McLaughlin & Quinn, LLC - Providence | Boston

If several of the following apply in your situation, you might consider Bankruptcy:

• Your wages have been garnished or your bank account has been attached
• Most of your debts are unsecured debts like credit card bills, hospital or doctor's bills, etc.
• Your total debt, not including your car or house loan, is more than you could pay, even over five or more years
• Collection agencies are calling you at home and/or at work
• Your payments are more than 30 days behind on more than one bill
• There are lawsuits pending against you
• You have high medical bills not covered by insurance
• You owe the IRS or State income taxes that you are unable to currently pay
• You have few assets
• You have little or no savings
• You have had property repossessed (such as a vehicle)

People who have had their wages garnished can especially benefit from a Bankruptcy because the Bankruptcy will stop the garnishment and may even help you get some of your pay back.

There are four types or "Chapters" of Bankruptcy:

• Chapter 7 (a liquidation or "straight" Bankruptcy for individuals or businesses),
• Chapter 13 (a payment plan for individuals with a regular source of income),
• Chapter 12 (a payment plan for family farmers and fishermen), and
• Chapter 11 (a more complex reorganization case used primarily by business debtors and sometimes by individuals with substantial debts and assets).

The two most important types of cases for consumers are Chapter 7 and Chapter 13. In both types of Bankruptcy cases, most creditors must immediately stop efforts to collect debts after your case is filed. This protection is called the "Automatic Stay."

Chapter 7

Chapter 7 is a liquidation or straight Bankruptcy.  In most cases, the debtor does not have any assets over and above what the law allows the debtor to keep (exempt property). Therefore, in most Chapter 7 cases, the debtor does not give up any property. In some cases, debtors may give up certain (non-exempt) property that they own at the time they file the Bankruptcy case.  A trustee sells or liquidates the non-exempt property and uses the sale proceeds to pay a dividend to creditors.

About 90 days after a Chapter 7 case is filed, most debtors receive a discharge of their dischargeable debts. This means the debts are legally extinguished.  Some debts, by their nature are not dischargeable and they do not go away.  Non-dischargeable debts must be paid after the case. Examples include past-due child support payments, certain taxes and student loans. Secured obligations for which the debtor has pledged collateral for the loan (such as cars, homes and household goods) must also be paid after Bankruptcy unless the debtor surrenders the collateral to the secured creditor.

Chapter 13

Chapter 13 is very different from Chapter 7. Debtors pay some of their debts over time from current income, pursuant to a count-approved plan. Chapter 13 can be used to allow a homeowner behind on their mortgage payments to keep their house by paying the past due payments over time, while keeping their post Bankruptcy mortgage payments current. Chapter 13 is also available to debtors who do not qualify for Chapter 7. There are limitations on the amount of secured and unsecured debts that a Chapter 13 debtor may have.  These debt limitation amounts change periodically.

Debtors in Chapter 13 usually keep all of their property, whether or not it is exempt, but they must make current payments on all of their secured loans and regular monthly expenses. The debtor also proposes a payment plan (called a Chapter 13 plan) that the Court must approve. Once approved, the plan payments are made to a trustee, who distributes the payments to creditors.

Chapter 7

For cases filed after October 17, 2005, individual debtors with primarily consumer debts who want to file a case under Chapter 7 will have their finances examined to determine if they can afford to pay something to their creditors. If they can, based on a set formula know as the "Means Test," they will not be eligible to file a Chapter 7.

If they want to file a Bankruptcy, they will need to file a Chapter 13. The Means Test is designed to force people who can afford to pay some of their creditors to do so rather than discharging all their debts in a Chapter 7. The Means Test is a complicated formula that cannot be explained here as each case is different.

Chapter 13

There are two main requirements for eligibility to file Chapter 13. First, the debtor must have regular income, although this need not be from wages - regular benefit payments or rental income qualifies. Second, the debtor must not have secured and unsecured debts over a certain dollar amount. The debt limits go up periodically and should be reviewed with your Bankruptcy counsel to determine your eligibility.

Yes. By filing a Bankruptcy petition, an injunction against all collection efforts by creditors immediately comes into place. This injunction, called the "Automatic Stay," requires creditors to stop calling, sending letters or suing you over your debts. In other words, all creditors and collection agencies are required to suspend collection activity and leave you alone.  This includes the IRS or State taxing authorities.

A Discharge is an order from the Bankruptcy court that wipes out all dischargeable debts. If a debt is discharged, a debtor no longer has a legal obligation to pay the debt and a creditor can no longer make any effort to force the debtor to repay. Beware though, because if a debtor has property that is collateral for a loan (such as a home mortgage or auto loan), the creditor may still be able to repossess the collateral after Bankruptcy.

It is important to note that in many cases, not all debts will be discharged in bankruptcy.  First, a bankruptcy case only discharges debts that the debtor owed and scheduled at the time the case was filed. Debts incurred after the case is filed are not discharged.

Debts that are not discharged include debts for certain taxes, certain unscheduled debts (creditors with debts not listed in your schedules), alimony, maintenance or support debts, pre-petition fines or restitution, debts for injury or death caused by a debtor's use of drugs or alcohol, most student loans and certain condo or co-op fees.

Other debts that may not be discharged include debts incurred through fraud or by willful or malicious actions of the debtor. If the creditor does not ask the court to rule on these debts, they will be discharged.

There are alternatives to filing for Bankruptcy depending on your financial situation.  Out-of-court settlements can be worked out with some creditors to settle your debts for less.  Consumer credit counseling agencies can often assist with debt consolidation plans. Make sure that if the agencies are charging fees, that they are reasonable. You should also make sure that all of your creditors will participate in the debt consolidation plan because some creditors will not, for example, the IRS, student loans and some banks or credit card companies.

A Financial Workout is a term that we use to describe any legal services designed to help you or your business deal with difficult financial situations.  A financial workout may mean negotiating with creditors, representing you in court if you are being sued or helping you implement a business or personal plan to settle with your creditors.  Financial Workouts may also involve filing for Bankruptcy if and when the time is right.  All Financial Workouts have the goal of protecting your business and personal assets from creditors while assisting you to reorganize and get your finances back on track.

Receivership is a commonly used practice in Rhode Island to liquidate the assets of a troubled business under the supervision of the Superior Court. Receiverships are state court proceedings that differ from Chapter 7 Bankruptcy cases in many procedural and practical ways. In a typical Receivership, the Superior Court appoints a Receiver to act as an agent of the court to liquidate the assets of a Corporation, Partnership, Limited Liability Company or Limited Liability Partnership.  Once the assets are liquidated, creditors are paid from the sale proceeds.

Individuals are not eligible for Receivership and there is no discharge of debt as there is in Bankruptcy. Receivers are also appointed is cases involving shareholder, partner or member disputes where management has become deadlocked.

The choice to file receivership or bankruptcy for your business is an important financial decision that requires advice from experienced legal counsel.