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Learn About Bankruptcy

Bankruptcy is a process in which consumers and businesses can eliminate or repay some or all of their debts under the protection of the federal bankruptcy court. For the most part, bankruptcies can be divided into two types -- liquidation and reorganization.

Bankruptcy could carry a social stigma and thus may be considered an option of last resort. It generally requires a full, public disclosure of all your assets and liabilities. It harms your credit greatly and remains on your credit report for up to 10 years. Also, the costs for filing for bankruptcy are not insignificant. Add to this, the kind of bankruptcy that can wipe out most of your debts is more difficult to qualify for, since the bankruptcy laws were reformed in 2005.

Still, there are times when filing for bankruptcy could be the best available option, especially if you have already tried some of the alternatives to bankruptcy, such as credit counseling and debt settlement, but could not maintain the monthly payments that those programs require. It also makes sense to seriously consider bankruptcy as an option if you have serious debts and are able to qualify for a Chapter 7 bankruptcy under the new, stricter requirements.

New Bankruptcy Requirements: Means Test, Median Income, and Counseling

Chapter 7 Bankruptcy & Chapter 13 Bankruptcy

Chapter 7 is also called liquidation bankruptcy. All non-exempt assets are sold off and the money used to pay the debtor’s unsecured commercial creditors. The Debtor's obligations are then considered paid off. The debtor may choose whether they want to reaffirm their mortgage and car loans, in which case those assets are not included in the bankruptcy estate. Not every debt may be discharged under Chapter 7.

Chapter 13 is also called wage-earner's bankruptcy. This is essentially a court ordered debt management program where the court appointed trustee creates a budget that will allow the debtor to pay back all of their debt within 5 years. The basic principle acting behind a Chapter 13 Bankruptcy is that the debtor then makes their payments to their creditors through the trustee until all of their debts have been repaid.

Before you can proceed with a Chapter 7 bankruptcy, there are some preliminary hurdles you must pass. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) made it more difficult to qualify for a Chapter 7 bankruptcy, especially if your income is above the median income level www.justice.gov/ust/eo/bapcpa/meanstesting.htm for your state and for a household your size. Now, in order to successfully discharge your debts in a Chapter 7, you are required to pass a "means test." The means test will examine your income and certain of your living expenses, in order to determine if you have the means to make reasonable payments to your creditors or not.

Under the new bankruptcy means test, if your disposable income is determined to be above a certain level, then you may not be eligible for Chapter 7 relief, and instead be forced to file for a Chapter 13 bankruptcy, if you still wish to pursue bankruptcy as a remedy.

Another requirement of the 2005 BAPCPA was to require you to seek credit counseling from a government-approved counseling organization www.justice.gov/ust/eo/bapcpa/ccde/cc_approved.htm within 180 days before your filing for bankruptcy. You also must complete a debtor education course, in order to have your debts discharged. Credit counseling must take place before you file for bankruptcy; debtor education must take place after you file.

Chapter 7: Liquidation Bankruptcy

When you hear the word "bankruptcy", you most likely think of a Chapter 7 bankruptcy, the kind of bankruptcy that can eliminate or discharge your debts. This type of bankruptcy is also called a Liquidation bankruptcy, because in a Chapter 7 bankruptcy the bankruptcy court appoints a trustee who is empowered to liquidate your assets and use the proceeds to pay back your creditors. The trustee is not allowed to liquidate all of your assets; some of your assets are protected. Despite the fact that bankruptcy cases are filed in federal court, which of your assets are protected and to what level they are protected is governed in part by the laws in your state. Each state has laws that lay out what assets are exempt from collection. Basically, this means a court appointed trustee sells everything they can use to pay off your creditors, except what is exempt.

Chapter 13: Payments for distribution to creditors

One of the consequences of making it harder to qualify for a Chapter 7 bankruptcy is that more people who wish to file for bankruptcy may end up having to file a Chapter 13 bankruptcy, which may be referred to as "Adjustment of Debts of an Individual with Regular Income."

You may be required to file a Chapter 13 Bankruptcy if you have a regular source of income, whether it is from a job, a pension or your social security benefits, that the court determines allows you to make payments to your creditors. In a Chapter 13 bankruptcy, you are allowed to propose a "payment plan" to repay creditors. Payment plans are usually spread out over a five year period. The bankruptcy court can require you to repay all or only a portion of your debts and will determine which creditors receive what percentage of your required monthly payment.

If you file for a Chapter 13 bankruptcy, you will be required to have a confirmation hearing, which serves as the basis for the court order approving your payment plan and ordering the creditors to accept it. This hearing is called a section 341 hearing, or "the three forty-one." The court either approves or disapproves your repayment plan, depending on whether it meets the Bankruptcy Code's requirements for confirmation.

One key difference between Chapter 13 and Chapter 7 is that in Chapter 13 you usually remain in possession of the property of the estate and you make payments to your creditors based on the your anticipated income over the life of the plan. Unlike Chapter 7, you do not receive an immediate discharge of debts. You must complete all the required payments under the plan before your bankruptcy will be discharged. During your bankruptcy case, you are protected from lawsuits, garnishments, and other creditor actions.

Bankruptcy Costs

To comply with all the requirements under the new bankruptcy law, attorneys are required to spend more time on each case. Attorneys are now required to personally verify and vouch for all financial information provided by their clients. This means the attorneys must spend even more time on cases and that they have a personal liability if the information in a case is incorrect. More time on a case means more fees, so costs for filing bankruptcy should rise.

Summary

Most people consider filing bankruptcy as an option of last resort. Because of the costs, the long term effects on your credit, the public nature of bankruptcy, and the fact that it may be more difficult to qualify for a Chapter 7 than before, it makes good sense for you to look into all the available alternatives to bankruptcy, before you choose to file. Look into a Consumer Credit Counseling service that can lower your interest rates, which could provide enough relief to allow you to avoid bankruptcy. Consult with a reputable debt settlement provider that can negotiate reduced out-of-court payoffs with your creditors (who should not charge you any fees for settling an account until after the settlement is finalized). Weigh the pros and cons of each approach. Pay extra attention to your bankruptcy alternatives, if you are told that the only bankruptcy you qualify for is a Chapter 13.

Most bankruptcy attorneys will offer a free initial consultation. Don't meet with one who doesn't. Find out if the attorney sees you as a candidate for Chapter 7 or Chapter 13. Make sure to check out the reputation of any attorney you consider hiring and comparison shop to find the best attorney at the best price. Don't hesitate to ask any questions that occur to you and do some homework before you meet with an attorney. The more prepared you are, the less the chance that you will be surprised at the end result.

     
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