Personal bankruptcy is a legal way to give people with
overwhelming debt a fresh financial start. Many people do not realize
that there are five types of bankruptcy options available under the U.S.
Bankruptcy Code; however, for most consumers there are really only two
viable options; Chapter 7 and Chapter 13 bankruptcy.
Chapter 7,
bankruptcy is entitled Liquidation: In a Chapter 7 bankruptcy, a
court-supervised procedure occurs during which a court-appointed trustee
collects the assets of the debtor’s estate, converts them to cash for
repayment, and makes all necessary distributions to the debtor’s
creditors; however this is all done within the debtor’s right to retain
certain exempt property. Traditionally, there is little or no nonexempt
property in a chapter 7 bankruptcy. Due to this fact, there may not be
an actual liquidation of the debtor’s assets. In this case, it is called
a “no-asset bankruptcy.” It is important to realize that a creditor
that is trying to collect on an unsecured claim will only get a
distribution from the bankruptcy estate if the case is an “asset
bankruptcy” and the creditor can provide proof of their claim with the
bankruptcy court. In almost all chapter 7 bankruptcies, the debtor will
be grated a discharge that releases them of personal liability for most
dischargeable debts. The entire process normally takes just a few months
from the time the bankruptcy petition is filed.
Chapter 13,
bankruptcy is entitled Adjustment of Debts of an Individual with Regular
Income: A chapter 13 bankruptcy is traditionally used for people who
have a regular source of income or a full-time job. For many people,
chapter 13 is preferable to chapter 7 because it allows the debtor to
keep some assets. A chapter 13 bankruptcy allows the debtor to repay
creditors over time. This time traditionally varies from three to five
years. This type of repayment proposal takes place at a confirmation
hearing. During this confirmation hearing, the court will either
approve or disapprove the debtor’s repayment plan. This decision largely
depends on whether the repayment plan meets the Bankruptcy Code’s
requirements for confirmation. In a Chapter 13 bankruptcy the debtor is
usually able to remain in control of their possession and property while
making payments to creditors; however, payments are made via a court
trustee. Unlike chapter 7 bankruptcy, the debtor does not receive an
immediate discharge of their debts. Under chapter 13 bankruptcy, the
debtor must complete the repayment plan before the discharge is granted;
however, the debtor is protected from lawsuits, garnishments, and other
creditor action while the plan is in effect.
It is important to
remain cognizant of the fact that not all debts are discharged under
bankruptcy. The debts that are able to be discharged will vary under
each chapter of the Bankruptcy Code. However, the most common types of
non-dischargeable debts are tax claims, debts that are not presented by
the debtor to the court while filing for bankruptcy, debts for spousal
or child support or alimony, debts to governmental units for fines and
penalties owed to government entities, debts for personal injury caused
by the debtor’s operation of a motor vehicle while driving intoxicated,
debts for willful and malicious injuries to person or property, debts
for government funded or guaranteed educational loans, and debts for
certain condominium or cooperative housing fees.
In order to file for bankruptcy, you must file a
petition in federal bankruptcy court. You must file a statement of
assets and liabilities as well as schedules listing of your creditors.
Once you have finished filing bankruptcy, your creditors can no longer
take action against you to collect discharged debts.
Negative Aspects of Bankruptcy
In chapter 13 bankruptcies, you may end up paying back 50% or more
of your current debts. Additionally, if you miss a regularly scheduled
payment at anytime during your chapter 13 bankruptcy repayment plan, you
could end up in violation of the court and forced to repay all the
debt!
One of the most difficult parts of bankruptcy is learning to
live with the fact that filing bankruptcy limits your personal spending
to items that the court considers absolutely necessary. In most cases,
debtors do not complete their chapter 13 bankruptcy repayment plans.
Most people filing chapter 13 bankruptcies think they will be able to
complete their repayment plan; however, only about a third of them
actually do. Additionally, chapter 7 bankruptcy may stay on your credit
longer than a chapter 13 bankruptcy. This time ranges from 7-10 years
for most people. Many people do not realize that if you own a home with a
sizable amount of equity, have a fair amount of assets to protect, or
have co-signers on a loan, you most likely will not be able to file
chapter 7 bankruptcy under current law. Now that the new bankruptcy
legislation has passed, it will be even more difficult to file for
bankruptcy.
Many people think that filing bankruptcy is the silver
bullet that will fix all of their debt and credit related problems;
however, filing bankruptcy is the worst thing you can do to your credit.
Most lending institutions will consider your bankruptcy when evaluating
you for a personal loan even after the bankruptcy has expired.
Qualifying for a loan after filing for bankruptcy can be very difficult
and could cost you considerably more than a person that has not filed
for bankruptcy.
It is understood that some situations will require
you to file for bankruptcy. However, you should avoid bankruptcy if at
all possible. A good debt settlement company can help eliminate most, if
not all, of your unsecured debt so that you do not have to file for
bankruptcy. If you require additional information on the subject of
bankruptcy you may want to contact a bankruptcy attorney in your area.