than $394,725 and their secured debts are less than $1,184,200 (these amounts change periodically).
Should you file for bankruptcy?
People who file for bankruptcy typically have way more debt than money to cover the debt and don't see their financial situation changing anytime soon.
There are a number of factors that lead to bankruptcy. Some of the most common factors include:
- Job loss
- Accidents resulting in medical debt
- Lawsuits from creditors
Bankruptcy isn't always the last resort. Sometimes, bankruptcy can be used as a financial planning tool when you have the money to repay your debts, but you need to restructure the terms to make life a little easier.
Steps to filing for bankruptcy
Although every case is different, there are 4 general steps that you must take to file for bankruptcy in Birmingham:
- Gather your financial records. It's important to compile an accurate list of your debts, assets, income and expenses so your lawyer and the court can better understand your situation.
- Get credit counseling within 180 days before filing. You can't file for bankruptcy unless you've gone through an approved credit counseling program. This requirement assures the court that you've exhausted all other possibilities before filing for bankruptcy. If you skip this step, your bankruptcy petition will be rejected.
- File the petition. Filing a bankruptcy petition involves filling out LOTS of forms. If you haven't spoken to an attorney, it's strongly recommended that you do so at this point. Understanding the bankruptcy laws is essential when filling out a petition. Keep in mind that credit counselors, court employees and judges are not permitted to offer legal advice.
- Meet with creditors. If your petition is accepted, your case will be assigned to a bankruptcy trustee. The bankruptcy trustee will set up a meeting with your creditors in order to give your creditors an opportunity to ask you or the court questions about your case.
How long does a bankruptcy proceeding take?
A Chapter 7 bankruptcy takes about 4-6 months to complete. It typically takes 95 days for a Chapter 13 bankruptcy petition to be approved, but the process won't be complete until the 3-5 year plan is complete.
In either case, it's important to remember that bankruptcy carries long-term penalties. A Chapter 7 bankruptcy will typically stay on your credit report for 10 years. A Chapter 13 bankruptcy will typically stay on your credit report for 7 years.
How does bankruptcy affect a personal injury claim?
Bankruptcy can have a dramatic effect on your personal injury claim. Keep in mind either party can file for bankruptcy.
A defendant might file for bankruptcy if they can't afford to pay a settlement or jury verdict. If this happens, the defendant will be granted an automatic stay, which means the plaintiff will be unable to proceed with their personal injury lawsuit or debt collection.
However, an automatic stay has its limits. A plaintiff can file a motion to continue their claim if 1 of 2 conditions are met:
- The defendant filed for bankruptcy for fraudulent reasons (for example, to stop a lawsuit); or
- The damages the plaintiff is seeking are within the policy limits of the defendant's insurance coverage.
If a plaintiff decides to file for bankruptcy after filing a personal injury lawsuit, the bankruptcy trustee will essentially own the lawsuit and make decisions on how to handle the lawsuit.
For that reason, it's generally a good idea to resolve a lawsuit before filing for bankruptcy. With that being said, a debtor can't have a large amount of money sitting in their bank account when they file for bankruptcy, so the bankruptcy may need to be delayed following the resolution of a personal injury lawsuit.