Bankruptcy Overview

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 card 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 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.

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. Examples of unsecured debt are credit card debt or medical bills.  An example of secured debt would be a mortgage or vehicle loan, but also pledged personal property and financed furniture – if the debtor fails to make payments, the creditor can repossess the collateral (the house, car, pledged goods or furniture). Under Chapter 7, secured debts like mortgages remain after discharge, if the debtor elects to keep the home and continue making payments, 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 13 allows the debtor to develop a payment plan to repay some or all of the debt owed over a 3 to 5 year period, depending on the type of debt, their income, assets and what secured debts they may wish to surrender.  Many times a debtor can pay off their vehicle at a reduced interest rate and pay nothing to their unsecured creditors, while others may file Chapter 13 to catch up back taxes, past due mortgage payments or back child support.  The best thing about Chapter 13 is it puts the debtor in charge and normally, they do not lose any property unless they wish to surrender it back to a creditor to reduce their repayment plan amount. Many detailed planning factors must take place to determine if a Chapter 13 is the right case to file and an experienced bankruptcy attorney should be consulted.

Before filing either Chapter 7 or Chapter 13, 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.  The debtor’s assets are another important factor to consider when determining which bankruptcy chapter to file.

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 Boles Holmes White at 334-366-6086, or email us for a consultation.


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