Financial difficulties can be overwhelming. Considering bankruptcy is a challenging decision. This article provides a comprehensive overview of the available bankruptcy options in Maryland, the processes involved, and the implications of each choice. Our goal is to equip you with the knowledge necessary to make an informed decision about your financial future to find a path to get back to where you should be.
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Bankruptcy in Maryland
Bankruptcy is a legal process that allows individuals or businesses facing financial difficulties to eliminate or restructure their debts. In the United States, bankruptcy laws are governed by federal law, specifically Title 11 of the United States Code (the Bankruptcy Code). However, individual states, including Maryland, have specific laws and exemptions that come into play when filing for bankruptcy.
Types of Bankruptcy in Maryland
Two primary types of bankruptcy are available to individuals in Maryland: Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy: Liquidation
Chapter 7 bankruptcy, also known as “liquidation” or “straight bankruptcy,” allows for the discharge of unsecured debts, such as credit card debt, medical bills, and personal loans. In a Chapter 7 bankruptcy, a trustee is appointed to collect and sell non-exempt assets to pay creditors.
Eligibility for Chapter 7 bankruptcy depends on your income, family size, and the “means test.” The means test compares your income to the median income for a household of your size in Maryland. If your income is below the median, you are likely eligible to file for Chapter 7 bankruptcy. If your income exceeds the median, you may still qualify, but the means test becomes more complex, and you should consult a bankruptcy attorney for guidance.
The process of filing for Chapter 7 bankruptcy involves the following steps:
- Credit Counseling: Before filing for bankruptcy, you must complete a credit counseling course from an approved provider. These are online courses that only take 20 minutes to complete.
- Filing the Petition: The bankruptcy process begins when you file a petition with the bankruptcy court. This petition includes detailed information about your finances, including income, expenses, assets, and debts.
- Automatic Stay: Once the petition is filed, an automatic stay goes into effect, temporarily stopping creditors from taking collection actions against you. So if you have lawsuits, wage garnishments, or foreclosure proceeds against you, this puts the legal pressures you are facing on hold.
- Trustee Appointment: The court will appoint a bankruptcy trustee to oversee your case. The trustee will review your financial information, and determine if there are any non-exempt assets to liquidate. In 98% of Chapter 7 bankruptcies there are no assets and the trustee simply approves the case.
- Meeting of Creditors: Although it is called a meeting of creditors, it is usually just a meeting with you and the bankruptcy trustee (and your lawyer). Creditors almost never appear or attend these meetings because there is very little they can do to impact the outcome of your bankruptcy.
- Discharge of Debts: This is the part that matters most. It is why you file for bankruptcy in the first place. If the trustee determines that you have no non-exempt assets to liquidate, your remaining unsecured debts will be discharged, meaning you are no longer legally obligated to pay them. Some debts, such as student loans, child support, and certain tax debts, cannot be discharged in bankruptcy.
- Financial Education Course: Before your debts can be discharged, you must complete a financial education course from an approved provider. Again, this course is done online and takes less than 30 minutes.
It is important to note that filing for Chapter 7 bankruptcy will remain on your credit report for 10 years. This can make it difficult to obtain future credit, loans, or housing. Furthermore, bankruptcy does not guarantee that all your debts will be discharged, and you may still be responsible for certain types of debts, as mentioned earlier.
Chapter 13 Bankruptcy: Reorganization
Chapter 13 bankruptcy, also known as “reorganization” or “wage earner’s bankruptcy,” allows individuals with regular income to develop a plan to repay all or a portion of their debts over a three-to-five-year period. The repayment plan is based on your disposable income, the amount left after subtracting necessary expenses from your monthly income.
Chapter 13 bankruptcy may be appropriate if you want to prevent foreclosure on your home, have non-exempt assets you wish to keep, or do not qualify for Chapter 7 bankruptcy due to the means test.
Here is an overview of Chapter 11 bankruptcy in Maryland:
- Eligibility: Both businesses and individuals can file for Chapter 11 bankruptcy. However, individuals typically file for Chapter 7 or Chapter 13 bankruptcy, as they are more straightforward and affordable options. Chapter 11 most suits businesses and individuals with substantial assets and complex debt structures.
- Purpose: The main goal of Chapter 11 bankruptcy is to allow the debtor to restructure their debts and continue operating while repaying creditors over a specific period. It allows the debtor to renegotiate contracts, leases, and payment terms with creditors while maintaining control of their assets and operations.
- Filing process: To initiate the process, the debtor must file a petition with the U.S. Bankruptcy Court for the District of Maryland. They must provide detailed information about their financial situation, including assets, liabilities, income, and expenses. Additionally, they must pay a filing fee and administrative fees.
- Automatic stay: Upon filing, an automatic stay goes into effect, temporarily halting all collection actions, foreclosures, and repossessions. This provides the debtor with breathing room to develop a reorganization plan.
- Reorganization plan: The debtor has the exclusive right to propose a reorganization plan within the first 120 days of filing. This plan outlines how they intend to repay their debts over a specific period, typically 3 to 5 years. Creditors, the U.S. Trustee, and the bankruptcy court must approve the plan.
- Disclosure statement: Along with the reorganization plan, the debtor must submit a disclosure statement that provides sufficient information for creditors to evaluate the plan. The bankruptcy court must approve the disclosure statement before creditors can vote on the plan.
- Confirmation: If the court confirms the plan, the debtor will begin making payments according to the agreed-upon terms. They must also comply with other obligations, such as reporting financial information to the U.S. Trustee.
- Discharge: Upon completing the reorganization plan, the debtor receives a discharge of any remaining unpaid debts. But not all debts are dischargeable. Non-dischargeable debts include student loans, taxes, and child support.
Maryland Bankruptcy Exemptions
Bankruptcy law is administered by federal courts. But there are Maryland-specific rules. When filing for bankruptcy in Maryland, certain property is exempt from being sold to pay creditors. These exemptions are designed to protect basic assets needed for daily living.
Some of the most common Maryland bankruptcy exemptions include:
- Homestead Exemption: You can protect up to $25,150 of equity in your primary residence that the creditor cannot touch.
- Personal Property Exemptions: You can protect various personal property items, such as clothing, household goods, appliances, and furniture, up to a certain value.
- Motor Vehicle Exemption: You can protect up to $3,775 of equity in a motor vehicle.
- Retirement Accounts: Qualified retirement accounts, including 401(k)s, 403(b)s, IRAs, and pension plans, are generally exempt.
- Wildcard Exemption: Maryland offers a wildcard exemption of up to $6,000, which can be applied to any property not covered by other exemptions.