Bankruptcy: When Debt Becomes Excessive and Unmanageable

Bankruptcy is a tough decision, and one that can come about for many reasons, with health care costs being one of the most common. Bankruptcy has both benefits and consequences that need to be weighed carefully, and it is important to find out as much as possible, especially in light of the new laws and regulations, before choosing bankruptcy as a means of dealing with debt.

Bankruptcy is a means of dealing with overwhelming debt in which the federal court system is used to resolve debt, typically through an initial selling off of assets, which are then divided among lenders, paying a portion of the debts and canceling the remaining amount or by restructuring or reducing the debt and setting in motion a repayment plan. When it comes to the average individual, the most common types of personal bankruptcy filed are Chapter 7 and Chapter 13. You may have many questions, and in this piece we discuss the basics.

How Chapter 7 and Chapter 13 Work

Chapter 7 bankruptcy requires that assets, with the exception of a few basic assets that are protected by law, to be sold and the money divided amongst creditors, who agree to the reduced amount, as recouping some is better than none. Then, the remaining debt, except for those that legally cannot be, such as child support, is eliminated and the debtor is no longer responsible for the outstanding amounts.

Chapter 13 bankruptcy operates a bit differently. The court assists in the restructuring of the debts and then, after means and income are accessed and proved, a repayment plan is developed. Usually, these plans are set for 3 to 5 years. The primary benefit to this plan is that it is possible to come out of it with your property.

While filing bankruptcy does have a negative effect on the credit rating, it is not as bad as it used to be, both because filing bankruptcy has become more common and because it is usually a once in a lifetime event. So, remember – if you must choose bankruptcy, it is not the end of the world, credit-wise.

Determining Whether to File Chapter 7 or Chapter 13

The type of bankruptcy that you can file is determined by specific regulations, which can vary from state to state. For example, you cannot file for Chapter 13 unless you have an income that can be determined to be steady and sufficient enough to abide by a court ordered repayment plan.

Recent changes in the law have had a significant affect on the process of bankruptcy, as well as the type of personal bankruptcy filings that you are eligible for. The income guidelines and requirements have become tougher. For example, some of those who may have in the past been eligible for debt elimination through Chapter 7 are now allowed only Chapter 13. Credit counseling is now one of the pre-filing requirements.

Credit counseling is a good idea anyway, and can offer an attractive alternative to filing for bankruptcy. Among other things, a credit counselor can help you negotiate a reduction of interest rates with your lenders, which will reduce the total amount owed, and they can also help to set up a repayment plan that will be satisfactory to the lenders and within your means to achieve. However, be careful of paying too much for credit counseling, as many places offer such services for free and many of the things that a credit counseling service will do for you, with a little knowledge and confidence, you can do for yourself.

When it comes time to choose a debt resolution, your best bet is always to study your options carefully, including bankruptcy, especially with the recent changes in bankruptcy law. In some circumstances, bankruptcy does make sense and can offer valuable protections as you make a new start towards a more healthy financial future.

Frequently Asked Questions about Bankruptcy

Will I lose everything if I file for bankruptcy? No. Some of your assets are exempt. Both the federal government and the individual states have exemption laws. Some states allow debtors to choose between the two, while the other states require debtors to follow the state exemption laws. In states where you have a choice, your decision should turn on which set of rules allows you to keep the most, or most important, assets. Exemptions generally include amounts for your homestead (i.e., home equity), motor vehicles, life insurance, jewelry, tools of trade, and household goods, as well as certain retirement and education savings.

Can I get rid of all of my debts by filing bankruptcy? Probably not. Certain debts cannot be discharged in bankruptcy. A discharge releases you from legal liability for the debt. Liens, however, remain; secured creditors are still able to get property back. Non-dischargeable debts remain after the bankruptcy case ends, and include (under Chapter 7) most tax debts, most student loans, domestic support obligations, and debts incurred in connection with fraud, larceny, and driving while intoxicated.

Do I need to use a lawyer? Not necessarily. You can file for bankruptcy yourself (this is known as filing “pro se”) or with the help of a petition preparer. However, bankruptcy can be a complex process, and filings must be precise. An experienced attorney can guide you through the process, and advise you about the potential consequences of your actions. Regardless of the fee, an attorney can help you save time, money, and stress.

Will I have to go to court? Yes. You are required to attend at least one meeting at the court shortly after you file (between 20 and 40 days). This is known as a Section 341 creditors meeting or first creditors meeting, and typically lasts less than 30 minutes. The purpose of the meeting is to give your creditors and the trustee an opportunity to question you about your financial affairs. However, creditors are not required to attend and often do not. You are required to answer any questions under oath.

Will my utilities be cut off? No. Public utilities are not allowed to cut off your service because you filed bankruptcy. They can, however, require you to pay a deposit for future service, and they can terminate service if you fail to make current payments after filing.

Will my creditors stop harassing me? Yes. Once a petition is filed, an automatic stay goes into effect. While the stay is in effect, creditors must not engage in collection activities without permission from the bankruptcy court. Lawsuits, foreclosures, repossession efforts, wage garnishments, dunning letters, and bill collector calls all should stop.

Will my credit be affected? Yes. The bankruptcy will appear on your credit report for 10 years. However, you will likely receive unsolicited credit card offers, and you should still be able to get credit, though it may be at a higher rate of interest or require a cosigner. Although the bankruptcy itself may appear on your credit report for up to 10 years, your credit scores will gradually improve over time.

Can I keep my credit cards? Don’t count on it, but it ultimately depends on the creditor. Your creditors will be notified of your filing, and it will be up to each of them to make a determination about your account. Some may allow you to keep your credit card if you sign a reaffirmation agreement; they may further opt to reduce your credit limit if they permit you to keep the account. Be very careful with any and all accounts that you are allowed to keep, particularly if excessive credit card debt led you to this point, because you’ll be unable to file bankruptcy again for several years.

Will everyone know that I filed for bankruptcy? Not likely, but some people may find out. Your bankruptcy case is a matter of public record and it can be reviewed by anyone making an inquiry at the clerk’s office in the bankruptcy court where you filed.


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