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What is Bankruptcy?
Understanding bankruptcy laws and the foreclosure process is crucial for both homeowners and lenders. This understanding can prevent unnecessary distress, save resources, and provide opportunities for viable solutions. The foreclosure process in the state of Georgia, one of the many U.S. states that practices nonjudicial foreclosure, meaning foreclosure without the intervention of the court.
Bankruptcy is a federal legal proceeding that can provide relief for individuals or businesses facing significant financial difficulties. In the state of Georgia, as in other states, bankruptcy can offer a fresh start through either the discharge of certain debts or the repayment of debt through the bankruptcy process. Here's a detailed look at this process:
Bankruptcy is designed to help debtors who are unable to pay their existing debts. It begins with the filing of a petition. The bankruptcy includes all debts prior to the petition, known as prepetition debts. Once a debtor files a bankruptcy petition, an automatic stay is put in place, preventing creditors from taking actions to collect debts from the debtor.
However, bankruptcy does not stop the Georgia Department of Revenue from conducting an audit to determine a tax liability, issuing a notice of tax deficiency, demanding tax returns, making an assessment for any tax and issuing a notice and demand for payment of such an assessment, issuing refunds on tax returns and offsetting those refunds against assessed taxes when certain conditions apply, and offsetting tax refunds to tax debt under certain conditions.
Georgia Foreclosure Laws
Georgia operates under title theory, meaning that the property title remains in trust until the loan is fully paid off. If the borrower defaults on their mortgage payments, the lender can move to sell the property in question, thanks to the "power of sale" clause in the mortgage agreement. The process can be swift because Georgia law does not mandate a foreclosure redemption period — a post-sale timeframe when the borrower can reclaim their property by making full payment.
While bankruptcy can provide a fresh start, it's not without its consequences. Bankruptcy can significantly impact a debtor's credit score and remain on their credit report for seven to ten years, depending on the type of bankruptcy.
Additionally, not all debts are dischargeable in bankruptcy, including most student loans, child support, alimony, and certain tax debts.
Considerations for Bankruptcy
Types of Bankruptcy
There are several types of bankruptcy, but the most common are Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Also known as "liquidation bankruptcy," Chapter 7 involves the sale of a debtor's non-exempt assets by a trustee. The proceeds are used to pay creditors, and any remaining unsecured debts are usually discharged.
Chapter 13 Bankruptcy
This type of bankruptcy, also known as a "wage earner's plan," enables individuals with regular income to develop a plan to repay all or part of their debts over three to five years.
Chapter 7 Bankruptcy in Georgia
Chapter 7 bankruptcy, is the most common type of consumer bankruptcy filed in the U.S. It's the quickest way to get rid of your unsecured debt. In Georgia, most Chapter 7 bankruptcy cases are closed and discharged within 4 to 6 months, which means that your unsecured debt can be liquidated in a few months and you can begin to live your life debt-free.
However, the trustee of the bankruptcy can sell your non-exempt assets to repay your creditors. In Georgia, the homestead exemption allows you to exempt up to $21,500 in real property. If the equity in your home exceeds this amount, the trustee could sell your home.
Qualifying for Chapter 7 Bankruptcy
Not everyone is eligible to file for Chapter 7 bankruptcy. Under the U.S. Bankruptcy Code, individuals must pass a "means test" to qualify. The means test looks at your income, expenses, and the size of your family to determine your disposable income. If your income is below the median for a household of your size in your state, you pass the test and can file for Chapter 7 bankruptcy.
If your income is above the median, you might still qualify depending on your disposable income after certain allowed expenses. If you don't qualify for Chapter 7, you may be able to file under Chapter 13 instead, which involves a debt repayment plan.
The Process
Filing the Petition:
The process begins with filing a petition with the bankruptcy court. Along with the petition, you will need to file schedules of assets and liabilities, a schedule of current income and expenditures, a schedule of executory contracts and unexpired leases, and a statement of financial affairs.
Automatic Stay:
Once the petition is filed, an automatic stay is issued, which prevents creditors from taking actions to collect debts from you.
341 Meeting:
After the petition is filed, a case trustee will call a 341 meeting, inviting your creditors to object to the discharge of your debt. Even though creditors rarely show up, you should be prepared for this meeting.
Liquidation:
The trustee is allowed to sell assets to pay back your creditors. However, this rarely happens. In Georgia, you are allowed to keep up to $5,000 of personal property and $5,000 worth of vehicles.
Discharge:
After the process, most of your remaining unsecured debts are discharged, which means you are no longer legally required to pay them.
Considerations
Chapter 7 bankruptcy can provide a fresh start, but it's not without its consequences. It can significantly impact your credit score and remain on your credit report for ten years. Additionally, not all debts are dischargeable in bankruptcy, including most student loans, child support, alimony, and certain tax debts.
Exemptions in Chapter 7 Bankruptcy:
Exemptions play a crucial role in Chapter 7 bankruptcy. They determine what property (like a home, car, retirement accounts, personal belongings) you can keep. In Georgia, for instance, you can use the Georgia state exemptions to protect some equity in your home, a modest car, necessary clothing, and some household furnishings.
It's important to note that secured creditors may have the right to seize property if the loan isn't being paid, despite bankruptcy proceedings.
Discharge in Chapter 7 Bankruptcy:
After your assets have been dealt with and the trustee's work is finished, the court will grant a discharge, generally around 60 to 90 days after the 341 meeting. The discharge eliminates debts, but it's important to understand that not all debts are dischargeable. Non-dischargeable debts often include certain types of tax debts, child support, alimony, and student loans.
Chapter 13 bankruptcy,
Qualifying for Chapter 13 Bankruptcy
To qualify for Chapter 13 bankruptcy, a debtor must have a regular income and their unsecured and secured debts must fall within the limits set by the bankruptcy code. As of 2021, these are $419,275 for unsecured debts (such as credit card debt, personal loans, and medical bills) and $1,257,850 for secured debts (such as mortgages and car loans). These amounts are periodically adjusted for inflation.
Chapter 13 is typically chosen by those who have valuable assets they wish to protect, and it's particularly helpful for individuals who have consistent income but have fallen behind on mortgage payments, car loans, or other debts.
The Process
Filing the Petition:
Similar to Chapter 7, you begin by filing a petition with the bankruptcy court. The same schedules and statements are required.
Repayment Plan:
You propose a repayment plan to make installments to creditors over three to five years. If your current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period. If your income is greater than the state median, the plan generally must be for five years.
Automatic Stay:
Once the petition is filed, an automatic stay is issued, which prevents creditors from taking actions to collect debts from you.
341 Meeting:
A case trustee will call a 341 meeting, inviting your creditors to object to the repayment plan.
Repayment:
You make payments according to the plan to the trustee, who then distributes payments to creditors.
Discharge:
After completing the repayment plan, most of your remaining unsecured debts are discharged.
Considerations
Chapter 13 bankruptcy allows individuals to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. However, they must still make all mortgage payments that come due during the Chapter 13 plan on time.
Chapter 13 Bankruptcy in Georgia
Advantages of Chapter 13
Chapter 13 offers individuals a number of advantages over liquidation under Chapter 7. Perhaps most significantly, Chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still make all mortgage payments that come due during the Chapter 13 plan on time.
Another advantage of Chapter 13 is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the Chapter 13 plan. Doing this may lower the payments. Chapter 13 also has a special provision that protects third parties who are liable with the debtor on "consumer debts." This provision may protect co-signers.
Seeking Legal Advice
Bankruptcy laws and procedures can be complex and vary by state. Individuals considering bankruptcy should consult with a legal professional to understand their rights and options. Legal professionals can provide advice tailored to the individual's specific situation and help them navigate the bankruptcy process.
In conclusion, bankruptcy is a serious decision that can have lasting impacts. Individuals in Georgia facing potential bankruptcy should explore all available options and seek professional advice to make the best decision for their situation.
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