QUESTION:  I WANT TO DECLARE BANKRUPTCY TO ELIMINATE ALL MY DEBT.  DOES DECLARING BANKRUPTCY AUTOMATICALLY ELIMINATE ALL MY DEBT, OR DO I STILL NEED TO PAY BACK SOME OF IT?

This is a very common question we receive from members of the Korean community. The short answer to this question is:  DEPENDS ON YOUR INCOME.  In essence, by filing for bankruptcy protection, you are saying that you simply cannot afford to pay back all your debt, and that you need help in either eliminating it entirely, or coming to some sort of manageable payment plan.  Prior to the bankruptcy law changes of 2005, generally, people had a choice of either filing bankruptcy under either Chapter 7 or 13, and it was exactly that – it was the choice of the debtor.  Post October 2005, the new bankruptcy laws make it a little more stringent on whether you can completely eliminate all your debt, without having to ever pay it back.  The essence of the new bankruptcy laws revolves around the idea that if you have regular income and you can pay SOME of your creditors back, you should be made to.

To understand the two primary bankruptcy chapters applicable to consumers, below are key summaries:

Chapter 7 - entitled Liquidation, contemplates an orderly, court-supervised procedure by which a trustee takes over the assets of the debtor's estate, reduces them to cash, and makes distributions to creditors, subject to the debtor's right to retain certain exempt property and the rights of secured creditors.  Because there is usually little or no nonexempt property in most chapter 7 cases, there may not be an actual liquidation of the debtor's assets. These cases are called "no-asset cases." A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court. In most chapter 7 cases, if the debtor is an individual, he or she receives a discharge that releases him or her from personal liability for certain dischargeable debts. The debtor normally receives a discharge just a few months after the petition is filed. Amendments to the Bankruptcy Code enacted in to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a "means test" to determine whether individual consumer debtors qualify for relief under chapter 7. If such a debtor's income is in excess of certain thresholds, the debtor may not be eligible for chapter 7 relief.  For example, if a Debtor is a California resident, is married and has one child, this income threshold is approximately $64,700 per year (actual income threshold used by the Bankruptcy Court may vary).  This means that if the debtor is married and his household consists of three people (himself, wife and one child), he will automatically be eligible to choose Chapter 7 if his annual income is less than the above amount.  If the income is in excess of the above amount, the debtor will have to take the MEANS TEST first.  If the debtor does not qualify for Chapter 7 under the test, then he/she will be forced to file under Chapter 13.

Chapter 13, entitled Adjustment of Debts of an Individual With Regular Income, is designed for an individual debtor who has a regular source of income. Chapter 13 is often preferable to chapter 7 because it enables the debtor to keep a valuable asset, such as a house, and because it allows the debtor to propose a "plan" to repay creditors over time – usually three to five years. Chapter 13 is also used by consumer debtors who do not qualify for chapter 7 relief under the means test. At a confirmation hearing, the court either approves or disapproves the debtor's repayment plan, depending on whether it meets the Bankruptcy Code's requirements for confirmation. Chapter 13 is very different from chapter 7 since the chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor's anticipated income over the life of the plan. Unlike chapter 7, the debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is received. The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. The discharge is also somewhat broader (i.e., more debts are eliminated) under chapter 13 than the discharge under chapter 7.

If you are considering bankruptcy, please contact the Hope Law Group so that we may help you navigate through the complex new laws of bankruptcy.

HOPE LAW GROUP (213) 255-5753