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What is Bankruptcy?

To most people the concept of bankruptcy is unknown and is misunderstood. Originally, the bankruptcy laws of the United States were formulated by the United States Congress to protect people and businesses from legal attack by their creditors. For many, the notion of bankruptcy was a frightening thought. Frankly, up until 20 years ago, the bankruptcy process was indeed a rigid and unpleasant experience. However, the advent of credit cards created the ability for individuals and businesses to obtain high amounts of credit from banks throughout this country. As a result, for the first time in the history of the United States, individuals were able to access lines of credit far beyond their means.

The concept of bankruptcy is a legal theory in which the United States Bankruptcy Courts preside over the orderly liquidation of debt on behalf of an individual, a married couple filing jointly, or a business. A competent bankruptcy lawyer will prepare a petition on behalf of their debtor client. The petition consists of approximately 40 pages describing the debtors assets, income, expenses, liabilities, and financial activities over the past several years. In the vast majority of all bankruptcy cases filed, the debtor is given a prompt discharge by the United States Bankruptcy Court which dismisses the financial obligations of the debtor. The debtor is given a fresh start in order to resume their life without the burden of debt. Understandably, the United States Bankruptcy Court insists that all debtors submit their petitions under the pains and penalties of perjury. Once the Court is assured that the debtor is an honest and truthful debtor, the discharge will be given. The discharge is permanent and complete. A debtor who has gone through the bankruptcy process and received a discharge from the Bankruptcy Court does indeed have a fresh start. Assuming the debtor is able to get back on their feet, the income and assets that they earn remain theirs without interference from the prior bankruptcy filing. Indeed, it is the purpose of bankruptcy to rehabilitate people and put them back into a productive and financially stable state.

Individuals passing through the bankruptcy process receive a discharge on their financial obligations by order of the United States Bankruptcy Court. This discharge is powerful and permanent. The debtors are not required to pay their debts, at any point, and the creditors are permitted to charge-off the discharged debt in such a manner as to achieve a business expense, thus reducing their overall tax liability. The important concept to remember is that the individual debts of the debtor are discharged on a permanent basis. The creditors are forbidden from communicating, in any manner, written or by telephone, in an effort to collect their debt. The creditors must accept the discharge order of the Bankruptcy Court and move on without any further contact with the debtor.

This of course would depend upon the type of bankruptcy filed and the complexity of the case. Very simply, Chapter 7 bankruptcy proceedings generally have an initial legal fee of between $750 and $1,500. Chapter 13 bankruptcy proceedings, because their pendency before the court lasts at least several years, involves higher legal fees. In most instances a Chapter 13 bankruptcy fee will range between $2,500 and $3,500.

The Law Offices of Joseph P. Foley, however, affords all clients the opportunity to have their legal fees paid through a payment plan. All plans are designed differently and are formulated to accommodate the financial ability of the debtor. All initial consultations are free of charge and afford the potential client the opportunity to meet with, and hopefully achieve a certain comfort level with Atty. Joseph P. Foley and it affords the attorney the opportunity to properly and completely assess the clients particular problem and advise the client as to the proper remedy available.

A bankruptcy attorney must determine at the outset of the consultation what chapter would best suit the situation of the client. Essentially, there are only two chapters available to individual debtors. That would be a Chapter 7 bankruptcy proceeding in which the debtor is seeking a fresh start and does not own substantial assets that would be lost in a Chapter 7 bankruptcy proceeding. The other option would be a Chapter 13 bankruptcy in which a debtor desires to remain in control of their assets, prevent the Bankruptcy Court from seizing their assets, and reorganize their debt over a period of time based chiefly on the ability of the debtor to pay rather than the amount actually owed to the creditor. A Chapter 13 Bankruptcy Plan, once submitted to the Bankruptcy Court and approved, is a permanent agreement between the debtor and the debtors creditors.

Married people in bankruptcy are treated the same way that married people are treated by the Internal Revenue Service. That it is to say, married couples are allowed to file a single petition with the United States Bankruptcy Court and proceed through the process as if they were one person. Obviously, a thorough examination of the married couple must be made by the bankruptcy attorney to insure that a joint bankruptcy filing is proper. There may be situations where only one of the married parties is in debt and in that case that individual is permitted to file a bankruptcy proceeding on their own. Because bankruptcies are reported by social security number, the credit rating of the other married party is unaffected by their spouses bankruptcy filing.

Although most people believe that a bankruptcy is reported on their credit rating for seven years, the fact is that bankruptcy is reported for ten years on an individuals credit report and that has been so for the past 35 years. However, the impact of bankruptcy on ones credit rating has diminished steadily over the past 25 years. Debtors who filed bankruptcy proceedings in the 1980s were generally prevented from obtaining credit for the full ten years.

However, with the advent of credit cards and the enormous increase in bankruptcy filings over the last 20 years, creditors have become accustomed to dealing with individuals with bankruptcies in their recent history. Thus, presently,125 individuals who file bankruptcy proceedings do not have much difficulty obtaining credit within 18 to 24 months of their bankruptcy filing. Obviously, this requires that the debtor avoid any further financial defaults after the filing of their bankruptcy petition. Assuming the debtor has steady employment and no derogatory information entered on their credit rating subsequent to the filing of the bankruptcy proceeding, the average debtor should not anticipate having difficulty obtaining credit for approximately two years after filing bankruptcy.

Although discharging income tax liability can be a complicated issue in a bankruptcy proceeding, the general rule of thumb would be that income tax liability that has been assessed and outstanding for a period of more than three years is generally dischargeable in a bankruptcy proceeding. Obviously, there is a requirement that the income tax returns be filed in a timely fashion, without any fraudulent conduct, and simply not paid by the individual at the time the original tax obligation was due and payable.

Financial Recovery After Bankruptcy

During the 1960s and 1970s, an individual in need of a line of credit was required to sit down with the local banker and fill out an application. That process largely disappeared in the 1980s and 1990s with the advent with the Mastercard and Visa systems. The result was an enormous increase in the amounts of debt and thus an increase in bankruptcies filed in this country. Prior to the early 1980s, the total number of bankruptcies filed in the United States was approximately 200,000. With the introduction of the bank credit card system, bankruptcy filings in the United States now approach 1,300,000 per year. For the twelve-month period ending in June 2012, Massachusetts alone, saw 18,799 bankruptcy filings in district courts across the state.

As a result of this dramatic increase in cases filed, the stigma attached to bankruptcy proceedings has largely disappeared. Debtors who file bankruptcy proceedings in the last several years have discovered that, after perhaps 12 to 18 months, they begin to receive unsolicited credit cards through the mail.